August 26, 2024
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The Paradox of Russian Energy
How is a country so rich in resources facing energy deficits?
By: Ekaterina Zolotova
In early August, Russian President Vladimir Putin signed a law that, starting Nov. 1, legalizes the mining of cryptocurrency, which the Kremlin sees as a handy tool for circumventing international sanctions and replenishing its budget. Crypto mining is notoriously energy intensive, but all it requires is electricity, something Russia has in abundance. But even for Russia, uncontrolled growth in electricity consumption could lead to a power shortage in certain regions that are already struggling amid sanctions and the war in Ukraine.
It’s an increasingly precarious issue for a country that, in its search for new income sources, has decided to expand its data economy. The data center market in Russia grew by 21 percent in 2023, its rise facilitated by the use of Russian-made equipment and Russian cloud services. For scale, the data center near Balakovo will use as much electricity as the entire city, which boasts a population of 200,000 people and is home to several manufacturing plants. And this is to say nothing of the expected growth in digital services and the eventual introduction of artificial intelligence.
Put simply, the development of a digital economy requires reliable electric power infrastructure capable of ensuring data security and a mature IT sector. Uninterrupted electricity, then, is important not just for the niceties of everyday life but also for a burgeoning technology market. And though Russia is among the world’s biggest energy producers, the risk is that demand may grow faster than Moscow can build new infrastructure. Last year, electricity consumption increased by 1.4 percent, reaching a record volume of 1.1 trillion kilowatts per hour. Power consumption also reached a historic high of 171.1 gigawatts. In addition, Russia sells a ton of electricity. In the first half of 2024, it exported 3.5 billion kWh to Kazakhstan, 600 million kWh to Mongolia, and 500 million kWh to China.
Production & Consumption of Electric Energy in Russia
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Complicating the situation is the nature of the Russian grid. Every region has its own energy issues, and supply can vary widely with the changing of the seasons. The Unified Energy System of Russia does what it can to centralize operational control, but the country is so vast, and its population centers so few and far between, that it’s difficult to evenly distribute capacity. Some regions cannot be connected to each other at all. It also explains why Russia can have so much energy that it exports to nearby markets but can nonetheless have regional deficits.
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The energy industry thus may be unable to match the Kremlin's ambitions to increase energy production for new IT enterprises, balance power distribution, overcome deficits in certain regions and literally keep the lights on. Even now some regions are unable to cope with the growth of electricity consumption. For example, in southeastern Siberia, it’s impossible to connect new large-scale consumers, and in the south, power outage schedules have had to be introduced to support heavier loads on networks during summer temperature spikes. Even Moscow may face an electricity deficit, according to the draft of the General Scheme for the Development of Russian Energy (a shortage of 1.6 GW of capacity by 2030 and 4.2 GW by 2042). Insufficient capacity will also limit Russian energy exports. By the end of 2023, the country had reduced electricity exports by 21 percent to 10.7 billion kWh. This owed partly to European sanctions, which brought exports there to a halt, and partly to a lack of capacity in the Far East, which forced Russia to reduce exports to China by a third.
Infrastructure is also a problem. Unscheduled outages and emergency repairs in older facilities often take capacity offline. Recently in the south, for example, generators failed at the Rostov nuclear power plant, and on Aug. 16, damaged equipment halted generation in Vladivostok and other nearby cities. Power grid firm System Operator notes that the current fleet of turbines used to generate electricity, which were put in place from 1960 to 1990, is all but exhausted. In distribution networks of medium and low voltage infrastructure – which constitutes more than 80 percent of total infrastructure – the situation is even worse. Upgrading existing infrastructure – and building new facilities outright – is time-consuming and expensive.
In addition to the difficulty of introducing new power capacities, there is a risk that existing ones will underperform. The Ukraine war, for example, creates security risks all along Russia’s western border, where important facilities in the Russian grid are located. The recent breakthrough of Ukrainian troops in Kursk region has cast doubt on whether the Kursk nuclear power plant will continue to be a part of the electrical system. The Kursk facility is one of the largest of Russia’s 11 nuclear power plants, so Moscow can ill afford to lose it as Russia has plans for it to offset Moscow’s looming energy deficit. (However, the International Atomic Energy Agency has found no reason to worry about nuclear safety at the Kursk plant.)
Meanwhile, the international sanctions campaign against Russia has also affected its energy industry. The sheer volume of Russian energy exports has been dramatically reduced, as have the number of markets available to its sellers. Restrictions introduced in 2022-23 hurt cable and conductor supplies and equipment imports. Russia was thus forced to restructure production as it endeavored to increase capacity. But import substitution brought on by sanctions slowed the implementation of projects meant to overcome energy deficits. (Renewable energy projects were especially affected.)
The paradox of the Russian energy system as a whole is that it can theoretically produce large capacities, overcome its deficits and, in the event of a failure of one station or another, tap into energy reserves to transfer electricity to and from various regions. So – again, in theory – Moscow should have no problem mining cryptocurrencies and building out new data centers. Yet the Kremlin will have to also build new infrastructure, update old stations, stabilize existing power plants, ensure the safety of its facilities and guarantee the provision of the imported material needed to do all of this. In light of these risks, Russia may not be able to absorb as much loss as many seem to think.
