Ruble’s Plunge Damps Solar Ambitions for Russia

Russia’s first tentative steps into developing a solar industry have slammed headfirst into a currency collapse and looming economic crisis.

A plunge in the value of the ruble and rising interest rates have raised the cost of developments. That has prompted investors to seek changes to the terms of the deals they’ve signed and to reconsider future work, said Mikhail Molchanov, chief executive officer of Solar Systems LLC, a developer owned by the Chinese company Amur Sirius Power Equipment Co. Ltd.

“No one thought the ruble would fall like it did,” Molchanov said in an interview from Moscow. Solar Systems has rights to build 175 megawatts of capacity and wants to win an 170 megawatts more. It sees the economic environment as a setback, not a catastrophe.

Hit by economic sanctions following the annexation of Crimea along with falling oil prices, Russia expects a recession this year. The central bank boosted interest rates to defend the currency, which has fallen 70 percent against the dollar over the past year.

The currency’s decline has driven up the price of importing photovoltaic equipment, which is mostly made in China, Germany, the U.S. and Japan. Higher interest rates also increase the cost of loans used to finance the projects. Molchanov said 70 percent of solar project funds are to come from loans.

Pressing Change

Solar Energy Holding, the largest winner of capacity rights for solar auctions in Russia, also plans to lobby for changes to development terms, said Victor Antonov, head of investor relations.

“Without any changes, projects are not attractive to investors,” Antonov said. Market participants seek adjustments for exchange rate changes, waivers for fines and shifts in dates for commissioning, he said.

The need to reset terms of solar deals comes 1 1/2 years after Russia awarded its first-ever subsidies for renewables. The government in September tendered for projects with a combined capacity of 504 megawatts. Before then, the country had only a handful of photovoltaics.

The incentives came with strict rules encouraging companies to boost the use of Russian equipment for clean energy. Siemens AG and OAO Lukoil both pointed to local content requirements as deterrents to participation in wind power auctions last year.

Press officials at Russia’s Energy Ministry didn’t immediately respond to a request for comment.

Capacity Builders

Solar Energy Holding won 435 megawatts of solar power capacities in auctions in 2013 and 2014 and 105 megawatts of wind power capacities, according to the company website.

Solar Systems won rights to supply clean electricity for prices ranging from 106,000-111,000 rubles per kilowatt of installed capacity last year, according to the administrator’s website. Those prices were designed to offer companies a 14 percent return over capital costs.

The bid was made based on an estimate that solar panels would cost about $1,000 per kilowatt, which was 35,000 rubles at the time, Molchanov said.

“Now it will cost us two times more,” he said.

Solar investors including Solar Systems, Hevel and closely-held Solar Energy Holding have responded to local-content rules by entering into panel manufacturing themselves.

Even with those plans, more than half of the expenses of solar companies will have to be paid in dollars, Antonov said.

Amur Sirius has a long history with Russia, having built the first high-voltage grid links, he said. Solar Systems will probably seek project financing from China for its work in Russia, Molchanov said.

Solar Systems, Schmid Group and Pekintas Group are planning to start a plant in Russia’s Tatarstan region in the first half of next year, Molchanov said. Russian billionaire Victor Vekselberg’s OOO Hevel Solar venture with Russian state-owned OAO Rusnano opened a panel manufacturing plant earlier this month, according to Hevel’s website.

Before it's here, it's on the Bloomberg Terminal.