December 1997/January 1998

by Susan Legro

Many American companies are familiar with Russia's vast energy resources, but few are aware of the country's potential market for energy-efficiency products and services. Despite the transformation of the Russian economy since 1991, high energy costs still make Russian manufacturers uncompetitive and burden municipal governments with heavy utility expenses. A growing number of U.S. suppliers are finding their way in to this important energy market.

Some Russian experts call their country "the Saudi Arabia of energy savings," because of the energy that can be recovered from its economy through greater efficiency. Soviet-era economic planners emphasized the development of heavy industry and transformed Russia into a prolific energy consumer. Since the early 1990s, Russia's energy inefficiency has actually increased, because output in almost every sector of the economy has declined faster than energy consumption. As a result, the amount of energy consumed per unit of GDP in Russia in 1996 was 32 percent higher than in 1990. Energy price reforms, which have raised Russia's energy prices to world levels or higher, have made energy-efficient technologies more attractive.

Two Major Markets
There are two major energy-efficiency markets in Russia: industry and municipal government. In the spring of 1997, Russian industrial consumers paid nearly twice as much per kilowatt/hour of electricity as did comparable companies in the United States. Energy is now a major share of Russian production costs, and in some factories costs per unit of output are higher than in the West because of high energy prices.

High costs give energy-intensive industries strong incentives to save. Moscabelmet, a large copper cable company in Moscow, has spent 5-7 percent of its revenue annually for the past eight years on energy-efficiency equipment and saved approximately $90,000 per year in the process. Production stoppages are now less frequent because of improved power quality, and Moscabelmet is not in debt to power and water utilities.

Municipally-owned utilities are the other major market for energy-efficiency equipment. Centralized district heating systems supply 70 percent of Russian households with heat and hot water, and more than 1,000 large systems (serving at least 10,000 users) consume 450-500 million gigajoules of heat annually (approximately six barrels of oil produce one gigajoule of heat). Cities also subsidize heat and hot water services with heat subsidies now dominating many municipal budgets. Some Russian cities spend a third of their budget subsidizing citizens' heat and hot water.

The financial burdens imposed by these obligations have led cities to seek ways to reduce their energy consumption. In Chelyabinsk, which spends more on heat than on health care, municipal officials earmarked $750,000 this year for energy-efficiency improvements to their district heating system. The money saved from the efficiency program will be re-invested in further improvements to the system.

U.S. Companies
U.S. companies have been in Russia's energy-efficiency market for many years. Honeywell, Inc., for example, has been doing business in Russia since 1968. Other U.S. companies have entered the market more recently, including Johnson Controls, Armstrong International, EMCO, Bacharach, Fissenko Transsonic Corporation, Teledyne Laars, Fulton, and Environmentally Safe Products.

Small and medium-sized U.S. suppliers have also found growing opportunities in Russia over the last two to three years. Panametrics, Inc., for example, began by selling portable flowmeters to larger municipal district heating companies and electric utilities. It has since expanded into the water-distribution and petrochemical sectors with both portable and on-line flowmeters.

Panametrics sells its products through a local representative, an arrangement that enables customers to pay in rubles while the U.S. manufacturer receives payment in dollars. Other energy-efficiency companies prefer to work through a U.S.-based intermediary. The intermediary can be either a distributor or a larger vendor with an overseas presence. Environmentally Safe Products sells low-emissivity insulation in Russia through another U.S. company, Technologies International, which handles marketing, distribution, and payment in Russia. EMCO, which received its first large order for flowmeters from Siberia about three years ago, introduced its products in Russia by working through Honeywell's Austrian subsidiary.

CENEf
The Russian Center for Energy Efficiency (CENEf) is a valuable resource for U.S. companies in Russia's energy-efficiency market. A non-governmental, non-profit Russian organization, CENEf maintains databases on Russian energy managers at large industrial enterprises and has a specialized reference center at its Moscow headquarters. U.S. companies looking for customers can contact CENEf's English-speaking staff in Moscow to tap into this information. CENEf also publishes two quarterly newsletters, Energy Efficiency and Energy Manager, which reach 2,200 Russian city officials, utility managers, and industrial energy managers.

Another strength of CENEf is its strong contacts with city and regional governments throughout Russia. In the past two years, CENEf has developed multi-year, energy-efficiency investment plans for municipal utilities in Kostroma, Chelyabinsk, Lytkarino, Dzerzhinsk, Zheleznogorsk, and the Orlov region. Participating cities have already invested more than $2 million of their own funds, and will eventually acquire and install roughly $65 million worth of equipment. CENEf also organizes seminars and training programs for industrial energy managers across Russia and holds an annual workshop and trade show each May: "Business Opportunities for Energy Efficiency in Russia."

CENEf was founded in 1992 with funding from the Department of Energy, the U.S. Agency for International Development, the U.S. Environmental Protection Agency, and the World Wildlife Fund. The center has been self-sustaining since 1996.

The market for energy-efficiency products and services in Russian industry will continue to grow over the next decade as economic restructuring forces Russian companies to cut production costs. With the enactment of legislation phasing out residential heat subsidies, municipal governments also face increasing pressure to reduce their residents' heating bills or face nonpayment problems. These developments bode well for U.S. firms willing to look at the Russian energy market from the demand side. For more information on CENEf, visit www.glasnet.ru/~cenef/.

Susan Legro is a research scientist at the Advanced International Studies Unit of Battelle, PNNL.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)