Russia in the age of the energy transition: an impetus for the transformation of the Russian energy sector

3. Russia and the energy transition

This chapter uses a qualitative meta-analysis to provide a brief contextual background and to establish the reason why the energy transition is of relevance to Russia. The first sub-chapter defines what the energy transition is. It explains the origin of the term and elaborates on the narrower and broader understandings of it. The second sub-chapter deals with the degree of the energy transition's impact on the energy system. It presents four selected topics to outline the debate about the pace and scale of the energy transition. The final sub-chapter builds on this debate and elaborates on why the energy transition is of significance for Russia.

3.1 Definition: Energiewende, low-carbon transition, and the fourth energy transition

The term energy transition is a direct translation of the German term `Energiewende', which was originally coined by the scholars Krause, Bossel and Mьller-ReiЯmann (1980) of the German Institute for Applied Ecology in 1980. In the early 2010s, the term entered the global vocabulary, following the Fukushima Daiichi nuclear disaster and Germany's decision to phase-out nuclear power while accelerating the transition towards renewable energy (Hake, Fischer, Venghaus and Weckenbrock, 2015). In a narrower sense, the energy transition is therefore closely connected with the transition towards renewable energy. Sometimes, however, the energy transition means a `low-carbon transition' more generally and includes only the renunciation of fossil fuels while reserving a role for nuclear energy next to renewable energy (Pravalie and Bandoc, 2018). In other words, renewable energy is a permanent feature of the energy transition, while in some countries nuclear energy can play an additional role in it. This dissertation uses the term energy transition to describe a low-carbon transition in the energy field. It focuses therefore on the renunciation of fossil fuels and reserves a role for nuclear energy next to renewable energy. This choice has been made, because Russia belongs to those countries that underline the role of nuclear energy in their energy mix and the energy transition. Note: the dissertation uses exclusively and consistently the term energy transition to express this definition throughout the dissertation. Alternative terms (i.e. Energiewende, low-carbon transition, fourth energy transition) are used only in this sub-chapter to provide a contextual background.

In a broader sense, an energy transition denotes in general a structural transformation of an energy sector. More specifically, Smil (2010) uses the term “to describe the change in the composition (structure) of primary energy supply” and “the gradual shift from a specific pattern of energy provision to a new state of an energy system” (p. vii, italics in original). In quantitative terms, this means a 10% reduction in the market share of a certain energy source over a decade (ERI RAS and Skolkovo, 2019, p. 15). Historically, such reductions have occurred a few times already. The transition towards renewable energy is therefore only another shift in a series of previous transformations. Smil's (2017) differentiation of energy transitions considers the current energy transition as the `fourth energy transition', following the transition from biomass to coal (first energy transition) and the introductions of oil (second energy transition) and natural gas (third energy transition) into energy systems. Figure 1 illustrates the four energy transitions.

Figure 1: The four energy transitions

Source: ERI RAS and Skolkovo, 2019, p. 16

The fourth energy transition involves four key elements: energy efficiency and the so-called “three Ds”, meaning decarbonisation, digitalisation and decentralisation (ERI RAS and Skolkovo, 2019, pp. 20-44). Energy efficiency includes a vast range of different technologies and takes an important role across various sectors (pp. 23-24). Some examples include vehicle efficiency in the transport sector, the use of secondary energy sources and cogeneration in industry, and the use of new thermal insulation materials in the design of buildings in residential and commercial sectors. Decarbonisation constitutes the backbone of the fourth energy transition and includes in particular renewables and electrification (p. 25). Apart from traditional water power, the most important renewable resources include waves, tides, wind, sunlight, geothermal heat, and biomass. The most significant technologies are hydropower stations, wave farms, tidal power stations, on- and offshore wind farms, solar photovoltaics (PV), concentrating solar power plants, geothermal power plants, and biomass power plants. The renewable power plants convert primary energy sources into electrical energy, which is then transported by an electricity grid. The electrical energy is then either stored or reconverted for end-uses. Decarbonisation means therefore not only the expansion of renewable power plants, but also the enhanced electrification of the economy. Digitalisation and decentralisation proceed in conjunction with decarbonisation (pp. 37-44). With digital technologies, the energy sector can improve the aggregation, analysis and transmission of data, which, in turn, facilitates the implementation of `smart solutions' and the creation of `smart grids'. Moreover, they prompt the further decentralisation of the energy system by connecting an increasing number of distributed devices which deliver electricity up to the system. The effect of these developments is the gradual transformation of passive energy consumers into active “energy prosumers” that produce and consume energy at the same time (Jacobs, 2016). In other words, digitalisation and decentralisation alter the energy supply paradigm. Together with energy efficiency and decarbonisation, they constitute the four key elements of the fourth energy transition.

In addition to energy efficiency and the three D's, the energy transition is also associated with an uncertainty about the future shape of the energy sector. The dissertation highlights this feature, as it is the reason why the energy transition's relevance for Russia and her energy sector is occasionally belittled. The substantial variance between energy outlooks reflects the uncertainty about the energy transition's impact on the energy sector (ERI RAS and Skolkovo, 2019, pp. 8-11). One key difference, for example, concerns the global primary energy consumption in 2040, which stretches from less than 14,000 mtoe (e.g. IEA's (2018) “Sustainable Development Scenario”; IRENA's (2019b) “Global Energy transformation”) to more than 22,000 mtoe (e.g. BP's (2019) “More energy”). The vehicle fleet size and the role of electric vehicles (EV) remain uncertain, too. Most energy outlooks, however, predict the share of EVs to reach at least one third of the total number of cars by 2040 (e.g. Bloomberg's (2020) “Electric Vehicle Outlook 2020”; IEA's (2019b) “Global EV Outlook 2019”). The share of renewables in the global energy consumption and production are also highly debated. With regards to consumption, the energy outlooks range from less than one fifth (e.g. ERI RAS' and Skolkovo's (2019) “Conservative scenario”) to around one third (e.g. DNV GL's (2018) “Energy Transition Outlook 2018”; Shell' (2018) “Sky”). Only some exceptions project higher estimations (e.g. BP's (2019) “Rapid transition”; IRENA's (2019b) “Global Energy transformation”). Concerning the share of renewables in the global energy production, the numbers are significantly higher and stretch from more than 30% (e.g. IEA's (2019f) “Current Policies Scenario”) to almost 80% (e.g. IEA's (2018) “Sustainable Development Scenario”; IRENA's (2019b) “Global Energy transformation”). The level of oil prices in 2040 and the timelines for the global peaks of oil and coal demand constitute also key uncertainties. The COVID-19 crisis has added another layer of uncertainty to these indicators. The crisis has forced large parts of the world into confinement and created a historic shock to the energy sector by cutting down demand for energy, in particular fossil fuels. Although it is too early to determine the long-term impacts, some energy outlooks consider the COVID-19 crisis as a potential catalyst for the energy transition if it is connected to economic recovery policies (e.g. IEA's (2020b) “Global Energy Review 2020”). In short, the future shape of the energy sector remains uncertain. Despite this uncertainty, however, it has to be highlighted that energy outlooks do not call into question the basic assumption that the world has entered a new energy transition - the fourth energy transition. Instead, one should understand the variance between energy outlooks as a disagreement concerning the degree of the energy transition's impact on the energy sector. The degree of the impact depends very much on the pace and scale of the energy transition. The next sub-chapter explores this issue in more depth.

3.2 Pace and scale: slow versus fast transition

Having defined what the energy transition is, this sub-chapter turns to the reasoning of the different energy outlooks to explain why the future shape of the energy sector is so much disputed. As highlighted above, the main disagreement does not concern whether the energy transition is taking place, since there is a consensus about its existence. Instead, the main disagreement concerns the degree of the energy transition's impact on the energy sector. More specifically, this means the pace and scale of the energy transition. While some see the signs of an energy revolution, others are more doubtful and emphasise the energy sector's inertia. To illustrate the debate, the dissertation presents four selected topics. This includes (1) renewable energy technologies, (2) China's and India's energy mixes, (3) Africa's development pathway, and (4) the EU's energy policy. It is worth exploring the four topics, since they constitute determining factors for the future shape of the energy sector and are therefore relevant to understand the significance of the energy transition for Russia and her energy sector. This constitutes the essence of the qualitative meta-analysis. For each topic the dissertation presents contrasting positions. The positions represent two opposing camps, which the dissertation defines as the `slow transition camp' (ST) and the `fast transition camp' (FT).

(1/FT) Renewable energy technologies. The fast transition camp underlines the improved cost competitiveness and the advanced technological development of renewable power plants. More specifically, it highlights the increased capacity factor of renewable power plants and the sharp drop of total installed costs and the levelized cost of electricity (LCOE) (IRENA, 2019a, pp. 11-30). The global weighted-average LCOE of various renewable power plants has entered the range of fossil fuel-fired power generation costs (pp. 11-12). The fast transition camp underlines in particular the dramatic drop in the costs of solar PV plants, which have fallen by 99% over the last forty years, and depicts this drop as a major success story for renewable energy in general. Kavlak, McNerney and Trancik (2018) have researched the causes of solar PV cost decline and identified several relevant factors, which are, among others, increased module efficiency due to technological improvements, government policies like feed-in tariffs or subsidies that have helped markets to grow, government-funded and private research and development, and economies of scale. Other renewable energy plants like offshore wind are less widely deployed and therefore less cost competitive. However, developments in these sectors are also fast. Offshore wind projects have been successful in Europe's North Sea, which triggered interest in the United States, China and other countries (IEA, 2019f, p. 27). The fast transition camp assumes that the mechanisms that helped solar PV to gain ground could be replicated to support other renewable energy technologies.

(1/ST) Renewable energy technologies. The slow transition camp cautions not to overemphasise the increased cost competitiveness and the advanced technological development of renewable energy. Instead, one should focus on energy security (Johansson, 2013). Looking at wind and solar power, the slow transition camp emphasises the issue of VRE, which is a renewable energy source that is partially unavailable and which cannot be dispatched because of its fluctuating nature (IEA, 2019f, p. 779). In other words, output cannot be quickly increased or decreased following changes of demand. This poses new risks to energy planners and operators. The slow transition camp argues therefore that one should not look at the decreasing LCOE of VRE, but rather consider a value-adjusted LCOE (VALCOE), which adds three categories of value in power systems, namely energy, flexibility and capacity (IEA, 2019h). This approach shows that falling costs alone are not sufficient to enhance the competitiveness of VRE, as a VALCOE includes energy security issues. Additional actions to balance the energy system are therefore needed. Grid energy storage is one measure. To maintain the electricity grid stable, it is necessary to store electrical energy when it is plentiful and to time-shift the output to times of higher demand. Batteries, for example, help cushioning peak energy demand, but they cannot be used for inter-seasonal energy storage (Zhang, Wei, Cao and Lin, 2018). The hydrogen economy receives also increasing attention (IEA, 2019d, pp. 18-22, 2019f, pp. 587-593). Hydrogen can be used for energy storage, but the slow transition camp emphasises that grey hydrogen dominates the current production, which is why hydrogen is not compatible with the energy transition at the moment. Moreover, the slow transition camp highlights that the infrastructure for hydrogen storage is not mature enough to ensure a stable and reliable large-scale grid energy storage. Challenges for grid energy storage remain therefore, which is why the slow transition camp argues that the fluctuating nature of VRE constitutes an unresolved and ongoing threat for energy security.

(2/ST) China and India. The slow transition camp highlights China's and India's heavy dependence on fossil fuels and the substantial position of both countries in the global energy system. Coal-fired power plants have been driving China's development and are supposed to support also India's growth strategies (IEA, 2019f, pp. 219-251, 2019g,). Considering the long operational lifetime and the low marginal cost of coal-fired power plants, the slow transition camp argues that it is difficult to replace them quickly. Oil is also prominent in both countries. China became the world's largest importer of oil and seeks to expand its imports (IEA, 2019a). India aims as well to increase the import of oil and petroleum products, as it is confronted with a rising car fleet due to its growing economy and population (IEA, 2019f, p. 135). Natural gas plays a minor role in India, but is becoming more important in China's future energy mix (IEA, 2019c). In 2014, China and Russia signed a deal to deliver natural gas from Russia to China through the Power of Siberia (POS) pipeline. China invests also into liquefied natural gas (LNG) infrastructure and has recently overtaken Japan as the world's largest LNG importer. Considering the significant role of fossil fuels in China and India, the slow transition camp argues that a fast transition towards renewable energy is unlikely in both countries. What is more, the slow transition camp views China's and India's heavy dependence on fossil fuels also as an obstacle for a fast energy transition on a global scale, as the countries play a substantial role in the global energy sector and influence therefore its development.

(2/FT) China and India. The fast transition camp does not doubt the essential role of fossil fuels in China and India. However, it argues that one should also consider the growing role of renewable energy in both countries. China became the leading investor in renewable energy and the world's largest market for it (Chiu, 2017). The country is leading in water power, wind power, and solar power. China has four of the top ten largest dams (IEA, 2019e), produces more than a quarter of the global wind power (Dai, Yang and Wen, 2018), and accounts for two thirds of the global solar PV production capacity (Zhang and He, 2013). With regards to solar power, China's production capacity was an important factor in creating global supply chains and in expanding the global solar economy. India expands its renewable energy production capacity, too. To unburden both the environment and the fiscal budget, the country has been using auctions as a means for the deployment of renewable energy (Buckley, 2019). This approach proved to be successful, as the auctions have caused an immense downward price pressure. The fast transition camp argues therefore that the increased cost competitiveness of renewable energy could reverse India's plans of expanding its coal-fired power generation, which are not only associated with the country's economic growth, but also with severe environmental problems. What is more, nuclear energy is of particular significance in China and of relevance in India. Considering the role of nuclear energy and the growth of renewable energy in China and India together with the position of both countries in the global energy system, the fast transition camp argues that the two countries promote a fast energy transition on a global scale despite their heavy dependence on fossil fuels.

(3/ST) Africa. The African continent is growing and will require more energy in the future. The slow transition camp argues that fossil fuels will become essential for Africa's development pathway, as it is unlikely that African states will be able to leapfrog a carbon intensive development (Unruh and Carrillo-Hermosilla, 2006). One reason for this assumption is an increasing mobility, which is caused not only by a growing population and higher income levels, but also by rising industries that will require more transport. The slow transition camp argues that petroleum products will fuel Africa's growing mobility (IEA, 2019f, p. 509). Moreover, the role of liquefied petroleum gas (LPG) is also expected to grow, as many African states are trying to expand clean cooking (pp. 357-363). Countries like Ghana, Kenya and Cameroon are promoting LPG as a cleaner alternative to solid biomass, which includes fuelwood, charcoal, and dung (p. 357). The slow transition camp argues also that natural gas is likely to expand (p. 389). Recent gas discoveries have promoted this fuel in Africa and are turning it into an attractive source of income. The growth of industries is another factor supporting the expansion of fossil fuels, as many industries are hard to electrify. Hence, the use of natural gas or other fossil fuels is expected to grow. What is more, the slow transition camp claims that renewables cannot ensure the continent's growth in a stable manner, as Africa lacks the critical infrastructure.

(3/FT) Africa. The fast transition camp points at Africa's abundance in renewable energy sources and emphasises the continent's richness in key minerals that are essential in the production of renewable energy technologies (IEA, 2019f, p. 341). Although Africa's renewable energy sources have remained largely untapped, the fast transition camp highlights a number of large renewable energy projects (e.g. Egypt's Benban Solar Park, Morocco's Noor Power Station, Kenya's Lake Turkana Wind Power Station) and the development of decentralised solutions aimed at reaching universal access to electricity. Mini-grids and stand-alone-systems are becoming more important as a means to accelerate the rate of electrification in more isolated and rural areas (IEA, 2019f, pp. 384-386). Small diesel generators used to be the backbone of such solutions, but renewable energy is becoming an increasingly attractive alternative. For many sub-Saharan African countries, fiscal constraints have been a challenge to provide electricity to their populations, as fossil fuels need to be subsidised in many cases. The increasing cost competitiveness of renewable energy, however, helps African governments to provide energy that is both renewable and affordable, thus constituting a solution that can respond to an increasing demand for energy while mitigating poverty. Results of such considerations can be observed in sub-Saharan Africa, where solar home systems enabled almost five million people to gain access to electricity in 2018 (p. 384). In addition to renewable energy, the fast transition camp highlights that nuclear energy could become an option for various African countries, despite serious security challenges. Although only South Africa has an operating nuclear power plant so far, one should note that a third of the almost 30 countries that are currently considering nuclear energy are in Africa (IAEA, 2018).

(4/FT) EU. The EU is dependent on the import of fossil fuels. Although the dependency rate varies across the EU Member States, the fast transition camp emphasises that the EU considers its overall import dependency as a threat to its energy security. Hence, the EU has introduced several policies. The Energy Union, for example, was launched in 2015 to diversify the EU's sources of energy and to decarbonise the economy (European Commission, 2015). The Clean energy for all Europeans package is a crucial component of the Energy Union and consists of several legislative acts (European Commission, 2017). The revised Renewable Energy Directive 2018/2001/EU, for example, established a new binding renewable energy target of at least 32% by 2030 and includes a clause for a possible upwards revision by 2023 (European Commission, 2020). The European Green Deal is another important political project (von der Leyen, 2019, pp. 5-7). With the Green Deal, the EU seeks to become climate-neutral by 2050 and to decouple economic growth from resource use. Renewable energy is the backbone of the Green Deal and essential in the EU's long-term energy strategy, which seeks to reduce the EU's import dependency from 55% to 20% in 2050 (European Commission, 2018, p. 8). The European Central Bank has announced to support the Green Deal with a green push in its monetary policy (Lagarde, 2020). What is more, the COVID-19 crisis could accelerate the realisation of the Green Deal, as political support for a “green recovery” is growing in both the EU's Member States and institutions (Willuhn, 2020).

(4/ST) EU. The slow transition camp is doubtful about such a development and argues that the EU uses tactics and strategies without an objective. The EU seeks to provide “secure, sustainable, competitive and affordable energy” (European Commission, 2015), but offers only a vague outline of the future shape of the energy sector. This means that important questions remain unanswered, including the types and locations of renewable energy, the role of gas in the energy transition, the relationship between centralised and decentralised energy grids, the forms of storage, and the operating responsibility (Scholten, 2019). The slow transition camp emphasises that the EU lacks the power to answer these questions, as it sets only targets like the 32% share of renewable energy in the energy mix by 2030, while Member States decide over the implementation and execution of energy policies (Scholten, 2019). What is more, the slow transition camp highlights deep divides over energy issues among the Member States. Western EU Member States consider the opportunities of the energy transition more than Eastern EU Member States, which are concerned about electricity prices and their workforce in the fossil fuel industry (de la Esperanza Mata Perez, Scholten and Smith Stegen, 2019). Different national interests constitute difficult challenges for the realisation of EU projects like the Energy Union and the Green Deal. What is more, the slow transition camp points at the role of natural gas in the EU's future energy system. Natural gas is the cleanest fossil fuel and considered by some as a bridging technology that could help the EU to reach its envisaged climate-neutrality by 2050, which is why a majority of the European Parliament has voted in favour of the 4th list of Projects of Common Interest that includes a substantial amount of natural gas projects (orf.at, 2020). Others, however, view most of the natural gas projects on the list as unnecessary from a security of supply point of view and argue that these investments could jeopardise the expansion of renewable energy (Artelys, 2020). Note: the dissertation acknowledges that the allocation of natural gas to one of the two camps depends very much on the perspective, i.e. it can be part of a fast transition if it is considered primarily as a bridging technology, but also as part of a slow transition if it becomes an obstacle to the energy transition (cf. sub-chapter 4.1.). Using the often-quoted study by Artelys (2020), this dissertation assigns the issue of natural gas to the slow transition camp.

Having outlined the different positions on the pace and scale of the energy transition, the qualitative meta-analysis turns to the interpretation of the debate. This sub-chapter makes clear that the energy transition is not black or white but in colour. It shows that both camps point at relevant aspects that need to be considered. (1) Various renewable energy technologies have been significantly advancing and can compete on price with fossil fuels. However, important questions remain open. Energy security is of particular relevance here. Storage technologies need to become mature, as otherwise the expansion of VRE can negatively impact the reliability of energy supply. Considering the improved cost competitiveness and the advanced technological development of VRE, this dissertation argues that energy security issues will not reduce the expansion of VRE but rather incentivise the further development of storage technologies. (2/3) While renewable energy technologies are developing rapidly, fossil fuels are not expected to become irrelevant anytime soon. Coal has fuelled China's and India's economic growth and is likely to stay relevant in their energy mixes, as coal-fired power plants have a long operational lifetime and low marginal costs. The use of oil and petroleum products is also growing in the two countries, whereas natural gas is becoming an attractive option rather in China than in India. African countries could follow this pathway, as it is difficult to leapfrog a carbon intensive development. Hence, the growth strategies of China, India and African countries could decelerate the energy transition, as they are based primarily on fossil fuels. However, one should also emphasise the development of renewable energy technologies and the role of nuclear energy in China and India and the huge potential for renewable energy in Africa. China is leading in water power, wind power, and solar power. Moreover, it is one of the largest producers of nuclear energy. India, in turn, invests into renewable and nuclear energy to mitigate its growing import dependency on fossil fuels and to unburden its fiscal budget and environment. The growing development of renewable energy technologies in China and India could produce increasing returns to scale and therefore accelerate the energy transition. This could not only reduce the demand for fossil fuels in China and India, but also allow renewable energy to become more prominent in the growth strategies of African countries. Thus, renewable and nuclear energy as opposed to fossil fuels could provide the basis for the development of countries. (4) The EU and many of its Member States are actively promoting the energy transition. The Energy Union has helped to diversify the EU's sources of energy and to decarbonise the economy, while the Green Deal could become the framework of the EU's economic recovery following the COVID-19 crisis. Although one should also point at decelerating factors such as the limited power base on the EU side and the divides between EU Member States, this dissertation argues that EU and national policies serve as strong examples which show that the energy transition is progressing in the EU and many of its Member States. Table 2 summarises the four topics and the arguments of the debate.

Table 2: Summary of discussion regarding the pace and scale of the energy transition

3.3 Relevance: challenges and opportunities for Russia's energy sector

Building on the debate about the pace and scale of the energy transition, this sub-chapter turns to the energy transition's relevance for Russia and outlines the challenges and opportunities for Russia's energy sector. This constitutes the final element of the qualitative meta-analysis. The sub-chapter proceeds in three steps. First, it explains the energy relationship between the EU and Russia and elaborates on the negative impact of the EU's energy transition on the export of Russia's fossil fuels. Second, the sub-chapter explores Russia's pivot to Asia and its growing connections with various African countries to discuss critically the extent to which that partial reorientation can constitute a mitigation of challenges caused by the EU's energy transition. Finally, it explains why the hydrogen economy is an opportunity for Russia's energy sector.

The EU and Russia have an interdependent relationship in the energy field. In 2017, the former's energy mix consisted mainly of five different sources: crude oil and petroleum products (36%), natural gas (23%), coal (15%), renewable energy (14%), and nuclear energy (12%) (Eurostat, 2019b). In the same year, the EU produced approximately 45% of its own energy and imported the remaining 55%. Russia is the most significant source of all fossil fuels that the EU imports (30% of crude oil and petroleum products, 40% of natural gas, and 39% of coal) and is therefore strongly present in the EU's overall energy mix. (Eurostat, 2019a). The EU is also important for Russia, as it constitutes a large export market for the country's fossil fuels. Russia exports a significant majority of its crude oil, petroleum products and natural gas to the EU, as illustrated in Figures 2 and 3. Although Asia is the most important export market for Russia's coal (29% Republic of Korea, 28% China, and 18% Japan), coal is also exported in large amounts to the EU, especially to Germany (14%) and Poland (13%) (statista.com, 2020). Note: the percentages are rounded and use as a reference year 2018. The EU's aim to become climate-neutral by 2050 will have a severe impact on this interdependent relationship. Although some highlight decelerating factors such as the limited power base on the EU side and the divides between EU Member States (cf. 4/ST in sub-chapter 4.2.), it is not doubted that the EU will progress its energy transition through policies such as the Energy Union or political goals like the Green Deal (cf. 4/FT in sub-chapter 4.2.). The COVID-19 crisis could become a catalyst and accelerate this process, as the support for a green economic recovery is growing in both EU institutions and various Member States (Willuhn, 2020). The next paragraph elaborates on how the EU's declining demand for fossil fuels can impact Russia's energy sector.

Figure 2: Major crude oil trade flows worldwide, 2018 (million tonnes)

Source: BP, 2019, p. 29

Figure 3: Major natural gas trade flows worldwide in 2018 (billion cubic metres)

Source: BP, 2019, p. 41

The phase-out of coal is slowly gaining traction throughout EU Member States. Thermal coal is likely to disappear first from the EU's energy mix, while various companies are researching into ways of reducing the heavy industry's need for coking coal (e.g. h2future-project.eu, n.d.). Within the EU, Germany and Poland have not only the largest installed coal capacity, but are also Russia's most important export market for coal. Hence, developments in the two countries are of particular relevance here. The sharpest EU-wide decline is expected in Germany, where coal power capacity is planned to fall from 44.4 GW to 17 GW within the next ten years (Simon, 2019). Poland's planned decline of its coal fleet will be much softer, from 26.9 GW to 22.9 GW. This means that Russia's coal exports to the EU will certainly decline, although there are differences with regards to individual EU Member States. Crude oil and petroleum products will most likely stay longer in the energy mix than coal, but they are equally incompatible with the EU's climate neutrality objective. Thus, it is likely that the EU's demand for crude oil and petroleum products will eventually fall, too. For Russia, this means a direct challenge to its economy, as revenues from the export of crude oil and petroleum products to the EU account for a large share of the country's GDP and budget (cf. sub-chapter 5.1.). While coal, crude oil and petroleum products are expected to become less relevant if the EU adheres to its climate-neutrality objective, the future of natural gas is less determined. The European Parliament has recently approved a substantial amount of natural gas projects as part of the 4th list of Projects of Common Interest (orf.at, 2020). Although it is too early to draw any conclusions here, this could indicate that the EU considers natural gas as a bridging technology in its energy transition or even as a second mainstay in a heterogenous future energy system that could consist of natural gas next to renewable and nuclear energy. Hence, Russia's natural gas could maintain its relevant position in the EU's energy mix despite the EU's energy transition. However, two points should be considered here. First, natural gas is unlikely to mitigate the negative impact of the EU's energy transition on Russia's economy, as the revenues from the export of natural gas are significantly lower than from crude oil and petroleum products (cf. sub-chapter 5.1.). Second, and following on from the above, natural gas could be even less likely to mitigate the energy transition's negative economic impact if the EU continues its diversification of the sources of imports. It follows that the EU's energy transition will most likely have a negative impact on Russia's energy sector and the export of its fossil fuels, in particular coal, crude oil and petroleum products. The next paragraphs explore critically how Russia seeks to address this challenge.

To balance the EU's declining demand for fossil fuels, Russia has signalled, among others, a pivot to Asia and a closer connection with various African countries. This move is comprehensible, given the prominent role of fossil fuels in the energy mix of China and India and considering the growing demand for energy in Africa (cf. 2/ST and 3/ST in sub-chapter 4.2.). Coal is of particular relevance in China and India. While the former is already the most important export destination for Russia's coal, the Russian Energy Ministry expects coal exports to almost double in the following 10 years, provided that Russian authorities manage to cancel China's coal duties that apply to Russian exporters but not to their Australian and Indonesian competitors (IEA, 2019g). India is also likely to become more relevant as an export market for Russia's coal. In 2019, India's Ministry of Steel announced that the country would significantly increase their coal imports from Russia and support the exploration and extraction of coal mines in Russia's Far East (IEA, 2019g). Although coal exports are likely to increase, one should also emphasise that both China and India are actively seeking to reduce their dependence on coal in order to mitigate severe environmental problems such as air pollution or water scarcity (cf. 2/FT in sub-chapter 4.2.). China and India are therefore considering alternative options, which includes not only a switch from coal-fired to natural gas-fired power plants, but also the deployment of renewable and nuclear energy. Hence, a growth of coal exports to China and India could help Russia to mitigate the EU's declining import of its coal in the short-medium term. In the medium-long term, however, coal exports to China and India could also decrease, as both countries are investing into other energy sources. Thus, the dissertation considers an increase of coal exports to China and India as a lucrative business, but not as an opportunity for Russia's energy sector in the long term.

The demand for Russia's crude oil, petroleum products and natural gas is also likely to increase in Asia (cf. 2/ST in sub-chapter 4.2.). China has already become Russia's second most important export market for crude oil. The country is connected to Russia's Eastern Siberia-Pacific Ocean oil pipeline and imports large quantities of crude oil via the Kozmino sea terminal (Kaczmarski and Kardas, 2016). The Russian Energy Ministry expects that oil exports to China will further grow, as China's domestic oil production is decreasing while its oil consumption levels are rising (Henderson and Mitrova, 2016, p. 36). What is more, Russia and China are coming closer together in terms of technological equipment and the financing of oil projects, as the latter supports the former to mitigate Western sanctions on the petroleum industry (Henderson and Mitrova, 2016, pp. 15-19). With the launch of the POS natural gas pipeline in late 2019, the natural gas market has also seen a significant increase of Russian exports to China. India could also provide an important contribution to diversify Russia's export markets. In the energy field, the collaboration between India and Russia has so far centred primarily on nuclear energy and oil investments. The investment of Indian oil companies into Russian oil fields exceeds $10 billion (Shikin and Bhandari, 2017, p. 9). ONGC Videsh Limited, a subsidiary of India's state-owned Oil and Natural Gas Corporation (ONGC), has a 20% stake in the Sakhalin-1 project and purchased significant shares from Rosneft in the Vankor Field, which is one of the largest onshore oil fields in Russia. Russia, in turn, agreed to deliver large quantities of crude oil to India (The Economic Times, 2020). What is more, Rosneft received 49% of India's second largest refinery, the Vadinar Oil Terminal, and a network of 2700 petrol stations (Shikin and Bhandari, 2017, p. 6). India could also help Russia in its integration into the global LNG market, as it has already several operational LNG import terminals that could serve as future destinations for some of Russia's natural gas exports. Hence, an increase of crude oil and natural gas exports to China and India could support Russia in balancing the negative effects of the EU's energy transition on its economy and energy sector.

The oil and natural gas sectors, however, face also several obstacles in their pivot to Asia. With regards to the oil sector, barriers include, among others, infrastructural problems and delays in the exploration and development of the fields that are intended to be the raw material base for Russia's oil exports to Asian customers (Kaczmarski and Kardas, 2016). Sanctions restrict the access to essential Western technologies and financing, both of which are needed in particular for future projects in shale formations and in the Arctic shelf (Mitrova, Grushevenko and Malov, 2018, p. 18, 25-26). Although China and India can replace to a certain extent Western financing, the two countries are not capable of providing all necessary technological equipment, since Western companies are market leaders in crucial segments of the oil sector. The natural gas sector is also confronted with several challenges. Although natural gas exports from Russia to China seem like a logical conclusion, given Russia's significant natural gas resources in its East and China's growing demand, a combination of political and economic issues have complicated further developments. Thus, it took significant political intervention to launch the POS natural gas pipeline (Henderson and Mitrova, 2015). What is more, Russia will not be able to replicate in its pivot to Asia the strong position it has in the EU's natural gas market, as the negotiations over the pricing scheme and the trading route of natural gas exports from Russia to China have shown that the former is the latter's junior partner (pp. 53-54). Moreover, China seeks to maintain a balanced “compass of supply diversity”, which includes pipelines from Central Asia and Myanmar and LNG supply in the country's east (Henderson and Mitrova, 2015, p. 14-17). It follows that Russia has several obstacles in its pivot to Asia. The demand for the country's crude oil, petroleum products and natural gas will likely increase in countries such as China and India, but various barriers mean that Russia cannot easily exchange the EU's market with the Asian market for its fossil fuels. Although it is possible that Russia's oil and gas sectors will overcome these problems, the dissertation argues that Russia's energy sector should consider alternative pathways in order to not only prepare well for the challenges that are caused by the energy transition, but also to use the opportunities that are offered by it.

Although Russia's pivot to Asia constitutes the country's most important strategy in its attempt to diversify its energy sector away from the dependence on the EU's market, one can also observe increasing connections with various African countries. Defence contracts and military exports have so far dominated Russia's engagement with African countries. Energy deals, however, are becoming increasingly important, as Africa's demand for energy is increasing. Nuclear energy is of particular importance here (cf. 3/FT in sub-chapter 4.2.). Although only South Africa has an operating nuclear power plant, many more African countries are considering to follow suit in order to meet the growing demand for energy. Russia's Rosatom provides comprehensive offers including the financing, construction and operation of nuclear energy facilities and is therefore particularly appealing to those countries that lack nuclear energy knowhow and the financial resources (Meliksetian, 2019). The oil and gas sectors are also of significance (cf. 3/ST in sub-chapter 4.2.), albeit to a lesser extent than the nuclear energy sector. Various African countries have lucrative oil and gas fields that sparked the interest of Russian companies to work together with Africa's petroleum industry. Gazprom and Transneft, for example, cooperate with Algeria's Sonatrech on a pipeline construction project (Mpungose, 2019), while Rosneft signed an agreement with Nigeria's Oranto for refining, logistics and trading projects (Gupte and Griffin, 2019). Russian companies have also purchased significant stakes in various oil and natural gas projects. Gazprom joined Algeria's El-Assel project; Tatneft holds stakes in Libya's Ghadames and Sirte projects; Lukoil became part of the Marine XII project in the Republic of Congo; and Rosneft joined Egypt's Zohr natural gas project (Gupte and Griffin, 2019). What is more, Russia also seeks to enter Africa's growing LNG market. The country already has a 12-year LNG supply deal with Ghana and seeks to sign more agreements once LNG projects come onstream in Mozambique, Egypt and Tanzania (Gupte and Griffin, 2019). It follows that energy deals are becoming more significant in the relations between Russia and various African countries. In addition to Russia's pivot to Asia, growing energy relations with Africa could therefore provide another option to balance the EU's declining demand for Russia's energy. At the moment, however, one should only consider this as a potential option, as energy relations Russia and African countries are only at an early stage and not even certain in some cases. Hence, Russia's energy sector should consider additional strategies to respond to the challenges that are caused by the energy transition.

It follows from the above that Russia can mitigate to a certain extent the EU's declining demand for its fossil fuels through a pivot to Asia and increased energy relations with various African countries. However, the pivot to Asia faces several relevant obstacles, while Russia's engagement with African countries in the energy field is only at the beginning of its potential evolution and in some cases not even certain. Hence, the qualitative meta-analysis shows that the partial reorientation of Russia's fossil fuels industry towards new export markets can be considered as a useful but not sufficient strategy for Russia's energy sector. The dissertation argues therefore that Russia's energy sector should also become a part of the energy transition while pursuing a partial reorientation of the fossil fuels industry. As the final paragraph of this sub-chapter shows, the hydrogen economy can be distilled from the debate and constitutes an exemplary option for Russia's energy sector. energy strategy hydrogen economy

The hydrogen economy is enjoying unprecedented momentum around the world and offers various new opportunities (IEA, 2019d, pp. 18-22). Energy storage is one of them, as hydrogen could become the key solution to energy security challenges that are caused by the intermittent nature of VRE. To overcome the problem of intermittency, energy systems could use, among others, hydrogen to store electrical energy when it is plentiful and to time-shift the output to times of higher demand (Mitrova, Melnikov and Chugunov, 2019, pp. 30-32). In addition, hydrogen can be used for power generation, as it can run fuel cell mini-power plants in households and replace natural gas in gas-fired power plants (pp. 32-35). Moreover, hydrogen can be utilised in transport as a fuel (pp. 36-42), in chemical industries as a basis for the production of synthetic gases (pp. 42-43), and in metallurgy as a means to reduce the use of iron ore (pp. 43-44). Hence, the hydrogen economy could turn into a potential mainstay of the energy transition. In spite of these opportunities, however, the hydrogen economy is immature (cf. 1/ST in sub-chapter 4.2.). The infrastructure is not enough developed and the production of hydrogen is dominated by grey hydrogen, which is not compatible with the energy transition, since the process releases a large quantity of CO2. This dissertation argues that the underdevelopment of the hydrogen economy presents an opportunity for Russia to join the energy transition through a market niche. The hydrogen economy could help Russia's energy sector to secure a competitive advantage within the energy transition and to make up for the country's considerable backlog in the development of renewable energy technologies. In other words, Russia would not have to catch up other countries like China or Germany in the development of specific technologies such as solar PV or wind power, but could position itself globally with its own specialisation. In view of the debate in the previous sub-chapter, Russia's hydrogen could also become an element in the EU's energy transition and an attractive additional option for China, India and various African countries. What is more, the development of a hydrogen economy can be well connected to Russia's current energy sector. Russia has a huge potential not only for the production of blue hydrogen through its large gas sector, but also for green hydrogen through the nuclear energy sector and various water power stations. Hence, the hydrogen economy could become Russia's additional response to the challenges that are caused by the energy transition. Having defined the hydrogen economy as an opportunity for Russia, the next chapter explores various systematic forces that support and obstruct the development of Russia's hydrogen economy.

4. An impetus for a transformation

This chapter uses a PEST analysis to explain how the energy transition functions as an impetus for the transformation of Russia's energy sector. The first sub-chapter explores Russia's carbon lock-in condition. It explains how systematic forces strengthen the country's high-carbon energy system and inhibit a shift towards a low-carbon energy system. The second sub-chapter shows how stranded assets can weaken the former system and support a transformation towards the latter one. The final sub-chapter looks at that transformation and presents an exemplary carbon unlock process. It analyses the drivers and obstacles for the development of a hydrogen economy in Russia.

4.1 Carbon lock-in

Russia is among the world's largest hydrocarbon resource holders, producers and exporters. The country has almost 6 percent of global proved oil reserves and is among the world's top oil producers. Note: the percentages used in this paragraph indicate Russia's share of the global oil, natural gas and coal reserves and the global production / consumption and export / import of oil, natural gas and coal; the percentages are averaged, rounded, based on OPEC (2019) and BP (2019), and use 2018 as a reference year. West Siberia and the Volga-Ural region are the centres of Russia's current oil production, but the country has also potential in East Siberia and in the Arctic region, in particular in the Barents Sea, the Kara Sea, the Laptev Sea, and the East Siberian Sea (Carnegie Endowment, n.d.). Russia's share of the global oil consumption (3-4 percent) is much below its share of the global oil production (13 percent), which allows the country to belong to the world's largest oil exporters (11 percent). Natural gas is also abundant in Russia. The country's natural gas reserves are the largest in the world (20 percent). Moreover, Russia is a major natural gas producer (17 percent) and consumer (12 percent). What is more, it is the world's leading exporter of natural gas (26 percent). The country uses primarily pipelines for its natural gas exports. In addition to large oil and natural gas reserves, Russia has also significant coal reserves (15 percent). Its sub-bituminous coal reserves are the largest in the world (28 percent). Although the country's share of the global coal production is only 5 to 6 percent, it is the world's biggest coal exporter (16 percent) after Australia (29 percent) and Indonesia (26 percent). In short, Russia is rich in fossil fuels and exploits the abundance of oil, natural gas and coal, which is why fossil fuels have become prevalent in Russia's energy system. In other words, Russia's use of its richness in fossil fuels has enabled the country's high-carbon energy system to become predominant. The predominant position, however, is also the main cause for Russia's carbon lock-in condition, which inhibits a shift towards a low-carbon energy system. The following sections elaborate in more depth on how (1) political, (2) economic, (3) social and (4) technological forces strengthen the high-carbon energy system's predominant position and therefore Russia's carbon lock-in condition.