UPDATE 2-Fortum buys emissions credits from Russia's TGC-1

(Adds details, quotes, MOSCOW to dateline)

By Sakari Suoninen and Simon Shuster

HELSINKI/MOSCOW, Feb 20 (Reuters) - Finnish utility Fortum (FUM1V.HE) has signed a pioneering deal to buy more than 5 million carbon dioxide (CO2) emissions credits from Russian electricity producer TGC-1 (TGKA.MM), Fortum said on Wednesday.

After two years of delays, the Russian government last month put in place the legal mechanisms for companies to create carbon credits in Russia, which has the potential to become the second biggest source of the credits after China.

Fortum's deal with TGC-1 is the first to take advantage of these mechanisms.

The market value of the credits -- to be created under the Kyoto Protocol's Joint Implementation (JI) scheme -- is about 70 million euros ($103 million), making it the largest such deal in Russia, Fortum said in a statement.

Fortum said the deal covers around half of its annual emissions of the greenhouse gas carbon dioxide.

Under the Protocol's JI and Clean Development Mechanism (CDM) programmes to fight climate change, those in rich countries can invest in emissions-cutting projects in developing and former communist nations and count the cuts as their own.

The Russian utility will reconstruct hydropower plants, expand and renew its combined heat and power generation plants and improve the efficiency of its district heating network.

"We are talking about massive reductions in greenhouse gases, during the Kyoto period of 2008 - 2012, we estimate reductions of 5 million tonnes of CO2," Tapio Kuula, Senior Vice President at Fortum, said in a statement.

"These reductions will not end after that period, but will continue at 1.6 million tonnes annually."

Fortum estimated it could transfer about 3 to 4 million tonnes of the cuts as credits to Finland.

POSITIVE SIGNAL

"The agreement is extremely important for the Russian energy sector and the Kyoto Protocol in general," said Andrei Gorkov, head of the carbon fund at former Russian energy monopoly UES.

Alexey Kardashin, director of Kyoto-based projects for Germany's Tuev Sued in Russia said: "The size of this deal is very significant, and it sends a very positive signal for investors looking into these kinds of projects in Russia."

"I know there are other energy companies that are examining similar options, similar cooperation with European firms. We are expecting a boom on this market," he said.

TGC-1 is effectively controlled by Russia's gas export monopoly Gazprom (GAZP.MM).

Its willingness to take part in the project is seen as a positive signal to the market that Russia's state-controlled industrial giants are not ignoring the opportunities of the carbon market.

Fortum itself owns around one fourth of TGC-1. (Reporting by Sakari Suoninen and Simon Shuster, editing by Anthony Barker)