Kazakhstan is a landlocked middle income country and the world’s 17th largest oil producer. It is a former soviet republic and the current president, Nursultan Nazarbayev, has been in office since independence in 1991. Hydrocarbons are central to the Kazakh economy, accounting for over half of the country’s exports. As a result, GDP growth has largely tracked the price of oil over the past decade leading to a prolonged investment boom across the Kazakh economy in the 2000s. The government is pursuing a broad reform agenda aiming to diversify the economy, modernise its infrastructure and improve living standards. A key part of the government’s long-term plans is the promotion of renewable energy, reflected by the declaration in its 2050 strategy that “the era of hydrocarbon economy is coming to its end”.
Kazakhstan’s energy system is completely reliant upon fossil fuels. The electricity mix is dominated by coal, which accounts for 12GW of the approximately 20GW installed capacity. Gas makes up 4.5GW, oil 0.7GW and hydro 2.5GW. The generation fleet is ageing, with the majority of coal and gas plants commissioned over 30 years ago. A number of plant retirements are expected over the coming years, creating a degree of urgency for the government to attract investment.
The legacy of the old soviet transmission system adds to the need for investment in the Kazakh power sector. The Kazakh grid is made up of three separate networks that were formally integrated into the Russian grid in the north, and the ‘United Energy System of Central Asia’ to the south that connects with neighbouring Uzbekistan, Kyrgyzstan and Tajikistan. Since independence, the focus of energy policy across the region has been self-sufficiency, but that aim is complicated in Kazakhstan by a lack of internal interconnection between the major demand centres in the south-east and the bulk of generation capacity located in the north-east. Although a north-south interconnection has been expanded, the country still a net importer due to grid bottle necks and transmission losses that exceed 20%.
The Kazakh power system was part liberalised in the 1990s, but it has since fallen back towards an oligopolistic structure with generation dominated by a single state-backed entity: Samruk-Energy. A number of government interventions since the mid-2000s has triggered this shift. Declining capacity margins encouraged the regulator to mandate investments in new capacity, whilst at the same time tariffs have been capped below the marginal cost of generation. As the regulatory and credit risks of such an arrangement are difficult for private investors to bear, the level of state ownership of generation capacity has risen to almost two thirds. The Kazakh transmission network is owned and operated by state-owned KEGOC, which is regulated by the Agency on Regulation of Natural Monopolies (ANMR).
The government is embarking upon a renewed liberalisation agenda that seeks to modernise the power system and encourage the build out of renewable energy technologies. The government has set a target for 3% of power generation to be from solar and wind by 2020, increasing to 30% in 2030 and 50% in 2050. Underpinning these targets is the 2009 Law about Support of Use of Renewable Sources of Energy (the “RES law”), which was amended in 2013 and ensures guaranteed off-take and 15 year fixed tariffs for renewable projects.
The development of the renewable project pipeline has been slow, despite the rush to secure power purchasing agreements (PPA). To date, more than 100 projects with a cumulative capacity of over 3GW have signed PPAs, but many developers have not conducted the necessary work to ensure their projects are viable. Developers have also found it difficult to bank projects even with the award of a PPA, as uncertainty persists around the creditworthiness of the Financial Settlement Center (the government counterparty through which fixed tariffs will be paid) and the volatility of the Kazakh Tenge. The government has moved to solve these problems by capitalising the FSC and indexing fixed tariffs to inflation and the USD/KZT exchange rate, but it remains to be seen if these changes will ameliorate the perceived financial risks. A further complication is that the government has stated its intention to move away from fixed tariffs and towards competitive auctions. It is currently unclear what the timeline will be for auctions to be introduced, or what will happen to the existing pipeline of projects awarded fixed tariff PPAs. Projects much be commissioned within 36 months of being awarded a PPA, so it may be the case that auctions are gradually introduced as undeveloped capacity falls out of the project pipeline over time.
Kazakhstan scored 0.82 in Climatescope 2017, placing it 54th out of the 71 countries assessed worldwide and 10th among the 17 Asian nations surveyed. It was the highest ranked of the five former Soviet Central Asian Republics, four of which are included in the project for the first time. The country’s strongest performance was on Low-Carbon Business & Clean Energy Value Chains Parameter III.
The country’s power sector is dominated by a single state-owned utility generator and a state-run transmission monopoly. Private sector participation is permitted, but the barriers to entry are high.
On Enabling Framework Parameter I, Kazakhstan scored 0.84 and was ranked 56th overall. The country has put supportive measures in place, but they have been relatively ineffectual to date. Weaknesses include concerns about the creditworthiness of the body tasked with delivering the feed-in tariff subsidies, and the distant target date of 2050 to achieve 50% of power from renewables. The country’s worst performance was on Clean Energy Investment and Climate Financing Parameter II. It scored 0.20, ranking it in the bottom 10 globally. This reflects the absence of investment in 2016. However, since 2012, there has been investment of almost $500m in the country as well as loans and grants of $221m.
On Parameter III, it scored 1.95 and took 33rd place overall, placing it in top 50% of the countries assessed. This reflects the wide range of financial institutions involved in clean energy and the presence of a variety of on-grid clean energy service providers.
The country also performed relatively well on Greenhouse Gas Management Activities Parameter IV, managing 36th place. This was partly thanks its signing of the Paris Agreement in 2015 and establishment of a Nationally Determined Contribution. The lack of a domestic climate change policy undermined its score, however.