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 KAZAKHSTAN International Business Magazine №1/2, 2001
 Restructuring and Privatisation of Kazakhstan’s Power Industry: Basic Results and Achievements
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Restructuring and Privatisation of Kazakhstan’s Power Industry: Basic Results and Achievements
Kenzhemurat Dukenbayev, president of KOREM, Ph.D. (in technical sciences)
 
For Kazakhstan, 1992 was a turning point on the path to a market economy. That year saw the beginning of introduction of free prices for goods and services in virtually all economic sectors of the country. However, under the conditions of the post-Soviet economic order and increasing inflation, this fundamental measure led to aggravation of the crisis of non-payments. This crisis turned out to be especially destructive for the power industry, which was at that time still a state monopoly maintaining the economy and population in the early 1990’s.
 
In spite of these non-payments, the power industry, being state-owned, had to provide continuous power supply, thus crediting other economic sectors. Although the state made repeated attempts to solve the problem by constantly raising power tariffs, this situation led to the power enterprises nearly losing all of their current assets by 1994. Receivables for power and heat were growing in the sector, just as the payables were (payments for fuel, spare parts and materials, salaries, etc.)
 
These negative trends showed that retaining a state monopoly in the power industry could lead to an unacceptable degradation in the sector and an abrupt fall in the reliability of power supply to consumers.
 
The above factors served as the principal motives for fundamental reforms of the sector by the Kazakhstani government to achieve the following strategic goals:
• adjusting property relationships in the power industry in compliance with a governmental programme for large-scale privatisation of industry, agriculture and utilities;
• fostering competition among power-generating enterprises for the distribution of electricity, which would lead to cutting the production costs and stabilising the final production cost;
• providing consumers with the opportunity to choose a supplier of electricity.
 
The government’s concept of market reforms in the power industry included a restructuring of the sector with unbundling of electricity generation, transmission and distribution services. The plan also provided for economic independence of all specialised enterprises (design institutes, construction, assembly, and repair companies). As a result, the sector would be divided into monopolistic and competitive sections. The latter comprised all the power generators and specialised enterprises, while power grid operators (transmission and distribution companies) were considered natural monopolists.
 
In the course of the programme, all power generators were privatised: nationally important power plants were sold to strategic investors, and the majority of regional cogeneration power plants were transferred to public ownership. Major hydropower plants were handed over under concession. Large industrial enterprises were given ownership and management privileges for the industrially important isolated generating plants that provided them with power and heat.
 
Today the privatisation of generation plants is nearly complete, with 52 power plants already privatised. The only three power plants that are still state-owned are the Mangystau Power Technological Plant, Shardara GES and coal-fired power plant Ekibastuz GRES 2. However, negotiations over selling 50% of the shares of Ekibastuz GRES 2 to Russia’s RAO United Energy System are nearing finalization.
 
Power grid companies which owned and operated 110, 35 and 6-10kV power grids were transformed into independent joint-stock ventures (REKs). National Kazakhstan Electric Grid Operating Company (KEGOC) was established to own and operate high voltage power grids (1150, 500 and 220kV). KEGOC’s separate affiliate company - National Dispatch Centre (NDC) - provides centralised dispatch services for United Power Grid of Kazakhstan.
 
It should be noted that there have been some negative consequences of power sector reform. During the privatisation process, the owners of a number of regional power plants managed to receive the assets of corresponding REKs into ownership or concession. The basic motive of these entities was to obtain guaranteed (excluding any competitive power supplies) distribution of electricity. In fact, power monopolies were reconstructed at regional levels, which was an obvious deviation from the governmental course of power sector reform. Due to that situation, the government had to reconsider its approach to the privatisation of REKs and terms of its completion. It was considered expedient to invite the EBRD to participate in providing a transparent mechanism for REK privatisation. The Bank was to purchase 10% of the shares of each of the privatised REKs.
 
The chief positive results of the government programme for restructuring and privatising the power industry of Kazakhstan have been:
• establishing a competitive electricity and power wholesale market operating on the basis of bilateral contracts between generators and consumers, who are now able to choose from among numerous suppliers, which increased the level of mutual responsibility;
• stabilising the prices for the electricity distributed from power plant buses; the prices proved stable even during the devaluation of the tenge by half in April 1999 and the consequent rise in fuel and rail shipment prices;
• defining the ratio between state regulation and market self-control in the power industry;
• developing international co-operation in the power industry.
 
September 2000 saw the set-up of a technological base for international trade of electricity among Kazakhstan, Russia and Central Asian states for the first time in the CIS. The power grids of these countries were united to provide simultaneous operation, which helped to expand the market and to integrate legal, commercial and customs provisions.
 
The problems of the upcoming stage of deeper reforms in the power industry are as follows:
• the basic assets of the power industry have not been modernised over the past decade, and subsequently, generation and power grid assets have been dangerously deteriorated;
• the current steady increase in electricity consumption by the real sector requires anticipatory commissioning of new power facilities and an increase in the capacity and reliability of power grid assets;
• the discrepancies between Kazakhstani and international standards are hampering the introduction of new equipment and technologies from the world’s leading producers of energy equipment;
• despite a growth of the capitals drawn in, Kazakhstani banks are still unable to finance capital-intensive enterprises in the power industry and render crucial long-term credits to the sector;
• attracting credits from international banks (such as the EBRD) is complicated, as they charge a high interest rate due to the risk of dealing with a transition economy like Kazakhstan’s. In addition, a decline in electricity consumption was observed prior to 2000, and credits were attracted only with government guarantees.
 
Nevertheless, structural reforms, privatisation of the sector, and the emerging constant growth of electricity consumption have created key conditions for drawing credits and direct investments by owners of power facilities.
 
For instance, AES corporation – the owner of Ekibastuz GRES I, the largest power plant in Kazakhstan – invested US$100m in the restoration of the plant’s power-generating units.
 
Kazchrome, which owns the nationally important Aksu power plant, invested US$125m to upgrade its power units. US$10m was also used to transform the Akturbo gas turbine unit into a steam and gas power unit, resulting in a 35MW increase in capacity.
 
TengizChevroil attracted about US$90m in investment for the reconstruction of its gas turbine power plant (with full replacement of outdated gas turbines by more sophisticated ones with a total capacity of 138MW) and for the construction of a new, more powerful gas turbine plant (with an initial capacity of 80MW and a design capacity of 480MW).
 
Aktobemunaigaz invested about US$9m in the construction of the 24MW Zhanazhol gas turbine (total capacity is 48MW).
 
An alliance of companies (British Gas, Agip, and others) invested about US$50m in the construction of an 80MW (240MW) gas turbine power plant for the Karachaganak gas-processing complex.
 
Apart from drawing a World Bank credit of US$140m and an EBRD credit of US$45m to finance a project for modernising the national electricity network, KEGOC plans to invest US$72m of its own funds. All of these factors have contributed to the company’s sufficiently high ratings from international rating agencies Standard & Poor’s and Moody’s. KEGOC was the first among similar Central Asian companies to receive these ratings. In March 2001 the company’s credit rating was upgraded to ‘BB’ by Standard & Poor’s.
 
However, despite the enduring reforms, there are still problems in need of prompt resolution.
 
First, the market participants entered the reformed system without adjusted and approved administrative documents (provisions, regulations, instructions, etc.), the development of which should be co-ordinated by KEGOC, the sector’s headquarters. This complicates relationships between market participants, especially in the field of centralised dispatch management.
 
Second, experience has shown that it is crucial to set up a centralised balancing pool or spot market for power sales under ‘a day in advance’ and ‘an hour in advance’ patterns, in addition to developing a market of short-term bilateral contracts on the sale and purchase of electricity. This is within the authority of the KOREM closed joint stock company, a newly created operator of the power and electricity market.
 
Third, close attention should be paid to modernising the technical means of power market infrastructure. Automated energy management systems need to be established to include up-to-date means of metering electricity generated and transmitted, and devices which process and transmit data to corresponding dispatch centres. This should be an objective for all the market participants.


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