Kazakhstan’s Power Market
A brief review prepared by Askhat Ospanov, a lawyer from Sayat Zholshy & Partners Law Firm
Characteristics of Kazakhstan’s Power System
The power industry is one of the most important elements of the fuel and energy complex, providing more than 7% of the country’s total industrial production. In 2004 alone, domestic power facilities have produced 66.9 billion kWh of electric power, of which 5.3 billion kWh were supplied to other countries (22% more than in the previous year). It is indicative that about 86–88% of Kazakhstan’s electric power is produced on cogeneration plants.
Speaking of general characteristics of the Kazakhstani power system, it is worth noting that the system is distinguished by the irregular arrangement of power facilities throughout the country. Conditionally, the domestic energy complex may be divided into three large regions:
Northern and Central Region. This includes the Akmola, East Kazakhstan, Karaganda, Kostanai and Pavlodar Oblasts. The power industry of these oblasts is incorporated in a uniform network and is closely connected with the power supply system of the Russian Federation. Kazakhstan’s largest energy-supplying facilities: Ekibastuz State Regional Power Plant – 1 and State Regional Power Plant – 2, Aksu State Regional Power Plant, Karaganda Cogeneration Plant – 3, Ust-Kamenogorsk Cogeneration Plant, and Shulba Hydroelectric Power Station are located in the Northern and Central region. The lion’s share of electric power generation falls on the Ekisbastuz Power Station (up to 4,000 MW). Due to significant coal deposits, the coal-fired electric power industry prevails in this region. The regional power output is used to meet the local demand has the potential for export.
Southern Region. Consolidating Almaty, Zhambyl, Kyzylorda and South Kazakhstan Oblastsby the electric grid, this region is closely connected with the power systems of Kyrgyzstan and Uzbekistan. As there are no domestic fuel sources, and, accordingly, large power stations, the region depends on electric power import from neighbouring countries. In 1998, in order to resolve this problem, the construction of the Ekibastyz – Nura – Agadyr – South Kazakhstan State Regional Power Plant – Almaty transit electric line was completed with a 500-kilovolt capacity. This line has connected the Southern region with Northern and Central Kazakhstan. It allowed these oblasts to become independent from energy imports from other Central Asia countries. The next step was the construction of the "North-South" second main line at the end of 2004. The project value was estimated at US$295.6 million. The new line will not only cover the energy needs of Kazakhstan’s southern regions, but also will function as the transit line. As Vladimir Shkolnik, the Minister of Power and Mineral Resources of the Republic of Kazakhstan noted in an interview, "the second line is necessary for transit of electric power produced at hydroelectric power plants of the neighbouring southern republics".
Western Region. This region includes Aktobe, Atyrau, Western Kazakhstan and Mangistau Oblasts. It is closely connected with the Russian power system. Except for Aktobe Oblast, whose electric industry works separately, all the oblasts are joined to the common electric network. Despite significant hydrocarbon reserves, a part of the needs for electric energy is covered thanks to imports from Russia. In the future, the construction of new generating plants is planned in the region in order to cover the local needs and to export energy abroad.
Another peculiarity of Kazakhstan’s power system is the uniform vertically organized dispatching system. It is also characterized with a large amount of combined electric power production means (cogeneration plants). Most of the Kazakhstani power plants are significantly deteriorated, exceeding a design service life (the average deterioration in capacity makes 58.5%1).
1. The Energy Sector Development Program to 2030 (ratified by the resolution of the government of the Republic of Kazakhstan, dated April 9,1999, #384).
Power transmission lines with the voltage 0.4–6/10–35–110–220–500 and 1,150 kilovolt and a general extent of 454,706.5 km demand urgent modernization. Nowadays, 8.8% backbone 220–500 kilovolt power lines do not meet the operation requirements and demand urgent repair2. Approximately 26% of power lines of lower voltage are completely deteriorated (from 0.38 up to 110 kilovolt).
Privatization of power facilities and wide attraction of private capital in this sphere was the basic catalyst to modernize the power industry. Nowadays, about 80% of all power-suppliers are privatized or transferred to management. At that, the investors were both domestic companies and large foreign companies such as the Russian Company UES of Russia, AES, and Access Industries.
Organizationally, the structure of Kazakhstan’s modern power system consists of the following independent divisions:
National Power System (NPS), presented by The Kazakhstan Electricity Grid Operation Company (KEGOC). NPS employs backbone power lines (interstate and inter-regional) with a voltage of 220–500–1,150 kilovolt.
Regional Electric Grid Companies (REC), containing distribution networks of 110 kilovolt and less and transferring electric power at the regional level.
Electric power producers –power stations independent or integrated with large industrial power facilities.
At the same time, the organizational structure does not meet the modern market requirements for the electric power industry. Thus, there is no system for effective control and metering of power and electricity, necessary for the automatic metering of contractual and actual electric power transfer. The weak connection between Kazakhstan’s regions and the imbalance in power generation (in Kazakhstan’s Northern and Central regions – 72.7% of all power-suppliers) is one of the main problems. Still there is no pricing market mechanism in the power retail market and it is still imperfect in the wholesale market. And, finally, there is no competition in the sphere of power supply by retail consumers and free choice of the electric power supplier.
On February 18, 2004, the resolution of the government of the Republic of Kazakhstan approved the Concept of Further Developing Market Relations in the Electric Power Industry of the Republic of Kazakhstan. It is directed towards securing and developing a principle of separation between participants in the power market by the following functions:
· generation of electric energy;
· transfer and distribution of electric energy; and
· delivery (selling) of electric energy to the ultimate consumer.
The Concept stipulates the precise differentiation of two levels of Kazakhstan’s power system: the wholesale and retail markets of electric energy. The new model of power system was set at the legislative level. Thus, the following were passed: the law of the Republic of Kazakhstan, dated July 09, 2004, On the Electric Power Industry; Rules of the Organization and Functioning of the Electric Power Wholesale Market of the Republic of Kazakhstan3; Rules of the Organization and Functioning of the Electric Power Retail Market and also Access to and Providing Services in this Market4.
3. Ratified by the Order of the Minister of Power and Mineral Resources of the Republic of Kazakhstan, dated August 27, 2004, #197.
4. Ratified by the Order of the Minister of Power and Mineral Resources of the Republic of Kazakhstan, dated September 30, 2004, #232.
Below, we present a model for the wholesale and retail electric power market on the basis of the Concept and the aforementioned regulatory acts.
The Wholesale Electric Power Market
The new model of the wholesale electric power market consists of the following parts:
Decentralized Market. In this market the participants of the wholesale market (buyers and sellers of electric power) conclude direct bilateral electric power sale and purchase agreements5.
5. To participate inn the wholesale market, an energy company or a consumer have to meet certain requirements, in particular, to supply/use not less than 1 MW of the average daily capacity of electric power.
Centralized Market. The centralized market represents some kind of stock exchange on which its participants sell and buy electric power. The basic commodity in this market is "the day forward" contracts (spot-market), and medium-term and long-term power supply contracts (forward contracts). At the moment of the Concept acceptance, spot transactions amounted to only 1% of the total number of concluded contracts. The rest are direct bilateral sale and purchase agreements.
Balancing Market. In the "real time" mode, the balancing power market physically removes imbalances between contractual and actual power transfers. The system operator (KEGOC) eliminates imbalances using the reserve capacity. For this purpose, state bodies and KEGOC will define certain power plants with reserve capacity. A market participant, exceeding the contractual volume of consumption or decreasing electric power production, pays the services of the system operator on settlement of the imbalances.
System and Auxiliary Services Market.The main seller/buyer in this market is the system operator – KEGOC. As the seller, KEGOC renders to all participants of the wholesale market services similar to the services of regional electric grid companies in the retail market: the transfer of electric energy through networks of the National Power System (220–500–1,150 kilovolt); dispatching control of networks and consumption of electric energy; regulation of capacity during transfer of electric energy and dispatching. The Kazakh law relates all the aforementioned services to the natural monopoly sphere. Tariffs for these services are preliminarily coordinated with antimonopoly bodies and are uniform for all consumers. As the buyer, KEGOC acquires from the wholesale market participants the services on availability of necessary electric capacity reserves (energy producers), and also services on regulation of active and reactive power for the maintenance of standards of reliability and electric power quality (REC).
The Retail Market of Electric Power
More precisely, the principle of functions division could be traced in the new structure of the power retail market, the organizational structure of which is formed of three groups of independent units.
Power-generating Companies. At present, the generation of electric power is excluded from the list of natural monopolies. As a result, power producers are usual industrial companies, the basic purpose of which is the effective sale of production (in this case, electric energy). The free competition between energy-generating companies and the absence of rigid antimonopoly control should become the stimulus for the development of the energy-producing industry, increases of power plants performance and introductions of "know-how".
Regional Electric Grid Companies (REC) take a special place in system of the retail market as the activity of REC is subject to legislative regulation.
This is connected with the following provisions of the laws:
1. Within the limits of one political subdivision—oblast—only one REC can function. Thus, any competition in the sphere of the transfer and distribution of electric power in the retail market is excluded.
2. The transfer, distribution, dispatching and consumption of electric power are the sphere of natural monopoly. All of the aforementioned services relate to direct basic REC functions. Accordingly, REC activity will be subject to regulation by the legislation on natural monopolies, unlike the activity of the energy-generating or energy-supplying companies.
The Antimonopoly Law of the Republic of Kazakhstan includes two categories: regulation of natural monopolies and legislation on competition protection. The sphere of natural monopolies includes a strictly limited activity list. The activity of natural monopolies is controlled by the state and has rigid restrictions (it is forbidden to engage in different types of activity and to participate in the activity of other companies, the tariffs are set by the antimonopoly body, etc.). Laws on competition protection provide for regulation of the activity of any companies dominating in a certain market (the share exceeds 35%) or monopolies, and also anticompetitive actions and agreements. The legal regime of monopolies (dominant companies) is characterized with greater freedom and absence of rigid interdictions.
The role of the REC in the retail market can be compared to the role of traffic controller for road traffic. Besides the direct functions on transferring and distributing electric power (through power lines of a regional level), the REC ensure the quality of transferred power by controlling the capacity, making and observance by all participants of electric power consumption schedules, revealing non-contractual consumption of electric energy (an imbalance).
Besides the REC, individual energy transferring companies may transfer electric energy. The existence of such companies is explained by the presence of isolated electric networks, as the rule, intended for transfer of electric power to large industrial complexes.
Power-supplying Companies.Nowadays, according to the Ministry of Power and Mineral Resources of the Republic of Kazakhstan, more than 500 companies have power supply licenses. It is indicative that process requirements to energy-supplying companies are considerably different from the requirements to energy-generating companies or the REC, which substantially facilitates their establishment. Thus, for example, electric power production plants are necessary for energy-generating companies, and for the REC, a system of power lines of various capacity and step-down substations is critical. Unlike these companies, energy-supplying companies need to have the following in order to access the retail market:
1. Custody transfer metering devices and systems for consumers in the coverage zone. (It is worth noting that a similar requirement is established for electric power consumers. Thus, charges for the purchase of custody transfer metering devices may be borne by consumers).
2. The computer-aided data acquisition and transmission system to register power and electricity consumption from metering devices.
Energy-supplying companies will play the role of original "energy traders" in the retail market, i.e. payments for the electric power from consumers are received by energy-supplying companies. Then, according to the provisions of the Rules, the funds received from consumers are distributed in the following directions:
· payment for electric energy purchased from the power-generating companies;
· payment to REC (energy-transferring companies) for power transfer;
· payment to REC for capacity control;
· payment to REC for energy consumed without any contract.
The margin will be the profit of the energy-supplying companies.
The most important factors of the development of market relations in the power industry are the further privatization of the state property and the active attraction of private investors.
At present, the process of privatizing Kazakhstan’s electric power industry is not completed. In particular, in January 2005, the government of the Republic of Kazakhstan approved the list of facilities that are subject for sale this year. Thus, it is proposed to sell the state shareholdings of Eurasian Power Corporation, The Kazakhstani Operator of the Electric Power and Capacity Market, Mangistau REC, West Kazakhstan REC, and Zhezkazgan REC.
Another strategic move is management transfer to private investors in the middle of 2005 of the largest power facility, Ekibastuz State Regional Power Plant - 2, which is the largest energy-supplier in Kazakhstan (the power plant includes two power units with a 525 MW capacity and a design output of 8 billion kWh). It should not be forgotten that in April 2005, Russian Company UES of Russia declared the conclusion of the transaction on the purchase of 50% of this power plant. Shares were transferred as repayment of Kazakhstan's debt before Russia for the received electric power. At the end of June 2005, tenders for transfer of the remaining 50% shares in trust management were invited. According to the results of the bidding, the tenders of two participants have been considered as the most preferable: Access Industries Company and Euroasian Power Corporation. The winner will be defined after the additional bidding.
Development of Alternative Energy Sources
Speaking of the creation and expansion of power generation, it is necessary to mention alternative energy sources. In particular, in Kazakhstan there are greater opportunities for the development of wind energy. Some landscapes (Dzungarian Gates, Kordai Pass, Mangistau Ridge, Caspian Sea and Balkhash Coast) are appropriate for the installation of wind generators.
In December of the last year, the trial wind generator project was started in Kentau. Windmills with a 150 kWh capacity were installed 6 kilometres from the city. Both plants were rendered and installed by the Indian company NEPS India LTD.
In comparison with traditional energy sources, windmills have a number of the important advantages, such as the low cost, environmentally friendly technology, and minimal expenses on maintenance. We anticipate that alternative energy sources will be applied more widely in the future.
The question on constructing an atomic power station in Balkhash was discussed in Kazakhstan for a long time. However, its consideration has been temporarily suspended. The most important reason is the environmental impact and a risk to the people living in this region.
In the near future, the development of the hydroelectric power sector will become important, primarily in the Southern and Southeastern regions of Kazakhstan. The total hydrological potential of Kazakhstan amounts to 170 billion kWh, and 62 billion kWh can be developed technically. Today, we actually use more than 8 billion kWh, and the share of hydroelectric power plants in the power industry amounts to 12%.
The government is planning the construction of a number of hydroelectric power plants in Almaty Oblast, including Moinak Hydroelectric Power Plant (capacity 300 MW), Kerbulak Hydroelectric Power Plant (capacity 50 MW), small hydroelectric power plants on the Aksu River (capacity 235 MW) and on the Teitek River (capacity 390 MW).
The aims of these projects is to reduce the dependence of the southern region of electric energy import from Kyrgyzstan and Uzbekistan. The realization of projects to construct and modernize hydroelectric power plants is planned through the active attraction of private capital. In particular, some large projects will be financed due to issue and offering of a special financial instrument—design bonds. Bonds will be issued under a guarantee of the government of the Republic of Kazakhstan and the Development Bank of Kazakhstan. KazKuat, a specially established state company, will act as the operator of the projects and will regulate construction of the plants and attraction of investments under the guarantees of the government of Kazakhstan. According to the decision of the government of Kazakhstan, the state share holding of Shardary Hydroelectric Power Plant will be transferred to the management of the new company. KazKuat will also be the basic founder of Moinak Hydroelectric Power Plant Company.
Kazakhstan has significant hydrocarbon reserves, with the main deposits concentrated in the western region of the country. At the same time, the western region still imports electric energy from neighbouring Russia. Local authorities and oil companies are undertaking measures to promote domestic power-suppliers. The top priority is the construction of gas-turbine power plants fired by gas delivered from oilfields. Construction of gas-turbine plants near oilfields is a widely spread practice around the world. On the one hand, it resolves the problem of gas disposal, and, on the other hand, additional energy sources appear. The most significant projects in this region will be: construction of gas-turbine plants with a 48 MW capacity at Aktobemunaigaz industrial complex; the commissioning of Tengizchevroil gas-turbine power plant with a 144 MW capacity, completely covering the needs of the Tengiz Oil and Gas Complex; and construction of a gas-turbine plant at the Kumkol field (Kyzylorda Oblast) developed by PetroKazakhstan Inc., with a capacity of up to 200 MW.
Summing up this brief review, we would like to note that the new system of the power market organization in Kazakhstan stipulates a highly competitive environment at two levels: the generation and selling of electric energy. Accordingly, one can expect the active participation of private capital in the development and construction of power facilities and the establishment of several private energy-supplying competitions within the territory of one region under the direct or indirect control by the government.
And secondly, in comparison with the power systems of other CIS countries, Kazakhstan is the leader of reform in this sphere. At the same time, the effectiveness of the reforms can be estimated only with time. At this stage of reforms, some disputable issues arose, which demanded prompt decision. For example, the regulatory acts on the electric power industry do not provide for responsibility for power failures. Taking into account the recent accident in Moscow and similar cases, it is expedient to resolve all arising questions at the stage of reform, or rather prevent their arising.
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