Kazakhstan’s Electric Power: Facing Crisis in Two Years?
By Sergei Smirnov
With over 7% of the total national industrial production, Kazakhstan’s electric power sector is the important part of the economy. However, the outlook for its development is not optimistic. According to experts, the growing demand will exceed electricity production capacity as soon as 2008. This will result in a deficiency of 3 billion kWh by 2009, which will grow to 14.5 billion kWh by 2015.
Today Kazakhstan has 54 cogeneration plants and five hydroelectric stations with a total capacity of approximately 17 gigawatts, and electric power transmission lines of 23,500 km. Kazakhstan’s largest power plants are Ekibastuz district power plants No.1 and No. 2, Aksu district power plant (the former Yermakov plant), Karaganda power and heating plant No. 3, Ust-Kamenogorsk power and heating plant, Shulbinsk hydroelectric station and Zhambyl district power plant. Cogeneration plants account for over 85% of the overall electric power production; meanwhile power and heating plants produce approximately 38% (6,700 MW). 70% of cogeneration plants burn coal and merely 15% burn gas and oil. Therefore coal remains the main combustible despite of Kazakhstan’s abundant hydrocarbon reserves.
As the coal deposits are located in the northern and central regions of Kazakhstan, the largest power plants are situated there (over 70% of all electric power generating facilities). Accordingly, these regions overproduce electric power, meanwhile Aktobe and West Kazakhstan oblasts (which have large hydrocarbon reserves) report a deficiency of electric power and import up to 68% of electricity from neighbouring regions in Russia.
The problem of electric power supply in South Kazakhstan also remains acute. This region does not have the sufficient primary sources of energy, so that it has to import coal and gas to produce electric power. Besides this, up to 15% of electric power is imported from neighbouring nations to make up for the deficit. Unfortunately the transmitting communications between the north which is rich in electric power and south with its deficit of electric power are poorly developed. To be more precise, there is only one 500 kV power line with a maximum transmission capacity of 600 MW between the regions.
Insufficient attention was given to the development of Kazakhstan’s electric power generating facilities over the last fifteen years. The consequences are unpleasant. According to KEGOC President Kanat Bozumbayev, the electric power production rate will not exceed 73 billion kW by 2008, meanwhile consumption is expected to grow to 74 billion kW “so we will face significant problems with electric power deficit by 2008”.
The reason is clear. Kazakhstan’s industries develop while the number of electricity generating facilities remains the same. According to the Ministry of Energy, in 2005 southern and western regions of Kazakhstan reported an electricity deficit of 800 MW and 300 MW, respectively. The figure is expected to grow to 2,700 MW and 1,300 MW by 2015. The experts of the Centre for Marketing and Analytical Research also say that a deficit of 0.5 billion kWh will begin in 2008 assuming that no new facilities are put into operation. The deficit rate could reach 14.5 billion kWh by 2015. However, the implementation of additional generating facilities will lower the deficit to 2.1 kWh.
Retail and Wholesale
The wholesale market, where almost all contracts for Kazakhstan’s excessive electric power are concluded, is divided into two segments. The first and the main one is the decentralised market where a seller and buyer have direct bilateral transactions. The second segment is the centralised market where multilateral trades are carried out at the virtual exchange. The state-owned Kazakh Electric Power Market Operator (KOREM) was established at the end of 2000 to operate the centralized trades. Approximately 100 participants in Kazakhstan’s electric power wholesale market are clients of the operator.
According to the chart below, sales are growing steadily in this segment. Today, 48 companies are registered in the wholesale market, while a mere 14 companies participate in trades on regular basis. District plants are not active here because their main goal is to generate heat.
The number of the participants can be increased by attracting foreign suppliers (companies from Russia, Kyrgyzstan and Tajikistan). The main problem is the existing customs regulations which require the declaration of electric power. That is why it is necessary to change the customs legislation so that the transfer of electric power is registered automatically. So far the number of proposals on centralized trades is insufficient.
Nevertheless, despite all this, the stock exchange market is developing. Only 18 short and long-term transactions on electric power were registered in 2004 compared with 89 in 2005. Quarterly supplies of electric power enjoyed high demand; meanwhile the wholesale market participants believe that increasing the number of long-term contracts would be a favourable trend for the market. Intermediaries are another problem. Acting as a power stock operator, KOREM could organise direct trades which would be profitable both for seller and buyer. Yet intermediaries account for up to 30% of the market.
According to experts, legislation drawbacks do not allow the creation of an efficient market mechanism. For example, article No. 25 of the Law of Kazakhstan On Electric Power was intended to guarantee supplies, by separating subsidiaries (the socalled ‘electric power supply organisations’ or EPSOs) from the regional electric grid operators. EPSOs are affiliated with electric power transferring organisations (EPTOs) and aim to supply electric power to particular consumers. However, these are the regional electric grid operators who set up EPSOs and EPTOs using various schemes. Therefore the consumers still do not have a wide range of choices. To resolve this, the Ministry of Energy has issued over 500 licences allowing companies to transfer electricity to consumers maintaining the facade of competition on the retail market.
Another serious problem is the distribution and redistribution of quotas which is plasticised by the Ministry of Energy. In particular, the Ministry has increased the quota of Kazphosphate, which is a private company, for cheap electric power (from 106 to 210 MW) at the expense of Almaty’s quota which was reduced from 128 to 30 MW. The southern capital was ‘advised’ to compensate for the deficit by purchasing 250 MW from the Zhambyl district electric power plant.
The state programme to privatise and restructure domestic electric power was approved in May 1996 and resulted in large-scale privatisation of electric power generating facilities. Hydroelectric stations of large capacity were transferred under concessions. Power and heating plants of industrial significance were transferred to large industrial complexes. Common power and heating plants were transferred mainly to utility service providers.
Therefore, the domestic electric power sector can be described as follows. As of 2007, AES (the USA) is the largest producer and the owner of AES Ekibastuz (former Ekibastuz district electric power plant No. 1) with 20% of Kazakhstan’s overall electric power production AES has a contract for the 30-year rent of two hydroelectric stations (in Ust-Kamenogorsk and Shulbinsk) and four power and heating plants in Sorginsk, Leninogorsk, Ust-Kamenogorsk and Semipalatinsk. The RAO UES of Russia and Kazakhstan own Ekibastuz district electric power plant No. 2 which accounts for 10-12% of the national electricity production on a parity basis. The national share is transmitted to Access Industries for trust management for 10 years.
It is clear that sufficient supply of electric power to Kazakhstan depends first of all on these two largest participants. AES plans to increase the generating capacity of Ekibastuz district electric power plant No. 1 from 1,800 MW to 4,000 MW over the period of eight years by rehabilitating one unit every two years. Ekibastuz district plant No. 2 has developed a feasibility study for the construction of a third and fourth power units of 500 MW each. However, these are the investment plans of the companies and are not regulated by the government, so the scope of work and terms may change.
Today just a few new owners modernise and reconstruct their facilities. Others operate their facility as it is using the existing capacities with the existing tariffs. According to experts, privatization did not alleviate financial gaps in the sector; even more, the electric power rates began to grow steadily and consumers’ paying capacity is not taken into account.
The wear and tear of electric plants (estimated at 60-80%) resulted into the growing gap between their designed (18,500 MW) and factual (14,400 MW) capacity.
The electric grid is not an exception and the situation is even more dangerous because using worn out grids increases losses. Electric power transmission services, which are included in the sector of natural monopolies, account for approximately 20% of the final cost of electric power; however the owners of electric power transmitting companies refuse to invest in the reconstruction of the grids.
The electric grids in rural areas are in the worst state; the government has almost lost control over electrification there. According to experts, the construction of 112,600 km of high-tension lines of 110 kV or less, 614 distribution substations (of 110 and 35 kV) with the total capacity of 4.13 million kW, and 23,700 conventional substations of 10/0.4 kV with the total capacity of over 4.3 million kW in rural areas is necessary. This measure will allow rural area consumption to increase to 8.7-9.9 billion kWh by 2015. Considerable investment, as well as establishing respective engineering organisations and the network of construction and mounting companies are needed for this large-scale plan.
Kazakhstan’s joint power system (which is talked about as if it is a completed fact) is only just establishing itself. That is why the ultimate goal is to construct large intersystem grids to link all Kazakhstan’s regions into a joint system.
Aside from this, according to experts, the nation needs an efficient energy conservation policy. Kazakhstan does not have automatic systems to count commercial transmissions of electric power, so it is impossible to define the actual transmission loss and to fine-tune the balance between consumption and production. Therefore it is easier for the companies to increase rates, referring to the growing loss of electric energy (which exceeded the norm long ago), rather than make investments in renovation.
To date, the process of wear and tear and the obsolescence of facilities has not stopped, which means (taking into account the growing electricity consumption and increased load on the equipment) that the risk of electric power system failure increases.
Searching for the Solution
Of course, some measures are taken to compensate for the deficit. In particular, a project to construct a second 1,115 km North-South line of 500 kV is underway and is expected to be completed by 2010. The project costs $330m, including a $100m loan provided by the World Bank, $148m by the European Bank, $75m by the Development Bank of Kazakhstan, and KEGOC’s own investments of approximately $9m. The line will allow increases in transmissions from Ekibastuz district electric power plants to South Kazakhstan from 650 MW to 1,350 MW. However, the problem will still remain acute.
The government plans to resolve this problem by constructing additional generating facilities. However, taking into account that designing a large plant requires more than three years and construction takes several years, commissioning the new electric power facilities is a long-term objective.
The Chinese Project Advantages and Drawbacks
China is very active in the development of the Kazakhstan’s electric power market. Currently the preliminary feasibility study of the Kazakhstan-China line is under development. It comprises the construction of 12 units for the new district electric power plant of 7,200 MW in Ekibastuz and a 4,000 km long direct current line to transmit 800 kV. It is assumed that the plant will produce approximately 40 billion kWh per year. The project is estimated to cost a total of $9.5bn and China is in charge of finding the sources of investment. The project will raise the overall production of electric power in Ekibastuz region to 13,000 MW.
However, the implementation of this project has negative aspects. The first one concerns the environment. It is known that the Ekibastuz coal excavated from open pits has high ash content. Even now the ash waste piles can be seen around the regional electric power plants from a distance of 50 km. Strong winds turn local air into dense ash smog. If the need to resolve the problem is obvious now, it is easy to imagine the drastic consequences of the new project which will add tens of millions tonnes of ash every year.
Another aspect concerns the economy. Taking into account the insignificant participation of Kazakh contractors in the construction of the transmission line (because Kazakhstan has neither specialists, nor experience or necessary equipment), the major part of the investment will by-pass the national economy. As a result, Kazakhstan will only receive drawbacks (hills of ash), while China will enjoy the advantages of electric power.
The Kazakhstan’s government approved the concept of the development of hydroelectric power sector, which provides for the construction of approximately 20 hydroelectric stations up to 2015. However, the projects have many uncertainties. So far the emphasis is on hydroelectric peak stations of small capacity. The largest one will be the $251m Moinak station of 300 MW of the expected capacity. Nevertheless even if the Moinak and Kerbulak hydroelectric stations are put into operation in 2020, the electric power deficit will reach 1,300 MW in Almaty city and Almaty Oblast.
This problem can be resolved by a network of gas turbine electric power plants which would burn associated gas supplied by oil producers (approximately 40 million kWh of electric power can be produced by burning 10 billion m3 of gas), and using alternative sources of energy.
The wind potential is estimated at over 1.8 trillion kWh per year in Kazakhstan. There are approximately 15 regions in Kazakhstan where the average wind speed exceeds 3-5 m per second. The Dzhungar Gates, Shelek Wind Corridor, Kordai and the watersides of Caspian and Balkhash are among these regions.
Wind has obvious advantages when compared to traditional sources of energy: it is inexhaustible, available for small and middlesized business, environmentally friendly, and the electric power generated using this source of energy has a comparably small cost, not exceeding 3-4 tenge per kWh. However, despite the good outlook for this, Kazakhstan has only pilot projects so far.
The electric power sector is very expensive and requires large investments. According to KEGOC’s estimates, the sector will require approximately $10bn (including $5.5-6bn for electric power generating facilities, and $3.5-4bn for the modernisation of electric grids) by 2015.
There is not a wide choice of finance sources for these projects. Large producers of subsoil resources and metallurgic plants had purchased electric power plants for their needs so they pay no attention to the problems of the utility grids. The western banks will allocate funds provided that the investments are recovered within a period of 10 years or less. Taking into account the present situation, investments would actually be recouped in 40-45 years.
Of course, it is the government who should provide finance. The question is whether the government takes this step. Will it take the money from the National Fund to repay expenses aimed at the development of the national electric power sector?
Another alternative is to change the rates for electric power. However it would be quite difficult to ensure the implementation of an investment programme in this case. The growth in rates should be much higher than the current 4-5% per year, but this is unrealistic considering the relatively low incomes of the majority of Kazakhstan’s citizens. Besides, social allowances to the people on lower incomes should also be increased.
Specialists are considering alternative ways of attracting investments by selling shares in electric power companies, offering tax allowances, including the prolongation of tax preferences, and giving state guarantees for loans.
Therefore, the issue of financing the sector is not settled, and investors are welcomed.
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