Executive Summary
The Republic of Kazakhstan has embarked on the energy transition from the fossil-based to low carbon power. Coal is the dominant source of energy in the country, accounting for 64.7% of total projected generation and 74.0% of thermal generation in 2019. The government is seeking to diversify Kazakhstan’s energy mix and the National Green Growth Plan envisages the following (optimistic) breakdown by 2030: 49.0% coal, 21.0% gas, 10.0% hydropower and 8.0% nuclear, alongside a sizeable renewables element. However, we predict that the relative contribution of coal will fall at a slower pace than targeted by the government, such that it still accounts for 64.9% of total electricity generation and 74.0% of thermal generation in 2028.
By 2050, the government anticipates that non-thermal sources will generate at least half of Kazakhstan’s energy needs. This plan requires the start of a domestic nuclear energy program and significant growth in non-hydro renewables. Kazakhstan will remain open to foreign investment as a means to import the capital and expertise to realize its objectives, although investor uncertainty about the operating environment will further militate against the government achieving its targets.
According to the first President Nazarbayev, Kazakhstan intends to reach 50% of renewable energy sources (RES) in the total energy balance by 2050, with an intermediate goal of 3% by 2020 and 10% by 2030. From a geographical and meteorological points of view there is a tremendous potential in utilizing more wind power, solar installations and biomass in increasing the renewable share in the country. As stated in the analytical report of JSC “Samruk-Energy” on the electricity and coal market of Kazakhstan, the country was introduced to 5 renewable energy sources (RES) in January 2019. This alludes to the following RES: wind power plants (WPP) “Kerbulak-1” - 4.5 MW and WPP “Kerbulak-2” - 4.5 MW in Almaty region; solar power plants (SES) “Gulshat” KPM Delta-40 MW in Karaganda region; WPP “wind energy Technologies” - 52.8 MW in Mangistau region; biogas plant of agricultural firm “Kurma” - 1.3 MW in Karaganda region. Up to the present moment, the country has 72 active renewable energy facilities with a total capacity of 634 MW – 200.25 MW hydroelectric power plants, 249 MW solar power stations, 183.25 MW wind power stations and 1.65 MW biogas facility.
Overall, power plants of Kazakhstan in January 2019 produced 9 944.4 million kWh of electricity. In January 2019, compared to the same period of 2018, electricity production increased significantly (growth of 20% and above) in the Turkestan region. At the same time, more than 5% decrease in electricity production was observed in Almaty, Zhambyl, Kostanay and Pavlodar regions.
The Kazakhstani Government over the recent years has been actively attracting a greater investment into the renewable energy sector, implementing a 15-year feed-in-tariff (FiT) mechanism in 2013. In 2018, the Ministry of energy shifted to a new stage of support: the country began to conduct renewable auctions. The auction mechanism allowed, on the one hand, to make transparent and understandable the process of selection of projects and investors, on the other hand, to bet on more efficient technologies and projects that allow to minimize the impact on tariffs for end consumers from the introduction of renewable energy capacities.
Along the way, the government of Kazakhstan has worked closely with several financial institutions, such as the European Bank for the fastest growth of RES. The Eurasian Development Bank (EDB) aims to invest with the total amount of funding about $600 million into Kazakhstan’s renewable energy sources. In a 2010 submission to the UN, the government pledged to reduce Kazakhstan’s greenhouse gas emissions to 15.0% below 1992 levels by 2020, and its subsequent National Green Energy Plan determined that 30.0% of domestic energy should come from renewable sources by 2030 and 50.0% by 2050, of which four fifths would come from solar, wind, biomass and geothermal energy. This was elaborated on in February 2014, when the government announced it aimed to have 1,040MW of renewables capacity by 2020. The government’s commitment to renewables means it will be a driver of energy generation over the forecast period, albeit not a particularly significant one, with thermal power remaining the key source of generation.
The country has taken steps to attract greater investment into the renewable energy segment in recent years - introducing a 15-year feed-in-tariff (FiT) mechanism in 2013 - and there are plans to open up the power and energy sectors to greater numbers of private investors. The main focus for the renewables sector is wind and solar power. Kazakhstan is very rich in wind potential, with around 50.0% of the country’s territory having average wind speeds of 4-5m/sec at a height of 30m. The wind potential of Kazakhstan is 1.8trn kWh per year, close to 10 times Kazakhstan’s current energy consumption, according to UN estimates. Solar also has great potential given the number of sunny hours per year - typically between 2,200 and 3,000 - implying a capacity of 1,300-1,800kW/sqm per year.
Hydro Power
Hydropower accounts for approximately 12.3% of Kazakhstan’s total generating capacity. Kazakhstan has abundant hydro resources, which are mainly concentrated in the eastern and southern parts of the country on the Irtysh, Ili and Syrdarya rivers (73 % of the total capacity of hydro resources). Hydropower plants on the Irtysh River constitutes of the Bukhtyrma (750MW), Shulbinsk (702MW) and Ust-Kamenogorsk (315MW), the Kapshagai (364MW) plant on the Ili River, and the Shardarinskaya(104MW) plant on the Syrdarya River.
According to the estimates of Kazakhstani experts, theoretically the capacity of all the country’s hydro resources is about 170 billion kWh per year. 62 billion kWh production per year is technologically feasible, and for 27 billion kWh per year refer to the economic potential. However, it is important to note that as of today hydro resources provide no more than 2% of total electricity generation, while the share of their installed capacity is 12.3%.
Wind Power
Special studies carried out in the framework of a joint project of the UN development Program and the Ministry of energy and mineral resources of the Republic of Kazakhstan have shown the presence of a good wind climate and conditions for the construction of wind power systems in different regions of Kazakhstan. With the use of meteorological data, the wind Atlas of Kazakhstan was developed, which is a map with the distribution of wind speed throughout the country. A rough estimate of Kazakhstan’s wind energy resources based on the wind Atlas shows that an average annual wind speed of more than 7 m/s is observed on an area of more than 50,000 square km at an altitude of 80 meters. For the development of wind energy potential, the Ministry of energy and mineral resources of Kazakhstan with the support of the UN development Program has developed a Program of wind energy development in Kazakhstan until 2015 with a perspective until 2030. In the framework of this Program provides for the implementation of wind farm construction with the introduction of 250-300 MW by 2015 and 2000 MW by 2030. These power plants will produce up to 1 billion kWh of electricity by 2015 and 5 billion kWh by 2030.
Kazakhstan is rich in wind energy resources. In some regions, the average wind speed at an altitude of 15 m is 27-36 m / s. there are at least 10 areas with a large wind potential with an average wind speed of 8 -10 m/s. The most significant are the wind energy resources of the Dzungarian Gate (17,000 kWh / m2). Other promising areas include Yerementau (Akmola region), Fort Shevchenko (Caspian Sea coast), Korda(Zhambyl region).
Solar Power
The potential of solar energy in Kazakhstan is estimated at 2.5 billion kWh per year, which corresponds to an area of about 10 km2 of solar cells with a total efficiency of 16%. The average efficiency of modern solar panels varies in the range of 15-25%. Solar energy can be widely used in two-thirds of the territory of the Republic of Kazakhstan. In the southern regions, the duration of solar radiation is from 2,800 to 3,000 hours per year, and the annual consumption of solar energy is from 1,280 to 1,870 kWh per 1 m2. Moreover, in June, the amount of energy per 1 m2 on the horizontal surface ranges from 6.4 to 7.5 kWh per day, which makes the South Kazakhstan, Kyzylorda and Aral regions extremely favorable to produce solar energy. According to the Strategic development plan of the Republic of Kazakhstan and the Concept of transition to a “green economy” it is planned to put into operation about 28 solar power plants by the end of 2020.
Biomass
In Kazakhstan, forests cover an area of more than 10 million hectares, which is 4 % of the total territory of the country, of which 4700 thousand hectares are covered with saxaul. In 1990, the volume of logging in the country amounted to about 3 million m3 per year. The volume of wood waste in logging and woodworking enterprises, as well as wood used as firewood, is almost 1.3 million m3 or 1 million tons. Consequently, the wood waste energy potential makes up more than 200 thousand tons. Also, it is important to note that the use of biological fuel has a certain reserve. Up to 35 billion kWh of electricity and 44 million gig calories of thermal energy can be obtained annually due to the processing of agricultural waste.
Current Market Trends
Non-hydropower renewables are expected to outperform the remainder of Kazakhstan’s power market in percentage terms over the forecast period, but not spectacularly and from a very low base, meaning that the segment will struggle to gain significant traction. Overall, generation by non-hydropower renewables rising by an average of 9.7% per year in the decade, taking output from a minuscule 0.65TWh in 2018 to 1.48TWh in 2028. A 53.2% surge in non-hydro renewables output in 2019 took the segment’s overall share of power generation in Kazakhstan to a shade under 1.0%, a ratio that we see rising only marginally to 1.4% in 2028, due to conservative forecasts from 2021 onwards. Total Eni, a subsidiary of French oil giant Total, announced in July 2019 that it will build two solar plants in Kazakhstan - a 28MW facility in south- central Kyzylorda and a 100MW plant in southern Zhambyl - with construction set to be underway by year-end and a combined project cost of EUR137mn, according to Construction Europe.
The Asian Development Bank announced an EUR27mn loan to support construction of the 100MW plant in southern Zhambyl. Germany’s Green Energy 3000 broke ground on a 50MW plant at Chulakkurgan in southern Kazakhstan, with the facility set to be linked to the grid thanks to a new 110kV line, according to PVTECH. Building work was underway for the 100MW Nura solar plant in the Akmola region, with construction undertaken by Russia’s Hevel Group.
In September 2019 European Bank for Reconstruction and Development (EBRD) approves €300 million extension of Kazakhstan Renewables Framework. The Program will support solar, wind, hydro, biogas, distribution and transmission projects. First phase supported 262 MW of renewable energy capacity across the country. The facility will promote solar, wind, hydro, biogas, distribution and transmission projects and is expected to reduce CO2 emissions by at least 500,000 tones per year. The EBRD Board of Directors approved the extension to the existing Framework, which has been almost fully utilized. The first phase supported the creation of 262 MW of renewable power-generation capacity across the country, attracted four private international investors and supported a grid-strengthening project. In addition to the EBRD funding, the Framework will be supported by concessional finance from the Green Climate Fund. It will also benefit from a comprehensive technical cooperation program, which will support competitive tendering for wind projects, the development of a carbon market in Kazakhstan and the promotion of gender inclusion in the renewable energy sector.
Market Obstacles
A number of factors make us cautious about the trajectory of the renewables market, especially beyond the next couple of years. Lingering concerns about the absence of a domestic manufacturing base in the renewable energy sector, the impact of exchange rate fluctuations on the value of FiTs, and inefficient transmission and distribution (T&D) infrastructure will all likely curb investment into the renewables sector. More broadly, poor governance and an opaque operating environment are also likely to inhibit broader foreign investment in Kazakhstan, despite some tentative reform efforts aimed at attracting private capital into the economy to offset lower oil revenues.
While gradual liberalization and institutional assistance could lay the foundations for faster growth over a longer timeframe, the dominance of the state means that the avenues through which private investment can be channeled directly into renewable energy projects look likely to remain largely untested over the medium term. Few investors are willing to enter the market amid concerns that graft and corruption are a major risk to project realization. To this end, the enforcement of regulation, legislation and concessions in the energy sector is difficult to evaluate, and the EBRD has said that mechanisms like the Kazakhstani public-private partnership framework are deficient, hindering private participation.
Best Prospects for U.S. Exporters
Kazakhstan is committed to moving forward rapidly on setting up biodiesel, small hydro, and solar plants as well as continued investments in wind energy. There are opportunities in the development of transmission lines that Kazakhstan has been working on during the last ten years. There are the following best prospects on Kazakhstan for the renewable energy equipment manufacturers:
- Solar panels
- Inverters
- Batteries
- Solar water heaters
Regulatory Environment
July 4, 2020, is the 11th anniversary of the adoption of the Law of the Republic of Kazakhstan “On support of the use of renewable energy sources” № 165-IV ZRK (“Law on RES”). While being ranked ninth in coal reserves, 12th in oil reserves and first in uranium mining, Kazakhstan supports the development of renewable energy sources (“RES”) and plans to bring the production of electric energy by RES up to 50% by 2050. The initial RES projects were implemented through a scheme of development of a feasibility study indicating the price, payback period and etc.
Power purchase agreements were then concluded at the price and payback period specified in the feasibility study. Where the RES facilities were connected to a regional energy company (“REC”), the latter should acquire electricity produced by the RES facility to compensate for the normative (permitted) electric energy losses in their networks, but not more than half the power produced; and in the case where this exceeds the amount produced by the RES facility, the remaining amount should be purchased by the system operator (JSC “KEGOC”1 ). In the case where a RES facility is connected to the power grids of the system operator, the latter was obliged to purchase all the electricity produced by the RES facility.
On July 4, 2013, amendments were made to the Law on RES, as a result of which a new scheme for the implementation of RES projects was introduced − the fixed tariff (“FIT”) scheme. Under this, the government set FIT for each category of renewable energy sources (wind, sun, hydro and biogas), investors independently received a connection point, developed a power distribution scheme, on the basis of which a REC or the system operator (depending on the connection point) issued technical conditions for connection, after which the investor applied for inclusion into the RES location plan2 and entered into a connection agreement. The final stage of such a permitting procedure was the inclusion of the project into the authorized body’s3 list of RES objects4 and conclusion of a power purchase agreement (“PPA”) at the FIT between the investor and the financial settlement center . After that, the investor had to start and complete the construction of the RES facility in the timeframe specified by law. The principal difference between the feasibility study and the FIT schemes were the establishment of tariffs and the introduction of FSC as a buyer of energy produced by the RES. Where the FSC sells electricity to conventional power producers, they in turn supply all energy (RES and conventional) to final users. On July 11, 2017, new changes were enacted to the Law on RES, as a result of which the current auction scheme was introduced, through which all new RES projects are implemented. According to this scheme, the authorized body develops and publishes a schedule of auctions for the year, which indicates the auctioned capacity, land, connection points, etc. An investor can be both a legal entity created in Kazakhstan and a foreign legal entity.
The investor needs to conclude an agreement with the organizer of the auction and submit documents confirming compliance with the qualification requirements. If the investor wins at the auction, the authorized body includes it into the RES location plan and the list of RES objects. After that, the investor and the FSC enter into a PPA.
Not all projects indicated in the schedule of auctions have reserved land plots and connection points, but only small ones (up to 30 MW). Accordingly, for large RES projects, investors should independently find the land.
There are fixed deadlines for the start of construction and commissioning of power installations (failure to meet deadline leads to “automatic” termination of the PPA); in respect to auction PPAs, a grace period of one year for commissioning is provided, in the event that proof of completion of construction and installation works in the amount of at least 70% of the total scope of work is provided; Tariffs are set in tenge (indexation is not available to everyone, and also does not cover the entire exchange rate fluctuation); The FSC has limited financial capabilities.
Market Entry Strategies
The best way to enter the Kazakhstani market is to establish a local presence, which is a crucial component of doing business in Kazakhstan for contacts and after-sales service. At a minimum, companies should establish a representative office in country. Representatives in the energy sector emphasize that it is not enough to work through a local distributor. Finding a reliable, credit-worthy partner in Kazakhstan requires due diligence, caution, and attention to a potential partner’s achievements and reputation. U.S. firms are advised to verify trade references offered by potential partners, check banking records and correspondent account capability with Western banks, and verify the personal bona fides of key company officers. Local companies in Kazakhstan are sensitive to pricing and contract financing terms. That is why when entering the market it is necessary to balance sales opportunities with the risk of non-payment.
It is advisable to start transactions on a full prepayment basis. Generally, payment terms for construction equipment and materials are between 30-60 days. A trading relationship should be developed over time. Project financing opportunities offered by a U.S. company will increase the likelihood and potential amount of transactions.
U.S. companies in Kazakhstan use a combination of marketing methods including distributing or direct sales, working through a countrywide distributor or agent, working through more than one local-area distributor or agent, and/or distributing or selling products directly from a warehouse. Distribution channels still require extensive training/service support, and project financing such as leasing schemes for equipment.
Local Industry Resources
U.S. Commercial Service Information
To explore the market and discuss customized market entry strategies, please contact:
Dean Matlack, Senior Commercial Officer
Dean.Matlack@trade.gov
Tel.: + 77272507612
Ms. Azhar Kadrzhanova, Commercial Specialist
Azhar.Kazdrhanova@trade.gov
