Kazakhstan's way to Decarbonization.
Where to begin in power industry.
The year 2022 has brought a lot of changes to the world. And one of them, which is close to those of us who dwell on the vast spaces of the Former Soviet Union, was a clear shift of leadership amongst the FMS countries in the positive and steady development on a path to better future in all its forms and dimensions whichever are comprehended as a paramount goal of our existence as countries and nations. It is not about actual parameters such as GDP or something similar. It is about where we are going to. And this is a very true regarding our industries – energy and power, being a base for the robust economy in the modern world. In Russia all those numerous issues and ideas related to the deep industry restructuring with the ESG agenda, which seemed so purposeful in 2021, today have mostly lost their meaning and attractiveness due to a complete shift of priorities for both societal actors, the government and public. These days the main discourse in Russia is about how to get together and then to get through, in a sense of how to survive as a nation. The horizons of planning have shrunk to a few months, if not weeks. And in this context all these rather strange hustles and bustles on decarbonization which are still around and time to time something comes out from the depths of various regulator bodies such as some indigenous green certificates system or a regular yearly auction on RES quotas under infamous Capacity Delivery Program for renewables (which almost do not have the capacity in terms of the Russian Capacity Market) – all that just shade off deep irrelevance of those moves to the current situation in the country, its needs and its moods.
But as it is well known the sacred place doesn’t stay vacant long. The new leaders on the ground have appeared. And this is Kazakhstan in the first place. The Central Asia generally have been bringing up an increasing interest for the last few years as a quite promising territory for the fast development and investments. Uzbekistan and Kyrgyzstan all along with Tajikistan are also in the optics but Kazakhstan as a largest and most advanced country of the region, rich in resources, with about 20GWe and steadily rising consumption and, what is probably most important, with a new leadership striving to the new ideas aligned with main trends and tendencies of the world development, not opposing them, is definitely a number one. In other words, this country looks up to the future, not backwards, it is big enough to be self-sustained, it is located between two major countries of Eurasia, has educated workforce speaking major languages, Russian in the first place, and all that makes it a very promising one.
The new Strategy on carbon neutrality to be reached by Kazakhstan by 2060 adopted a few days ago is one of such hallmarks demonstrating the steady course of the country. It is a very important document, although often treated as a routine one these days, but we must remember that it shows the road the country has chosen to follow for the next 40 years at least at its energy and power policy. And it was done despite of all odds as Kazakhstan’s today generation mix based for about 80% on coal. It means that a huge amount of work lies ahead for the country's energy and power industry. And this kind of job needs professional expertise, scrutiny, resolve, eagerness, perseverance and, of course, money.
The Strategy states that “regulatory and institutional base will be updated as well as conditions for development of innovative instruments and standards for green financing, taxonomies of green projects will be renewed based on the international experience for such taxonomies development and investors’ expectations”.
And further on “…economically optimized policy will allow markets to determine prices, whereas all capital, operational and ecological costs will be accounted for, to incentivize rational and spare use of resources and to sustain private investments into energy efficiency and transition to alternative energy sources. Besides, price formation on GHG will internalize the ecological costs of carbon intensive production and will attract investments into RES and low carbon technologies. At the same time notable prices for GHG would lead to ramping up of the state incomes which might be redistributed for decarbonization and backing up green projects.”
It is obvious the Strategy presumes that decarbonization in the country should proceed on the market-based principles. But the question is if there is a real market in the power and energy industry in Kazakhstan, which can serve as a ground for such reforms, described in the Strategy? In other words, does the country have necessary conditions now to start turning the theses of the Strategy into reality? And the answer is unfortunately mostly negative so far.
The regulatory framework of Kazakhstan’s power industry at this time can be characterized as formally market-based whereas in essence a predominantly administrative one. On the one hand we can see that there is unbundling of the industry by the type of business: generation, grid and supply, some auction-based prices as well as a formally open retail market with much stricter attitude towards consumers and considerably more marketable rules comparing to Russia, but on the other hand practically everywhere we can see tariffs instead of prices, manually managed procedures for all processes giving too little space for a robust resilient adaptive modern market.
Decarbonization in the power industry cannot be conducted exclusively from the top by inventing some goals and taking measures for all the way down to the market actors making them participate in auctions and tenders and stay dependent on the subjective wills and moods. It needs agility and flexibility, market actors should be aware of terms and conditions they work within but in general they need to be free at their risks and decisions, plans and schedules. For instance, a very important factor now days for speeding up decarbonization processes is competition between customers’ renewable generation and a system traditional one, especially at peak hours. This creates drivers for various tech solutions based on distributed energy resources, including efficient gas peakers and batteries as well as their management systems allowing to avoid switching on an expensive and carbon intensive generation when the consumption of power is at highest levels. But to make these drivers work markets should assess the peak resources justly by producing adequate price signals at the hours of actual system stress, not just “from 17:00 till 23:00”. Not tariffs for capacity and energy should be in place, which are raised systematically but still insufficient for real investments, but market-based prices, reflecting actual costs in the system. Of course, one may object, saying that Central Asia is not rich enough for such a market, but our search into some details shows that it is not very true, the country withstands some medium level Russian regions prices and considering the lower prices in the economy generally it seems quite ready to the market challenges related to decarbonization. We can see that the auction prices for RES in Kazakhstan are notably lower then in Russia set by CDA program, allowing investors there not to worry on anything except the image of RES as something unnecessary and redundant. The RES penetration in Kazakhstan is relatively higher, then in Russia, and the potential of their further growth looks quite promising. The point is to put the process of RES advance on market track giving an opportunity to enhance and flourish various types and forms of renewables at both sides of the power supply with simultaneous speedy peakers’ proliferation all along with Demand Response on the consumers’ side. The subsidies for the poor would be inevitable, but they should be externalized as much as possible and managed by the budget and taxation on the windfall incomes which certainly would be here among generators, and RES too, as the power market evolves and develops.
And the next question to moot is how to assist Central Asia’s power industries properly in their strive to the market-based functioning power and its consequent smooth and steady development. There are many institutions with variety of programs on this account now days somehow trying to facilitate these processes but at closer look at them one may discover that they rarely target issues of markets designs as a whole, based on learnt lessons from world’s experiences. Mostly they are about some “technical assistance” on some vague upgrading features and additions to the current underdeveloped markets, some prop-ups and canes in order just to get a space and place for the future activities in the particular country, to spend some granted money and formally report to grant issuing structures – yes, we did it, waiting for the next tranche. But not for solving real problems these countries face on their pathways to decarbonization. A recent brief familiarization with one of such a program showed that grant lenders tend to stipulate a bunch of covenants aiming the only goal – to give financing just to an EU based company with experts indoctrinated by the only one right model of the market – a Nord Pool's one. Even though this model, which Europe promotes for 20 years by now (and which was really good at the time when it was invented), showed a lot of pitfalls and inconsistencies during last several years, and especially in 2022, when gas prices skyrocketed while EU authorities froze mesmerized watching cut off of usual gas supplies. I don’t want to say that the Russian model, for instance, is better, on the opposite, it is much worse and much less market based by now due to the long history of market’s distortion reasoned exactly the same way – Russia was not rich enough to allow itself a real competitive well-structured power market. Nevertheless, today for the countries like Kazakhstan we definitely need something different, a new one, responding to current challenges and realities and ready to survive through many other ordeals on the long way to carbon neutrality.
But, by and large, Kazakhstan is lucky – a lot of coincidences, including its current leadership and availability of many Russian experts seeking how to apply for good their experience and professionalism gives an opportunity window to make things rolling in the country’s power industry.
Don’t miss it. It might not be around for long.