An acquaintance with a Kazakhstan’ power market, I has been devoting quite much time to for the last few weeks as our Agency has been being in the process of the change of place and focuses of its activity, has yet brought me to the necessity to speak up on the plans of Kazakh’s colleagues for reformatting and restructuring the power sector, which they have presented in the Concept draft of the power industry development of the Republic of Kazakhstan up to 2035. As I understood, having watched one of the recent electricity industry experts’ gatherings, which had taken place at the National Chamber of Entrepreneurs of RK “Atamaken” and broadcasted on FB, the Concept is not adopted yet but it is on the final stage of the discussion. If we closely listen to the experts, we would see that they were slightly baffled on their future by the content of the Strategy on Carbon Neutrality by 2060 endorsed by President K-J Tokaev, which clearly states the commitment to withdraw from coal – a main fuel for country’s generation, and by now they don’t clearly imagine where and how they would go on in relation to the generation mix in the first place, which essentially determines the industry development.
By and large all these discussions on the country power market all along with the Concept itself are extremely interesting for an external observer with the Russian and some international background in the competitive markets as they give a chance to wind time back and to look at the Russian and other markets, well-developed and not, under another angle and evaluate what should had been done back then, almost 20 years ago, compare to what is really completed by now and, of course, how it would have affected us today, should it’s been done another way.
Kazakhstan, no offence towards our colleagues, seemed to start vividly at that time almost aligned with Russia, but then had chosen “another path” (taking into account specifics, etc.) and as of today it still did not complete the homework mission to create a real power market, which had been competed by Russia long ago, although with huge mistakes and at high cost, but in general it had that done. And despite all that what is happening with the Russian power market lately, despite objectively unconducive environment towards free market ideas, yet there is no questioning whether a market is better than the rigid tariff regulation, be it well disguised under the market clothes or outwardly rough and simple. The question of what better determines what to do and how to be in the industry – subjective opinions of bureaucrats or objective market-based mechanisms – has been decided for the latter, though time to time not the way it’s been wished.
But in Kazakhstan all these talks on the future industry development begin with a phrase “we are surely for progress, but we won’t let any shocking therapy happen here, we understand social importance of our products, etc.” It means that the market should not be enabled to decide mostly on its own what is needed for the sector normal functioning and development, using its almost single but universal mechanism and instrument – prices set by costs in temporal and spatial dimensions. And we may see it in the Concept, where there is a detailed analysis of the current situation, of reasons which caused the industry stagnation, related to the oligopolistic market, of prices, which are set not higher then designated tariffs for energy at the decentralized bilateral trade, based on some openly or covertly non-transparent social and political circumstances and factors, but on economic reasons. Having elaborated also at what is going on worldwide on the matter (though sometimes contradictory and inconsistently, to my view), finally the Concept comes to a quite paradoxical conclusion – that in order to have the market functional the Central Buyer model is needed, which would eventually procure a unified averagely weighted tariff for all ratepayers of the large, various and versatile country. In other words, if the decentralized, though with price caps, but still a market, doesn’t work, then let’s make its antipode – a super centralized one, absolutely noncompetitive at the demand side, based on tariffs and by the principle all sisters on earrings.
It is understandable, since it’s somehow familiar – more or less the same procedure is in force in Kazakhstan for the utility scale RES, where future resources are purchased at different auctioned prices and when they are commissioned, their costs are translated onto consumers through additions to the traditional plants’ tariffs and all that is being called a PPA for some reasons, although customers do not see these RE projects and don’t feel them marketwise, in distinction to real PPAs with individual off takers.
It works the same way also with so called “capacity market” which is in fact just a bearable, in authorities’ opinion, financial liability loaded onto the market, calculated, obviously, at some socio-political criteria, and again, not for all, but by a special list, for those who are “strong enough” to hold it up. The money for capacity is taken from that load on individual tariff basis for generation maintainance and enhancement. It is usually noted that these funds are critically insufficient, and it seems to be true comparing to Russian prices where energy prices are similar to Kazakhstani ones, but capacity charges are considerably higher. It’s said that these capacity tariffs would inevitably rise, but no one says neither in discussions nor in the Concept that they should not be tariffs in general, regardless how they are calculated and placed upon; it is not said that they should grow out organically from a market necessity according to demand forecasts and potential supply from the available generation, considering externalities set by regulators, the decarbonization in the first place, or broadly what is now called ESG agenda. And the last but not the least, these costs should not be dispersed among all and always but only for those who are engaged at the hour of the system stress, paid for those who are able to hold the load at supply side and charged to those who loads the system at peak hour. In other words, by optimum, not all sisters on earrings.
Yes, it is obvious that the current market is dysfunctional, there is a notable share of so called tightened generation, i.e. generation affiliated with consumers (greetings to Russian advocates of industrial owned generation!), plus 75% oligopolies of three largest generators on the market, striking the contracts just with “profitable” customers while remainders, dumped on the mass consumers' market, cost unproportionally high, which makes a way for cross subsidies and elevated expenses in the budget sector all along with distortions of costs at retail business and as a result leading to additional inflation – all that should be taken care of, to my modest viewpoint, but to the different direction, contrary to the conclusions presented in the Concept.
The issue of malicious withholding from the mass electricity market relatively cheap and affordable generation through the decentralized trade of oligopolistic structures is stipulated not as much by the market design as, to a greater extent, by monopolization of the market itself by a few large market actors ( it’s worth noting that the same situation today is in Russia, that is why all these appeals, so popular before February 2022, stating that the growth of bilateral agreements on the Russian market would rectify the lack of competition, had at least missed the point, as Kazakhstani experience discovers). In many countries, in Northern Europe, where freedom of self-dispatching flourishes, in Britain, where so called OTC (over the counter bilateral deals) comprise the bulk of power supply while the centralized trade holds a relatively small share but sets a benchmark price, and even in the US, where markets although are the Gross pools (i.e., fully centralized in distinction to Europe where the Net pools prevail – residual, where remainders and surplus are traded at centralized exchanges), generators are mandated to work on them only if they contracted capacity and obtain corresponding incomes. And no major problems do arise. Why?
Because unlike in Kazakhstan, as well as in Russia by the way, there are no large dominant territorial generators in these countries, they are more numerous there in general at each area, in addition in Europe due to zonal model of the market one might always buy electricity from an alternative supplier at wholesale or retail market. It means that in fact the problem is linked to not as much with a market design issue as more with lack of antimonopoly efforts. It’s long and cumbersome, it’s clear, but there are other options and solutions: American, European, Canadian. But what is quite sure today that Kazakhstan doesn’t need to step back – to the Chinese option which China itself has been trying to get rid of since 2016. The country doesn’t need the Central Buyer model buying electricity from ostensibly competitive generation and then translating its costs to the customers at some averagely weighted unified tariffs, causing internal cross subsidies, mitigating basic market indicators and creating disbalances between wholesale and retail. Both on wholesale and retail a healthy market needs differentiation reflecting marginal costs at timewise and spatial dimensions. Yes, in the areas with high density of customers and generation the prices are always lower, and vise versa, but this is a natural process, reflecting natural market factors. In remote areas with weak grid interconnections the costs of generation as well as transmission and distribution are higher. But if for some reasons a real load appears there somehow, then the very these high prices on generation and elevated grid tariffs attract investments there both into generation and into networks since they may be paid off much sooner. And it is true for both sides of the power procurement process, for supply and demand. Conditions for distributed energy resources – DER spur up, as well as for the buildup of new grids, for real competition based on terms, determined by an agenda, which is mostly related to ESG today. A regulator’s mission consists in defining rules and boundaries, not in enforced purchase of electricity at someone’s desired prices, in fact the designated ones, which afterwards to be imposed as an average onto consumers, suppressing marketwise signals and corresponding incentives down the road. Generally, a market, whatever, centralized or not should be free. Otherwise, it is not a market, but requisition and imitation.
It is true that always and almost everywhere there is an issue of subsidies for unprotected and vulnerable customers on the competitive markets, because electricity is a basic necessity in 21st century as it used to be bread and clothes in 16-18 ones. And this requires special treatment and solutions. They may vary, some of them might be painful and complex, based on compromises for market and society, but they must rely not on a simple leveling and not on an actual market negating funneled through a Central Buyer model. Kazakhstan looks ahead today, and that is why solutions which suit the country should be vanguard, conducive to economic progress and prosperity, its role of a locomotive in the region and a most powerful country, literally and generally, which has various connections with power systems of neighboring regions. The transition to the Central Buyer model of the power market does not correspond these criteria at all.