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 KAZAKHSTAN International Business Magazine №4, 2006
 Kazakhstan’s Electric Power Sector: New Challenges and Opportunities
Kazakhstan’s Electric Power Sector: New Challenges and Opportunities
Editor’s overview
In 2002, Kazakhstan reached a positive balance in electric power transfers between neighbouring countries for the first time since achieving independence, i.e. the country had a de facto abundance of power. However, five years had not elapsed before experts sounded the alarm: our economy can face a deficiency of electrical power in the very near future...
This was the leitmotif of a conference which was held in Almaty in early November within the Power Kazakhstan 2006 exhibition. Kanat Bozumbayev, KEGOC president and Chairman of the Board of the Kazakhstan Electricity Association (KEA), explained the meaning of the new challenges. He reminded delegates that the average growth of domestic electricity consumption stands at over 5-6%, while GDP is increasing by 9% per year. This year, power consumption has already exceeded 71 billion kWh. Kazakhstan’s power plants can produce 73-74 billion kWh per year. This means that Kazakhstan has already almost depleted its available resources, while electricity consumption will continue to grow. According to experts, the indicator will reach 74-75 billion kWh by 2008, 84 billion kWh by 2010 and 101 billion kWh by 2015 (Diagram 1). The conclusion is obvious: the government must take urgent measures to increase domestic power production.
Minimum Plan…
Taking account of the tight time limits, KEA has already developed a plan of measures to rehabilitate the major components of electric power industry in Kazakhstan, reduce the loss of electric power and increase energy production by 2015. Specialists emphasise that, the utmost priority is to ensure strict compliance with CIS standards and to organise regular maintenance of the main power plants. The production rate can increase to 80 billion kWh in the next two years if the operating hours of heating power plants are extended from the current 5,000 to their designed capacity of 6,000 hours per year.
As the capital stock of existing power plants has depreciated by 70-80%, it is necessary to carry out inexpensive modernisation ($150-200 per kWh). We are speaking about six power generators in the Aksu district power plant ($220m should be invested in the production of an additional 300 MW), three mothballed power generators at the Ekibastuz district power plant No. 1 ($300m for 500 MW), the Karaganda district power plant ($140m for 695 MW) and several regional power plants ($540m for 2,700 MW). All in all, Kazakhstan’s annual production rate can increase by 10 billion kWh to 90 billion kWh until 2015.
Experts believe that these are merely temporary measures and that it would be impossible to respond to the country’s growing demand for electricity without extending the capacity of existing power plants and constructing new power plants. In particular, according to Mr Bozumbayev, new power-generating facilities with a total designed capacity of approximately 4,600 MW (Table 1) should be put into operation within the period of 2006-2015. Among the priorities are the construction of the third and fourth units of the Ekibastuz district power plant No. 2 (1,000 MW), a new power plant in South Kazakhstan (1,000 MW), and gas-fired and combined cycle power plants in West Kazakhstan (a total of up to 1,300 MW).
The necessity to develop the hydro-electric power sector has become acute. The share of hydro-electric power in overall domestic power production should be increased to 20% from the current 12% in the next 5-10 years, mainly due to the construction of new peak hydro-electric plants to supply energy during periods of high demand. The first project has been launched. This May, Moinak GES (in which state-owned KazKuat holds 51% of shares and private Birlik 49%) began constructing a 300 MW Moinak hydro-electric plant on the Charyn River, Almaty Oblast. The Development Bank of Kazakhstan (DBK) will provide a $25m loan for the first phase of a $251.69m project. The bank also undertook obligations to raise sufficient funds from third parties. Moinak GES and China Development Bank have signed a $200m loan agreement to subsidise the second phase. The Kazakh government will act as a guarantor for repayment of one half of the amount. The Moinak hydro-electric plant will be constructed by the end of 2009 and will pay off in 20 years.
The Kazakh government set up state-owned KazKuat in February 2005 to accelerate the development of the domestic hydro-electric sector. KazKuat’s main goal is to construct and modernise electric power plants. Apart from the construction of the Moinak hydro-electric power plant, the company is implementing several other projects. The company is constructing an $81m Kerbulak hydro-electric plant on the Ili River to increase the capacity of Kapshagai hydro-electric plant by 160 MW to provide peak-load power during the winter. KazKuat plans to modernise the Shardarin hydro-electric plant (provisionally estimated at $47.9m) and to construct a $270m Bulak hydro-electric plant on the Irtysh River. The latter project aims to increase the peak load capacity of Shulbin hydro-electric plant by 500 MW.
In all, the key steps towards resolving the electricity deficiency problem have been defined. Taking account of the scale of the projects under consideration, KEA suggested that the government should develop the relevant investment programme for 2015 in the near future. A total of $9.5bn should be invested in Kazakhstan’s electric power sector during that period. This amount comprises $5.5bn for power plants, including $1.2bn in the modernisation of existing power plants, and $4.3bn for the construction of new power plants. Another $4bn will be invested in the development of transmission and distribution infrastructure.
… and the Maximum
Kazakhstan’s bankers contributed their vision of the sector’s further development during the Power Kazakhstan 2006 conference. In particular, President of Development Bank of Kazakhstan Askar Sembin, said that uneven distribution of raw materials and the vast territory of Kazakhstan resulted in excessive electric power supply in some regions and power deficiency in other regions. However, the head of DBK believes that this picture can undergo considerable changes in future. For example, North Kazakhstan can lose its abundant electric power supplies very quickly as the metallurgy industry develops and world prices for metallurgy products increase. It is obvious that Kazakhstan’s underdeveloped electrical power industry can exert a negative impact on the economy, if it slows down metallurgy and petroleum chemistry, which are the priority sectors within the economy diversification strategy. In this connection, DBK is giving priority to developing renewable energy. Today, the focus in on hydro-electric power, and nuclear electric power is in prospect.
On 17th October 2006, Kazakh Prime Minister Daniyal Akhmetov funded the nuclear power plant feasibility study in Mangystau Oblast. The nuclear power plant will be constructed at mothballed BN-350 fast neutron reactor located in the territory of Mangystau nuclear power plant. According to experts, nuclear power plants with reactors of average capacity are the optimum for Kazakhstan, in particular VBER-300, the latest technology of the Russian I.I. Afrikantov OKB Mechanical Engineering (OKBM). The working group chaired by the Prime Minister is considering the possibility of constructing a nuclear power plant in the city of Kurchatov, near Balkhash Lake, East Kazakhstan Oblast.
On the other hand, Mr Sembin believes that today it is necessary to invest not only in domestic but also in export production. DBK considers the construction of 7,200 MW Ekibastuz district power plant No. 3 worth approximately $5.7-7.2bn as an attractive prospective. The project provides for the construction of an 800 kV Kazakhstan-China electric power transmission line, which will require another $1.9-2.4bn. The initiative undertaken by the Shanghai Co-operation Organisation (SCO) will allow Kazakhstan to export its electricity to China.
Kazakhstan’s alternative for receiving additional electric power is investing in neighbouring countries. In particular, Kyrgyzstan is inviting Kazakhstan to participate in Kambaratin hydro-electric plants No. 1 and No. 2. Also, DBK is considering a possibility to co-finance the Tajik project for the construction of a 500 kV power transmission line from Tajikistan to Kazakhstan via Kyrgyzstan. The line will permit the supply of cheap Tajik hydro-electric power to South Kazakhstan during summer, and the transmission of electric power from Kazakhstan’s thermal power plants to Tajikistan during winter. However, Mr Bozumbayev stressed that these are the long-term plans because there is still a great deal to do in Kazakhstan.
The bankers’ investment calculations until 2015 differ from the figures suggested by the electric power specialists. According to Mr Sembin, approximately $11.2bn should be invested in new power plants, including export initiatives, as compared to the figure of $4.3bn mentioned by Mr Bozumabayev. Considering that investments both for export and domestic needs will be required in the next two or three years (almost simultaneously), let’s hope that the government will set priorities and draw up a common strategy in advance.
Finance Issues
The financial structure for handling attracted investments and the repayment methods are the key factors that will ensure the successful implementation of these grandiose plans. The electric power specialists offer simple and potentially effective solutions.
The additional placement of shares in international and domestic stock exchanges can be used as an alternative source of investment in private electricity generating and distributing companies.
Experts believe that the government should provide capital investment for new hydro-electric power plants and also provide government guarantees to reduce risk and lower interest rates for loans granted by domestic and international financial institutions. So far the first attempt is not successful. The allocation of governmental funds to guarantee China Development Bank’s loan for the construction of Moinak hydro-electric power plant is still postponed. As a result, the second phase of the project falls behind the schedule by six months.
A similar attitude is taken towards electricity transmission and distribution, particularly towards the development of a national electricity transmission network. Mr Bozumbayev noted that the favourable conjunction of raw material prices on the world market, budget proficiency and stable macroeconomic indicators in Kazakhstan are the optimum conditions for state investments in the development of electric power infrastructure.
Domestic energy specialists can also rely on the support of financial institutions. The head of DBK believes that in the very near future it will be possible to use an innovative tool, the launch of so-called "infrastructure funds" with the participation of major investment institutions, in order to raise funds for the sector. These funds will reduce government guarantees which will be provided only for the principal debt service. This will attract a much higher level of investments.
Kazakh commerce banks are perfectly ready to participate in the electric power projects. During the conference, Anuar Tukenov, advisor to the chairman of Bank TuranAlem (BTA), made a presentation about the BTA loan programme developed specially for the energy sector.
The investment recouping scheme is the key objective. In this regard, the domestic electricity sector is not attractive due to its long investment cycles and low prices. Today, prices for heat and electricity in Kazakhstan are almost the lowest compared to the prices recorded in other CIS countries, let alone the prices in developed countries. During the last 6-7 years, the price stood just below $0.015 in winter and equalled approximately $0.01 in summer on the wholesale market. According to Mr Bozumbayev, electric energy producers cannot recoup their investments in a situation of such "stability". Taking account of the current growth rates, the payback period will exceed 40 years. This was partly the reason why the electric energy companies did not invest in modernisation of their capital assets.
Under the circumstances, the sector can develop further only through the predictable and steady increase in tariffs, which should eventually exceed the minimum of $0.02 according to experts’ estimates. That is why the specialists suggest that a new price policy for infrastructure operators and ultimate consumers should be developed urgently.
Alternative Solution
The implementation of large and long-term projects like the development of the electric power industry requires a constructive dialogue among all participants and properly coordinated action.
The opponents of the construction of a new export district power plant in Ekibastuz believe there are significant drawbacks in the project. Marat Kambarov, the renowned Kazakh scientist and General Director of EnergoComplex VER, said that, first of all, there will be superfluous emission of greenhouse gas in the region which is overburdened with electricity generating facilities. Second, it would be necessary to construct a 1,500 km extra-high tension line in order to supply electricity from Ekibastuz to China. This will bring only a modest share of contracts for Kazakhstan because the country does not have relative services and experience. Therefore the major part of funds will bypass Kazakhstan. Lastly, hooking up local consumers and power plants located along the power transmitting bridge will be impossible due to the technologic peculiarities of the direct current transmission.
Mr Kambarov offers an alternative solution. He suggests constructing a 500 kV direct current line via Almaty-Taldykorgan-Ayagoz-Ekibastuz (along the eastern side of Lake Balkhash). This route would permit the use of inexhaustible alternative sources, i.e. the recoverable resources of mountain rivers and wind corridors of East Kazakhstan and Almaty Oblast. The complex of wind and hydro-electric power plants with a total capacity of 10,000 MW would produce a minimum of 35 billion kWh, which is more than two thirds of the targeted amount.
As for a direct current link for the export of electricity from Kazakhstan to China, it can be established on the border between the two nations (a similar link was established between Russia and Finland). In this case line voltage would be much lower because the line would consist of several parallel lines of approximately 10 km each. Mr Kambarov noted that Kazakh companies are sufficiently qualified to construct similar facilities. Besides, the construction of hydro-electric plant and wind plant would promote the electricity network development in the east of the country. And finally, Kazakhstan would enjoy an additional North-South link within its common energy system, which would increase its flexibility and reliability. The construction cost of such an electric power line would not exceed $1bn.
The solution which helps to resolve several problems at once is obvious. Therefore Mr Kambarov’s suggestion to set up a working group to study alternative policies for promoting electricity exports to China seems fairly logical. The right decision will ensure sufficient electricity supply for Kazakhstan and the diversification of its oil-dependent economy.

Table of contents
Kazakh Banks: Growth Risks  Dmitriy Angarov, Aleksey Kechko, James Watson 
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