Energy Efficiency: is Tariff a Crucial Issue?
At the end of August, the Government approved the program “Energy Efficiency –2020”, which aims to solve the task, set by the President, to reduce energy intensity of Kazakhstan’s GDP by 2015 by 10% at least. In addition, the officials declared that they would develop a new tariff policy for housing and communal services this year. The last issue is particularly relevant for the business and people that due to the constant escalation of tariffs became “reluctant investors”.
On the 27th of August the Government session was held under the chairmanship of the Prime Minister Serik Akhmetov. At this session the new state program “Energy Efficiency – 2020” was adopted. Its main target indicator is the annual reduction of energy consumption by 10%. Presenting the program, the Vice-Minister of Industry and New Technologies Nurlan Sauranbaev noted that the transition to the new energy saving model provides for the implementation 78 measures totaling KZT 1.2 trillion. Herewith, KZT 145 billion shall be allocated from the national budget and KZT 9.8 billion from the local budgets. And the state expects to receive the major amount of funds yet, which is KZT 1.045 trillion from the non-budgetary sources, including the investments, made by the businesses.
According to Mr. Sauranbaev, for the past three years, the Ministry of Industry has taken a number of steps, giving the ground for successful implementation of the new program. The appropriate normative-legal base is established, the Law “On energy saving and energy efficiency” came into force. More than 3 thousand energy consumption standards were adopted, two hundred technical standards for energy efficiency were approved, and all the construction regulations were revised and tightened, as well as the implementation of 16 regional and 5 sectoral plans for energy savings were started.
The program itself shall be implemented in two stages. The energy audit of all major consumers shall be completed at the first stage in 2013–2014. Thus, the State Energy Registry was formed this year, which included 11,712 facilities, including 727 industrial and 2,938 state-owned enterprises, as well as more than 8,000 institutions. “In accordance with the law, the large-scale energy audits for all large energy consumers were launched. Particular attention should be paid to the industrial sector, being the priority one not only due to its share in the total energy consumption of the country (over 50%), but also in terms of the energy saving potential (about 40 %).”
According to the Vice-Minister more than 2 thousand industrial enterprises should undergo energy audits by July 2015: “It should be noted that the market of auditors, accredited by the Ministry, is being already established. There are more than 25 companies that operate in this sphere today. Therefore, enterprises need to step up efforts to conduct energy audits. The foreign companies from the Europe, USA, Japan and Russia also take a great interest in the Kazakhstani energy audit market”.
At the second stage, that is, since 2015, the major activities on industry and energy sector modernization should be carried out on the base of energy audit results.
In general, the program “Energy Efficiency – 2020” includes nine key areas of activity:
- Energy-efficient industry. Mandatory increase of the energy efficiency of industries by 30%.
- Innovative power industry. Reduction of the unit cost of power generation by 14%.
- Energy-efficient housing services. Improvement of the energy efficiency of housing services and reduction of the energy intensity by 30% per 1 m2.
- Energy-efficient construction. Revision and tightening of all constriction standards, implementation of energy efficient construction technologies (grade A and B) since 2015
- Energy-efficient transport. Fleet renewal and modernization of railway locomotives, people encouragement to buy fuel-efficient vehicles with lower fuel consumption by 30%.
- Energy-efficient budget sector. Reduction of the energy consumption by government enterprises up to 25%.
- Energy-efficient public lighting system. Gradual transition to LEDs, modernization of public lighting system and reduction of power consumption by 60%.
- Energy-efficient public society. Public monitoring of the implementation of energy saving programs by the local executive bodies, promotion of energy saving policy and personnel training on the energy saving measures.
- Economical payment. Formation of the economical energy consumption model of population behavior.
The special focus of the program implementation shall be on three key economic sectors that consume the largest energy volume: the industry and power industry (more than 50% of energy resources, with the reduction potential up to 40%), the transport sector (20%, up to 35%), as well as the housing services and public institutions (30%, up to 25%).
The mandatory legal rules for the energy consumption reduction by 3% annually are planned to be established to improve the energy efficiency of industrial enterprises. This measure shall be applied to the individual entrepreneurs and legal entities that consume energy resources in the volume equivalent to or exceeding 1,500 tons of standard fuel per year, as well as to the government institutions and entities of the quasi-public sector, included in the State Energy Registry and should undergo the appropriate audit. According to such audit results, the enterprises should develop plans to improve their energy efficiency and implement energy management system since 2014. Such state support measures as the grants and technology business incubation, extended range of tools for energy efficiency improvement under the program “Performance 2020” shall be work as the incentive for these enterprises.
As it was noted during the discussion of the document by the Minister of Industry and New Technologies Asset Issekeshev, “the program provides the set of sanctions, which are 8, as well as the set of incentives, which includes the scope of measures from the tariff policy to soft loan granting. We will review the effectiveness of these sets of measures at the end of the first year. Perhaps, we would have to correct it. For example, very strict laws for enterprises are adopted in Japan now. According to these laws the enterprises are required to improve energy efficiency by 1–3% annually”.
In the transport sector, the Ministry of Industry proposes to increase taxes on vehicles with large engine capacity and decrease taxes on small cars to inspire the Kazakhstani people to use economical cars.
The new program provides the housing thermo-modernization, repair of engineering and urban utility networks, installing of building-level heat meters to reduce energy consumption in the housing sector. For this purpose the energy efficiency grades shall be established for buildings and energy consuming household devices. In addition, all construction norms and rules are revised for tightening and compliance with the energy efficiency standards.
The repairs of residential buildings with the thermo- modernization elements are performed under the Housing and Utilities Sector Modernization Program, supervised by the Ministry of Regional Development. As a result, the heat consumption savings for tenants can reach up to 30%. As it was noted at the Government session by the Vice-Minister of Regional Development Kairbek Uskenbayev, “under the united program on regional development the Ministry works out mechanisms to encourage the population for the full thermo-modernization of residential buildings. The subsidies should be allocated depending on the achieved degree of energy efficiency”.
According to him, the construction of three Energy Efficiency Centers in Astana, Almaty and Aktobe is now at the stage of completion. These centers should become the sites for demonstration and promotion of energy-saving technologies and energy-efficient materials.
In addition, a grant agreement with the World Bank is being prepared for signing. Under this agreement it is planned to upgrade 20 schools, 5 hospitals and implement 1 public lighting project annually within the period of 2014–2016 in different regions of the country.
Energy efficiency reform involves the gradual transition to LED lamps, as well as the ban on manufacture and sale of incandescent light bulbs of 25 watts and above, which shall enter into force on the 1st of January 2014. Kazakhstan has already established 11 enterprises for the production of LEDs, at that the prices of domestically produced lamps dropped from KZT 5.4 thousand to KZT 1.2 thousand for the last three years.
Summing up the session, the Head of Government Mr. Serik Akhmetov, stressing the importance of adopted program, said that energy efficiency improvement promotes the implementation of innovative solutions, development of science and transfer of new technologies: “This is evidenced by new examples of the implementation of energy efficiency technologies in industry, housing services and transport sectors. I believe that all central and local executive authorities should step up their efforts for the energy efficiency promotion. They should teach our people by showing them ways of energy savings”.
Hardly anyone would dispute the sheer fact that Kazakhstan needs the significant rising of economy energy efficiency today. It suffices to say that the energy intensity of our GDP is by 19 times higher than in Japan. And the measures, proposed by the Government under the new program, are surely well founded. Another issue is where the funds money for its implementation shall come from; all the more that main financing should be received from the non-budgetary sources. And if the situation with the large industrial giants is more or less understandable, the serious problems may arise in the housing sector.
According to the Member of the Expert Council on Rates Formation of the National Economic Chamber of Kazakhstan, the Atameken Union, Petr Svoik, the attempts undertaken since 2009 to solve the dual task of the worn-out networks renovation and the new facilities commissioning in the power industry and housing sector by means of the transition to the so-called limit, medium and long-term investment rates have brought people and SMEs to the “solvency margin”. While the problem of investing in modernization and development of housing sector still remains unresolved, and the level of claimed depreciation does not decrease (60–70%). Most of the powers generating plants were built in the 60’s and 80’s of the last century. More than half of the existing CHPs were built at least 30 years ago, and only about 13% of them are aged less than 10 years.
The expenses for payment of power and utilities bills already “eat” almost all 40%, which constitute the non-food part of the official poverty level. According to the results of price monitoring the tariff share is 15–20% (or even higher) of the household budgets of Kazakhstani people. According to Mr. Svoik, it is the limit of their “investment” capabilities and brings the social discontent to a dangerous point.
The position of small business is not better one. The tariff payments, in particular, become part of their costs and cover the major part of the current revenue, leaving no funds for business development. Moreover, according to the polls, up to half of SMEs are thinking about closing their businesses just because of the rapid growth of tariff burden.
Even statistics confirms the fact that the tariffs ahead the general level of price rise and promote multiplying of non-tariff pricing chains. Only in 2012 at the official inflation rate of 6% the paid services grow by 9.3%, including hot water – 10.8%, power – 10.1%, housing services – 8.2%. Moreover, it is not a spontaneous tariff growth, but a result of conscious applying of limit tariffs policy.
However, the Government believes that the mechanism of investment rates proved to be effective and has a number of advantages. According to the Minister of Economy and Budget Planning, Mr. Yerbolat Dosayev, the first of these advantages is the increasing of investment for modernization and renovation of capital and production assets by private funds: “Today, almost all the infrastructure updating and modernization measures in the housing sector are carried out at the expense of budget funds of national and local levels. However, take into account the available limited budgets; we have a low scope of updates and a high degree of infrastructure deterioration. Today the principles of limit tariffs have confirmed its effectiveness for power plants both in terms of elimination of budget financing and promotion of private traders for investing, as well as of fixed assets renovation.” The second advantage is the stability and predictability of tariff growth for monopolists, for which the tariffs make up a significant portion of costs in industrial-innovative projects. “The dynamics of growth of tariffs for services of natural monopolies, except for the power plants, cannot be predicted, and the investors should act blindly at decision-making on implementation of the project. We believe that the application of limit tariffs shall provide the business entities, which are the potential investors, withthe possibility for more qualitatively development and fully implementation of investment projects, including those under the State Program of Forced Industrial-Innovative Development of Kazakhstan.”
As can be seen the fundraising mechanism really works. Thus, according to the Ministry of Industry, KZT 514.6 billion (or $3.43 billion) were collected with the limit tariffs, approved in 2009 for power consumers, during last four years. And this is only for the generation, if not counting the same “investment” allowances for power grids operation.
Another issue is how this money is used. For example, in January 2013, the Agency for Protection of Competition and the Attorney General's Office discovered that funds, received from the tariff increase in the amount of KZT 2 billion, were directed by the power companies for dividend payments to the founders, celebrations and cultural events.
The Audit Committee noted that the state program on tariff policy and competition development for 2010–2014 is being implemented effectively. KZT 2.2 billion were lost due to the lack of state control over the way the monopoly distributes funds for modernization. At that just the same costs of the investment programs are accepted as the basis for the tariffs formation. In addition, the implementation of programs for competition promotion, improvement of transparency of local executive bodies’ activities, reduction of administrative barriers and creation of the necessary infrastructure were weakly controlled.
Meanwhile, tariffs for the housing services continue to rise. Thus, in June of this year the power prices raised in 14 regions of Kazakhstan. The largest increase was in the Kostanay (+11.2 %, by 1.29 KZT/kWh) and Kyzylorda (+9.3 %, by 1.11 KZT / kWh) regions. The Deputy Chairman of the Agency on Regulation of Natural Monopolies, Amanzhol Alpysbayev, explained that the change was mainly due to the increase of the tariffs at the stations, which amounted from 40 to 80 tiyn/kWh. The reason is the increase in the investment component, which is included in the power generation costs according to the long-term government policy “Tariff as exchange for investments”. “The consumers should understand that tariff growth is a necessary measure. It is necessary for the maintenance and modernization of assets, providing of high quality services and economy development. The delay in taking unpopular decisions on tariffs could become a threat to the smooth supply of essential services.”
However, there are various sources used in the world practice for the funding of housing current activities and the capital expenditures. In addition to own funds there are bank credits and loans most often, raised in the stock market, including by means of municipal bonds (which are practiced by the city administration in many countries), placement of shares, attraction of the strategic investor. Companies invest the loans in expansion of capacities and modernization, and then by means of the greater economy (in the case of the newer equipment installation) or new income sources these loans are repaid.
The argument that “investment” the Kazakhstanis’ potential is not enough to solve lots of problems in the energy efficiency and utilities sectors seems to have been heard by the officials. For example, the Chairman of the Agency on Regulation of Natural Monopolies, Murat Ospanov, at the Government session in June, said that the administration sees the way out of the current situation in obtaining loans from development institutions and banks of the second level: “Attraction of loans for the implementation of investment programs has the significant potential – they provide the opportunity for the short time large-scale modernization of heating systems and water utilities with minimal impact on the tariff rates”.
He also raised the problem of low coverage of apartment buildings by building-level heat metering devices, as in the existing Law “On Natural Monopolies and Regulated Markets” the responsibilities for their installation are blurred and imposed on the monopolist, as well as on the consumers. In this regard, it is planned to make changes that will entrust the monopolist only with this responsibility. “The new approach provides that the monopolists should be the property holder of metering devices. Correspondingly, the maintenance and the protection of devices should be performed at their expense. Metering devices, which are on the consumer’s balance, will be purchased by the monopolists from the inhabitants with the depreciable value. The periodic data reading shall be executed with the involvement of non-governmental organizations. The funding source for the installation of meters in the first stage shall be the funds, gained due to the recalculation of central heat service price taking into account the outside temperature, as well as to the use of differential tariffs based on investment programs adjustment. In the future the installation of metering devices shall become one of the priority components of investment programs.”
In addition, the Agency on Regulation of Natural Monopolies proposes to exclude the representational and audit expenses (other than stock companies), marketing services, bank charges and costs of financial-technical expertise from the tariff setting structure of monopolists.
Herewith, the strict requirements for the public hearings performing and mandatory annual reporting of monopolists shall be established to increase transparency of the tariff setting. “The announcement of public hearings, statements of tariff changing shall be made on TV and in newspapers with the largest circulation in the region. Thus, new requirements for the selection of mass-media and announcement formats are introduced.”