Rules For Renewables

What investors in renewable energy projects in Kazakhstan should know

Kazakhstan has high potential for using renewable energy which in the long run should replace conventional energy sources. This review describes the main factors to be taken into account when implementing renewable energy projects in Kazakhstan.

According to the legislation of the Republic of Kazakhstan, alternative or renewable energy sources (hereinafter – RESs) include wind, solar radiation, water, heat from soil, groundwater, rivers and ponds (geothermal energy) and anthropogenic sources (biomass, biogas), etc. In Kazakhstan’s case, the most feasible alternative energy sources include wind and solar energy and hydropower.

President Nursultan Nazarbayev’s address “Kazakhstan-2050 Strategy: a New Political Course of the Accomplished Nation” states that transition to “green” development should become a strategic goal for the nation. To this end, the Presidential Decree No. 577 of May 30, 2013 established the Concept of Kazakhstan’s transition to a “green economy.”

Renewable energy is one of the priority areas in this field. According to the Concept, by 2020 RESs should account for 3% of electricity produced in Kazakhstan. This is an ambitious goal, since today’s share of RESs is less than 1%.

To achieve this, a number of regulations have been passed to create a particular environment, where RESs will play a certain role in the country’s energy sector. However, many of the existing enactments contain significant shortcomings of the legal, technical and conceptual nature, and also ignore the successful experience of foreign countries.

Still, there have been some positive changes in the regulatory framework. Specifically, production, transmission and distribution of electric and heat power, operations of power plants, electricity grids and substations, as well as the use of RES, no longer need to be licensed.

In this article, we would like to draw the attention of potential investors to Kazakhstan’s renewable energy regulations, which should be taken into account at the planning stage before actually engaging into any activities in this sector.

Renewable energy laws and regulations

Transmission and use of electric and heat energy are regulated by the Law No. 588-II of July 9, 2004 “On Electric Power Industry.” The main provisions in the field of RES support were first established at the legislative level by the Law No. 165-IV of July 4, 2009 “On supporting the use of renewable energy sources.” Some specific issues in the field of RES use are also regulated by other enactments, such as the Land Code, the Code of Administrative Offenses, anti-trust regulations, etc. In particular, when designing and building an RES facility, the investor should be guided by the general rules in the field of architecture and construction, as there are no special guidelines for the construction of renewable energy facilities.

It is also should be noted that today’s regulatory framework has a number of obstacles to the successful integration of RESs in the universal electric power and heating system, as well as the market for electric and heat energy. In particular, the main problem is that technical and market rules, as well as template contracts, do not meet the special needs of RESs. In this regard, comprehensive improvement of the regulatory framework is essential, including but not limited to reviewing rules for power networks the balancing mechanisms on the electric power market, the rules for services provided by system operators, the way the market for system and support services is organised and operates, as well as the rules for the wholesale market. Furthermore, it is important to introduce template contracts between the system operator and the centralised seller of electricity, on the one hand, and other market participants, on the other hand, taking into account technological and other differences of the RES facilities.

Location of renewable energy facilities

The location plan for RES facilities is adopted by the Ministry of Energy of the Republic of Kazakhstan, an authority in charge of the government’s policy in the field of renewable energy. Investors have to be included in this plan before they get land plots from local municipal authorities. However, there is currently no clear statutory criteria for including projects in the location plan and how such a plan should be reviewed by the relevant authority.

Selling electricity on the open market or through Settlement Centre

The investor shall have the right at its sole discretion to sell electricity produced at RES facilities either to the Settlement Centre at a fixed rate, or to end consumers at contractual prices according to signed bilateral contracts in accordance with Kazakhstan’s electric power legislation.

Importantly, if investors decide to sell electricity at contract prices stipulated in signed contracts, they cannot sell their electricity at a fixed tariff to the Settlement Centre.

The Settlement Centre signs purchase-and-sale agreements for electricity for a period of 15 years with energy producers that use RESs and have been included by the authorised body in the list of energy producers using renewable energy sources, and also buys electricity produced by RES facilities for as long as the corresponding fixed rate remains valid.

Investors interested in building RES facilities may enter into contracts for the sale of the entire amount of electricity generated by the facility before the construction of such a facility even begins.

Incentives for companies using renewable energy sources

The legislation of the Republic of Kazakhstan has a number of incentives for energy producers using RESs, including:

• Fixed electricity rates for every renewable energy facility for a period of 15 years, with the possibility of annual adjustment;
• Reservation and priority in the allocation of land plots for the construction of RES facilities;
• Mandatory connection of RES facilities to the networks of the power transmission company;
• Priority transfer of electricity produced at RES facilities;
• Guaranteed purchase of electricity produced at RES facilities by the Settlement Centre;
• Exempting RES facilities from paying electricity transmission fees;
• No licensing required;
• Investment privileges and benefits for individuals and legal entities engaged in the design, construction and operation of RES facilities (in accordance with the Law “On investments”).

Constraints on RES prospects in Kazakhstan

Despite the support from the government, growth of the renewable energy sector in Kazakhstan is held back by a number of factors.

First, there is no way to adjust the fixed rate to currency devaluation. The government does promise to purchase the entire amount of electricity produced by RES facilities during 15 years with the rate’s annual adjustment to inflation. However, the legislation says nothing about adjusting the rate in case of significant changes in the exchange rate of the national currency against foreign currency (currencies). Although investors in the RES infrastructure will have to buy the majority of equipment for foreign currency, and will have to use borrowed funds (up to 80% of the project cost), including those lent by the EBRD, IFC, ADB, etc., to complete the project.

Secondly, there are no guarantees the Settlement Centre will be able to purchase the entire amount of electricity produced by RES facilities (the organisation is not immune to solvency problems). In particular, the main concern of investors is who will pay, if RES energy will make up 10% or more of the total amount of energy produced. In this regard, most investors believe that including the costs of creating a reserve fund for the Settlement Centre in the rate may be a partial solution to the problem, as the Centre will only use these funds to fill the balance gaps and pay its debts to energy producers using RESs as a result of non-payment or delayed payment by consumers for electricity supplied to them and produced by RES facilities.

Thirdly, in addition to a fixed rate, there is a tariff in support of RESs, where the Settlement Centre will resell electricity purchased from RES facilities to conventional power plants. However, the current legislation does not allow conventional power plants to deduct the costs of purchasing expensive electricity produced by RES facilities. In this regard, such consumers demand changes in the regulatory framework to make sure that the costs incurred by conditional consumers for purchasing renewable energy are taken into account in determining and adjusting the maximum electricity rate.

Fourthly, land regulations do not specify registration procedures for land plots in conservation areas. Due to the nature of RES and the possibility of using hydropower and geothermal energy (energy generated by heat from soil, groundwater, rivers and ponds) as an alternative source of energy, the issue of providing land plots to energy producers has to be resolved.

Fifthly, the current legislation does not mandate that energy transmission companies should connect RES facilities to their networks. The existing template contracts for transmission and dispatch services are not consistent with the technological nature of the renewable energy generation, so there has to be a special document to address this issue. Besides, a connection contract would protect the interests of both producers of renewable energy and network companies, so it will be a win-win. Specifically, if a connection contract is signed in advance (say, six months prior to connection), the network operator, properly informed about such a connection and all the specifications, will have enough time to take necessary measures to make sure it is technically prepared to connect an RES facility. Today, contracts for transmission and dispatch services are signed the moment a facility needs to be connected to the network, so the parties do not have time to agree on their obligations in advance and make all the required preparations from both ends.

Sixthly, securing funding from foreign banks and financial institutions may be problematic due to statutory restrictions in the field of insurance and the fact that Kazakhstani insurance companies have no experience in insuring RES facilities. For instance, the Kazakh legislation explicitly prohibits foreign insurance companies from insuring any property interests of a Kazakh-domiciled legal entity or its subsidiaries located in Kazakhstan.

Furthermore, despite the fact that the law allows voluntary property insurance of legal entities and individuals, insurance companies, having no experience in the field, prefer to stay away from insuring RES infrastructure, which is not making things easy for investors trying to borrow funds, no matter from Kazakh or foreign banks or financial organisations. This problem could be solved, for example, by mandating that both the insurer and the policyholder have to agree on the terms and sign the insurance contract for insuring an RES facility.

Raushana Chaltabayeva, Partner at Colibri Kazakhstan law firm