July 4, 2019, is the 10th anniversary of the adoption of the Law of the Republic of Kazakhstan "On support of the use of renewable energy sources" № 165-IV ZRK ("Law on RES"). While being ranked ninth in coal reserves, 12th in oil reserves and first in uranium mining, Kazakhstan supports the development of renewable energy sources ("RES") and plans to bring the production of electric energy by RES up to 50% by 2050.
The initial RES projects were implemented through a scheme of development of a feasibility study indicating the price, payback period and etc. Power purchase agreements were then concluded at the price and payback period specified in the feasibility study. Where the RES facilities were connected to a regional energy company ("REC"), the latter should acquire electricity produced by the RES facility to compensate for the normative(permitted) electric energy losses in their networks, but not more than half the power produced; and in the case where this exceeds the amount produced by the RES facility, the remaining amount should be purchased by the system operator (JSC "KEGOC"1 ). In the case where a RES facility is connected to the power grids of the system operator, the latter was obliged to purchase all the electricity produced by the RES facility.
On July 4, 2013, amendments were made to the Law on RES, as a result of which a new scheme for the implementation of RES projects was introduced − the fixed tariff ("FIT") scheme. Under this, the government set FIT for each category of renewable energy sources (wind, sun, hydro and biogas), investors independently received a connection point, developed a power distribution scheme, on the basis of which a REC or the system operator (depending on the connection point) issued technical conditions for connection, after which the investor applied for inclusion into the RES location plan2 and entered into a connection agreement. The final stage of such a permitting procedure was the inclusion of the project into the authorized body's3 list of RES objects4 and conclusion of a power purchase agreement ("PPA") at the FIT between the investor and the financial settlement center ("FSC"5). After that, the investor had to start and complete the construction of the RES facility in the timeframe specified by law. The principal difference between the feasibility study and the FIT schemes were the establishment of tariffs and the introduction of FSC as a buyer of energy produced by the RES. Where the FSC sells electricity to conventional power producers, they in turn supply all energy (RES and conventional) to final users.
Both schemes (the feasibility study and the FIT) suggested that investors go through permitting procedures and only then apply for conclusion of a PPA. Subsequently, this procedure was radically changed by the transition to auctions.
On July 11, 2017, new changes were enacted to the Law on RES, as a result of which the current auction scheme was introduced, through which all new RES projects are implemented. According to this scheme, the authorized body develops and publishes a schedule of auctions for the year, which indicates the auctioned capacity, land, connection points, etc. An investor can be both a legal entity created in Kazakhstan and a foreign legal entity. The investor needs to conclude an agreement with the organizer of the auction6 and submit documents confirming compliance with the qualification requirements7. If the investor wins at the auction, the authorized body includes it into the RES location plan and the list of RES objects. After that, the investor and the FSC enter into a PPA.
Not all projects indicated in the schedule of auctions have reserved land plots and connection points, but only small ones (up to 30 MW). Accordingly, for large RES projects, investors should independently find the land plots and the connection points. This means that investors participate in auctions without important elements: the cost of land for the construction of RES facilities, the cost of land required to construct a transmission line to the connection point, the transmission line construction costs, and possible associated costs (building access roads etc.).
Investors in RES (both under the FIT and the auction schemes) also face the following challenges:
- Search for land plots required for the large-scale RES facilities – mostly the required land plots are the land plots with designated use for agriculture and the process of changing their designated purpose takes considerable time and requires additional investments.
- There are fixed deadlines for the
start of construction and commissioning of power installations
(failure to meet deadline leads to "automatic"
termination of the PPA);
- in respect to auction PPAs, a grace period of one year for commissioning is provided, in the event that proof of completion of construction and installation works in the amount of at least 70% of the total scope of work is provided;
- Tariffs are set in tenge (indexation is not available to everyone, and also does not cover the entire exchange rate fluctuation);
- The FSC has limited financial capabilities;
- In the authorization documents and the PPA there is no clarity on the type of the RES facility's current, direct current (DC) or alternating current (AC).
The government and the competent authority have done significant work to improve the legal regime for RES (simplification of permitting procedures, the introduction of indexation for exchange rate differences8, the introduction of requirements for the creation of a reserve fund of the FSC, etc.). However, some problems remain, and therefore, in the framework of further improvement of the investment climate, the authorized body developed a package of amendments to regulatory acts in April 2019, some of which were adopted on June 19, 2019 and some of which are still in the process of approval (hereinafter «Draft Amendments»).
On June 19, 2019, the Minister of Energy of the Republic of Kazakhstan signed Order № 224, which, in particular, introduced the following changes to the Rules for the centralized purchase and sale of electricity9:
- The PPA concluded under an auction scheme may contain an arbitration clause on dispute resolution at the International Arbitration Center of the Astana International Financial Center with the prior consent of the authorized body of the industry.
- The right to extend the commissioning of the RES facility under the FIT scheme for one year is granted, if before the expiration of 36 months (the commissioning period) from the date of signing the PPA, proof of completion of construction and installation works in the amount of at least 70% of the total scope of work is provided.
The main innovations proposed by the Draft Amendments are10:
To create two types of auctions: zonal auctions (current) and project auctions (new).
The latter assumes that a project is put up for auction with (1) initial marketing data, (2) results of public hearings and a preliminary environment impact assessment, (3) a specific location of the RES facility (with the certain cost of buying out or leasing the land plot), and (4) a scheme of power distribution and technical conditions for connection (hereinafter "Documentation"). The Documentation is being developed for the FSC prior to the auctions, and the costs of its development shall be reimbursed by the project auction's winner.
There are new qualification requirements regarding the availability of technical conditions for connection to the electrical network, the land plot for the construction of renewable energy facilities (if the land plot is not specified in the auction schedule), as well as approval by the system operator of the scheme of power distribution.
- The concept of a financial organization is introduced into the auction PPA; the financial organization has the right to replace the seller, i.e. the investor in the RES project, by analogy with a direct agreement in public-private partnership projects.
- A clarification that the power capacity of the installation shall be indicated in DC (direct current) for solar power plants and in AC (alternating current) for wind, hydro and bio power plants.
In general, the Draft Amendments are positive for the regulation of renewable energy sources, but the published version of the project changes has a number of flaws and it is not yet clear in what form and when the Draft Amendments will be adopted. Given that the authorized body has already announced the first project auction on November 27, 2019, it is likely that project auctions will be introduced soon.
- Joint stock company "KEGOC" (Kazakhstan Electricity Grid Operating Company) .
- Layout of facilities for the use of RES.
- Ministry of Energy of the Republic of Kazakhstan.
- List of energy producing organizations using RES.
- LLP "Settlement and Financial Centre".
- JSC "Kazakhstan Operator of the Electric Power and Power Market" www.korem.kz.
- It should be noted that qualification requirements are imposed only on legal capacity, but there are no requirements in terms of experience or technical qualifications.
- The fixed tariff and the auction price are indexed according to different conditions.
- Order of the Minister of Energy of the Republic of Kazakhstan dated March 2, 2015 № 164 "On approval of the rules for the centralized purchase and sale by the settlement and financial centre of electrical energy produced by facilities for the use of renewable energy sources, recalculation and redistribution of the settlement and financial centre of the relevant share of electrical energy to a qualified conditional consumer by the end of the calendar year" ("Rules for the centralized purchase and sale of EE").
- The project changes have not yet been adopted; these changes are as of April 2019.
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