The Energy Transition in Central Asia: Drivers, Policy and Opportunities
Central Asia is the region to the east of the Caspian Sea with Russia to the north, China to the east, and Afghanistan and Iran to the south. In this area of four million square kilometres sit the five former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. Although often considered as a homogenous bloc facing many common challenges and constraints, the Central Asian republics have taken differing approaches to the development of renewable energy resources. The region provides an interesting snapshot of the opportunities the energy transition can present to developing economies.
Central Asia has sizeable deposits of gas and other natural resources. Turkmenistan has the sixth-largest proven gas deposits in the world,1 and Kazakhstan has significant deposits of oil and coal. Hydrocarbons dominate domestic electricity generation and the region’s wider economies.
Kazakhstan is a good example of hydrocarbon dependence. Kazakhstan is the 62nd most populous country in the world yet is in the top 25 largest emitters of greenhouse gases (GHG). Kazakhstan’s abundance of natural resources have underpinned an economic reliance on oil exports for almost three decades, and its domestic electricity sector is dominated by ageing coal-fired power generation, fuelled by cheap, large volumes of coal found in the country’s north-east. As a result, Kazakhstan’s energy sector accounts for the bulk of the country’s greenhouse gas emissions.2
The Central Asian republics also inherited a legacy of ageing infrastructure from the Soviet era, and face many geographical challenges to development – all are landlocked with no direct access to seaports, or double-landlocked in the case of Uzbekistan. The region’s climate swings from cold winters to punishingly hot summers, which can put a strain on the reliability of existing electricity supplies as well as constraints on the design and construction of renewable energy facilities. However, as growing populations and developing economies demand greater access to reliable energy supplies, opportunities abound for investment in renewable energy and infrastructure projects in the region.
As with many developing economies, building renewable electricity generation facilities is only part of the picture. To encourage an attractive investment climate and to establish the framework needed for investments into renewable energy projects, Central Asia is seeing significant structural and regulatory reforms in the electricity sector and wider economies of the region.
Paris Agreement commitments
Against this backdrop, the Central Asian republics have engaged to a greater or lesser extent on setting a course to transition away from dependence on oil and gas, and all five are now signatories to the Paris Agreement.
Kazakhstan ratified the Paris Agreement and submitted its intended nationally determined contribution (INDC) in 2016,3 committing to reduce GHG emissions by 15% below 1990 levels by 2030, and setting a further, conditional target to reduce GHG emissions by 25% below 1990 levels, subject to additional international investments, access to low carbon technologies and the establishment of a green climate fund.4 That same year, Turkmenistan ratified the Paris Agreement, 18 years after ratifying the Kyoto Protocol. Notably, Turkmenistan pegged its INDC to its GDP; the nation’s unconditional target is to keep the growth rate of GHG emissions lower than the growth rate of GDP between 2015 and 2030, with a further, conditional target of preventing any increase in GHG emissions between 2015 and 2030, subject to the republic garnering international support.5
The following year in 2017, Tajikistan ratified the Paris Agreement and submitted its INDC, committing to reduce GHG emissions by 10-20% below 1990 levels by 2030, and to 25-35% below 1990 levels by 2030, subject to new substantial international funding and technology transfer.6 A year later in 2018, Uzbekistan ratified the Paris Agreement with the intention of strengthening measures and actions to counter climate change and to decrease specific emissions of greenhouse gases per unit of GDP by 10% by 2030 from the level of 2010. As with Turkmenistan and Tajikistan, in formulating its INDC, Uzbekistan envisaged support from international organisations and financial institutions, as well as the influx of advanced low carbon technologies.7
Last out of the group, Kyrgyzstan ratified the Paris Agreement in October 2019.8 Having relatively low GHG emissions to start with9, the Kyrgyz Republic committed to reducing GHG emissions by 11.49-13.75% below ‘business as usual’ in 2030; and, contingent on getting adequate support from the international community, to reducing GHG emissions by 29.00-30.89% below ‘business as usual’ in 2030. Looking further ahead, the republic plans to reduce GHG emissions by at least 12.67-15.69% below ‘business as usual’ in 2050, and with the support of the international community, by 35.06-36.75% below ‘business as usual’ in 2050.
Kazakhstan – a decade of development
The first Central Asian republic to sign the Paris Agreement is also one with a longer track record of developments in the renewable energy sector. Kazakhstan is a vast country, the 9th-largest in the world. Kazakhstan’s vast steppes offer great potential for developing wind and solar energy. However, its geography also presents challenges. Investments in its electricity sector must grapple with the country’s size, location, very low population density, ageing infrastructure and climate extremes.
For the first two decades following independence, Kazakhstan’s renewable electricity generation assets were limited to a few Soviet-era hydropower plants that contributed around 13% of the country’s electricity. Over the last decade or so this picture has slowly evolved. At the time of writing, Kazakhstan had 117 active renewable energy facilities with a total capacity of over 1.7GW.10 By the end of 2021, the Ministry of Energy expects a further 23 facilities to come online with a total capacity of over 380MW.11
Kazakhstan’s legal and regulatory framework for the implementation of renewable energy projects has developed over time. In 2009, Kazakhstan adopted a law On Supporting the Use of Renewable Energy Sources, which aimed to incentivise investment by giving renewable energy suppliers a right to connect to the electricity grid and requiring transmission companies to buy the electricity they generated. The law also set aside land plots for renewable energy projects and provided a mechanism for concluding power purchase agreements for renewable energy at prices and with payback periods developed in feasibility studies.
Also in 2009, Kazakhstan adopted its Concept on Transition towards Green Economy until 2050. This long-term strategy aims to increase the share of solar and wind energy sources in electricity production from 0-3% by 2020, and then raise the share of alternative sources in electricity production to 30% by 2030, and 50% by 2050.
These early reforms and policy drivers failed to spark significant growth in the renewable electricity sector, partly due to the need for further regulation and the project-based nature of renewable electricity tariffs under the renewable energy law, which required tariffs to be negotiated on a case-by-case basis for each project.
In 2013, Kazakhstan passed a new law that introduced a feed-in tariff scheme. This improved the investment climate and started drawing more interest from both domestic and international investors. Then in 2017/2018, Kazakhstan moved from feed-in tariffs to an auction-based framework that is designed to allow competitive market pricing. Successful investors are awarded the right to enter into a long-term power purchase agreement with Kazakhstan’s common offtaker, the Financial Settlement Center of Renewable Energy, a 100% subsidiary of the national grid operator Kazakhstan Electricity Grid Operating Company (KEGOC), which has been operating since 1 January 2019 as the country’s sole buyer of renewable electricity.
Under the auction scheme, the Ministry of Energy publishes an annual schedule of auctions, indicating the auctioned capacity, and in the case of projects under 30MW, relevant connection points and reserved land plots. Because the auction system favours projects under 30MW in this way, much of Kazakhstan’s new generation capacity is being added in the form of smaller projects. 19MW of renewable energy capacity was awarded in the initial pilot auction in early June 2018, and the second round in October 2018 resulted in the award of 664MW of renewable energy capacity. The country’s renewable energy auctions have generally been oversubscribed and have seen significant reductions in levelized energy costs.
Another notable component of Kazakhstan’s regulatory environment is its emissions trading scheme (ETS). Launched in 2013, the National Allocation Plan of Kazakhstan was the first emissions trading scheme in Central Asia and is still the only active scheme in the region.
Kazakhstan’s story is one of slow and incremental development, with a long history of reforms and a greater number of smaller renewable energy projects over the past decade than its Central Asian neighbours.
Uzbekistan – rapid reforms
Uzbekistan’s approach to the energy transition has followed a different path to Kazakhstan’s. Uzbekistan is the most populous Central Asian country with over 34 million citizens. For a long period following its independence, it had a tightly controlled economy with a heavy reliance on natural gas. In recent years, however, Uzbekistan has engaged in a rapid and wide-ranging series of economic reforms under President Mirziyoyev. The reform agenda has encompassed the energy sector, with a programme of privatisation, restructuring and deregulation. In this context, Uzbekistan is also engaging in a programme of rapid expansion into renewable electricity generation on a significant scale from a near-standing start.
Uzbekistan enacted its first comprehensive renewable energy law in May 2019 (Law No. ZRU-539 On Use of Renewable Sources of Energy dated 21 May 2019). The law supports investment in renewable energy generation by providing tax, customs and other benefits and preferences to producers of renewable energy and equipment used in the renewable energy sector. Other legal and regulatory reforms in the sector include a regulation for the connection of private sector electricity manufacturers to the national electricity grid.
Two other pieces of recent legislation are the Law on Public-Private Partnership (Law No. ZRU-537 adopted on 10 May 2019) and the Law on Investment and Investment Activities (Law No. ZRU-598 dated 25 December 2019). These laws have a broader scope across the Uzbek economy, but they provide regulatory frameworks and government support for the implementation of renewable energy projects.
In October 2019, Uzbekistan published its strategy for the transition to a green economy in the period to 2030. The strategy aims to fulfil the country’s obligations under the Paris Agreement. The plans include the construction of almost 10GW of new renewable energy facilities by 2030, including 5GW of solar, 3GW of wind and 1.9 GW of hydroelectric power plants. Recent announcements suggest that those wind and solar targets are being increased further to 7GW and 5GW respectively.12
Uzbekistan’s first solar PV projects attracted interest from dozens of international developers and investors. In March 2019, 23 companies from Europe, Asia and the Middle East participated in the tender process for a 100MW PV project in the Navoi province. In October 2019, Uzbekistan announced that Masdar Clean Energy of the United Arab Emirates was awarded the country’s first competitively tendered PV solar power plant to be implemented on PPP principles, with the pricing coming in at around 2.7 US cents per kilowatt-hour, the lowest price among emerging markets at the time. Subsequent tenders have seen participation from a large number of interested foreign investors and progressively lower pricing.13
In the renewable electricity space, although solar PV generation has dominated the headlines in Uzbekistan, other technologies also feature. Uzbekistan has some existing hydro generation assets and the European Bank for Reconstruction and Development (EBRD) is financing the rehabilitation of an existing hydro plant in the Tashkent region. Other new hydro projects have also been announced recently, with funding coming from China Exim Bank, the Uzbekistan Fund for Reconstruction and Development (UFRD) and the Russian Export-Import Bank (Rosexim).
Uzbekistan is also developing wind power generation facilities, both through tenders and on a bilateral basis. Alongside the push for renewable generation, Uzbekistan is pursuing an ambitious nuclear power strategy and has recently announced several investments in gas-fired CCGT power generation assets in the south of the country, with funding from the Asian Development Bank (ADB), EBRD and the UFRD. Uzbekistan’s need for significant increases in power generation capacity offers significant opportunities for foreign investment in Uzbekistan.
Kyrgyzstan and Tajikistan – hydro powerhouses
Kyrgyzstan and Tajikistan are much less populous countries that take advantage of their mountainous geography to generate the majority of their electricity from hydroelectric power stations. Both nations produced over 90% of their annual electricity from hydropower in 2017, possess abundant water reserves and have over 8GW of existing hydroelectric capacity.14
Kyrgyzstan has one of the highest shares of renewable electricity in the world.15 The Naryn river flows through Kyrgyzstan, feeding the giant Toktogul reservoir to the West, and numerous large and medium-sized rivers offer an estimated 140 – 170TWh of hydro potential, of which only 10% has been exploited.16 The republic faces some challenges, though. Between 2010 and 2018 Kyrgyzstan made no major additions to its hydropower capacity, and residential electricity demand rose by almost 60% between 2007 and 2016.17 Reliability is also a concern – five out of Kyrgyzstan’s seven main hydropower plants are over 30 years old, and with almost 40% of Kyrgyzstan’s electricity coming from the Toktogul reservoir, many people in the republic may soon feel the effects of country-wide droughts which have seen the Toktogul reservoir water level fall over recent years.18
Like Kazakhstan, Kyrgyzstan initiated reforms aimed at renewable energy investments over a decade ago, adopting a Law on Renewable Energy at the end of 2008 to provide a framework for the continued development of renewable energy resources and various incentives and privileges for renewable energy producers. The republic also established an Independent Regulator, a National Energy Holding Company, and a State Committee on Industry, Energy and Subsoil Use. Since 2016, the State Committee has been responsible for developing and implementing a uniform state policy in the energy sector, including developing incentives for energy efficiency and the use of renewable energy sources and creating conditions for introducing and using renewable energy sources.19
Tajikistan, too, is a mountainous country with significant potential for generating electricity from hydroelectric sources. With substantial water reserves and 93% of its topography covered in mountains, approximately 98% of the republic’s electricity is generated by hydropower plants.20 However, because many of Tajikistan’s hydropower plants are dependent on river basins fed by glacial meltwater and snowmelt, the effects of climate change may soon begin to affect the dynamics of the republic’s hydroelectric power supply, particularly given that 70% of the landlocked nation’s electricity comes from a single facility, the 3,000MW Nurek hydropower plant.21
Tajikistan’s renewable energy sector is underpinned by a law on the use of renewable energy sources, adopted in 2010 and updated in 2015. In 2013, Tajikistan produced its Sustainable Energy for All framework, in which it analysed the current status of its energy sector and set out certain long-term goals and objectives to achieve by 2030. Among other objectives, the framework sets out to ensure access to electricity for people living in rural areas, improve energy efficiency, and notably, to increase energy production from renewable energy sources by 20% against the baseline year (2010), corresponding to a 10% share of renewable energy in the total electricity balance, and to increase indigenous energy sources in the energy sector from 59.3% in 2010 to 80% in 2030.22
Like Kyrgyzstan, Tajikistan’s power supply is vulnerable to supply shocks and seasonal shortages that provide strong drivers for the development of alternative, renewable sources of energy.
Turkmenistan – green shoots
Some commentators see gas as a transition fuel that can offer a transitory alternative to more polluting coal and oil. With its overwhelming dependence on natural gas for electricity generation, Turkmenistan currently sits in this ‘transition’ slot. Although the country has been slower than its Central Asian neighbours to introduce policy and regulatory reform supporting the development of renewable energy, Turkmenistan has now become the last of the five Central Asian republics to introduce a renewable energy strategy and a dedicated law on renewable energy. A Presidential Decree dated 4 December 2020 approved Turkmenistan’s national strategy on the development of renewable energy for the period up to 2030, and in March 2021, Turkmenistan passed a law on renewable energy sources.23 The law envisages support for renewable power generation including tax and customs benefits and guaranteed connection of generating facilities into the power network of Turkmenistan.
Support from international financial institutions
Support from international financial institutions has been crucial to driving the energy transition in Central Asia. For example, in 2019 Uzbekistan became the first country outside Africa to join the World Bank Group’s Scaling Solar program24. In addition, the World Bank is working with the Uzbek government on a grid code, tariff reform, renewable project development and investment strategy.
Uzbekistan has also utilised the support of international financial institutions as transaction advisors to help with the structuring and financing of large-scale solar PV projects. In fact, the country is pursuing two parallel programs with different institutions as transaction advisors. In August 2019 Uzbekistan signed a mandate with ADB on a program to build several PV power plants with a total capacity of up to 1GW. Then in October 2019, Uzbekistan signed a mandate with the International Finance Corporation (IFC) to develop up to 900MW of solar power.
Kazakhstan’s renewable energy sector also benefits from significant support from the EBRD through the EBRD Kazakhstan Renewables Framework, which has seen the EBRD invest in a large number of Kazakhstan’s green energy projects across two phases, including both the development of renewable power-generation capacity across Kazakhstan and strengthening and improving Kazakhstan’s electricity grid. The Kazakhstan Renewables Framework is also being supported by the Green Climate Fund, the largest climate fund in the world, which will provide concessional finance and a comprehensive technical cooperation programme.
Other international financial institution support in the region includes the World Bank Group’s Tajikistan–World Bank Group Country Partnership Framework 2019-202325 and ADB’s support for modernisation of hydropower facilities in Kyrgyzstan26.
This support from international financial institutions is likely to continue in the medium term as the renewable energy sector grows, which can help facilitate an increasing level of private sector investment in projects in the region.
Transition 2.0 – hydrogen
Although Central Asia could be said to be playing catch-up on renewable electricity generation, there are also signs that Central Asian countries are recognising the benefits and opportunities of being at the forefront of the energy transition. Many developed economies are seeing increased hype and enthusiasm about the potential that hydrogen could play in the energy transition across the sector, including for domestic heating, electricity generation, as a fuel for heavy transport, shipping and aviation, and as a zero-carbon solution for hard to abate industrial sectors such as steel production.
Both Uzbekistan and Kazakhstan have indicated an ambition to explore possibilities for hydrogen production and use. Uzbekistan is developing a hydrogen strategy by way of a presidential decree aimed at boosting the development of renewable and hydrogen energy. The decree is expected to set out measures to support technological innovation in both hydrogen and renewable energy and to build hydrogen infrastructure to promote energy efficiency and security.
Separately, the Ministry of Energy of Uzbekistan, Saudi Arabia’s ACWA Power and the U.S. industrial gases giant Air Products have announced their cooperation on the development of hydrogen and green energy in Uzbekistan. The Ministry of Energy has also signed a memorandum of understanding with Germany’s Siemens Energy on the development of various energy projects, including hydrogen.27
Kazakhstan has also made a splash in the hydrogen space with the announcement by German developer Svevind that it had signed a memorandum of understanding with Kazakh Invest for a massive hydrogen project in Kazakhstan.28 The announcement refers to an ambitious 45GW of solar and wind farms powering 30GW of electrolysers to produce three million tonnes of green hydrogen per annum. This is a massive scale for hydrogen production, let alone green hydrogen, and is by far the largest green hydrogen project announced to date. Even the renewable energy component is an order of magnitude bigger than anything in Central Asia. If the project is successful, it will mark a significant departure from Kazakhstan’s previously small-scale and incremental approach to developing clean energy assets.
As hydrogen continues to play an increasing role in efforts to transition away from fossil fuels, one potential supply chain model would see green hydrogen produced at low cost at locations with abundant renewable energy potential and fewer space constraints and then exported to countries that have the demand, but not the production capacity needed to satisfy that demand with local production. This trend can be seen for example in Australia’s plans for exporting hydrogen to East Asia, Germany’s plans for cooperation on hydrogen development with Namibia, and strategies floated by countries such as India, Russia, Saudi Arabia and the United Arab Emirates. Central Asia is well placed to capitalise on its abundant renewable energy potential and central location (it’s in the name!) to be a hub for hydrogen production and export.
If a developing hydrogen market accommodates blue hydrogen, made by capturing the carbon dioxide emissions from the steam methane reformation process, then the plentiful supply of natural gas in Central Asia may make blue hydrogen a viable opportunity in the region. Turkmenistan has recently talked about the potential for supplying blue hydrogen to Europe.29
Although the development of a hydrogen sector in Central Asia is still at a very early stage, these recent announcements suggest a realisation that the energy transition offers significant opportunities for the Central Asian countries as they grow their economies and move away from reliance on fossil fuels.
This article was first published in Construction Law International, Vol 16 No 4, December 2021, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.
9 As of 2010, the Kyrgyz Republic accounted for just 0.079% of the world’s total population, and its GHG emissions per capita were less than one-third of the world average.
19 IEA (2020), Kyrgyzstan energy profile, IEA, Paris https://www.iea.org/reports/kyrgyzstan-energy-profile
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