Auction for renewable energy sources

In a nutshell:

Worldwide demand for renewable energy sources is constantly increasing. This is because of the inexhaustible and environment-friendly nature of these energy sources.

In a nutshell:

Worldwide demand for renewable energy sources is constantly increasing. This is because of the inexhaustible and environment-friendly nature of these energy sources.

Currently, the government of the Republic of Kazakhstan is heavily focusing on the development of alternative energy sources. Since the law on ”Support for the use of energy from renewable energy sources” was adopted in 2009, this issue was last addressed explicitly during the international exhibition ”Astana EXPO-2017”. The feed-in tariffs determined afterwards in 2014:

Later on, due to significant currency fluctuations, amongst others, the Kazakh government had to develop a mechanism enabling the annual adjustment of the fixed tariffs.

For projects involving liabilities in foreign currency, the feed-in tariffs were pegged to the US dollar based on a procedure established by the government of the Republic of Kazakhstan in cases where the exchange rate of the national currency to convertible currencies changed by 25% and more. In effect, this indexation of the feed-in tariffs has led to increased interest of foreign investors in expanding renewable energy sources.

Since March 2018, Kazakhstan has applied another strategy. The intention is to increase the interest of investors by implementing an auction system. It is planned that projects of up to 1,000 MW will be auctioned. The plans for 2018 provide that a total of 18 auctions will be held in two rounds.

The first auctions will be subject to a maximum price that bidders will be able to underbid during the auction. These maximum prices have been determined by reference to the feed-in tariffs defined in 2014.

For the following auctions, the maximum or initial price will be the (final) price determined during the last auction. But such a gradation has the effect that a large number of bidders is to be expected at the beginning of the auctions.

The Ministry of Energy of the Republic of Kazakhstan is of the opinion that, overall, the transition to the auction system will cause a 50% decrease in solar energy prices.

An important aspect connected with the transition to the auction system is the question of how the legislative amendment will apply to the PPAs that were concluded with the Kazakh Financial Settlement Centre already before 2018. This ”old-case” regulation will not be affected by the implementation of the new auction system. The feed-in tariffs fixed in 2014 (see table 1) will continue to apply for 15 years.

A prospective investor, thus, will be able to choose between two investment models. On the one hand, the investor will be able to choose projects to which the old-case regulation might apply; on the other hand, the investor will be able to opt for participation in auctions.

At the beginning of a project, it is important to clarify all risks related to the indexation of (old) feed-in tariffs, the issue of whether construction permits are required, etc. For a project that might fall within the remit of the old-case regulation, it is always recommended to perform a due diligence audit detecting such and other risks.

Also the participation in an auction may entail risks because a security deposit is required for participation same as in the case that the auction is won.

Our consulting experience in renewable energy projects enables us to be your reliable partner in this area in Kazakhstan and abroad. We will be happy to answer your questions and provide you with detailed advice with regard to your concrete questions.

Currently, the government of the Republic of Kazakhstan is heavily focusing on the development of alternative energy sources. Since the law on ”Support for the use of energy from renewable energy sources” was adopted in 2009, this issue was last addressed explicitly during the international exhibition ”Astana EXPO-2017”. The feed-in tariffs determined afterwards in 2014:

Later on, due to significant currency fluctuations, amongst others, the Kazakh government had to develop a mechanism enabling the annual adjustment of the fixed tariffs.

For projects involving liabilities in foreign currency, the feed-in tariffs were pegged to the US dollar based on a procedure established by the government of the Republic of Kazakhstan in cases where the exchange rate of the national currency to convertible currencies changed by 25% and more. In effect, this indexation of the feed-in tariffs has led to increased interest of foreign investors in expanding renewable energy sources.

Since March 2018, Kazakhstan has applied another strategy. The intention is to increase the interest of investors by implementing an auction system. It is planned that projects of up to 1,000 MW will be auctioned. The plans for 2018 provide that a total of 18 auctions will be held in two rounds.

The first auctions will be subject to a maximum price that bidders will be able to underbid during the auction. These maximum prices have been determined by reference to the feed-in tariffs defined in 2014.

For the following auctions, the maximum or initial price will be the (final) price determined during the last auction. But such a gradation has the effect that a large number of bidders is to be expected at the beginning of the auctions.

The Ministry of Energy of the Republic of Kazakhstan is of the opinion that, overall, the transition to the auction system will cause a 50% decrease in solar energy prices.

An important aspect connected with the transition to the auction system is the question of how the legislative amendment will apply to the PPAs that were concluded with the Kazakh Financial Settlement Centre already before 2018. This ”old-case” regulation will not be affected by the implementation of the new auction system. The feed-in tariffs fixed in 2014 (see table 1) will continue to apply for 15 years.

A prospective investor, thus, will be able to choose between two investment models. On the one hand, the investor will be able to choose projects to which the old-case regulation might apply; on the other hand, the investor will be able to opt for participation in auctions.

At the beginning of a project, it is important to clarify all risks related to the indexation of (old) feed-in tariffs, the issue of whether construction permits are required, etc. For a project that might fall within the remit of the old-case regulation, it is always recommended to perform a due diligence audit detecting such and other risks.

Also the participation in an auction may entail risks because a security deposit is required for participation same as in the case that the auction is won.

Our consulting experience in renewable energy projects enables us to be your reliable partner in this area in Kazakhstan and abroad. We will be happy to answer your questions and provide you with detailed advice with regard to your concrete questions.