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In 2013, the Kazakh government adopted a concept for the transition to a green economy, which among other things should support the expansion of renewable energies. At the same time, the Kazakh law on renewable energies of 2009 was reformed and a fixed feed-in tariff was adopted in an ordinance. The model of the feed-in tariff was and remains dependent on the type of energy production (photovoltaic, wind, biogas, and water).
Originally, the following feed-in tariffs1 were planned:
For (the now old) investment projects with liabilities in foreign currency, the feed-in tariffs were linked to the US dollar in the event of a change in the exchange rate of the national currency (KZT) to the convertible currencies by 25 percent or more, in a procedure determined by the Kazakh government. This indexation had led to a strong increase in the interest of foreign investors in the expansion of renewable energy sources. This is how the Kazakh government came close to its goal of increasing the share of renewable energies in the country to 3 percent by 2020, 10 percent by 2030, and 50 percent by 2050.
Since March 2018, Kazakhstan has been pursuing a different strategy. The interest of investors is to be increased by introducing an auction system. Projects of up to 1,000 megawatts in total should be put out to tender. The first tenders were subject to a maximum price which the bidders were able to undercut in the auction. These maximum prices were determined by a reference to the feed-in tariffs set in 2013.
The Kazakh legislator has thus introduced an auction system that follows the model of the lowest bid. For further auctions, the maximum or starting price was then the (final) price fixed at the last auction. The provision of security in the form of a bank guarantee, as a precondition for participation in the auction, is also intended to ensure that only reputable investors participate in the auctions. It is also planned to provide a security deposit for the realization of the project, which can only be repaid to the investor after completion of the investment project.
Currently, the following initial prices for auctions are valid (as of 27 October 2020):
* The exchange rate on 27 October 2020 is 1 Euro = 507, 618 KZT / 1 KZT = 0.00196999
Investors will still be exempted from the network transmission fees. They are also entitled to a grid connection for their project.
With the feed-in tariff model, investors do not need to look for sales opportunities, since the "Financial Settlement Center" acts as the central buyer of the energy generated from renewable energy sources. This is a wholly-owned subsidiary of the state-owned grid operator "Kazakhstan Electricity Grid Operating Company - KEGOC", which finances its activities from payments made by conventional energy producers.
Projects in the field of renewable energy sources are considered priority investment projects. This allows investors to benefit from tax and customs preferences. Exemption from customs duties as well as the granting of tax exemptions (e.g. real estate tax) and facilitation for the entry of foreign specialists are some examples of the applicable promotional measures.
However, it should be noted that only projects above a certain investment size can benefit from these preferences. According to the exchange rate of the KZT to the USD, the investment volume must be approximately USD 11 million.
One of the challenges is the legal certainty in questions of taxation. Currently a change in the Kazakh tax law is being discussed, which, among other things, provides for the annual taxation of photovoltaic systems with a land tax of 1.5 percent p.a. based on the book value. As a result, smaller projects are de facto disadvantaged. This is the case, for example, only concerning the annual real estate tax of 1.5 percent to be paid.
Due to the financing of the feed-in tariff model by conventional energy producers, a growing resistance of the same can be expected soon. It is also true that, for political reasons, there is no intention to pass on the additional costs to the consumer. Investors will be exposed to increasing competitive pressure due to exchange rate risks as well as falling prices for the feed-in tariff, caused by the introduction of an auction system. This is supported by the considerations of the Kazakh state, which has comparatively large gas reserves, to build gas-fired power plants. On the other hand, the EBRD2 forecasts that energy demand will increase by about 2.5 percent annually. This will be the Kazakh demand for renewable energies, also because of the dependence of South Kazakhstan on energy supplies from neighboring countries.
The current potential3 for the expansion of renewable energies is
1 Financial Settlement Center of RE Kazakhstan (October 2020)
2 Transition to the “Green Economy”. RES Kazakhstan (July 2019) / European Bank for Reconstruction and Development / London: One Exchange Square.
3 Investor’s Guide to renewable energy projects in Kazakhstan (2020). Power the Future Regional Program. / Nur-sultan: USAID.
The Kazakh legislature has not yet adopted a legal framework for the promotion of self-sufficient plants. Apart from the general customs and sales tax concessions, there is no de facto model of self-consumption.
In the absence of a legally regulated model that regulates the sale of surplus energy, as well as to promote the security of supply in rural areas, the Kazakh government must develop a new concept.
It remains to be seen when the Kazakh government will pay attention to the concept of self-sufficiency. In the meantime, the implementation of large projects should increase the share of renewable energy.
When realizing renewable energy projects, a Power Purchase Agreement (PPA) is almost always concluded.
Currently, investors who want to develop projects in Kazakhstan and who have successfully participated in an auction can conclude a Power Purchase Agreement (PPA) with the "Financial Settlement Center". The legal basis for the conclusion of the PPA is the Ministerial Order of 11.09.2018 on No.: 360. The PPA is also a model contract, the terms, and conditions of which cannot be changed. The term of the PPA is 15 years. The beginning of the term is the date of successful testing of the equipment, which is documented. The energy fed into the grid from this date must be paid for by the "Financial Settlement Center".
The PPA provides for several contractual obligations for the investor, which must be observed to avoid termination and other disadvantages. These include, among other things, obligations to submit a notice of the start of construction as well as the notification of acceptance of the completed plant.
The PPA also provides for indexation of the feed-in tariff. Exchange rate fluctuations are indexed in proportion to the Kazakh Currency (KZT) to the USD in the amount of 70 percent. At the same time, 30 percent of the feed-in tariff is adjusted to the consumer price index.
Further information on indexation can be found on the website of the Financial Settlement Center.
Currently, there are numerous bureaucratic hurdles to be overcome in the execution of the PPAs. In some cases, there are discrepancies between the requirements in the PPA and the Kazakh standards, which have since been repealed. Right. An example is the contractual obligation of the investor to present a so-called technical passport of the plant. Although the so-called technical passport has now been abolished, the Financial Settlement Center has occasionally demanded it regarding the contractual regulation.
Furthermore, there are further obligations of the investor to provide information, e.g. on the existence of liabilities in foreign currencies. According to the relevant regulations, it is only sufficient to inform the investor whether such liability exists at all. In individual cases, the "Financial Settlement Center" required additional information, e.g. on the composition of the liability or the term of the loan.
Another challenge is to ensure the solvency of the Financial Settlement Center. The "Financial Settlement Center" is legally obliged to set up a reserve fund to secure claims for payments under the PPA. However, the reserve fund can accumulate reserves exclusively in local currency (PPA). Due to the volatility of the Kazakh currency and the fact that further projects will be realized in the future, the solvency of the Financial Settlement Center could be questioned, as only 3 percent of the annual expenses for investor compensation are secured by the reserve fund. In conclusion, however, it should be noted that the Financial Settlement Center has so far always fulfilled its obligations on time and in full.
The Kazakh government continues to make efforts to improve legal certainty for the PPAs. With the government decree of June 19, 2019, a clause has been included in the model PPAs, whereby in the event of disputes, the international arbitration court located at the International Financial Center Astana can be designated as the competent court.
International banks such as the EBRD will continue to work to improve the legal framework to enhance the bankability of future PPAs.
The resource potential of renewable energies in Kazakhstan is:
Kazakh legislation allows the conclusion of electricity supply contracts between the energy producer and a consumer. The price can be freely agreed upon by the parties to the electricity supply contract.
The practical relevance of the conclusion of electricity supply contracts is, however, of minor importance. Kazakhstan generates most of its energy by coal-fired power plants. Due to the enormous coal reserves, the generation of energy does not compete with renewable energy sources.
The challenge is, therefore, to increase tariffs for industry and end-users to make energy production from renewable energy sources competitive.
The direct marketing approach will play a subordinate role in the Kazakh energy market in the coming years due to the described starting position.
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Michael Quiring
Attorney at Law (Germany)
Partner, Office head
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