Power supplies in Kazakhstan: $21 billion sought for
A vast territory like Kazakhstan’s makes life expensive for the relatively scant population scattered over it. A perfect example is the country’s electric power generation and distribution network, upgrading and completion of which is costing tens of billions in dollars which, if rationally invested, will send prices way in excess of purchasing power for a vast majority of the people. Turning Kazakhstan into a major net exporter of electricity seems the only way to earn the huge sums to be invested back. But market opportunities are limited, and on a mid-term competition is lurking to the south of Kazakhstan.
by Charles van der Leeuw, KZW senior contributor
On paper, the national power grid of Kazakhstan (KEGOC) looks finacially sound, and even profitable (see table), with net income over the past year accounting for 20 per cent of sales revenue. However, investments in order to keep the network intact have almost doubled in 2008 from 2007, and amounted to roughly three times the company’s net income. The trouble is how that money can be earned back. And this is only without the 21 billion US dollar equivalent needed to expand the network’s generation capacity.
Kazakhstan never had an integrated power network covering all of its territory. In Soviet times, it made no sense to transport electricity from the northern provinces, which were – and still are – integrated in the regional network of southwestern Siberia, to the southern regions, most of which were able to obtain low-cost power from the hydroelectric stations in Kyrgyzstan and Tajikistan. Today, the economic structure of independent Kazakhstan requires the completion of an incoherent transportation system along with the refurbishment of those part of generation and supply facilities which still function. Most of the lines, transformers and substations are worn out. This year, the first phase of KEGOC’s so-called rehabilitation project is supposed to have been completed with the modernisation of 41 substations and their networks in the country. Costs come close to 44 billion tenge, being the equivalent of about 200 million euro or 300 US dollar.
A similar amount has been spent on the completion of the second phase of the north-south line. In late 2008, the first line was put into operation. Its capacity of 650 MegaWatt brought relief of up to 4 billion kiloWatt hours per annum to Kazakhstan’s southern provinces – an amount which is poised to be doubled with the opening of the second line. Not only will this give the power-strapped southern regions better access to the resources of the north with its overcapacity in generating facilities, enabling the latter to operate at a higher proportion of their capacity.
The new link will also make southern Kazakhstan, which is more densely populated and makes up for more than half of the country’s overall annual consumption, less dependent on importation from former Soviet republics to its south. Recently, the Uzbeks disconnected their national grid from the so-called Central Asian Unified Power System, a network dating from Soviet times which interconnects the supply systems of Uzbekistan, Turkmenistan, Kazakhstan, Kyrgyzstan and Tajikistan. In early 2009, Kazakhstan quitted the system for a brief while following allegations of siphoning – notably by the Tajiks.
From their side, Kyrgyzstan and Tajikistan, which have 80 per cent of the region’s overall water resources on their territories, demand cash for their water supplies which should enable them to make their ambitions hydro-electric projects materialise. Should this happen, the three remaining republics can be supplied with five times all the power they need – at a price, that is. Not only will that make the expensive north-south connection of Kazakhstan redundant, but the cash-strapped republics of Kyrgyzstan and Tajikistan can also boost their exports into China – at the expense of KEGOC’s hopes for extra sources of income to realise its projects and make them viable for the future.
The first phase of the north-south line could only be completed thanks to a loan of 255 million euro from the European Bank for Reconstruction and Development. How that loan can be paid back with interest is anyone’s guess for the time being. Instead, billions more are needed to secure enough supplies to meet demand, which by 2016 is expected to have increased from its current level in the order of 80 billion kiloWatt hours to an annual 124.5 billion. It is here that KEGOC finds itself in the middle of a vicious circle: growth in sales volumes is needed since 80 billion kiloWatt is all it can produce even if its existing grid has been upgraded. For extra capacity, new, mostly thermal power generation facilities throughout the country (see table) are under construction, devouring capital investment. The need to save energy rather than allowing consumption to grow beyond measure imposes itself here – but then, that will also bring KEGOC’s income further down.
For at the heart of the trouble with Kazakhstan’s ambitious electricity projects is how to earn the investment back. Nominally, consumer prices for electric power in Kazakhstan are on the lower end of the global tariff scale. Expressed in proportions of average personal income, though, they reach an unacceptable 5 per cent, bringing total costs for water and energy (including heating, gas and power) up to a staggering 20 per cent of minimum income. Only the fact that pensioners and “registered” unemployed get discounts allows the system to remain financially intact. For others, downtown Almaty prices differ between “private” and “commercial” users, with the latter paying about three times more. On one hand, price calculations tend to be arbitrary to consumers’ disadvantage, which in turn leads to massive siphoning at the expense of the supplier.
The dilemma becomes clear by adding up the figures. In all, it will be clear to see that Kazakhstan’s 4 million-or-so households cannot possibly bring in more than a thousand tenge per household on average. Consumer good industries remain poorly developed in Kazakhstan, and those that survive the contractions in demand offer little hope for enough expansion to contribute a more substantial part of KEGOC’s income in order for the latter to count on sufficient return on investment. Oil and gas fields do not use excessive amounts of electricity. moreover, the two largest ones, Tengiz in the west operated by Chevron and Karachaganak jointly operated by Eni and British Gas, already have their own power facilities working on gas turbines fueled straight from the fields, leaving no market opportunities for KEGOC.
As for the heavy industry, mainly consisting of metal processing, companies that own melters have their own electricity stations. Most of these rely on coal, which is brought in from mines equally owned by the mining and metallurgy companies – meaning that KEGOC cannot find relief there either. Only recently, copper miner Kazakhmys decided to sell its power station of Ekibastuz, which it had purchased from AES of the USA, Kazakhstan’s sole privately operated provincial power network, to the state. But it still owns the coal mine that supplies it and has clearly no intention of giving its coal away for free. In order to solve the deficit, KEGOC has started the construction of a power line from the east of the Kazakh heartland where Ekibastuz is located into China, where power in in demand among the country’s large industrial complexes which are able to pay up to five times the average consumer price in Kazakhstan.
This and little else is where KEGOC’s hopes seem to lie: to become a major exporter of electric power to neighbouring countries. But it is bound to become a hard struggle. Due to the new customs union with the Russian Federation and Belarus within the framework of EuAsEC, the Kazakhs will very soon have to comply with tariff harmonisation which excludes easy profits for KEGOC on the Russian market. This leaves only China, which is ready to buy considerable amounts of power from Kazakhstan as of now, but what will happen as soon as Kyrgyzstan and Tajikistan boost their power generation remains to be seen. In all, KEGOC will have to live with the fact that investment requires growth, and when growth becomes less desirable investment becomes all the more questionable for it.
KEGOC’S KEY FIGURES FOR 2007/’08
|sales revenue||Kazakh tenge||28.5380bn||33.2760bn|
|net income||Kazakh tenge||5.2466bn||6.6127bn|
|operating expenses||Kazakh tenge||25.9249bn||26.6724bn|
|capital investment||Kazakh tenge||12.9150bn||21.9670bn|
THERMAL POWER PLANTS TO BE OPENED IN KAZAKHSTAN BEFORE 2016
|name||location||capacity in MW|