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Skip Navigation LinksHome :: Back Issues :: Creating a free market in power

September 2002

Creating a free market in power


Kazakhstan has had more success than most former Soviet states in reforming its power sector. Electricity suppliers hope prices can be pushed higher but the abundance of oil and gas will limit rises.




"Communism is Soviet power and the electrification of the whole country!" This was one of Lenin's rallying cries during the early days the Communist revolution. The electrification of the country was so closely identified with modernizing the former Soviet Union that some women still bear the name Elektrifikasiya, given to them by ardent Party-supporting parents.
Since the collapse of communism the equation has been rearranged: without Soviet power, electricity production also disappeared. All the countries of eastern Europe are struggling to reform their dilapidated utility sectors, but Kazakhstan is among the few that has made any progress.
Catastrophe steeled the government's mettle to act, and act decisively. In 1996 and 1997 rampant corruption and non-payment caused two power and heat plants to close down in the depths of the icy winter of central Asia's steppes.
Fuel supplies are largely in the hands of commercial companies and with no cash coming in the power stations in the towns of Kokchetav and Temirtow ran out of fuel, leaving the population to cook on open fires in the snow-covered streets. Many other utilities were also on the brink of bankruptcy.
Happily no one died as a direct result, but citizens forced to withstand sub-zero temperatures in their own apartments spurred the Kazakhstan government to launch a complete overhaul of the system through privatization. The state-owned holding company Kazakhstanenergo was broken up into a republican grid company - the Kazakhstan Electricity Grid Operating Company (KEGOC) - in July 1997 and individual generating companies, or energos, which were separately sold off.
At the same time, a raft of new legislation was passed to underpin the workings of the nascent wholesale power market. Among the most important of the legislative changes was to define power as a commodity rather than a service, which means non-paying customers are subject to the tougher criminal code rather than the harder-to-enforce civil code; customers who don't pay their bills can be accused of stealing electricity.
Next, the energos were sold off to strategic investors for little more than investment pledges, starting in 1996. In all, Kazakhstan can boast 54 thermal, five hydro and one nuclear power plants that generate 18,000MWt of power. Almost 90% of the energos are now privately owned and operated.
Since then, tariffs have been raised incrementally to bring them closer to an economically appropriate level. Thanks to Kazakhstan's abundant oil and gas resources, tariffs will never reach international levels, but previous tariff levels barely covered running costs, let alone capital investment requirements.
The next stage of reform
The transformation to a free market for power is not complete and the new owners have not all been successful. Belgian investor Tractabel bought Almaty Power Consolidated in 1996. It serves the capital and is the biggest energo in the country. But Tractabel pulled out a few years later after rowing with the Kazakh government about tariff increases. The American utility operator AES, another big investor in Kazakhstan's utilities sector, is also experiencing problems.
Setting appropriate tariff levels has always been a political hot potato. Operators want them as high as possible but local industry lobbies sympathetic regional administrations to keep them as low as possible - effectively a subsidy to deadwood industry.
However, Kazakhstan has had more success in rebalancing tariffs than some of its neighbours. Unlike in Russia, regional governors are directly appointed by the president and are not as concerned about the loss of popularity hiking tariffs causes among voters. At the same time, having lived through the winters of 1996 and 1997 most regional governors have more sympathy with the needs of utilities.
"The cathartic effect of collapse of the system in 1996 and 1997 means the government is more open to the needs of the energos," says Val Vaninov, vice president of Access Industries, which bought the Petropavlovsk power plant and a thermal station in Ekibastuz in northern Kazakhstan in 1998. "We have been lobbying the government to make lots of little tariff hikes often, rather than a few big painful increases. It is an ongoing process, but tariffs are high enough to make power a going concern in Kazakhstan."
Vaninov says that the key to returning the power stations to health has been to collect bills and collect them in cash. Access Industry receives 100% of payment in cash, up from 20% four years ago. Persistent non-payers can also now be cut off.
The reforms are now in their third phase of deregulating generation and distribution companies. Progress here has been slower as only a few of the 22 regional distribution companies have been sold off. The state still owns stakes of between 25% and 100% in 11 distribution companies and the local authorities control the rest. The government announced last year that it would sell another four regional distribution companies by February, but at the time of writing nothing had happened.
Deregulation of the wholesale market is not complete either and energos are unable to make up shortfalls by turning to a spot market. The key to making a wholesale market work is to allow generating companies to sign long-term contracts directly with their biggest clients and buy power from other generators when they run short, something the government is reluctant to allow.
Although the KEGOC grid company links all the generators together there is no working market on which to buy and sell excess generating capacity. In 1999 the biggest companies set up an informal pool to cover shortfalls at peak times - known as the Pool Rem - to which the bulk of energos now belong.
However, energos that want to tap into other energos' power, are required to pre-pay in special escrow accounts. The prices are high and take no account of the availability of excess generating capacity. Pool Rem is more of an insurance scheme than a marketplace.
"KOREM allows trading on the wholesale market but the volumes are still very small. The process of creating a fully fledged free market is still not finished," says Vaninov. "The market would have developed faster if everyone could buy power from the wholesale market at spot prices from the very beginning." But, he adds, "I believe the government is committed to creating a really open market and letting tariffs reach realistic levels."






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