Kazakhstan plans capacity market to boost investment in power sector

By bne IntelliNews May 4, 2011

Clare Nuttall in Astana -

Kazakhstan is planning to create an electricity capacity market in a bid to attract more investment to the power generation sector, the head of the country's power grid operator tells bne.

Legislation paving the way for the capacity market to be created has been drawn up by national grid operator Kegoc and approved by Kazakhstan's Economic Policy Board, which is headed by Prime Minister Karim Massimov. It is now is due to be submitted to the parliament in the near future.

"The capacity market mechanism will make it possible to return investments, including on renewable resources. We expect that when the capacity market is established, it will completely solve problems connected to the construction of generating plants," the chairman of Kegoc's management board, Almassadam Satkaliyev, tells bne, adding that Kegoc will be the operator of the capacity market.

Investment in Kazakhstan's electricity generation and transmission sector has been a matter of urgency since the economy started to take off in the mid-2000s. The slowdown in economic activity during the recent crisis gave a brief respite, but demand is now expected to accelerate as the economy expands and the government pushes ahead with its industrialisation plans. Domestic consumption is also rising as the population grows and becomes more affluent.

The development of the capacity market will help bring in more investors like Malaysia's CapAsia, a private equity fund set up by CIMB Group and Standard Bank Group, which on April 25 announced they had agreed to provide $50m in equity capital to Central Asian Power and Energy Company (CAPEC) in Kazakhstan through its Islamic Infrastructure Fund (IIF). "We see Kazakhstan as a primary market for IIF because of the government's commitment to furthering private sector involvement in the provision and financing of infrastructure," CapAsia's CEO, Dr Johan Bastin, said in a statement.

Renewables

Kegoc itself has already approved a long-term investment strategy under which a total of KZT530bn ($3.6bn) will be invested by 2025. It has embarked upon several projects, including rehabilitation of substations, transmission lines and other equipment, building a new substation near Almaty, and power lines to the Moinak power plant. Kegoc is now considering building a new 500 kilovolt north-south power line, and new transmission lines to connect the west Kazakhstan regions of Uralsk, Atyrau and Mangystau to the national grid.

Interest in alternative energy has increased since the adoption of legislation on renewable energy in 2009. Kegoc forecasts that renewable energy could account for up to 130bn kilowatt hours (kWh) in Kazakhstan. "There is a good dynamic for introducing small hydropower plants in the south of Kazakhstan. Several projects to build wind farms have also been initiated recently," Satkaliyev says. "As the system operator, Kegoc will give maximum support."

Some 30% of Kegoc's investment programme is expected to be funded either directly from the Kazakh government or through state holding company Samruk-Kazyna, which owns 100% of Kegoc. The electricity company is one of those earmarked for participation in the "People's IPO" programme, under which state companies will list around 10% of their shares on the domestic stock exchange. President Nursultan Nazarbayev has ordered that the IPOs take place before the end of this year, but a government working group is still working on the parameters. "The IPO is a good chance for alternative direct investments for our projects, rather than receiving funds from the state budget. It is really what we need and a very necessary process," Satkaliyev says. "It is an opportunity for us to join the stock market as a transparent company."

Historically, Kegoc has eschewed bond offerings in favour of raising loans from international development banks. "We are in good cooperation with the European Bank for Reconstruction and Development and the International Bank for Reconstruction and Development. The Development Bank of China has made very interesting proposals with regard to financing some of our projects," Satkaliyev says. "The terms and conditions for raising funds from these institutions are much better than those relating to bond issues."

A new $155m loan agreement with the EBRD is due to be signed during the bank's annual meeting which will take place in Astana in May. The loan will be used for Kegoc's investment programme and to refinance old loans that were raised when conditions were less favourable.

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