Clare Nuttall in Almaty -

Kazakhstan's urgent need to expand and modernise its energy sector has been somewhat allayed by the crisis and consequent fall in demand for electricity, but once the economy revives the danger of a power deficit will return. Given that it takes several years to build new power plants, today there is a window of opportunity to prepare for the future, provided sufficient funds can be found.

A year ago, investing in capacity was a matter of urgency in Kazakhstan as the yawning power deficit in supply grew. Power cuts, especially in the south, were frequent, with electricity infrastructure stretched to capacity by the increase in industrial production over the last eight years.

When commodity prices dropped last autumn, so too did the consumption of electricity. According to the National Statistics Office, industrial production in Kazakhstan fell 1.8% year on year in January, with the steepest fall seen in the manufacturing sector. While the situation is by no means as extreme as, for example, in Ukraine, many businesses are now operating at a lower capacity. Electricity generation in the month fell 7.8% on year. "After many years of economic growth, there was clear deficit in power," Ajdan Karibzhanov, managing director responsible for investments at the SamrukKazyna National Welfare Fund, told the Euroconvention Kazakhstan Infrastructure Summit in March. "Building new power stations takes several years and costs billions of dollars. If we start to build new capacity and upgrade old facilities now, in five years' time they will be operational."

Power imbalance

Overall, Kazakhstan produced just over 80bn kilowatt hours (kWh) of electricity in 2008, down from the 82bn-83bn kWh originally forecast. The previous year, 76bn kWh was produced. According to Evgeny Vinokurov, head of the economic analysis unit at the Eurasian Development Bank, generation and consumption are currently in balance. "There was not much change in consumption during 2008 because due to the crisis, consumption went down in the latter part of the year. Forecasts made in 2006 and 2007 expected a deficit by 2009, but the crisis bought some changes on the side of consumption," Vinokurov tells bne.

"Nevertheless, a deficit is expected two years after the economy starts growing again. There will be a huge need for new capacity. The problem is that once the decision to build is made, the time to build a power plant is around five years; eight to nine years for a hydroelectric plant," he says.

Kazakhstan also suffers from a regional imbalance. While the north of the country exports energy to Russia, in the south and west a deficit in supply makes it necessary to import from its southern neighbours. Increasing capacity in the south would free Kazakhstan from the often tense relations with the rest of the region over electricity supply - in late February, the Kazakh Electricity Grid Operating Company (KEGOC) temporarily severed links to the Central Asian power grid, accusing Tajikistan of taking more energy than agreed from the grid.

West Kazakhstan is also short of energy despite government efforts to develop the region, which include ambitious mega projects such as the Aktau City project and Caspian Energy Hub. In one example, the West Kazakhstan authorities announced in February that the construction of a new cement plant in the region - believed to be Heidelberg Cement's plant - was being postponed due to the lack of a reliable electricity supply. "In the last 10 years, infrastructure in this region has not been developed much. People don't need new high-rise buildings, they need new roads, access to drinking water and a reliable electricity supply," says Bahitbek Haten, CEO of NAI Kazakhstan Aristan.

Several major construction projects are already on the drawing board. "There is an understanding of what should be built, where, when," says Vinokurov. "The vision for the sector encompasses various sources which will make it easier to balance demand and supply at peak times. The biggest source is coal, but nuclear and hydro energy will also play a part."

The biggest project in the works is the 1.2-megawatt (MW) coal power plant in Balkhash to supply energy to the Almaty and Jambyl regions of south Kazakhstan, where there is the biggest energy deficit. The plant will burn Ekibastuz coal, which is both cheap and long lasting. Coal-fired power stations already account for the lion's share of Kazakhstan's electricity generation. The Balkhash project will require $4.5bn-5bn to build. "The obvious idea was to build it under a PPP scheme, with the government keeping a significant stake, but this is not realistic under current conditions," says Vinokurov. It will also be difficult to raise money from international development organisations due to the expected ecological impact of the plant on the environment at Lake Balkhash.

Another major project on the drawing board is the planned Aktau nuclear power plant, to serve West Kazakhstan. The plant was going to be based on a new type of nuclear reactor, based on Soviet-era submarine technology. However, the project, which was to have been carried out by a Russian-Kazakh joint venture, has recently come unstuck due to a dispute over the copyright for the technology.

But other, smaller projects are going ahead, including the Moinak hydroelectric plants, which are due to be commissioned in December 2011, new coal power stations near Shymkent, the capital of South Kazakhstan oblast, and a third unit at the Ekibastuz GRES-2 power plant.

Efforts to upgrade Kazakhstan's outdated transmission infrastructure are also in progress. The European Bank for Reconstruction and Development (EBRD) in mid-2008 provided national grid company KEGOC with a $400m syndicated loan to fund the second stage of KEGOC's modernisation of the Kazakh electricity grid. The modernisation project will cost a total of KZT54.5bn (€278m).

According to a report from the EBRD, "about 80% of the power generation capacity is concentrated in the north, while transmission in the south, where demand has been rising rapidly, is insufficient... An average of 15% of the electricity generated in Kazakhstan is lost before it reaches consumers due to the widespread deterioration of the country's power infrastructure." Calculations by the Kazakh government put the country's energy intensity at almost 10 times higher than in developed economies.

Completion of these projects during the current economic crisis will put Kazakhstan in a better position once stronger GDP growth resumes. However, if Kazakhstan is unable to take advantage of the current lull in demand for electricity, it will face a severe deficit in a few years' time.

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