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    Uzbekistan Power Market Overview


    January 17, 2022 - Fitch Solutions Sector Intelligence

     

      THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

      Uzbekistan Power Market Overview

      • 17 Jan 2022
      • Uzbekistan
      • Power
      Regulation And Competition

      The state remains a dominant player in electricity markets across Central Asia. Almost all generation, transmission and distribution in Uzbekistan is controlled by Uzbekenergo (UE). This makes for inefficient running of assets that were mostly in place before the Soviet collapse. The rehabilitation of power plants and transmission and distribution networks sorely needed.

      Uzbekistan was furthermore an integral part of the Central Asia Integrated Power Grid comprising Turkmenistan, Tajikistan, Kyrgyzstan, Uzbekistan and southern Kazakhstan - an integrated system put in place during the Soviet era. However, the country pulled out of the system in 2009, due to concerns over water flows from its eastern neighbours and to generate more revenue from exporting electricity elsewhere (most notably Afghanistan and Pakistan).

      The majority of Uzbekistan's power sector is owned and operated by the 53 subsidiaries of UE - through which the company operates 97% of Uzbekistan's power generating assets, the electricity transmission network, the power distribution network, centralised electricity dispatch assets and electricity retailing.

      UzbElectroSet is the transmission system operator in Uzbekistan. Electricity distribution is allocated to 14 district-level transmission operators. UzSuvEnergo develops and operates the smaller-scale hydropower facilities in the country, while EnergoSotish fully controls the electricity wholesale market as the only purchaser.

      Important laws and decrees include the following:

      • The 2009 Law on Electricity set out rules for the gradual unbundling of the electricity sector and transition towards a system more based on market principles. This means Uzbekistan has financially and legally unbundled transmission and distribution, while parts of the Uzbekenergo subsidiaries have been privatised.
      • The 2001 Decree on Deepening Economic Reforms in the Energy Sector of Uzbekistan called for the demonopolisation of energy enterprises and introduction of competition to the power sector. However, privatisation efforts have been few and far between.
      • The 2001 Law on Measures for Organising the Activities of the UE transferred power generation assets to Uzbekenergo. It also created the UzGosEnergoNadzor as a technical regulator for the electricity sector. The same law aimed to allow for private sector ownership for up to 49% of generation and distribution assets; however, privatisation plans have reportedly not come to fruition as international investors remain wary of entering Uzbekistan's power sector owing to a challenging operating environment.
      • The Law on Improving the Activities of Economic Management Agencies (2003) and On Improved Organisation of UE Activities (2004) separated the transmission network into five zones. It also separated distribution into distinct regional companies.
      • The Law on Extension of the Process of Demonopolisation and Privatisation (2006-2008) implied that shares would be offered to 26 companies - with 12 distribution and nine electricity companies offered 15% of shares. Subsequent laws have put out more companies for tenders but have largely been unsuccessful.
      • The 2009 Law on Electric Power aimed to establish a framework for electricity that would be more integrated to make the sector more attractive to private investors. It also made it easier for generators to sell electricity to the grid, and allowed for on grid generation without licensing.
      • The development of the power industry up to 2015 was regulated by the Presidential Decree No. 1442 stemming from December 15 2010. The decree identified 48 investment projects, and most notably the modernisation of 15 thermal power plants.
      • The 2019 Renewable Energy Law, whose aim is to lessen Uzbekistan's reliance on fossil fuel based energy by developing and regulating a renewable energy sector. The Law focuses both on the use of renewable sources of energy ('Renewables') and on the production of equipment used in the renewable energy sector ('Equipment').

      Multiple government agencies hold different responsibilities and perform separate functions in the Uzbek power sector. The Cabinet of Ministers as such governs the UE, while the Ministry of Finance approves electricity tariffs based on the input from UE and UzGosEnergoNadzor. Finally, the State Committee on Demonopolisation monitors competition in the power sector (as well as other sectors), customer rights and its financial performance.

      Pricing

      In Uzbekistan the Ministry of Finance sets the electricity tariffs. Similar to the rest of the region, electricity tariffs are very low, and at best at maintenance and cost recovery rates. According to the World Bank, the average electricity tariff is about 50% below the long-term cost recovery requirement, meaning UE's revenues will remain below what is required to fund future investments in new capacity and prevent upgrading existing capacity.

      While the government has made some attempts at raising electricity tariffs over the last decade, the increase in real terms was very limited because of high inflation rates. We expect UE to continue to struggle with implementing an effective tariff scheme targeted towards the different segments of the population (in regards to household income), meaning that an underfunded power sector will remain a problem over our forecast period.

      Uzbekistan's electricity trading model is based on a single electricity-buyer mechanism. Currently, the country's wholesale company EnergoSotish concludes agreements with power generators in terms of electricity purchases. The company also makes agreements with territorial electricity transmission companies for the distribution of electricity as well as with the national grid operator Uzbekenergo for the transmission of power from generator to distributor.

      Uzbek electricity customers are reportedly divided into tariff groups based on level of consumption and type of electricity use (for example, electricity for heating). Despite the Ministry of Finance setting electricity tariffs, load-serving companies have the right to differentiate electricity tariffs based on the time of consumption (peak hour, semi-peak hour and night load). We note there are two types of electricity tariff in Uzbekistan:

      • The single-rate tariff: This is a fee that is linked to every 1kWh of active electricity that is supplied to the customer.
      • The double-rate tariff: This is an annual fee linked to each kW of maximum capacity demand declared by the customer (to participate during maximum load on the electricity grid). The fee is also tied to each kWh supplied (in addition to the single rate tariff).
      This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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