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Uzbek deputy energy chief details power sector reform plan

BBC International Reports (Central Asia)  


    Reforms will be carried out towards liberalisation in Uzbekistan's electric energy sector, according to information from the country's deputy energy minister Sherzod Khojayev. He says, however, that even if market conditions are created, the country's tariff policy will be preserved for the population and certain categories of customers. "That is to say liberalisation does not mean that everyone will do whatever they want. Mechanisms will be introduced for the government's influence over the specific market," he said. The main electrical networks which are a strategic facility should be under government control, the deputy minister suggests. He also said more attention should be paid to energy efficiency issues in the country. Customers should form a culture of rational consumption of energy resources, the deputy energy minister said. The following is the text of the article entitled: "'Raising prices is not enough,' Sherzod Khojayev on reforming the energy sector", published by news website on 24 May, with original subheadings retained

    Uzbekistan's deputy energy minister, Sherzod Khojayev, has spoken about the reform of the energy sector, the liberalisation of the energy market, the attraction of private investments to the sector and tariff policy. publishes quotes from an article with his comments provided by the press service of the Ministry of Energy. Current situation in energy sector

    Before the beginning of the reform of the energy sector, various countries' experience was studied, the deputy minister said.

    "We are attracting specialists from a very broad variety of countries - from Asia, Europe and America. These specialists are people who took part in such energy sector reforms not only in their homelands but also in other countries. We saw what they encountered during the implementation process, what recommendations they gave and what it led to. That is why we have chosen those specialists who can precisely answer our questions," he said.

    Among the specialists involved there are two high-level experts who conducted energy sector reforms in Georgia [a former Soviet republic].

    "We certainly took their recommendations into account," he said.

    "It is wrong to make decisions based only on the economic or political situation when carrying out any reform in a particular country. At the same time it is necessary to take into account the way of life and mentality of our people. In this regard, we studied the experience of Turkey, which is much closer to us. In some areas, we took advice from Western European experts since they started reform processes much earlier and have 20-30 years of experience, which they are sharing with us," he said.

    The deputy minister of energy believes that the initial goal of the reform is to make the energy sector one of the determining factors in the development of the economy, as in any country.

    "The development of the energy sector should be one step ahead of overall economic development," he said.

    In the electric energy sector, in the period up to 2017, the annual increase in production was 2.5-2.7% or much lower than the growth rate of the economy of Uzbekistan. During the first 25 years of Uzbekistan's independence, 3,300 MW of new capacities were put into operation, and the figure for the past five years exceeds 5,000 MW, the deputy minister noted.

    "We have calculated what will be the need for electricity by 2030. What resources will it be met with? It is necessary to implement investment projects, which means funds for them. According to analytical calculations, the average demand will grow by 10% a year until 2030. When we started these calculations in 2019, many experts concluded that these are optimistic figures, and in reality, the demand does not grow like that. But now three years have passed, and practice shows that we were not mistaken in our forecasts," he said.

    Today the capacity of the Uzbek energy system is about 13,000 MW, most of which is in maximum demand during winter. Taking into account the fact that by 2030 the share of renewable sources of energy will rise, the increase in the capacity is expected to be up to 32,000 MW.

    "The capacity will grow due to new power plants that need to be built and put into operation. But [electricity] production alone is not enough. We must not only produce but also deliver the generated electricity to customers. And here, of course, a question arises as to how to do it efficiently and effectively. We require such investments that are quite large. Hence a question arises as to how the state can continue its economic policy, whether to remain a monopolist or look for other ways?" Khojayev poses the question. Involvement of private sector

    "The monopoly is not only in servicing but also in responsibility as well as investments," the deputy energy minister continued.

    "There are areas where it is very difficult to stop having the state monopoly, it is possible to do so but it takes 20-30 years. In some areas the monopoly can be broken more quickly and the private sector can be involved. Electric energy is just such a sphere where there is an opportunity to attract the private sector," he said.

    "Like any business in the private sector, the question of investors interested in the electric energy sphere is the same: 'I am ready to spend a certain amount of money on a [electric energy] project, but who can guarantee that I will make a profit and return tomorrow?' they ask. Investors want from the state a guarantee of payment in the form of a letter of guarantee, which places a heavy burden on the state. Such contracts will be reviewed in the near future," the deputy minister emphasised.

    Sherzod Khojayev said that in order to attract investors, the state should not issue guarantee letters but should create such a climate for investors so that they "see with their own eyes that all their costs will be compensated in the form of profit".

    "Our problem is that today the balance between the price of electricity produced and the cost of its production is broken in Uzbekistan. That is, from a business point of view, the production of electricity and its sale to people is not profitable, which causes some loss. Not a single investor who sees that the sector is operating at a loss will invest in it," he said.

    As the volume of production of any product increases the cost will be reduced several times. The cost is declining but there are other unfavourable factors that have to be dealt with, the deputy minister explained.

    First, today only 8% of Uzbekistan's electricity production comes from renewable energy sources. Its main part is hydropower. Ninety-two per cent comes from the burning of fossil fuel, that is natural gas, coal and fuel oil.

    According to information from him, almost no investment has been made in the [electric] energy sector for 25 years. In other words, insufficient attention was paid to the discovery of new deposits, the creation of reserves and the optimisation of costs associated with their extraction.

    "Let's take a simple example. When we extract natural gas from a field discovered 30-40-50 years ago, the cost of 1 cubic metre of gas is lower than at a newly discovered one. And the share of these newly discovered deposits in our country is growing every year. That is, of course, the cost will increase. Now, when the cost of fuel supplied to thermal power plants is rising. This also leads to an increase in production costs and ultimately to an increase in the cost of electricity," he said.

    Khojayev also acknowledged that compared to other countries, Uzbekistan has a significant imbalance in living standards, incomes and energy prices.

    "In fact, the problem here is not how expensive, cheap, high or low but in the absence of guaranteed rules, that is, if someone comes here and says that the will start extraction, generation and sale of electricity, there are no market rules. There are no market access conditions. After entering the market, there are no strict rules that define the obligations of investors, and increases in prices under our current reforms are not enough to make the business economically attractive," he emphasised.

    The deputy minister of energy said it was necessary to draw up and approve market rules so as to make it possible to grant a licence to any business entity with a desire to enter the market and to define a clear procedure by which it could start its production. Tariff policy

    It is necessary to clearly define what policy to pursue - price or tariff policy.

    "Many people confuse these concepts. They are trying to draw a comparison with examples from Europe, America and Korea. Do not confuse price and tariff. (With a pricing policy) if demand suddenly increases and there is not enough supply the price will rise. We have seen this several times in the past two years in European countries. Prices for electricity and natural gas have increased several times. We can say that in the retail market the price will be higher after it increases in the wholesale market," he said.

    In his opinion, entrepreneurs who work in this market approach the issue only in accordance with the rules of business.

    "Their main goal is to make a profit, not to protect the public or other customers. We have a tariff policy, and so even if we reach market conditions, this tariff policy will be preserved for the population and certain categories of customers. That is liberalisation does not mean that everyone will do whatever they want. Mechanisms will be introduced for the state's influence over the specific market," the deputy minister emphasised.

    Sherzod Khojayev noted that under these conditions "companies can win over customers from other competitors, saying that it is ready to offer a price for electricity lower than that of those competitors, by reducing production costs through expenditure reduction and higher efficiency, as well as through discounts and other support tools".

    He cited the work of internet service providers as an example. Uzbektelecom is the main owner of the telecommunications networks [in Uzbekistan]. It has its own provider (Uzonline) which competes with many other private providers. Most of them use the Uzbektelecom network. But there is constant competition to attract customers.

    "As a result, customers win as they have a choice. The same should be with electricity in the future. Customers will be able to pick the supplier of their choice and conclude an agreement with it. But unlike internet service provision, here the state will keep its tariff policy, not a pricing one. As a result, no matter how big the demand is, tariffs are set so that you cannot sell it for more than the set price," the deputy minister said.

    The deputy minister of energy spoke out against the tariff policy based on division "by regions not by prices". In his opinion, different tariffs for different regions will have more negative than positive effect "both on people's sentiment and on the development of entrepreneurship in the future".

    "Because business will be developed where resources are cheaper. If gas and electricity are expensive for the population in one region businesses will go to another region to invest and start production. This will increase the unemployment problem. This is definitely wrong. Therefore, the long-term strategy defines a unified tariff policy for regions," he emphasised. Conditions for investment

    Sherzod Khojayev explained the strong demand for investment by the fact that for 25 years no new generating capacities have been built or developed in Uzbekistan, and the power grids have become outdated and unusable.

    "With today's prices we can solve some problems of the sector through raising operational efficiency. But we cannot solve the problems that we have inherited for 25 years. For example, in simple terms, if a new neighbourhood or a residential area is built, it will be possible to build its infrastructure, but what about updating [the infrastructure] in the old neighbourhood? This requires a lot of money," he said.

    It is planned to invest about $20bn in the electric power sector by 2030.

    "This is a rather big amount, but the main goal of the reform is to create conditions for some of these $20bn to be invested by the government, some by investors and the other part by some other investor. Let investors invest and make a profit," the deputy minister said.

    In addition, unlike other sectors, the level of profitability of the [electric] energy sector is "not so high, as in the rest of the world".

    Here, mostly, if we take the average level around the world, the probability does not exceed 10 per cent. That is, investors are not chasing big profits, but they want to get guaranteed profits with small business risks. Low tariffs and low prices make investors wonder what will happen to their business if they cannot sell above the set prices?" he said.

    Sherzod Khodjayev pointed out that Uzbekistan had already concluded several public-private partnership agreements with several investors in the [electricity generation] field, but a different mechanism was used there. In particular, agreements on guaranteed purchase of electricity by the state were signed with most of the stations under construction. That is, Uzbekistan had committed itself to buying electricity at a certain price for 25 years.

    "During these 25 years, that investor cannot raise the price, and we cannot lower it, with the condition that the price will not change. When asked this system is good or bad, someone says that it is bad because it limits competition and that another investor could come and offer a cheaper and more convenient rate. On the other hand, before carrying out any reform, not only in the energy sector but also in all other areas, we must make sure that they do not stop halfway through," he said.

    According to information from him, all involved investors set one condition that Uzbekistan reforms the [electric] energy sector and switches to "market rails". First of all, it is necessary to implement several projects that will ensure that there will not be a huge electricity shortage in the country in the next two-three years.

    "With this condition, wer have signed many agreements on PPP [public-private partnership]. Stations will be launched, and there will be enough electricity in the market," he said.

    According to the deputy minister or energy, it is possible to announce the opening of the [electric] energy market, establish rules, invite investors, without guaranteeing the purchase of electricity. Then investors themselves will have to sell electricity on the market. But the deterioration of the geopolitical situation in neighbouring countries and problems similar to the coronavirus pandemic may weaken the activeness of investors, who may take a break for one year or two years so that the situation becomes clear.

    "We have signed several agreements to avoid such cases," Sherzod Khojayev said. Monopoly on power transmission network

    Sherzod Khojayev said it was difficult to imagine the energy sector of Uzbekistan without the participation of the state.

    "When we talk about non-state participation, we need to look here not only from the point of view of regulation or control by the state but also talk about the participation of state-owned enterprises as business entities. This seems very interesting, but if there is a natural monopoly in some area of the energy industry, and it is impossible to change it, then from a technical point of view it is better that this monopoly be a state monopoly than a private monopoly," he said.

    The main electrical networks which are a strategic facility should be under the control of the state, the deputy minister believes.

    "All entities connected to this network must be sure that they are of equal value to the owner of this network. It is necessary to provide everyone with equal conditions, since the only interest of the state is that the system works properly and surely and that the prices in the system are fair," he explained.

    The Ministry of Energy has drawn up a blueprint for transferring the electricity sector on market rails, and this blueprint will be signed in the coming days. This blueprint defines specific conditions for transition to the next stage of the market, but no time frame. Energy efficiency

    The deputy minister pointed out that energy efficiency could be encouraged through tariffs (rather than prices). For example, large industrial enterprises pay for electricity at differentiated tariffs. They are urged to change their technological process, use electricity at night and save it in the evening and morning, when demand from the population and small businesses increases sharply.

    "This is also one of the tools. Unfortunately, little attention is paid to energy efficiency issues in our country, especially among its population. We hear a lot of objections: 'There is already a lack of electricity, what are we going to save?' Essentially, the population also need to save electricity in order to have electricity. Even if you tirelessly increase [electricity generation] capacity it will not appear everywhere. You increase generating capacity, and someone wastes electrical energy, which causes a shortage of resources, and it does not reach someone," he said.

    A social norm for electricity consumption can help solve the problem as users will pay more if they use more than the government-determined norm. Customers should form a culture of rational consumption of energy resources, Khojayev emphasised.

    On 18 May, the Ministry of Finance and the Ministry of Economic Development announced the reform of the energy market and the introduction of the social norm for the consumption of electricity and gas throughout Uzbekistan. The market needs phased reform to attract private investment and increase capacity to meet the rising demand for energy, the ministries said.

    Source: website, Tashkent, in Russian 0400 gmt 24 May 22


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