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Kanat Bozumbayev, Nurlan Kapparov, and David Rekhviashvili on the February 21 Caspian Studies Panel, "Lessons from Kazakhstan's Successful Electricity Reform."
On February 21, the Caspian Studies Program sponsored an address by Kanat Bozumbayev, president of the Kazakhstan Electricity Grid Operating Company (KEGOC) and a former Kazakhstani vice-minister of energy, at the Kennedy School of Government. Nurlan Kapparov, also a former vice-minister of energy in Kazakhstan who is currently an MPA student at the Kennedy School of Government, introduced Mr. Bozumbayev and served as a moderator for the follow-up discussion.
Kapparov started the event by giving the audience some background on Kazakhstan’s energy situation. According to Kapparov, Kazakhstan has a unique opportunity in the energy sector because of its abundant natural resources. The country has enough coal to supply its energy needs for the next 150 years, the world’s largest deposits of uranium, substantial quantities of natural gas, and underexplored petroleum deposits that may amount to the world’s fifth largest oil reserves.
Mr. Bozumbayev began his remarks by indicating that Kazakhstan takes a great deal of pride in the electricity sector reform that it has instituted during its first decade of independence. He mentioned that Anatoly Chubais, CEO of Unified Energy Systems (Russia’s largest electricity company), recently encouraged Moscow to look to Kazakhstan as a model for successful electricity reform.
Despite all of Kazakhstan’s natural resources, however, Bozumbayev explained that the country’s energy sector faced significant obstacles prior to the past decade. Since Kazakhstan was a republic in the Soviet Union until 1991, its energy sector was part of the state-owned and vertically integrated Soviet energy system. Bozumbayev acknowledged that there were certain advantages to this system—it consolidated capital in an industry where some commodities (such as oil and natural gas) require heavy initial investments. Under this centralized control, Kazakhstan was also able to extend its power grid to all regions of the republic as well. However, there were serious economic drawbacks to the Soviet-administered energy system. Most significantly, all electricity sold within Kazakhstan was controlled by Soviet tariffs and, therefore, did not reflect the cost of production.
Since independence, however, Kazakhstan has made significant strides in reforming its electricity sector. In 1992, it divided the new post-Soviet state-controlled energy company into electricity administration and business management companies, which Bozumbayev described as a natural step in preparing nationalized industries for privatization. This transformation toward privatization has created substantial opportunities for new companies in the country’s electricity sector and has improved overall service.
Since Kazakhstan has more than enough electricity to support its own demands, it has been able to export electrical energy to its neighbors (including Russia). Bozumbayev indicated that, at the moment, 87 percent of Kazakhstan’s electricity comes from coal-powered plants and 13 percent from hydroelectric sources, but this could change in light of the country’s recent natural gas discoveries.
Bozumbayev explained that 1995 marked the beginning of radical energy reforms in Kazakhstan. He noted that these reforms entailed hardships for the Kazakhstani people since they took place at a time when the country’s economy was plagued with problems such as high inflation and low wages. However, Bozumbayev said that these reforms made the current successes of Kazakhstan’s electricity sector possible.
Bozumbayev and other officials in Kazakhstan began the reform by looking to other countries with successful electricity market systems (such as Great Britain and Norway) as models for designing a system for their own country. One of the first steps that Kazakhstan took was to allow its largest regional electricity producers to form joint-stock companies. While the state maintained its monopoly over the power transmission systems through KEGOC (the company that Mr. Bozumbayev runs), regional joint-stock companies introduced market elements into the country’s wholesale electricity market. These reforms gave regional power companies an opportunity to earn a profit but also presented them with challenges since many regional power plants were in poor physical shape and had accumulated significant debts during the Soviet period.
Over the past seven years, however, several strong regional electricity companies have emerged in Kazakhstan and have introduced choice and competition into the country’s wholesale electricity market. Bozumbayev gave some examples of this system’s success: electricity production in Kazakhstan has been able to keep up with domestic demand (something not true of other post-Soviet Newly Independent States), and wholesale prices have dropped by 500% since 1997. Kazakhstan has also been able to link its grid with neighboring Central Asian countries, which has expanded export opportunities and helped to improve the country’s trade balance.
Bozumbayev closed his remarks by acknowledging that Kazakhstan has not achieved all of its goals in the electricity sector. He said that his country hopes to develop more sophisticated spot market and hedging mechanisms in its electricity sector, which would help it to attract more foreign investment.
Q & A
Q: It seems as though Kazakhstan has established a significant amount of competition among regional electricity producers at wholesale level. But don’t the country’s regional electricity producers essentially have a monopoly over local markets?
A: It is true that competition in the Kazakhstani electricity sector only occurs at the wholesale market at the moment. We may soon be able to take measures to expand competition at the regional level, but they are technologically impossible right now. However, the national government does set tariffs for local electricity prices, which helps to establish a fair price for individual consumers.
Q: How did larger macroeconomic trends in Kazakhstan affect the reform process in the country’s electricity sector?
A: As Kazakhstan’s GDP began to grow in the early part of this decade, it generated a greater demand for electricity. In 2001, the country’s economy grew at 13 percent, while the energy sector grew at 5 percent. In 2002, the country’s economy grew at 9.5 percent and the energy sector grew at 4 percent. This year, growth in Kazakhstan’s energy sector will actually exceed growth in the overall domestic economy, largely due to the new opportunities to export electricity to other countries, such as Russia.
Q: What impact will oil and gas development have on the Kazakhstani electricity market?
A: Oil and gas development influences all economic activity in Kazakhstan, and the electricity sector is no exception. Most importantly, more of Kazakhstan’s electricity-generating capacity may come from natural gas rather than coal in the next several years. Of course, whatever happens with natural gas, our country will still have to be sure to strike a proper balance between meeting domestic energy demand and promoting energy export opportunities.
Q: Is Kazakhstan thinking about developing nuclear power plants?
A: Each government has to consider this option and many countries decide to pursue nuclear energy in order to take advantage of the technological advantages it offers. Kazakhstan has 29 percent of the world’s uranium deposits, so it makes sense for us to explore nuclear energy. However, we also have to be sensitive to domestic public opinion. For dozens of years, a large percentage of the Kazakhstani population was exposed to severe levels of radiation due to the Soviet atomic tests in Semipalatinsk. At the same time, we have to make a determination about whether coal or nuclear power will have more detrimental effects on the environment in Kazakhstan over the long run. It should be noted that Kazakhstan has already shown itself to be responsible in handling nuclear materials.
Summary by John Grennan, Caspian Studies Program
