Legal Framework for Investing in the Electric Power Industry of Kazakhstan
I. Current legal and regulatory regime
As far as we know, there are currently 8 large power plants of “national importance” operating in Kazakhstan, four of which are thermal power plants, and the remaining four are hydroelectric power plants. There are also a number of smaller regional power plants.
Energy is transmitted through power transmission networks by so-called "power transmission companies". There are two tiers of power transmission companies: the first is the system operator, which operates the national transmission network, and the second is the regional power grid companies, which transmit energy through regional power grids.
The system operator, Kazakhstan Electricity Grid Management Company JSC (KEGOC), is a national electricity transmission company that owns and operates the national electrical grid. It manages the electricity market and the international energy exchange system.
In Kazakhstan, there are also 18 regional power grid companies in each of the regions (administrative regions), large cities and the capital - Astana.
The system operator and regional power grid companies transmit electricity sold by power plants (so-called "energy producing organizations"), in accordance with electricity purchase agreements concluded with consumers and/or energy supply organizations. Relations between energy producing organizations on the one hand, and the system operator and regional power grid companies on the other hand, are regulated by separate agreements concluded between them.
In addition to the above players, in the energy market of Kazakhstan there are about 124 so-called “energy supply organizations” engaged in the distribution of electricity to end consumers in Kazakhstan.
The Law of the Republic of Kazakhstan “On Electric Power Industry” of July 9, 2004 was amended in 2009 to attract private investment through the establishment of a new system of tariff setting for the production of electrical energy, according to which investors accept certain investment obligations in exchange for the provision of a sufficient tariff (the so-called “tariff in return for investment” policy).
The law established a two-tier tariff system, including, at the lower level, the so-called “cap tariff” (where electricity producers can set their own prices up to a regulated maximum) and, at the top level, the “estimated tariff” and “individual tariff”, which can exceed the cap tariff, but only with the permission of authorized government bodies. Special regulatory rules were adopted for marginal, calculated and individual tariffs.
In accordance with the Law of the Republic of Kazakhstan "On Electric Power Industry", a generating company can arbitrarily set its electricity tariff based on an agreement with a counterparty. This tariff, however, must in no case exceed the maximum regulated tariff established for the sale of electricity by generating companies.
The marginal tariff varies depending on the specific group to which a particular energy producing company belongs, and today you can find out which marginal tariff will be applicable until the end of 2015. From 2016, however, the current system of cap, investment and settlement tariffs will be abolished due to the emergence of the so-called “capacity market” as described below.
Today, while the capacity market in Kazakhstan does not work, if the investment obligations of an energy producing company cannot be fulfilled through sales based on a marginal tariff, the legislation of the Republic of Kazakhstan allows the energy producing company to request and apply the so-called calculated or individual tariff.
It is also worth mentioning that, in accordance with the Law of the Republic of Kazakhstan “On Electric Power Industry,” the wholesale electricity market in Kazakhstan is divided into three types: (a) decentralized market, (b) balancing market, and (c) centralized market.
The decentralized market is designed to purchase electricity based on freely reached agreements, but at prices not exceeding established marginal tariffs.
The balancing market is designed for hourly financial and physical regulation of electricity imbalances in one network in Kazakhstan. Participation in the balancing electricity market is mandatory for all participants in the wholesale electricity market.
A centralized market is an electricity market managed by a special company to ensure communication between sellers and buyers of electricity. Sales in the centralized market are divided into three types: (a) short-term sales (sales with immediate settlement), (b) medium-term sales (week, month), and (c) long-term sales (quarter, year).
Published in the magazine"Energy and Law", No. 1, 2015
Shaimerden Chikanaev, Partner
