Kazakhstan Energy Sector Overview REMAP 2 Kick Off November 8, 2010 Tetra Tech

1. Kazakhstan Energy Sector OverviewREMAP 2 Kick OffNovember 8, 2010Tetra Tech

2. COUNTRY BACKGROUND • Landlocked country of 2.7 million square kilometers • Sixteen million citizens, primary religion is Islam • Presidential Government, the President (elected), Prime Minister (appointed), Cabinet (appointed) Mezhlis (parliament) (elected), • Economy is centered on oil & gas, mining and metallurgy, to large degree privatized • Market transition has a mixed record, Kazakhstan is heavily in debt • Primary energy resource is coal • USA, EBRD, ADB are the primary donors, Japan, China, Korea, and Russia are also active

3. COUNTRY BACKGROUND (Cont’d) • Current Challenges: • High inflation, significant debt, looming energy deficit • Soft authoritarian presidential rule • Corruption • Harsh investment environment • Heavy dependence on coal, limited other energy resources • Legal and institutional environment not fully transparent • Environmental and health degradation due to heavy reliance on coal

4. ENERGY SECTOR OVERVIEW Resources: • Coal is the major energy resource: power generation (on-grid and off-grid), industrial fuel, district heating, residential heating, etc. • Natural gas and petroleum products and refining capacity • Penetration of renewable resources is small, good potential for hydro, wind and solar Utilization: • Large industrial consumers and power generation • Electrification penetration practically 100% • Northern and Southern zones are major load centers for the country

5. ENERGY SECTOR OVERVIEW (Cont’d) Structure: • Energy sector is fully unbundled into State and privately owned corporations • Primary Elements: fuel suppliers (privately owned and operated), generation (coal, oil, gas, hydro), 3 interconnected transmission zones 1 primary TRANSCO-TSO and many smaller transmission distribution companies, heat distribution companies. Institutional: • Ministry of Industry and New Technologies • State owned transmission company - TSO • Agency for Regulation of Natural Monopolies (AREM) (quasi-independent) • Agency for Protection of Competition (AZK) • Sector governed by the Energy Law of 2004, with multiple amendments and 2009 Law on Support of Use of Renewable Energy Resources.

6. ENERGY SECTOR STRUCTURE Unbundled into state and privately owned functional elements: Fuel Generation Transmission & Dispatch Distribution Heat Energy policy vested with the Ministry of Industry and New Technologies Regulatory oversight by AREM and AZK Renewable energy governed by the Law on RES, National Program for RE

7. ENERGY SECTOR LAWS & REGULATIONS • Governing Legislation: • Law on Energy (2004) – Established unbundling of the power sector, sets up the regulatory authority, enacted policy of commercialization and privatization, establishes competitive power markets, etc. • Law on Support of Use of Renewable Energy Sources (2009) – Sets regulatory requirements and the framework for a for a strategy for efficient utilization of energy and renewable resources for stable development until 2024 – The Strategy. • New Law on Energy Savings is being developed and expected to be passed in 2010.

8. RENEWABLE ENERGY Promotion of renewable energy is governed by the Strategy (2005 – 2024) which has established the following goals: • Production by renewables should reach 5% by 2024 • Up to 50% of transmission and distribution losses should be covered by purchasing RES energy • Guaranteed purchase of energy produced by RES • Mandatory interconnection of RES at the nearest point of interconnection, no interconnection charges • Investment preferences for RES • Preferences for land allocation for RES

9. CLEAN ENERGY POTENTIAL • Hydro – 23.5 bln kwhr/year potential for economically efficient utilization • Hydro – Largest projects – Moynakskaya HPP, 300 MWT; expected commencement of operation - 2011 • Wind – Potentially the most significant resource • Wind – Theoretical potential 1.8 trillion kwhrs, 3 bln kwhrs/year potential for economically efficient utilization • Wind – The first wind map of Kazakhstan has been developed • Solar – 2200 – 3000 sunny hours/year • Solar – Energy potential 2.5 bln kwhrs/year • Agricultural Refuse – Potential 35 bln kwhrs, 44 mln Gkal of heat

10. ENERGY EFFICIENCY Significant EE and savings potential, estimated at 5 million tons of oil equivalent. Recommended measures: Reconstruction and modernization of existing power plants, Distribution and transmission network loss reduction, District heating loss reduction There have been some successful initiatives at the local level: establishment of EE Centers by municipalities Lack of financial incentives for EE measures and clean technologies There are no specific EE indicators and targets established for the industry

11. ELECTRICITY MARKET STRUCTURE Kazakhstan’s electricity sector is functionally unbundled: • Fossil fuels (coal, oil, gas) is supplied by private companies • Privatized generation companies • Transmission System Operator KEGOC operates high voltage transmission network and acts as a central dispatch authority • Distribution network is operated by 59 privatized distribution companies (RECs) • Most of the power market operates as a bilateral contract market • Small portion of the energy (10-15%) is traded on centralized market administered by KOREM (market operator for centralized trading) • Balancing market was introduced in 2008, still operates in “imitational” mode • Retail supply companies (ESO) supply power to retail consumers at tariffs approved by AREM

12. ELECTRICITY PRICES & TARIFFS Tariffs are approved by AREM for TSO, RECs and ESOs RECs are under heavy pressure from regional and local governments to keep tariffs low, some time below cost. Some industrial companies connected directly to the power plants and by energy as wholesale customers Customer Group Tariff (c/kWh) Astana residential 4.17 Karaganda residential 2.61 Almaty residential6.10

13. ELECTRICITY PRICES & TARIFFS (Cont’d) • Prices for energy produced by generators formally are not regulated • As of April 1, 2009 Government of Kazakhstan introduced the system of ceiling cap tariffs for generators, since then practically all energy sold on bilateral basis are in fact regulated • Centralized market administered by KOREM remains the only market segment with competitive prices

14. STAKEHOLDERS Kazakhstan has active lending programs supported mainly by the EBRD, Asian Development Bank, and World Bank Group, with active projects in sustainable energy development Major Stakeholders include: • EBRD – Provided $252 mln in loans, including $165 mln to KEGOC, purchased stake in Pavlodarenergo. Will channel financial resources to support transition to low carbon economy. Activities in the area of renewables and climate change will become an integral part of EBRD strategy • ADB – So far mainly provided technical assistance in the tariff setting area • World Bank – Under Joint Economic Research Program (JERP) provides co-financing and its benefits go well beyond lending. Government co-finances each piece of analytical work done under JERP

15. STAKEHOLDERS (CONT’D) • Private Sector – Almost 100% of generating companies has been privatized and placed under private ownership. Takes part in energy efficiency development • USAID – The energy-related programs have included: the National Program for Energy Savings (1994- 95); Energy Efficiency and Market Reform Project; Environmental Policies and Institutions for Central Asia; Central Asian American Enterprise Fund; Regional Energy Market Assistance Program and Ecolinks. In addition, AREM is involved in USAID-funded activities involving the United States Energy Association (USEA); National Association of Utility Regulatory Commissioners (NARUC); and the Energy Regulators Regional Association (ERRA). USAID and GoK also involved in the co-financing of Program of Economic Development, similarto JERP

16. GAP ANALYSIS There is no shortage of well written laws, rules, regulations, domestic and foreign support for energy sector reform and clean energy development. Many successes and significant reforms have been accomplished. However, there are significant gaps that if filled, could accelerate the pace of reform and development. Most significant are: • Implementation – A sound strategy of implementation based on: accomplishing specific objectives, transparency, sustainability, and support for national programs and objectives. • Wholesale power market reform – market need to provide price signals, this is one of its most important functions • Resource adequacy issues are not receiving proper attention • Donor Coordination – Improved donor coordination would yield greater synergy of related programs. • Emphasize Clean Energy – Integrate clean energy and energy efficiency considerations in all aspects of energy sector reform.

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