In an interview with the magazine "Global Business Reports" Yerkyn Amirhanov, President of Central-Asian Electric Power Corporation JSC, spoke about the company's investment strategy and shared his vision of the development of Kazakhstan's energy sector.
What changes have you observed in the power sector over the past couple of years?
Kazakhstan’s power sector has been evolving significantly. In the 2000s, the country’s economy showcased a good growth rate, with also resulted in an annual growth of 5% to 7% in energy consumption. At that time, it was becoming apparent that there was a deficit of power production in the country. Additionally, most power was being generated using outdated equipment. To solve this problem, the government introduced a program called ‘Tariff in exchange for investment’ in 2008. Within this program’s framework, all power companies were divided into 13 groups, each of which received a fixed tariff for the following seven years. The annual tariff increase was 18% to 20%. The program provided strong incentives for the production of new generation capacity and the modernization of existing equipment. As a result, production capacity increased by 30%. The ‘Tariff in exchange for investment’ program was designed for 2008-2015, and as of January 1st 2016, we were supposed to adopt new legislation, or the so-called Electricity Market, to help develop new generation capacity and create new power plants. However, in recent years, the growth of energy consumption has significantly showed, and the government postponed the introduction of the legislation for another three years. Thus, the tariffs for 2016-2018 will be fixed at the same level as those of 2015.
With regards to CAEPCO, in 2007 we began working with the European Bank for Reconstruction and Development (EBRD). EBRD became a large shareholder, owning 24% of CAEPCO’s shares in 2009. Working with such a large institutional investor allowed us to implement an investment program to modernize our assets.
How attractive are current tariffs for international investors?
Tariffs are calculated based on operational costs. Every layer in the market signs an investment agreement with the Ministry of Energy that specifies an amount that will be produced and the amount that will be sold, as well as the level of investment. In the following three years, the investment component of the tariff will be gradually reduced taking into consideration the level of inflation.
CAEPCO’s is satisfies with the current tariffs. We are expecting the wear-and-tear rate of equipment will be reduced from 80% in 2008 to 39% in 2018. In the coming three years, we will continue to improve this rate. In the past years, our operational costs were growing at the same rate as inflation, and the investment component was growing much faster, which is why our rate of investment in 2015 is significant enough to finish our development plans.
Please tell us more about CAEPCO’s investment program.
During the process of developing our investment program with the EBRD, CAEPCO focused on modernizing its production capacity, which currently amounts to 940 megawatts. Our program has three key directions. First, we will replace our generators (our newest power station is 40 years old). We dismantled old equipment, which allowed us to lower our operational costs. CAEPCO has combined power plants, which produce heat in addition to electricity. As we mainly work in northern regions, where homes are centrally heated for almost seven months a year, it is important to consider production of heat. Second, we will be reducing the amount of electricity lost during distribution. Our company is vertically integrated and operates in three regions, covering over 50 thousand square kilometers of the grid from 110 kilowatts and lower, which makes us the largest transmission and distribution company in Kazakhstan in terms of grid capacity. The third pillar of our investment program is focused on the environment. When we acquired our assets during the privatization period, they were harmful towards the environment. However, we managed to significantly decrease harmful waste and currently we are one of the leading companies in terms of environmentally friendly production.
Is CAEPCO planning to export electricity in the near future?
Thanks to our access to retailers, CAEPCO is able to sell everything it produces. At the same time, we are one of the few layers on the Kazakh power market that has the technological capacity to export to Russia, avoiding the national grid operator. However, because of the devaluation of the Russian ruble, at this moment it is not economical to export to Russia.
How will the power sector evolve over the next three to five years in Kazakhstan?
Kazakhstan has huge reserves of extremely cheap coal, which will remain the key source of power. New technological solutions are effective enough, and therefore we aim to use the most advanced technology in the field of coal-power generation. Green energy will also develop, but its implementation will depend on both market and political factors. In western Kazakhstan, gas-powered stations will play an important role.
Where do you envision CAEPCO in three to five years?
CAEPCO will continue to work towards decreasing its operational costs and improving productivity. Currently, we are focusing on several development projects, as well as increasing our generation and transmission capacity. In the coming years, we will try to maintain and strengthen our position as the largest private operator in Kazakhstan.