This review provides for the overview of the power energy sector of Uzbekistan, being currently subject to a large-scale transformation. It purposefully omits a detailed description of other energy markets, for example the natural gas market, as this would require a separate in-depth analysis owing to the multiplicity of major reforms ongoing in the country.
To begin with, the installed capacity of Uzbekistan power plants exceeds 12.5GW, making Uzbekistan one of the few energy-independent countries in Eurasia. The Uzbek power sector depends heavily on the country's gas and oil industry, as hydrocarbons (mainly, natural gas) contribute to about 97 per cent of the country's energy balance with the remaining 3 per cent being hydropower, coal and charcoal. There are almost 40 hydropower stations in Uzbekistan, but only nine of them have an energy capacity of more than 50MW and the relevant potential is likely to be limited, as water resources are shrinking. Currently, there are no nuclear power stations within its territory of Uzbekistan. However, the commissioning of the first nuclear power station, being constructed in cooperation with Russia's Rosatom, is scheduled for 2028–2029.
The legal and economic structure of the power industry of Uzbekistan is relatively simple. Proceeding from the assumption that the provision of electric power is a natural monopoly where the single state-owned monopolist can be the most efficient supplier, the Uzbek government has long maintained a model where the single incumbent – JSC Uzbekenergo – has been responsible for the power generation, transmission, distribution, dispatch management, and retail sales, operating through its affiliates in each region of the country. Over the past years, however, the government has become increasingly dissatisfied with the performance of the industry and currently, seeks to enhance competition within the sector. On 1 February 2019, it was announced that the energy sector would be reformed and JSC Uzbekenergo would be restructured.2
Currently, JSC Uzbekenergo is a central, vertically integrated, state-owned holding company, controlling more than 40 utility companies. Each of these utility companies performs one or more of the above functions – the power generation, long-distance transmission, distribution, dispatch management or retail sales. The company used to cooperate closely with JSC Uzbekneftegaz, which is the state-owned holding company and the sector regulator in oil and gas. The latter recently lost some of its powers, which were transferred (along with some powers of the JSC Uzbekenergo) to the Ministry of Energy.
The Presidential Decree providing for the unbundling, privatisation and attraction of foreign investment to the power industry was signed on 27 March 2019.3 According to this, JSC Uzbekenergo will cease to exist and three recently established joint-stock companies will completely replace the holding company, as explained below.
Current policy priorities in the sector include:
- maximising energy savings through rehabilitation and modernisation of existing power energy facilities and the introduction of energy-efficient technologies and equipment in various sectors of the economy to reduce costs and improve competitiveness;
- commercialising utility operations to improve performance. The government plans to continue de-monopolisation and deregulation of the power sector to increase competition. It prioritises the provision of open access to power transmission lines for power-generation companies;
- attracting private-sector investments to satisfy increased investment needs and to address the problem of depreciation;
- reducing the dependence on natural gas. The government is striving to increase the share of other energy sources by converting a number of gas-fired thermal plants to coal-fired, constructing new coal-fired power plants and increasing the share of renewable energy; and
- reducing the environmental impact of the power industry by relying on renewable energy.
i The regulators
The regulatory functions used to be entrusted to JSC Uzbekenergo are now in the hands of several state regulators. Since a substantial share of the Uzbekistan's power production is dependent on natural gas, recently the government has brought the majority of relevant powers in power energy and oil and gas under sole management of the Ministry of Energy.4 The Ministry was established on 1 February 2019 and is responsible for, among other things, the preparation and implementation of energy policies, plans and programmes in the above industries in coordination with its affiliated institutions: Uzenergoinspektsiya, Uzneftegasinspektsiya, the Agency for Development of the Nuclear Industry (UzAtom) and the Non-Commercial Organisation for Implementation of Production Share Agreements.
Some of the Ministry's other functions, as provided by relevant laws, include the regulation and supervision of the functioning of the power energy, gas, nuclear and renewable energy industries, the monitoring of the energy consumption efficiency, and implementation of projects under production share agreements. The above-mentioned Uzenergoinspektsiya and Uzneftegasinspektsiya control compliance with relevant state standards in the power energy and gas industries respectively.
The main regulators also include the Ministry of Finance, exercising price regulation and general control over financial flows within the state controlled sector, and the Cabinet of Ministers, approving the Rules for the Electricity Use (REU) and the Rules for the Gas Use as well as monitoring investment programmes in the industry.
Additionally, the Uzbek Agency for Standardisation, Metrology and Certification controls compliance with power energy efficiency and energy quality standards, whereas the State Antimonopoly Committee oversees how natural monopolies adhere to market rules and regulations, including the rules for price setting.
The main legislative acts for the industry are the Law on Electricity5 and the Law on Efficient Use of Power Energy,6 which determine the main state policies and the structure of the sector as well as set rules and restrictions for the country's energy markets. The Law on Natural Monopolies7 provides for some relevant rules for companies in the industry, empowering the Antimonopoly Committee to monitor and to punish anticompetitive activities of natural monopolies and to ensure a balance between interests of consumers, the state and energy companies.
The Regulations on Provision of Energy Services8 determine the rules for the provision of services related to ensuring energy efficiency by the state-owned monopolist the National Energy Saving Company under energy services contracts that have to be entered into by state agencies and state-owned enterprises. The Rules for Using Power Energy and the Rules for Using Natural Gas9 set the rules regulating relations between utility providers and purchaser of power energy and natural gas respectively. According to the Rules, standard form contracts must be applied across these sectors, as developed jointly by JSC Uzbekenergo, the Antimonopoly Committee and controlling agencies Uzenergoinspektsiya and Uzneftegasinspektsiya, mentioned above. Some basic rules for contacts on power supply are also set in Articles 468 to 478 of the Civil Code.
The legal framework for renewable energy remains underdeveloped and is partially covered only in subordinate legislative acts (some Presidential Decrees and Resolutions of the Cabinet of Ministers), which mainly relate to the provision of particular tax incentives to companies operating in the sector. A draft of the fully fledged Law on Renewable Energy Sources was passed by the Uzbek parliament on 3 May 2019, and is now awaiting approval by the President. Among other things, it regulates measures for the state support and development of renewable energy and creates a legal basis for state control over the sector. In August 2018, the parliament was preparing to review the draft on the second reading,10 but there has not been any further information in this regard.
ii Regulated activities
In general, generation, transmission, local supply, operation and retail sales in the power industry do not require special licences. In practice, however, the access to the markets is in many ways blocked. Hence, the transmission may only be performed by state-owned enterprises, which are also entrusted with centralised dispatch management, whereas local distribution networks are effectively in the hands of the state. Both categories of state-owned entities used to be controlled by JSC Uzbekenergo, but that control now is to be divided between JSC National Power Grids of Uzbekistan (the long-distance transmission) and JSC Regional Power Grids (the local distribution). Although private entities are able to engage in the generation of power energy, their access to the Single Power Grid (Uzbekistan's country-wide grid) requires the obtainment of a special permit. The rules for obtaining such a permit are, however, obscure and in practice, it may be impossible to get one unless an agreement is reached with the sector regulator (previously JSC Uzbekenergo and now the Ministry of Energy). Note that if legal entities and individuals produce power energy for their own use, they may trade in it but only using their own grid, since they are not allowed to connect to the Single Grid.
Recently, nevertheless, several regulations have been revealed for public discussion, setting some clearer rules for private generators, including the rules for access to the Single Power Grid. It is, however, hard to predict an exact time when these regulations will be adopted.
Speaking of retail sales, state-owned enterprises may provide private entities with the right to accept payments for electricity from consumers (i.e., act as intermediaries).
Since the construction of power plants and transmission lines is not licensed, special permits for each particular project may be required as, under Uzbek law, these are 'potentially dangerous [for employees, the society and the natural environment] industrial objects'.
iii Ownership and market access restrictions
As noted above, all facilities in the industry are now owned by the state. The Law on Electricity of 2009 laid the foundation for the legal unbundling in the industry, but privatisation was not pursued. Nevertheless, the above-mentioned structural ownership unbundling that will end in the liquidation of JSC Uzbekenergo and the establishment of three power energy companies are expected to preface massive privatisation. It seems that the priority in this regard will be given to foreign investors with solid experience in the power industry.
Currently, Uzbek law does not preclude foreigners from acquiring stakes in national energy companies.
iv Transfers of control and assignments
State shares in JSC Uzbekenergo are managed by the State Agency for Property Management (the Agency). As for the company's subsidiaries and affiliates, they may be owned by just JSC Uzbekenergo or both the company and the Agency (i.e., dual control is exercised in some cases).
Pursuant to Uzbek law, state shares be may transferred to private parties for performing management functions based on special standard form contracts. Such management is usually closely supervised by the Agency. To our knowledge, no such contracts in the power industry have been concluded.
Privatisation processes are governed by separate rules. State property is generally privatised through holding open auctions and tenders. The starting price varies and may be set as a fixed sum, as some fixed sum and the commitment of a potential owner to invest a particular amount into developing the object, or as the commitment to invest only. To commence privatisation, a privatisation programme must be approved by the President and the Cabinet of Ministers. Usually direct negotiations between potential private (whether local or foreign) investors and relevant sectoral regulators (in the case of the power industry, this would be the Ministry of Energy) precede all privatisation deals.
III TRANSMISSION/TRANSPORTATION AND DISTRIBUTION SERVICES
i Vertical integration and unbundling
As noted above, JSC Uzbekenergo has been a single, vertically integrated monopolist engaged in all types of activities in the power industry. The majority of Uzbekistan's power generation, transmission and distribution assets are owned and operated by subsidiaries of this state-owned company. Generally, all major generating companies represent separate legal entities owned by JSC Uzbekenergo. Its other subsidiary, Energosotish, acts as the single buyer of power energy from generating companies and the single wholesaler to local distributors. Uzelectroset, controlling seven high-voltage operators, acts as the main dispatch manager and transmitter of power energy based on contracts with Energosotish. Local distributors also acting as retailers are represented by 14 territorial joint-stock companies owned by JSC Uzbekenergo. Based on the changes of 27 March 2019, the JSC National Electricity Grids of Uzbekistan will replace both Energostish and Uzelectroset, taking over as the single intermediary between generating companies, the majority of which will come under the control of JSC Thermal Power Plants, and local distributors, which will be controlled by JSC Regional Power Grids.
ii Transmission and transportation, and distribution access
As explained above, access to the single power grid for producers and consumers is provided on the basis of special permits granted by subsidiaries of JSC Uzbekenergo, based on relevant state rules and standards, and has to be financed and organised by those requesting access. As almost no private grids exist, there is no alternative to this procedure and for all major endeavours a pre-agreement with JSC Uzbekenergo or its subsidiary or affiliate is recommended.
The Ministry of Finance is the state body responsible for setting tariffs in the power industry. In doing so it acts based on the Regulations on Tariff Groups of Consumers of Electrical and Heat Energy,11 which establishes three types of tariffs and 10 groups of consumers, thus setting basic principles for defining tariffs.
The three types of tariffs applied are:
- single-rate tariffs – usually the fee per 1kW/h of active power energy supplied to customers;
- double-rate tariffs – the annual payment for 1kW of the maximum power capacity declared for consumption by customers and the fee for 1kW/h of supplied electricity; and
- differential (time-of-use) tariffs – local distributors have the right to differentiate power energy tariffs based on the time of day (peak hours, half-peak hours or night load) and seasons (summer and winter periods), provided that customers have multi-tariff metering devices.
Ten of the above consumer tariff groups include industrial enterprises with a connected capacity of up to 750kW, industrial enterprises with a relevant capacity of more than 750kW, budget organisations, consumers using electricity for domestic needs, consumers using electricity for heating and others.
Some discounts are provided to socially vulnerable consumers, based on relevant decrees of the President. Such discounts are secured by the state subsidising local distributors, selling electricity at a discount.
Generally, based on some assessment by external experts, tariffs set by the Ministry remain significantly below the market level and are not able to satisfy ever-growing demands for investment.
iv Security and technology restrictions
Operators of power grids have the obligation to inspect and to maintain power grids; to reconstruct, transform or stop using power grids in a timely manner if they do not satisfy the safe-use requirements; to put up, repair or change signs related to power grids; and to take effective safety measures for power grids not in operation.
Other obligations for operators are in place under the Law on Electricity. Hence, power grids must be operated based on the principles of safety, high quality and economy. Power grids must be maintained so that the power supply remains uninterrupted and stable. Pursuant to the Law on Efficient Use of Energy, energy producing and consuming facilities along with the energy itself are subject to standardisation and certification. Further, the Law on the Protection of Nature,12 the Law on Ecological Control13 and the Law on the Protection of the Atmosphere14 impose the obligation on entities in the energy sector to take pre-emptive measures to decrease levels of potential environmental impact.
At the moment, concerns about cybersecurity and data processing have not come to the forefront with respect to the power industry. Some basic things are only partially addressed in bilateral and international treaties to which the country is a party, including the Shanghai Cooperation Organisation's agreement on cooperation in the field of ensuring international information security and the India–Uzbekistan agreements on the development of cooperation.
IV ENERGY MARKETS
i Contracts for sale of energy
Currently, relevant contracts for the supply of power energy may only be concluded between state-owned distributors and consumers, albeit private entities have the right to act as intermediaries in accepting payments under such contracts. As noted above, standard form contracts are used, as developed by JSC Uzbekenergo and the aforementioned state agencies. To become a valid consumer of energy, a particular consumer has to meet certain criteria (e.g., it must have the equipment necessary for the connection to territorial power grids and have metering devices installed). Prices under the contract are non-negotiable and are subject to state regulation.
The Rules for Using Power Energy, cited above, contain a number of provisions that have to be reflected in standard contracts. Thus, legal entities are allowed to purchase energy only after making the 100 per cent advance payment. Power supply contracts with legal entities also have to contain a provision on the payment of penalties to local power distributors in the amount of 50 per cent of the respective tariff for the amount of energy consumed in the relevant billing period in excess of the fixed amount set in the power supply contacts for more than 5 per cent. Likewise, if at the end of the billing period, the actual power load for a consumer exceeds the amount set in the power supply contract by more than 5 per cent, recalculation has to be made with respect to the load and the additional charge of 50 per cent of the tariff for the period may be imposed.
There are no separate rules that may potentially govern the supply of power energy by private generating companies. As for now, general rules for such contracts as provided by Articles 468 to 478 of the Civil Code will apply. It is highly likely, however, that a separate set of regulations will be developed.
ii Market developments
Apart from the unbundling and the privatisation reforms mentioned above, some other changes will have an impact on Uzbekistan's power energy market.
Currently, as briefly noted above, Uzbekistan has no nuclear power stations. However, despite some previous reluctance to use nuclear energy, the Uzbek government has adopted the Concept for Development of Nuclear Energy for 2019–2029,15 envisaging the construction of a nuclear power station with the total capacity of 2.4GW. Russia's Rosatom is going to be engaged to lead the project.
Under the total restructuring of the power industry projected by the reforms of 27 March 2019, a modern multidisciplinary project organisation, JSC UzEnergoEngineering, will be established. Among other things, it will engage in the design of power grids with a voltage of 0.4–500kV with the use of innovative technologies and the latest experience in the field.
Some other significant legal changes that are likely to seriously affect the market include: the provision of access to the single power grid to independent (private) producers of energy; incentives aimed at increasing the market share of generators using renewable energy; and changes in the tariff system with more market indicators being taken into account.
V RENEWABLE ENERGY AND CONSERVATION
i Development of renewable energy
Currently, the renewable energy sector is almost non-existent in Uzbekistan (not taking into account hydropower stations), as renewable sources are not used on an industrial scale. In 2009, Uzbekistan signed the Statute of the International Renewable Energy Agency (IRENA) and became a member of IRENA as a result.16 Nevertheless, the development of the renewable energy industry has not accelerated until recently.
Some basics of Uzbekistan's policy on renewable energy, as mentioned above, are set forth in several presidential decrees and the Law on the Efficient Use of Energy. As noted, the draft Law on Renewable Sources of Energy is expected to be approved soon.
In 2017–2018, owing to environmental concerns and resource depletion (particularly of natural gas), the government focused its attention on renewable energy again, and since then several attempts have been made to improve the legal framework for the industry. The lack of single institutional and legal frameworks seems to be the main contributor to the poor performance of the sector.
Therefore, on 26 May 2017, the President approved the state programme on developing renewable energy and boosting energy efficiency for 2017–2021. Its priorities include fostering the use of renewable sources, switching away from fossil fuels and ensuring the universal installation of energy-efficient technologies. Solar energy is expected to become the key source for the development of the energy sector by 2030 followed by hydro and wind power. Tax incentives are intended to be provided to projects in the field.
As regards hydropower, in May 2017 most of JSC Uzbekenergo hydropower generation assets were transferred to the newly established joint-stock company Uzbekhydroenergo. On 2 May 2017, the Programme of Measures for Further Development of the Hydropower Sector for 2017–2021 was adopted,17 addressing approved projects for the construction of new hydroelectric power plants and the modernisation of existing ones, and the provision of tax incentives for the period up to 1 January 2022 with respect to imported equipment that is required for the above construction and modernisation projects. As mentioned above, in comparison with the wind and solar energy generation, the hydropower industry is relatively well developed in Uzbekistan.
ii Energy efficiency and conservation
Uzbekistan's policy on energy efficiency is covered by the Law on the Efficient Use of Energy. The Law focuses on conservation of energy resources and their rational use. To achieve these goals, the Law provides for some mandatory obligations for users, producers and distributors of power energy. Thus, for example, energy-producing and consuming facilities, and energy itself, are subject to standardisation and certification.
For the purpose of the rational use of energy, the government provides businesses and individuals with the following benefits:
- customs duties and taxes on the import of special equipment, tools and materials, the use of which significantly increases the efficiency of energy use;
- preferential loans for implementing national, sectoral and regional targeted programmes and projects in the field of rational use of energy;
- financial grants for intersectoral research and development activities, the implementation of pilot projects on the production of energy efficient equipment; and
- feed-in tariffs for energy for legal and natural persons that ensure the reduction of energy consumption based on set standards or manufacture competitive products while maintaining energy consumption levels, which are below some set thresholds.
iii Technological developments
As has been noted, renewable energy is still a developing sector. Although Uzbekistan seems to have remarkable potential in terms of expanding its use of renewable energy resources, particularly solar energy, currently there are only a few legal acts encouraging technological developments in the sector, as discussed above.
In terms of energy efficiency, the government has expressed its interest in implementing smart grid projects that would enable the remote monitoring and control over electricity meters and energy consumption.
To give an example of some development initiatives, the Resolution of the Cabinet of Ministers No. 633 of 8 August 201818 shows that the government is interested in attracting private investors into the design, financing, construction and operation of photovoltaic energy production facilities in Uzbekistan for a projected amount of US$1 billion based on public-private partnership mechanisms. One of the projects related to the Resolution is the construction of a solar photovoltaic power plant with an energy capacity of about 100MW in the Samarkand region of Uzbekistan.
Further, the government is developing the Intelligent Electricity Metering project in cooperation with Korean KT Corporation, and plans to instal smart electricity metering devices in most regions of Uzbekistan. These works are expected to be completed by 2021.
VI THE YEAR IN REVIEW
Some of the key developments of 2018 and 2019, which have been described in part above, are covered in the following legal acts:
- Presidential Decree No. PP – 4249 of 27 March 2019 and Resolution of the Cabinet of Ministers No. 685 of 25 August 2018: measures to attract private direct investments, including foreign ones, in the energy sector by selling shares of respective joint-stock companies;
- Presidential Decree No. PP – 4249 of 27 March 2019 and Presidential Decree No. PP – 3107 of 30 June 2017: structural transformations and unbundling in energy and oil and gas;
- Annex 1 to Presidential Decree No. PP – 4165 of 7 February 2019: the Concept for the Development of the Nuclear Energy Sector for 2019–2021;
- Presidential Decree No. PP – 4142 of 1 February 2019: providing for the establishment of the Ministry of Energy;
- Presidential Decree No. PP – 3981 of 23 October 2018: the installation of modern electronic metering devices, enabling remote reading and control over power energy consumption;
- Resolution of the Cabinets of Ministers No. 633 of 8 August 2018: incentives for private investors designing or constructing photovoltaic plants and public-private partnership mechanisms in the field;
- Resolution of the Legislative Chamber of Oliy Majlis of the Republic of Uzbekistan No. 1833-III of 14 July 2018: the draft Law on Renewable Energy Sources;
- Resolution of the Cabinet of Ministers No. 444 of 12 June 2018: the introduction of simplified procedures for obtaining licences in the oil and gas sector. Under the Resolution, the Ministry of Energy has accumulated regulatory powers that previously had been distributed among several state regulators;
- Presidential Decree No. PP – 3102 of 26 May 2017: the programme of measures for furthering the development of renewable energy and enhancing energy efficiency in 2017–2021; and
- Presidential Decree No. PP – 2947 of 2 May 2017: the programme of measures for further development of the hydropower sector for 2017–2021.
VII CONCLUSIONS AND OUTLOOK
As the current energy policy of the government demonstrates, Uzbekistan will focus on diversifying its energy resources, developing the renewable energy sector and attracting private investments with foreign companies.
As regards the legislation in the area, we expect the draft Law on Renewable Energy Sources to be approved by the President soon. Given active development of the legislation on public-private partnership and privatisation trends in the industry, it is likely that the energy sector will also be affected by the adoption of new regulations for private players, which will clarify rules for private generators and other interested businesses (e.g., by streamlining the rules for access to the single power grid). It is also highly likely that the government will come up with some new incentives for private investors.
Overall, Uzbekistan's energy strategy and targets for 2030 can be summarised as follows:
- proceeding with the unbundling and the de-statisation in the industry, including the reforming of tariff setting;
- furthering privatisation in the energy sector by attracting private foreign and local direct investment, and simplifying the rules for access to the industry for private players;
- repairing and reconstructing depreciated energy facilities with the support of private direct investments;
- extending the use of smart grids and energy-efficient technologies;
- increasing the share of renewable energy sources and in particular supporting the construction of solar energy stations; and
- commissioning a nuclear power station.
1 Iroda Tokhirova is an associate at Kosta Legal Law Firm. The chapter was co-written by Maxim Dogonkin, formerly a senior associate at Kosta Legal Law Firm. The information in this chapter was correct as at May 2019.
4 See footnote 2, above.