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Understanding the energy transition in Central Asia and Caucasus

Uzbekistan, Kazakhstan, Azerbaijan and Georgia have all set off on a journey of energy transition, but each of these countries is taking a path of its own, as Anton Konnov, Alexey Mareev and Arthur Minosyan explain.

Common ground

Two main factors unite Uzbekistan, Kazakhstan, Azerbaijan and Georgia as they set out on separate energy transition journeys.

First, as former Soviet Union countries, they have traditionally relied almost exclusively on Russian technology to power their energy systems, which have recently lacked investment and need modernisation as well as decarbonisation. In the case of Uzbekistan, Kazakhstan and Azerbaijan, this has left each of them heavily dependent on fossil fuels of which they have plentiful reserves, whether that is oil, gas or coal.

Where Georgia is concerned, the reliance is on hydroelectric power plants, thanks to its abundant supplies of water and its lack of domestic fossil fuel reserves. But many of its hydro plants also date back to the Soviet era and it still imports some natural gas from Russia, even though, as long ago as in 2009, Georgia disassociated itself from the Commonwealth of Independent States (CIS) of which the other three are still a part.

The second factor uniting the four countries is that they have all signed up to the Paris Climate accord, committing themselves to cutting greenhouse gas emissions sharply by 2030. Uzbekistan, Azerbaijan and Georgia have committed to a 35% cut in emissions, while Kazakhstan is aiming for a 15-25% reduction in that time. Each of the countries has now announced nationally determined contributions (NDCs) to meet the Paris targets, and they are pinning their hopes, to varying degrees, on a widescale rollout of renewable energy, whether that is solar, wind, hydro or biomass. Uzbekistan and Kazakhstan also have long-held ambitions to add nuclear power to the mix. But there the similarities end.

Diverging paths

Uzbekistan, Kazakhstan, Azerbaijan and Georgia are pursuing different strategies, not just in terms of the technologies they deploy, and at what speed, but also in respect of following different paths to attract international investment as they look to reduce, although not cut, their historic reliance on Russia.

As energy transition gathers pace across this vast and disparate region, stretching from central Asia to the Caucasus, there is already growing evidence of activity and interest from international investors, particularly from Europe, the Middle East and Asia. Often this is being led by the big development banks, providing both direct financing and advice and guidance on market and regulatory reform. But big specialist infrastructure funds, especially those with a dedicated green focus, and industrial players are also increasingly showing interest.

We expect this trend to accelerate. Despite significant hurdles that must be negotiated, the potential for further investment in renewable energy is huge and it urgently needs to be fulfilled if these countries are to meet their ambitious climate commitments and increase their energy independence.

Uzbekistan looks to wind and solar

Uzbekistan has massive potential to develop wind and solar facilities on a large scale thanks to ideal natural conditions. Indeed, where solar is concerned, the country is said to have greater natural potential in terms of consistent sunshine than either Spain or Italy, where solar power is being widely adopted.

Currently, natural gas is the predominant electricity generation fuel, with renewable accounting for just 8% of the energy mix. Almost all of this comes from hydroelectric stations built in the Soviet era, and there is limited scope to develop hydro further given the high demand for water from the farming sector. Biomass also plays a part currently, but mostly as a fuel for domestic heating and cooking in rural areas. Against this background, the government is pushing ahead with an ambitious strategy to increase solar and wind, with the aim of building 12GW of capacity by 2030, in addition to a further 1.5GWs of hydro – a plan set out in its Paris Accord NDC.

Although Uzbekistan has not gone as far as other countries in the region in terms of liberalising its economy and energy market, it is widely seen as a stable and attractive destination for international investment. That perception has been helped by the government’s decision to set out its energy policy goals up to 2030 in a Green Economy Transition Strategy and an Electricity Supply Security Concept. With the help of international partners, it has also developed a roadmap for a carbon neutral electricity sector by 2050.

The government has also launched a competitive bidding process to attract foreign investment in large-scale solar projects, helped by development institutions. In July 2022, the Ministry of Energy announced that 11 groups from the Middle East, Turkey, China, India, Spain and France had prequalified to tender for three major solar projects. The process attracted far more competitive pricing than had previously been achieved, meaning that renewable investments could more readily compete with highly subsidised prices in the electricity market.

This year, Masdar, the increasingly active global green energy company based in the UAE, announced it had raised funds for three solar farms in Uzbekistan to produce some 900MW of power. Funds were raised from a wide variety of development organisations. Masdar is also developing a large-scale wind farm, while another Middle East green energy giant which is also increasingly active on the global stage is involved in developing four large wind projects in the Karakalpakstan, Bukhara and Navoi regions.

These are promising developments, but major challenges remain, not least the need for further action to bring down the cost of renewables compared with the artificially low price of traditional energy sources and the need to stimulate development through financial support mechanisms.

The country also needs to build skills and research capacity around renewable energy and, although the government has clear ambitions to build out its industry, it has yet to really convince the wider public of the need for energy transition.

All that will need to change in a country experiencing rapid population growth, which will inevitably put further strain on its electricity supply industry. Widespread adoption of renewables will not only help Uzbekistan to achieve its climate goals but will also increase energy security.

Nuclear power remains an option for a country with significant reserves of uranium. But development of nuclear power plants takes a long time and is highly capital intensive. Renewables can more rapidly meet the rising demand for electricity.

Kazakhstan weighs up decarbonisation options (including nuclear)

The urgency for Kazakhstan to make a success of energy transition is clear for a country that still relies on coal-fired power stations for 70% of its electricity generation. This is not surprising given its massive reserves of coal, the majority of which go to domestic consumption.

Renewable energy is limited in scope currently, with most of it coming from Soviet-era hydroelectric plants. But the government is actively looking to develop renewable and low carbon energy sources, and its National Concept for Transition to a Green Economy, a strategy adopted as early as 2013, includes a target to raise alternative energy sources (including nuclear power) from 3% in 2020 to 50% in 2050, and to cut greenhouse gas emissions by 40% in that time.

The potential for wind power is huge and we have already seen some significant projects developed. The potential for solar is more limited, however, given the country’s susceptibility to powerful winter storms and blizzards.

Kazakhstan, with the world’s second largest reserves of uranium, has long been debating whether to build a new nuclear power plant to increase its energy security. Traditionally that would almost certainly have been in collaboration with Russia’s nuclear power giant, Rosatom, and with Russian financing. But the country is currently assessing rival designs and this year has announced it is considering proposals from China, Korea and France as well as from Russia.

Whatever solution is chosen will lock Kazakhstan into a long-term dependence on the selected partner for maintenance and operation, given that technologies and fuel types differ from one to the other. Given the geopolitical tensions created since Russia’s invasion of Ukraine, the decision has become a great deal more complex.

Kazakhstan has gone further than many countries in the region in liberalising its electricity market, which is now largely privatised, with most power plants in private hands and wholesale prices determined by the market. This makes the country attractive to international investors, from major international institutions, and is driving development working with the state sovereign wealth fund.

But energy remains a vexed issue, as was demonstrated in the civil unrest that exploded in January 2022, after the government lifted a cap on liquid gas prices, with the riots eventually being quelled after an international force, involving troops from Russia and other neighbouring CIS countries, intervened to support the government. Some observers believe that Kazakhstan will be hard pressed to meet both the climate targets it has set and its ambitions for developing renewable energy more widely, not least as support for the coal industry remains strong and the transmission network needed to carry renewable power to consumers requires massive investment. It also remains unclear whether the government can garner public support for its energy transition plans. However, the commitment of the government is clear.

Azerbaijan continues efforts to diversify

Azerbaijan remains heavily dependent on oil and gas revenues, which account for some 90% of its exports. Although this has brought great wealth to the nation, there has been a growing realisation since the financial crisis of 2008 and the oil price shock ten years ago that it needs to diversify its economy. The government’s “Azerbaijan 2020 – Look into the Future” strategy specifically targets faster development of renewable energy, and a 2021 renewable energy law provides for the use of renewable energy in the electricity supply industry. Such moves recognise that this is a country with huge potential to develop renewable energy and the significant task involved in doing that if Azerbaijan is to meet its Paris commitments.

Today, fossil fuels make up more than 98% of the total energy supply, with renewables accounting for just 1.5%. Natural gas is the primary energy source for electricity production, accounting for 90% of the market, while hydro power accounts for a mere 4%.

Quite apart from helping to meet its climate goals, there is also a growing recognition that developing a sizeable renewables sector would help to preserve gas for export markets. To that end, the government has set a target for 30% of electricity to come from renewable sources by 2030, a clearly stated goal of achieving energy independence and an ambition to export not just oil and gas but electricity too.

The country has excellent solar power potential due to generally sunny conditions, but wind generation, both onshore and offshore in the Caspian Sea, could eventually make the biggest contribution. Although the dominant renewable energy source to date, hydropower remains relatively under-developed, but we are seeing small-scale hydro schemes get underway.

In addition, a number of international companies have begun exploring the development of green hydrogen capacity, often harnessing offshore wind to provide the renewable energy input. A Japanese engineering company has worked with the government to establish a green energy zone in the Karabakh region to explore a wide range of renewable energy developments.

Development banks have also been active in backing important projects. These include a wind power plant and a solar facility. Generous tax and tariff exemptions are also on offer to encourage investment.

The country is widely seen as a stable investment environment, but energy transition legislation requires further development. The government is simplifying the process of getting permits, thus making it easier for international investors to take part in pilot projects to test the potential for renewable energy. In an economy that has seen plenty of privatisation, the energy sector remains largely state controlled, but this is beginning to change. In addition, the government is working with international development banks to create a regulatory framework that will support energy transition.

Georgia takes a very different path

Georgia stands as a true outlier in this group of four countries, for many reasons. The share of renewables in Georgia’s electricity generation mix, at 81%, is one of the highest in the world, thanks to its dominant hydroelectric power industry and its abundance of rivers to feed that industry. Most of the remainder of electricity generation is fired by natural gas, all of which is imported from various sources, including Russia.

So great are the water resources that this still has further potential. It’s estimated that only about one-fifth of rivers are currently being used for hydropower and a total potential capacity of 15,000MWs is available, capable of producing 50TWh of electricity, according to figures quoted by the International Energy Agency.

Other renewable sources remain untapped too. Wind power potential is estimated to be around 4TWh and solar potential is also high.

The country is determined to meet most of its energy needs through hydro and the government is trying to incentivise foreign investment into developing new small and medium-sized hydro plants, for instance, by offering free access to the network and fixed tariffs for small and micro schemes. There’s also a focus on small solar schemes and regulations offering free access to the network and fixed tariffs for micro schemes.

We are seeing progress. In 2022, feasibility studies for 100 hydro schemes were underway, according to the IEA, with 56 at the licensing or construction stage. However, hydro remains controversial, especially where big new schemes are being proposed. These attract frequent opposition from environmental and community groups which argue that Georgia has huge untapped wind and solar potential as an alternative to hydro and that this could be harnessed without the need to modify the transmission system.

The government is indeed pushing the development of wind and solar, both of which have good potential given the country’s climate, but no full assessment of the potential for these two renewable technologies has been carried out to date. The 21MW Qartli wind farm has been in operation since 2016 and has now been privatised, while the government has signed MoUs for the development of 31 solar plants and another 13 wind farms.

Although seen as a good investment destination, Georgia’s political system is prone to frequent policy changes which can delay investment decisions. However, its ambition to join the EU, having disassociated itself from the CIS, and its clear belief that renewable energy is key to its decarbonisation and energy security strategy, are welcomed by investors.

It has now reached an accession agreement with Brussels, and as part of that has already begun to implement some EU regulation into domestic law, including around energy and water supply and the adoption of renewables. Clearer targets for renewable energy and more transparent price signals would, it is widely believed, increase investor confidence and this is something we expect to see developed.

A range of opportunities

Uzbekistan, Kazakhstan, Azerbaijan and Georgia are clearly the most developed of the former Soviet Union countries in terms of energy transition, from an investment, market, policy and regulatory point of view. They have set themselves very ambitious climate goals which will be very challenging to meet, but the direction of travel is clear even if the precise route map is yet to be developed in some of these economies. International investors are increasingly seeing the huge potential of energy transition in these markets and are voting with their feet. This is a strong trend and one which we fully expect to intensify.

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