(By Dr Shahid Qureshi, Chief Editor):-
Kazakhstan’s effort to invest in the green energy is appreciated world-wide as a positive gesture to save the environment. It is to be noted that the Development Bank of Kazakhstan is actively developing project financing in the Renewable Energies.
Renewable energy resources have been one of the most attractive investment niches in Kazakhstan over the past few years. The number of launched investment projects is approaching a hundred, and the total investment in green energy is growing by several hundred million dollars a year. The secret to the investment boom is the addition of several factors: favorable natural and climatic conditions, state regulation stimulating investments and readiness of institutional investors to support initiatives of private investors through various formats, including project financing.
A key stakeholder in this field is the Development Bank of Kazakhstan (DBK), which seeks to expand the portfolio of projects in renewable energy and is ready to co-finance the creation of green capacity of Kazakhstan’s electricity industry.
Incentives for investors
The potential of Kazakhstan for only the two most common types of green energy in the world – wind energy and solar energy – exceeds current consumption in the country. The EBRD estimates that the potential for solar energy production is in the range of 3.9-5.4 billion WH per year. The “ceiling” of wind power is several hundred times higher: according to the Ministry of Energy of the Republic of Kazakhstan, it’s 920 billion kWh per year. For comparison, the average level of electricity production in Kazakhstan in recent years is 100 billion kWh, and about 90% of the electricity is generated by fossil fuel-fired power plants, the rest is mainly provided by large hydro-power plants. The share of RE in generation is still small-1.7% (data provided by the Ministry of Energy of the Republic of Kazakhstan as of 30.06.2019).
Nevertheless, the Kazakhstan’s authorities have high expectations for green energy. The Concept of Kazakhstan’s transition to a green economy, adopted in 2013, plans that the share of renewable energy in electricity generation will reach 50% by 2050. These indicators then migrated to other strategies and plans and remain relevant to this day. For example, according to the Strategic Plan for the development of the economy of Kazakhstan: 3% of the share of renewable energy in total electricity production by the end of 2020, 10% of renewable energy in total electricity production by 2030, 50% of low-carbon alternative and renewable energy resources.
In order to achieve these goals, the government of the Republic of Kazakhstan, starting from 2014, began to build an investment-attractive system around RE, the main tools of which were long-term fixed tariffs and centralized purchase of electricity from various RE facilities. Subsequently, the government of Kazakhstan developed a mechanism for indexing the long-term tariff taking into account inflation and the exchange rate. The Financial Settlement Center of Renewable Energy LLP (FSC) (in the structure of the KEGOC system operator) was determined as a single purchaser. The system operator guaranteed the mandatory connection of the renewable energy facility to the network, while a new wind, solar power plant or mini-hydroelectric power station was exempt from electricity transmission fees.
In relation to renewable energy projects, there is a special regime-they can avoid paying customs duties for basic equipment, they receive investment preferences. Last year the mechanism of auctions for the reduction was introduced: The FSC played the right to implement the project on a specific site, the winner had to show the lowest tariff, and as a reward, he was waiting for an offtake contract for a long period. Even though after the introduction of the auction, there was a decrease in the average tariff by 20%, investors still find this niche extremely interesting. The total number of projects put up for auction in the last two years is 48.
According to the Ministry of Energy of the Republic of Kazakhstan, 86 renewable energy plants with a total capacity of 980 MW will operate in Kazakhstan by the end of 2019. The share of renewable energy in a generation will grow from 1.3 to 2.3% but will remain scanty in the country’s electricity balance.
It’s better with the development institution
Models of investment projects in renewable energy involve a rather narrow range of sources of financing. These are either the company’s own funds or a partnership mechanism with the development institution.
The main advantage of a partnership with the development institution is cheap financing. Since the shareholders of such structures are governments, they can attract cheap long-term money, and their lending rates are correspondingly lower. The mandate of most of them sets the goal to support green energy. Second-tier banks –an alternative lender – rarely support such projects, as they are quite complex for commercial banks. The funding base of STB is mainly represented by deposits of individuals and legal entities – it is basically quite short and tight money, and the final rates of commercial banks are correspondingly higher.
The staff of development institutions has experienced specialists in financing various renewable energy projects, who share expertise when structuring transactions. In addition, partnership with development institutions has a positive impact on the reputation of the investor and the project itself.
Kazakhstan with its relatively young renewable energy segment is no exception to the world practice. In 2018, the Expert Zertteu research group (Expert Kazakhstan analytical magazine) formed a pool of investment projects in the green energy, which were launched in 2018 or were under construction by then. The pool included 15 projects, and 11 of them were supported by such development institutions as DBK or EBRD. The average value of the share of co-financing of the development institutions in those projects turned out to be at the level of 55%.
Renewable energy expert
As a rule, development institutions participate in the RE projects under the project financing scheme. The model looks like this: investors lend to the project on the condition that the main source of repayment of borrowed funds are cash flows from the project. This format allows, on the one hand, to create a large financial leverage (the share of borrowed funds to own ones), which allows the owner of a capital-intensive project to implement it with a small amount of own funds. On the other hand, the lender in this model gains more control over the implementation of the project.
DBK actively uses this model of financing, providing favorable conditions for project financing: the minimum loan amount is 7 billion tenge, the maximum loan term is up to 20 years, the amount of the company’s own participation is not less than 30% of the cost of the investment project according to the estimate. An important point is that funding is provided in tenge, which is critical for the project, whose cash flows are also denominated in tenge.
So far, DBK has implemented four projects in renewable energy, but each of them is in different segments. The first one in terms of installed capacity is the Astana Expo-2017 wind-power station with a capacity of 50 MW and a cost of 44 billion tenge in the village of Kostomar, Akmola region. DBK finances 68% of the project cost. In the next phase, it is planned to expand the capacity of the station to 100 MW.
The second project is a solar power station in the Kapchagay district of Almaty region with a capacity of 100 MW. The project costs 26.3 billion tenge, 10.8 billion of which (41% of the cost) is a loan from DBK.
The third project is Zhylga Solar Energy Plant in Turkestan region. The capacity of the plant is 20 MW, the cost is 13 billion. This project is implemented in the format of project financing. The share of DBK in construction financing is 68%.
The fourth project is Turgusun-1 hydroelectric power station in the East Kazakhstan region. The HPS with a capacity of 25 MW worth 13.4 billion tenge. DBK contributes 37% of the project financing.
The presence of these projects in DBK’s portfolio is a positive signal for foreign investors in the green energy: The Bank can become an experienced and reliable partner for them.
Universal Energy international company, represented by its Eneverse Kunkuat project company, has already taken part in the implementation of the above projects, such as Solar power station in Kapshagay district of Almaty region with a capacity of 100 MW, and the German company called DERA GmbH (Zhylga Solar power station at 20 MW) was an investor of the Zhylga Solar power station project in Turkestan region.
“The active participation of foreign investors in the implementation of renewable energy projects was made possible thanks to the legal framework adopted by the government with the conclusion of firm contracts with fixed tariffs, the availability of a credit instrument as project financing and the availability of tenge liquidity for lending to such projects, which reduces the requirements for providing collateral and eliminates currency risks,” notes DBK.
RE is only a small segment of infrastructure projects, the financing model of which can be project financing. Having the support of a shareholder represented by the government of Kazakhstan, DBK is ready to develop project financing in public-private partnership projects, as today there are great prospects for its development in Kazakhstan, due to the need to develop infrastructure projects with the participation of foreign investors.
(Dr Shahid Qureshi is senior analyst with BBC and chief editor of The London Post. He writes on security, terrorism and foreign policy. He also appears as analyst on Al-Jazeera, Press TV, MBC, Kazak TV (Kazakhstan), LBC Radio London. He was also international Presidential election observer for Kazakhstan, 2019, 2016 and 2015, Azerbaijan 2018 and Pakistan 2002. He has written a famous book “War on Terror and Siege of Pakistan” published in 2009. He wrote his MA thesis on ‘Political Thought of Imam Khomeini’ and visited Tehran University. He is PhD in ‘Political Psychology’ also studied Law at a British University. He also speaks at Cambridge University and visiting professor in Hebe University in China.)
Views expressed are not of The London Post