Energy Transition: Trends in Kazakhstan and the African Continent | Morgan Lewis

Key topics discussed at COP26, the 2021 United Nations Climate Change Conference in Glasgow, were energy transitions in emerging markets and how richer countries would support poorer nations. Energy transition is particularly challenging in developing economies when they derive most of their revenues from fossil resources and have to balance economic growth with aiming for “net zero.”

Kazakhstanhowever, has vast potential in the renewable energy sector and could affect financing and regulatory trends on the African continent.

DEVELOPMENT OF RENEWABLE ENERGY IN KAZAKHSTAN

Kazakhstan continues to develop its renewable energy market in line with the Concept on Transition to Green Economy[1] adopted on May 30, 2013. According to this concept, the share of renewable energy sources in the total electricity production was meant to be 3% by 2020, 10% by 2030, and 50% of low-carbon alternative and renewable energy sources ( RES) by 2050. Further, pursuant to the Kazakhstan National Development Plan,[2] a 6% share of RES in the total electricity production should be met by 2025.

The first target of a 3% share of RES was successfully met in 2020, and the Kazakhstan president instructed the government to increase the share of renewable energy from the initial 10% to 15% by 2030. Based on information published by the Kazakhstan Ministry of Energy, there were 134 operating renewable energy projects with a cumulative capacity of 2,010 MW at the end of 2021, which included 684 MW of wind power plants, 1,038 MW of solar power plants, 280 MW of hydro power plants, and 8 MW of bio power plants. In addition, 10 renewable energy projects with a cumulative capacity of 290.6 MW are planned to be commissioned by the end of 2022.

Main players on the market are international oil and gas companies, energy companies, and manufacturers of RES equipment. Financing of RES projects is usually provided by international financial institutions and development banks.

The Law on Support of Use of Renewable Energy Sources was adopted on July 4, 2009, and provides for a renewable energy auction process (which replaced a prior feed-in tariff scheme) to attract investments in RES. The latest auctions were held in November 2021. An auction winner signs a 20-year power purchase agreement with the Financial and Settlement Center of Renewable Energy LLP (FSC), which is owned by the state. The FSC is the sole offtaker and buys all electricity produced by the RES company.

The Kazakhstan government developed the following state support measures to attract investments in renewable energy industry:

  • Guaranteed purchase of electricity at auction price for 20 years
  • Annual indexation of auction prices
  • Investment preferences (tax breaks, state in-kind grants)
  • Provision of financial support of the government to the FSC
  • Exemption from energy transmission fee and priority dispatch of electricity

Despite the first target of renewable shares in total electricity production being reached, investors continue to raise concerns about low auction prices and their sustainability, as well as inadequate indexation. Therefore, Kazakhstan regulators continue to further improve renewable energy regulations in order to meet the next target of a 6% share of RES in total electricity production by 2025.

REGULATORY AND FINANCING TRENDS IN AFRICA

While many African countries are dependent on fossil resources, the shift to green energy has very rapidly progressed over the last decade through the wealth of renewable energies available on the continent. According to a January 2022 report published by the International Renewable Energy Agency (IRENA) in collaboration with the African Development Bank, only 2% of the global investments in the renewable energy since 2000 were made in Africa despite the continent’s potential. However, if the policy framework and financing follow, the energy transition could boost Africa’s GDP by 6.4% on average by 2050, according to the report.

The development of an adequate regulatory framework that prevents market distortions and fosters investments and innovation is key to attract investments. Many African countries are developing tax and financial incentives, including tax and customs exemptions, for the first few years of the projects when they are “capital intense” and require huge investments. The current regulatory focus is very much on the power sector, including tariff regulations, market rules, and procurement guidelines.

In Ethiopia, for example, Proclamation No. 1076/2018 set out a framework for the development and financing of public-private partnerships to attract independent power producers in the country. Ethiopia also ratified the New York Convention[3] in 2020, which aims to have foreign and nondomestic arbitral awards recognized and enforced and to therefore provide protection to foreign investors.

The opening of the electricity market to private investors through regulatory changes has also been seen on the other side of Africa. Senegal adopted in July 2021 a new electricity code that put an end to the monopoly of SENELEC, the national electricity company, and passed new legislation setting up an energy regulation authority to oversee regulation of the energy sector.

Competitive procurement programs have helped attract investors and financing by providing a transparent and predictable route to market, but they need to be backed by an appropriate regulatory and contractual framework. In this regard, to streamline project development, several African countries have developed model power purchase agreements (PPAs) for renewable energy. Other key components of a successful renewable energy project include considering local content requirements, access to grid, and storage of the renewable energy.

Availability of funding is also key to achieving the transition to renewable forms of energy across Africa. According to a September 2021 white paper, Financing the Future of Energy, by the World Economic Forum in collaboration with Deloitte, funding is the biggest hurdle in ensuring Africa’s sustainable transition to renewables at scale. To scale this hurdle, development finance institutions and multilateral development banks such as the African Development Bank and development funds such as the Climate Investment Fund have become the dominant providers of funding for renewable energy projects in Africa.

Notable sources of funding include the following:

  1. Climate Investment Fund (CIF): Established in 2008, the CIF comprises four key programs — the Clean Technology Fund, the Forest Investment Program, the Pilot Program for Climate Resilience, and the Scaling Up Renewable Energy Program — of which the latter two have specific mandates to finance the development of renewable energy projects in certain African countries.
  2. Sustainable Energy Fund for Africa (SEFA): SEFA is a trust fund managed by the African Development Bank and supported by donor funding from the governments of Denmark, Italy, Norway, Spain, Sweden, the United States, and the United Kingdom. SEFA’s objective is to support sustainable economic growth in African countries through the efficient use of currently untapped clean energy resources with private sector – driven small to medium-sized projects necessary to stimulate the continent’s transition to more inclusive and green growth. SEFA provides funding for projects in the range of US $ 30 million to $ 200 million.
  3. Africa Renewable Energy Fund II (AREF): Having achieved its first close in 2021, the AREF is the successor to the Africa Renewable Energy Fund, which closed in 2014. AREF is a pan-African private equity fund managed by Berkeley Energy focused on developing early-stage renewable energy infrastructure and projects (ie, hydro, solar, onshore wind, and energy storage). The fund will focus predominantly on greenfield assets across Sub-Saharan African but excluding South Africa.
  4. Africa Energy Guarantee Facility (AEGF): The AEGF was launched in 2018 by the European Investment Bank in collaboration with Munich Reinsurance and the African Trade Insurance Agency as a dedicated risk-sharing facility. It supports private investment and financing in the energy sector in Africa and the development of sustainable energy infrastructure in Africa. The AEGF provides investment insurance for energy projects in Africa.

[1] Decree of the President of the Republic of Kazakhstan No. 577 dated May 30, 2013, “On Concept on Transition of the Republic of Kazakhstan to Green Economy.”

[2] Decree of the President of the Republic of Kazakhstan No. 636 dated February 15, 2018, “On Approval of the National Development Plan of the Republic of Kazakhstan until 2025.”

[3] Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958.

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