Energy Sector of Uzbekistan

January 2007

SUMMARY

Currently, Uzbekistan is the largest electricity producer among the Central Asian republics and a net exporter of electricity. The country has a total installed generation capacity of 12,300 MW. Uzbekistan achieved self-sufficiency in energy after gaining independence in 1991. Today, about 50% of the power-generating facilities of the Central Asia Integrated Power Grid are located in Uzbekistan. This power grid also incorporates the power systems of Turkmenistan, Tajikistan, Kyrgyzstan, and southern Kazakhstan.

Unfortunately, Uzbekistan’s maintenance of its power systems has largely deteriorated over the past years and much of the equipment in generation, transmission, and distribution systems is outdated and extremely inefficient. At present, it needs serious renovation and upgrading to meet the growing demands of the economy. The facilities require rehabilitation by introducing more efficient and environment friendly equipment so that they can operate at their design capacities. There are currently no manufacturing facilities in the country for the production of equipment used in power generation and transmission.

Renovation of the energy sector is a priority for the government of Uzbekistan. The growing demand for electricity and the wear of the existing power generating facilities in the country has motivated the government to develop a long-term program, spanning 2001-2010, for the reconstruction and development of the sector. In December 2001, the Government of Uzbekistan approved a Generating Capacity Development and Rehabilitation Program for the Energy Sector until 2010, envisaging an increase in the installed capacity of national power stations by 15% by 2010, which requires investments up to $1 billion. This program presents good opportunities for international contractors and suppliers of energy equipment and services.

A. Market highlights & best prospects

The following section will describe the general situation of Uzbekistan’s power-generating industry, a privatization plan, the government policy on industry reconstruction and development, and the policy’s influence on prospective involvement of foreign contractors and suppliers, procurement regulations, and statistical data.

I. Market Profile

General overview

Uzbekistan is the largest producer of electric power energy in Central Asia. However, according to estimates, at the current rate, by 2010, demand for primary energy may exceed projected production. The installed capacity of the country (12,300 MW) comes from 39 power plants, including 11 large thermal power plants with a total capacity of 10,600 MW and 28 hydroelectric power stations with a total capacity of 1,700 MW. There are no nuclear power plants in Uzbekistan.

Thus, electricity in Uzbekistan is derived primarily from thermal plants with 85% of thermal plants powered by natural gas. The remaining 15% are powered by coal and heavy oil. The largest natural gas-powered facilities include the Syrdarya (3,000 MW), Tashkent (1,860 MW), and Navoi plants (1,250 MW). The Talimardjan Thermal Power Station, with its unique 800 MW turbines, is largely complete (the first block of the station was commissioned in 2005). The most significant coal-powered facilities are two power plants in the vicinity of the Angren mine near Tashkent, the largest one being Novo-Angren (2,100 MW). About 11.5% of electricity in the country is produced at 28 hydroelectric plants, the largest being the Charvak Hydroelectric Station (600 MW) and the Khodjikent Hydroelectric Station.

In 2005, Uzbekistan generated 47.581 billion kW/h of electric power, which was 4.2% less compared with 2004. Power exports reached $16.9 million and included electricity mainly exported to neighboring countries (Tajikistan and Kyrgyzstan during the winter period). For instance, it was recently announced that Tajikistan will import 600 million kW/h of electric power from Uzbekistan during the first quarter of 2006 and 900 million kW/h will be exported during the summer period. The power system of Tajikistan experiences shortages in winter and surpluses in summer within the range of 1 to 1.5 kW/h. Such winter shortages are covered with power flows from the Republic of Uzbekistan and other sources. Summertime hydroelectric power surpluses are transmitted to Uzbekistan and other countries in the region. Rather than exporting electricity, it has been more common for Uzbekistan to export raw materials, especially natural gas, which the neighboring countries use in their own thermal power plants. Uzbekistan increased electricity production by 3.5% in the first 11 months of 2006 to 44.585 billion kilowatt-hours. Heat and power plants produced 38.775 billion kilowatt-hours in the period, up 7% year-on-year, and hydroelectric and block plants produced 5.81 billion kilowatt-hours, down 15.2%, including 513 million kilowatt- hours produced by hydroelectric plants, down 19% year-on-year.

The Uzbek power system is located in the central part of the United Central Asian Power System (CAPS), which includes the power systems of Kazakhstan, Kyrgyzstan, and Tajikistan. The Turkmen system that has previously worked with CAPS is now working with the Iranian Power System. As noted above, Uzbekistan accounts for over 50% of electricity generated by the System. Presently, CAPS works in parallel with UES of Russia through a number of single-chain high voltage power lines (VL-500 kV) connecting Southern and Northern Kazakhstan.

The total length of electricity lines is over 230,000 km. Mostly 500 kV and 220 kV lines connect the power system to the systems of the neighboring countries.

Most of the equipment for power generation was produced in Russia, other parts of the former Soviet Union, and by Soviet trading partners in Central and Eastern Europe. The physical condition of CAPS and UDC has deteriorated to an extent that makes it difficult to maintain reliable operation and develop a responsive regional wholesale power market without significant investment to rehabilitate the infrastructure. The current technical state is inadequate for modern metering and telemeter, telecommunications, frequency control, information systems, and supervisory control and data acquisition.

The facilities require rehabilitation with more efficient and environment-friendly equipment so that they can operate at their design capacities. There are currently no manufacturing facilities in the country for the production of equipment used in power generation and transmission.

Renewable energy

Uzbekistan possesses huge potential resources of renewable energy. Climatic conditions of Uzbekistan are especially favorable for utilizing solar energy. The potential of only solar energy is estimated at 51 billion toes (tons of oil equivalent or toe). The use of currently existing solar energy technologies and equipment would allow production of 179 million toe, which is more than three times current annual extraction of fossil fuel in the country. In the late 1980’s, a solar furnace was built in the country with a capacitance rate of 1,000 kW and a focus temperature of 3,000 degrees Celsius. Presently, solar energy is used mainly for hot water supply. A few manufacturers in Uzbekistan namely Uzgeliokurilish, Encom, and Photon, produce flat solar water heaters. The total area of installed solar collectors in the country is estimated at 40,000 square meters. The marginal utilization of solar energy in Uzbekistan is caused by low gas and electricity prices and the absence of a government renewable energy development program.

According to ADB, in many remote rural areas, decentralized generation through renewable energy sources, mainly through small hydropower plants, offers a competitive and environmentally friendly option for addressing electricity shortages (these electricity shortages are caused mainly by the fact that these areas are located far from the electricity grid). The hydropower potential from natural water flows is estimated to be about 20,000 MW, about 30% of that from small hydropower plants. Only 30% of the small hydropower plant potential is currently being used.

The recently compiled atlas of winds estimates that the gross potential of wind energy in Uzbekistan at 2.2 million toe. The technical potential of wind is about 430,000 toes. It is roughly estimated that about 75% of the country can’t be used to generate power with the help of wind because wind flows are seasonal in this part of Uzbekistan. However, there are two regions in the country, Karakalpakstan and in the Tashkent Region, with high potential for construction of wind power stations. Currently, the lack of meteorological stations with a modern data collection and registration system in the regions with good prospects for the wind power industry precludes more precise estimate of the technical potential in such regions. Small wind power stations are installed in one of the remote districts of Karakalpakstan and in Charvak near Tashkent.

The reserves of biomass resources are also estimated to be considerable, at least

2.65-2.95 toe. Small facilities generating power from biomass are operational in some small poultry and animal husbandry farms of Uzbekistan.

The government of Uzbekistan has developed a small-scale hydroelectric plants construction program in order to increase utilization effectiveness of the hydroelectric energy potential of the rivers and irrigation channels of the country. In July 2005, the Government of Uzbekistan requested ADB assistance to develop small hydropower plants along the existing irrigation canals and reservoirs. The proposed Rural Renewable Energy Development project, worth about $30 million, foresees construction and operation of five small-sized hydropower plants. In addition, the Ministry of Agriculture and Water Resources plans to implement a program of small-size power facilities to introduce about 440 MW of additional capacity and 1.3 billion kW/h of power output.

Government control

According to the Energy Charter Secretariat, the government owns the power sector of Uzbekistan. It is a part of the so called “fuel and energy complex” (FEC), to which the coal industry, the district heating systems, and the distribution systems for certain other types of energy products (liquid fuels, etc.) also belong. The head of the FEC is the Deputy Prime Minister of Uzbekistan. Despite recent efforts in restructuring aimed at making Uzbekistan’s power system more market-oriented, the structure remains a vertically integrated, government-owned monopoly.

In February 2001, the Government of Uzbekistan issued a decree on partial privatization, de-monopolization, and deregulation of the power engineering and coal mining industries. The Ministry of Power and Power Supply that controlled electric power generation was transformed into the Uzbekenergo State Joint-stock Company. It is an open-type joint stock company incorporating the JSC Ugol (Coal) as an independent legal entity. Major power stations and electric grids were also transformed into joint-stock companies, and were partially offered to foreign investors.

However, Uzbekenergo still holds the controlling shares of those companies. For instance, the subsidiary enterprise Uzelectroset (Uzbekistan electricity grid) took charge of all high-voltage transmission lines (110-500 kV) used for transporting electricity within Uzbekenergo. The main tasks of Uzbekenergo include power supply and dispatch, development program drafting, promotion of investment, R&D support in the coal and renewable energy sources industries, and the promotion of energy efficiency.

Financial status of the industry and tariffs

Since Uzbekenergo State Joint-stock Company is virtual a monopoly in production, transmission and sale of power, the government of Uzbekistan regulates all tariffs for energy. As the Energy Charter Secretariat notes, price and tariff regulatory functions for the FEC are distributed among several state bodies. One such body is the Department of Price Settlement under the Ministry of Finance of the Republic of Uzbekistan, which deals with economic regulation. The Department is, in fact, setting the tariffs for all forms of energy. Another one is UzEnergoNadzor, which is responsible for technical regulation in the electricity sector. The Ministry of Finance has price-setting functions regarding electricity and energy products. These functions are further divided into two subdivisions, one deals with all prices and tariffs for electricity and energy products for industry residential consumers, and the other deals with prices for coal and oil products for retail customers.

Uzbekenergo elaborates the draft electricity tariffs and submits them to the Ministry of Finance for approval. Draft tariffs developed by Uzbekenergo for electricity and heat take into account the annualized forecast costs in the power sector and the profits needed to assure the development of the sector. Depending on changes in the cost of power production, the tariffs can be revised and adjusted. All electricity end-users are differentiated by categories of tariff groups depending on their activities, irrespective of the form of ownership.

The average price for power in Uzbekistan in 2006 stood at $.29/kWh, lower than in many other countries of the CIS. Nevertheless, this represents significant increases compare with the average weighted tariff as of July 2003, which was $.126/kWh.

As the Energy Charter Secretariat notes, one of the greatest challenges that Uzbekistan faces in restructuring the power sector is the problem of cross-subsidies and direct government subsidies. Both subsidies and cross-subsidies lead to negative consequences, such as inefficiency, insolvency, etc. The officially stated purpose of cross-subsidies is to keep the prices of electricity and other energy products low for consumers and businesses that cannot afford to pay the real price or enjoy special supply rights. As a result, the consumers and businesses that do not have such privileges pay a higher price for electricity, which results in higher cost of their products, and often renders them uncompetitive. Eventually, such businesses fail or just stop paying the bills. Uzbekenergo eventually finds out that its cash flow does not cover the cost of fuel and other expenses. In the absence of bankruptcy procedures and enforcement, this leads to a situation where everyone owes everyone else, with the only distinction being that some owe more than the others. In an environment like this, businesses cannot be properly run because managerial decisions cannot be made on economic grounds.

Government Policy

No FDI has been reported thus far in the power sector, although the Uzbek government is trying to attract foreign capital for the rehabilitation of the national power industry. The State Property Committee (SPC) of Uzbekistan announced in August 2006 that the tender for the state's shares in Navoi and Tahiatash Power Plants failed. The privatization consultant for the tenders was Russian Finam Investment Company. The tender failed to draw bids, though several foreign investors showed interest in the bids, and even purchased tender documents. The tender on the sale of 39% shares of Navoi Power Plant (TES) and 38.9% shares of Tahiatash Power Plant was announced on November 29, 2005. In January 2006, the SPC extended the tender deadline to March 1, 2006. No information is available on whether the government will make another attempt to sell the objects and reduce the sales price. The established capacity of Navoi Power Plant is 1,250 MWatt. The annual volume of electric energy produced by the plant makes up over 6.4 billion kWt/h. The established capacity of Tahiatash Power Plant is 730 MWatt, and its annual volume of electric energy produced totals some 2.8 billion kWt/h.