Reforms and investments needed to ensure the future of clean energy in Central Asia – The Diplomat

The power outage that hit much of Central Asia in January 2022 was a stark reminder of the region’s need for a reliable and sustainable power supply to power its economy. In the cities and regions of Kazakhstan, Kyrgyzstan and Uzbekistan, offices and computer screens were turned off, small and medium-sized businesses were forced to interrupt their work, traffic stopped.

The widespread blackout has demonstrated that in order to support a growing economy and population, Central Asian governments will need to redouble their ongoing efforts to invest and attract private capital in energy infrastructure and maintenance. It also showed that interconnected countries – less so in the post-independence Central Asian republics – can get electricity from their neighbors when needed and can meet their energy needs at a lower cost.

Over the past year, such concerns have become more pressing. The war in Ukraine rocked energy markets, causing further shortages in natural gas supplies that were already overstretched. Prices soared, forcing many countries to reconsider their energy mix. This winter, cooler-than-usual temperatures across Central Asia have heightened those fears. Against the background of disruptions in the energy supply chain and rising global energy prices, energy security has once again become a key issue of our time.

For Central Asia, a clear solution is within reach. This is due to the significant resources of untapped available renewable energy in the region. To unlock this rich potential, Central Asian governments need to accelerate domestic energy reforms, thereby creating an enabling environment for the developer community and the private sector to invest in energy infrastructure with adequate returns.

With large-scale investment, Central Asia could become a clean energy hub

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Central Asia could become a clean energy transition hub to meet regional energy demand, which is expected to grow by more than 30 percent by 2030.

In 2021, about 80 percent of electricity in Central Asia was generated from fossil fuels, mainly coal and gas. Hydropower accounts for about 90 percent of the energy supply in Tajikistan and 80 percent in Kyrgyzstan, and these countries have the potential to increase electricity generation from this source by 10 and 25 times respectively, thus becoming the basis for affordable renewable energy and its storage. Kazakhstan has some of the best wind resources in the world and, like Kyrgyzstan, Turkmenistan and Uzbekistan, also has great potential to expand solar energy production. The deployment of these domestic and regional renewable energy sources will increase energy security in Central Asia, reduce dependence on fossil fuel production, and help achieve the region’s decarbonization goals.

The governments of the region also recognize the need for increased cooperation, trade and investment. Building confidence in the electricity trade requires reforms to improve sector governance and transparency, strengthen planning structures, phase out fossil fuel subsidies, and expand generation and grid capacity. It is critical that these reforms protect the interests of the most vulnerable communities by protecting vulnerable households from price adjustments. For many households in the region, high inflation and rising food prices have made it difficult to balance heating with other essential needs. Such efforts should also be accompanied by active communication campaigns.

If this happens, the region will benefit from increased economic activity and prosperity. The World Bank estimates that investments of at least US$20 billion will be required to expand Central Asia’s renewable energy supply and upgrade national and regional networks to improve trade and connectivity over the next five to ten years. Renewable energy projects identified include wind power, renewable energy system integration and hydroelectric upgrades in Kazakhstan; large-scale hydropower and pilot solar power in Kyrgyzstan and Tajikistan; and grid expansion, distribution upgrades and solar energy in Uzbekistan, as well as upgrades and expansion of cross-border connections.

Development of trade and interconnectedness

A regional electricity market that relies on a diverse energy mix can boost supply, stimulate domestic and regional economic growth, and support decarbonisation.

Although transmission systems in Central Asia are interconnected, only 2.5 percent of demand is currently met through trade, which is about 40 percent of the connection’s capacity. This low level of trade is due to the lack of a market platform, weak management of the regional network, outdated infrastructure and limited coordination. Trade in the Central Asian Power System, established in the 1970s, is largely based on bilateral agreements; decisions tend to be made at the political level, not at the commercial level, and it takes time to finalize.

On a global scale, regional energy trade is not limited to developed countries. For example, in the South African Power Pool, a number of short-term markets, including day-ahead, intraday and balancing markets, have been operating successfully for many years. In the Nordic countries and the European Union, regional markets have helped reduce utility operating costs and reduced the need for government support. Regional markets encourage countries to convert untapped potential into energy for the regional market, increasing export earnings. The production and sale of electricity from various sources (hydro, solar, thermal, wind) stabilizes the regional grid against seasonal fluctuations and demand surges, increasing resilience.

Regional markets are technically challenging to develop and implement, and the World Bank’s world-class team of experts can help ensure the success of such an ambitious project for the entire Central Asian region. To facilitate this development, Central Asia needs political commitment to regional energy cooperation, including through piloting and eventually full integration of market principles.

Cooperation to stimulate trade and green growth

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The World Bank is working with Central Asian governments to expand the energy interconnection through a combination of investment, technical assistance, and capacity building activities.

A key feature of this initiative is the proposed day-ahead market pilot project, which will provide a template for a more permanent solution. The pilot project will demonstrate proof of concept by encouraging collaboration that balances different levels of domestic market development. The advantage of this flexible decentralized approach is that governments can control their national markets and energy systems. Minimal harmonization of market rules and regulatory changes in the early stages of the initiative would allow it to roll out quickly.

This is among the issues that are discussed Central Asian Energy Trade and Investment Forum 2023which takes place in London on March 2-3. This event brings together high-level representatives of Central Asian governments, development partners and investors to discuss the interconnected issues of energy supply, decarbonization and economic growth.

For Central Asia, energy security is within reach through increased use of renewable energy and regional trade, as well as political commitment and private investment, and reforms in critical sectors. The investment needs are enormous, as are the investment opportunities. With coordination and action, the region can become a model of success for countries and regions facing similar challenges.