Think carefully before investing in Kazakhstan

Kazakhstan is the world's ninth-largest country, with a mountainous region larger than Pakistan. And yet, despite favourable resources, it has been slow to see the potential in wind.

Understandably so. Since the country was formed in 1991 after the break-up of the Soviet Union, its energy mix has been largely based on its large oil and gas reserves, which were discovered in the late 1990s and early 2000s. The country also has a record of developing renewables projects, including hydro and geothermal.

Now it is looking at wind and solar, and it wants foreign money.
This earned the central Asian nation a place of 37th in EY’s latest Renewable Energy Country Attractiveness Index, a ranking of countries based on the attractiveness for renewables investors.

And EY's researchers are not the only people showing interest.

For example, the European Bank for Reconstruction & Development and the Asian Development Bank have committed to help Kazahkstan develop its energy sector. In December, the EBRD approved a financing framework of up to €200m to fund renewable energy projects totalling up to 300MW, including wind farms. The presence of state-backed investors and macroeconomic stability should help to bring in funding from commercial sources.

Kazakhstan's government is also backing renewables. In 2009, it adopted a law to support the development of renewables projects; in 2013, it introduced competitive feed-in-tariffs; and in 2015, it introduced a ‘green economy law’ to promote an energy transition. It has a target to get 50% of energy from renewables by 2050.

And it has the wind resources. In the north of the country, average wind speeds of between four and six metres per second are suitable for utility-scale wind farms. Not the best – we have data for other markets in our Emerging Markets report – but fine.

Yet there are reasons for investors to be sceptical on Kazakhstan, including – but not only – its energy and infrastructure systems.

Since the country declared its independence from Russia in 1991, power tariffs for both industrial and residential consumers have been kept intentionally below cost-return levels by the Kazakh government to regulate monopolies and control inflation. One side effect of this is that private investors have been driven away.

To attract investors, the government introduced its 15-year feed-in tariff for renewables in 2013. Despite that, the few renewables projects that have been planned so far, including the 50MW Yereymentau wind farm, have been financed only by state-owned companies or state-backed institutions like the EBRD. We have not seen private investors ready to take the plunge.

The country also shifted to a floating currency last year, which led to a steep fall in the value of fixed tariffs and further limited the potential return on investment.

In addition, up to 33% of generated power is lost because of poor infrastructure. The best locations for wind farms are in areas where there are no transmission lines and, even with commitment to invest to improve the grid, Kazakhstan does not have a supply chain for wind. For wind developers, this would mean that they would have to assume further costs in terms of transportation and logistics to bring their own manufacturing expertise in the country.

But, in our mind, the biggest issue for investors is corruption. Poor governance, lack of transparency and inconsistent enforcement of legislation, are the strongest deterrents to investors in the country. As a result, Kazakhstan ranked 131st among 176 countries in the Transparency International’s 2016 Corruption Perceptions Index.

Kazakhstan is still young, though. Its entire investment climate is governed by laws created in the last ten years, and the government is trying to give a better image of the country to foreign investors. Between 2014 and 2015, it enacted four pieces of anti-corruption legislation, which defined bribery and other corruption as criminal offences and set standards of conduct for public officials.

It is one to watch but, for now, there wouldn't be enough to entice us if we had money to spend. Those tempted must tread carefully.

Kazakhstan is the world's ninth-largest country, with a mountainous region larger than Pakistan. And yet, despite favourable resources, it has been slow to see the potential in wind.

Understandably so. Since the country was formed in 1991 after the break-up of the Soviet Union, its energy mix has been largely based on its large oil and gas reserves, which were discovered in the late 1990s and early 2000s. The country also has a record of developing renewables projects, including hydro and geothermal.

Now it is looking at wind and solar, and it wants foreign money.
This earned the central Asian nation a place of 37th in EY’s latest Renewable Energy Country Attractiveness Index, a ranking of countries based on the attractiveness for renewables investors.

And EY's researchers are not the only people showing interest.

For example, the European Bank for Reconstruction & Development and the Asian Development Bank have committed to help Kazahkstan develop its energy sector. In December, the EBRD approved a financing framework of up to €200m to fund renewable energy projects totalling up to 300MW, including wind farms. The presence of state-backed investors and macroeconomic stability should help to bring in funding from commercial sources.

Kazakhstan's government is also backing renewables. In 2009, it adopted a law to support the development of renewables projects; in 2013, it introduced competitive feed-in-tariffs; and in 2015, it introduced a ‘green economy law’ to promote an energy transition. It has a target to get 50% of energy from renewables by 2050.

And it has the wind resources. In the north of the country, average wind speeds of between four and six metres per second are suitable for utility-scale wind farms. Not the best – we have data for other markets in our Emerging Markets report – but fine.

Yet there are reasons for investors to be sceptical on Kazakhstan, including – but not only – its energy and infrastructure systems.

Since the country declared its independence from Russia in 1991, power tariffs for both industrial and residential consumers have been kept intentionally below cost-return levels by the Kazakh government to regulate monopolies and control inflation. One side effect of this is that private investors have been driven away.

To attract investors, the government introduced its 15-year feed-in tariff for renewables in 2013. Despite that, the few renewables projects that have been planned so far, including the 50MW Yereymentau wind farm, have been financed only by state-owned companies or state-backed institutions like the EBRD. We have not seen private investors ready to take the plunge.

The country also shifted to a floating currency last year, which led to a steep fall in the value of fixed tariffs and further limited the potential return on investment.

In addition, up to 33% of generated power is lost because of poor infrastructure. The best locations for wind farms are in areas where there are no transmission lines and, even with commitment to invest to improve the grid, Kazakhstan does not have a supply chain for wind. For wind developers, this would mean that they would have to assume further costs in terms of transportation and logistics to bring their own manufacturing expertise in the country.

But, in our mind, the biggest issue for investors is corruption. Poor governance, lack of transparency and inconsistent enforcement of legislation, are the strongest deterrents to investors in the country. As a result, Kazakhstan ranked 131st among 176 countries in the Transparency International’s 2016 Corruption Perceptions Index.

Kazakhstan is still young, though. Its entire investment climate is governed by laws created in the last ten years, and the government is trying to give a better image of the country to foreign investors. Between 2014 and 2015, it enacted four pieces of anti-corruption legislation, which defined bribery and other corruption as criminal offences and set standards of conduct for public officials.

It is one to watch but, for now, there wouldn't be enough to entice us if we had money to spend. Those tempted must tread carefully.

Kazakhstan is the world's ninth-largest country, with a mountainous region larger than Pakistan. And yet, despite favourable resources, it has been slow to see the potential in wind.

Understandably so. Since the country was formed in 1991 after the break-up of the Soviet Union, its energy mix has been largely based on its large oil and gas reserves, which were discovered in the late 1990s and early 2000s. The country also has a record of developing renewables projects, including hydro and geothermal.

Now it is looking at wind and solar, and it wants foreign money.
This earned the central Asian nation a place of 37th in EY’s latest Renewable Energy Country Attractiveness Index, a ranking of countries based on the attractiveness for renewables investors.

And EY's researchers are not the only people showing interest.

For example, the European Bank for Reconstruction & Development and the Asian Development Bank have committed to help Kazahkstan develop its energy sector. In December, the EBRD approved a financing framework of up to €200m to fund renewable energy projects totalling up to 300MW, including wind farms. The presence of state-backed investors and macroeconomic stability should help to bring in funding from commercial sources.

Kazakhstan's government is also backing renewables. In 2009, it adopted a law to support the development of renewables projects; in 2013, it introduced competitive feed-in-tariffs; and in 2015, it introduced a ‘green economy law’ to promote an energy transition. It has a target to get 50% of energy from renewables by 2050.

And it has the wind resources. In the north of the country, average wind speeds of between four and six metres per second are suitable for utility-scale wind farms. Not the best – we have data for other markets in our Emerging Markets report – but fine.

Yet there are reasons for investors to be sceptical on Kazakhstan, including – but not only – its energy and infrastructure systems.

Since the country declared its independence from Russia in 1991, power tariffs for both industrial and residential consumers have been kept intentionally below cost-return levels by the Kazakh government to regulate monopolies and control inflation. One side effect of this is that private investors have been driven away.

To attract investors, the government introduced its 15-year feed-in tariff for renewables in 2013. Despite that, the few renewables projects that have been planned so far, including the 50MW Yereymentau wind farm, have been financed only by state-owned companies or state-backed institutions like the EBRD. We have not seen private investors ready to take the plunge.

The country also shifted to a floating currency last year, which led to a steep fall in the value of fixed tariffs and further limited the potential return on investment.

In addition, up to 33% of generated power is lost because of poor infrastructure. The best locations for wind farms are in areas where there are no transmission lines and, even with commitment to invest to improve the grid, Kazakhstan does not have a supply chain for wind. For wind developers, this would mean that they would have to assume further costs in terms of transportation and logistics to bring their own manufacturing expertise in the country.

But, in our mind, the biggest issue for investors is corruption. Poor governance, lack of transparency and inconsistent enforcement of legislation, are the strongest deterrents to investors in the country. As a result, Kazakhstan ranked 131st among 176 countries in the Transparency International’s 2016 Corruption Perceptions Index.

Kazakhstan is still young, though. Its entire investment climate is governed by laws created in the last ten years, and the government is trying to give a better image of the country to foreign investors. Between 2014 and 2015, it enacted four pieces of anti-corruption legislation, which defined bribery and other corruption as criminal offences and set standards of conduct for public officials.

It is one to watch but, for now, there wouldn't be enough to entice us if we had money to spend. Those tempted must tread carefully.