Status Quo

As part of the country’s Going Green initiative, Kazakhstan announced the following renewable energy (RE) targets in 2013:

  • 3% share of RE in total electricity production by 2020;

  • 10% share of RE in total electricity production by 2030; and

  • 50% share of low-carbon alternative and renewable energy sources (RES) by 2050.

The total installed capacity of renewable energy facilities in 2020 is 1700 MW distributed as follows:

  • Wind power plants - 933 MW;

  • Solar power plants, using solar PV energy converters – 467 MW;

  • Hydropower plants – 290 MW;

  • Biogas power plants – 10 MW.

Needless to say, renewables get the job done despite skepticism in Kazakhstan. Financial institutions have shown a high degree of interest in funding renewables, as well as oil and gas giants such as ENI, and are launching large wind and solar power projects in the country. As lawyers, we are incredibly excited about all the positive activity in the renewables sector. Signum Law Firm is currently engaged in the market’s major law-making project aimed at developing detailed recommendations on bankability and risk allocation for renewables in Kazakhstan.

This article will focus on key legal aspects that we believe should be enhanced as part of Kazakhstan’s current regulatory framework. Changing the country’s laws in this respect will reassure investors and ultimately increase their interest in supporting development of renewables.

Auctions: Price or Quality?

Auction mechanisms were initially introduced in Kazakhstan in 2017. Auctions are intended to determine auction prices for RE projects under consideration. The guaranteed purchasing price for RE producers determined at such auctions is an additional guarantee to secure their sales. These auctions are run by an auction organizer through an electronic platform.

Based on a review of current procurement programs across other emerging markets, we would like to highlight several major considerations to improve Kazakhstan’s current framework.

First and foremost, Kazakhstan’s RE Auction Rules do not set any prequalification criteria for potential bidders, only price criteria. However, the global practice is that potential bidders are required to pass certain minimal prequalification criteria before they can participate in the auction. The minimal prequalification criteria are a critical factor in auctions where the lowest price is the sole evaluation criteria to determine the winning bidder. That is the case today in Kazakhstan auctions.

Second, prequalification criteria typically depend on the size of the project, but generally they focus on a proven track record for construction or operation of similar projects. The threshold for a track record should be carefully calibrated to ensure healthy competition.

Land Reform is Critical

The initial stage in a renewable energy project is choosing the site where the facility will be built. Land plot selection is a critical factor determining a project’s success. The site determines how optimally an RES will be used and thus influences the project’s economic feasibility.

If the land belongs to the state, the investor must either obtain the right to use the land or acquire the land from the local authorities. Most of the land allocated for renewables in Kazakhstan is designated as agricultural land and therefore requires change of designation under the country’s land regulations. Once the winning bid is selected, the winner needs to spend significant time on resolving land-related issues such as changing the plot’s designated use. This is a complex, time-consuming task involving many stakeholders.

All parties involved in RES in Kazakhstan see one option for streamlining this approach as creation of a separate government entity or a special company by the government prior to the auction. This entity or company can either purchase the land or enter into a long-term lease for the land, thereby allowing the government to change the land’s designation prior to the auction. The auction would then offer developers either a long-term lease or the option to purchase the land from the holding company. This approach would demonstrate the state’s direct participation in RE land usage and reduce bureaucracy, which would save investment time and costs.

Is Arbitration an Illusion?

Renewable energy projects run through different phases involving multiple stakeholders and often multiple jurisdictions, hence potential disputes may be full of twists and turns. The Kazakh Power Purchase Agreement sets out a general rule requiring all disputes to be settled in Kazakhstan’s courts, unless the claimant elects to refer disputes to the International Arbitration Centre in the Astana International Financial Centre, with the contract’s governing law being Kazakhstan law.

Given that Arbitration Centre of the Astana International Financial Centre is a newly-created arbitration center in Kazakhstan, international developers and lenders may prefer the arbitration to be handled by a neutral international organization with a track record of dealing with complex disputes such as the LCIA, ICC, DIFC-LCIA, or SIAC. Further, arbitration is often conducted in a neutral venue with an established system of law for arbitration procedures and enforcement such as London, Paris, Singapore, or the DIFC in Dubai.

Moreover, Kazakhstani law dictates that any dispute referred to arbitration with the involvement of local company vs a state entity (including those legal entities directly or indirectly controlled by the state) must first obtain consent from the respective regulatory authority (Ministry of Energy) . We anticipate this would not be beneficial to investors as the government’s consent for arbitration is given on a case-by-case basis, and there is a high probability of not receiving consent. Provided Kazakhstan law finally grants investors the right to apply to a neutral international organization on its dispute over renewables in Kazakhstan, the said consent requirement actually makes such opportunity robust in practice.

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