At the end of January 2020, N.Nogayev, the Minister of Energy of the Republic of Kazakhstan, approved the document "Method of calculation of deterioration level of fixed assets of energy-generating companies" by the relevant order. This instruction has been developed for ensuring common approach to determination of deterioration level of energy-generating companies, and it is of advisory nature. Main provisions of the document were commented by Petr Svoik, the Chairman of the General Committee of Kazakhstan Association "Prozrachiy tarif" (Transparent tariff).

Such instruction is certainly necessary as it is. And, probably, from the point of view of methodology it is developed correctly. However, there are a few questions. If the Ministry approves some instruction for subordinate power plants, it probably should not exist on its own, but for some goal. In my opinion, there should be three such goals.

Use data on deterioration level for the following:

1. a) determination of decommissioned equipment;
2. b) determination of costs for renovation and renewal of worn-out power facilities;
3. c) determination of tariff levels.

In this sense, the Ministry is interested in ensuring that all data are reliable. Instruction actually states that it has been developed for independent expert examination.  Meanwhile, "Method of calculation of deterioration level of fixed assets of energy-generating companies" stipulates that such independent expert examination will be performed by the commission of employees of the power plant itself. The question here is to what extent such examination may be considered as "independent", and how likely it is that those responsible officers simply "draw" required data.

The matter of fact is that the Ministry of Energy has no entities for actually independent monitoring of power plant activities. And the body of the Ministry is not sufficient for such examinations. Data of power plants may be relied upon or not even without the instruction. In this case the question remains unanswered, as there is no certainty that data will be reliable.

As a result, the instruction has no information on independent assessment facility, as well as no connection with regulating functions of the authorized agency.

Let's go on. Power plants are regulated through so-called threshold tariffs. That is, the Ministry of Energy establishes the threshold for each plant, over which it is not allowed to distribute its product.  How such tariff is different from regulated tariff? Monopolists also have right to lower tariffs, but not for all consumers. Power plants, which are not monopolists, have the right to lower its tariffs below threshold values and do this not for all consumers, but for some chosen ones. It raises some big questions as it is.

If we start to consider details, we will ask a question: in what cases do power plants lower the tariffs? Yes, we know, that there are cases when power plants distribute electrical power at tariffs lower than market tariffs. We certainly know that such cases occur in so-called centralized markets. But this market is small. Power plants and customers  divided into very small groups in such market. That is, there is no free sale, but purely administration, and where less than 20% of energy is distributed.

And the remaining 80% of energy is distributed in the non-centralized wholesale market, for which there is simply no data. No data, and that's all. These are all bilateral confidential contracts. And it turns out to be a very strange situation. The authorized body approves certain increased tariffs for power plants, which, in addition to operational needs, also include a special surcharge for development. But for some reason the power plant has the ability to lower such threshold tariff – in unknown to us cases, in unknown volumes and for unknown buyers. All this looks very strange and it really has a scent of corruption.

Hence the conclusion. Of course ,we need "Method of calculation of deterioration level of fixed assets of energy-generating companies", but we need to finalize it so that it may help the Ministry of Energy in drawing up plans for disposal of capacities and replacing them with new ones. And I must say that such a plan is needed very much. After all, Kazakhstan energy sector players must understand level of deterioration in the country, what needs to be restored, what needs to be written off, and what capacities need to be built. The Ministry of Energy has no such plans. The Ministry of Energy only has forecasting balance by 2035, but there are no clear plans for withdrawal and commissioning of capacities. Moreover, if deterioration of equipment is determined by this method, then it will be needed to account that in threshold tariffs, and such tariffs still need to be dealt with, as I said above. In this regard, the instruction does not give us anything useful either.

You can read "Method of calculation of deterioration level of fixed assets of energy-generating companies" here:

Method of calculation of deterioration level

Link to the article: https://eenergy.media/2020/02/11/kak-metodika-rascheta-urovnya-iznosa-pomozhet-kazahstanskoj-energetike/