According to the expert, consequences will be extremely unfortunate, if we do not take measures on these problematic issues.

Yevgeny Nikitin, General Director of Kazakhmys Energy LLP, expert in the field of energy, told about the current situation in the electric power industry in the conversation with the journalist of zakon.kz.

Currently, our citizens assess performance of energy companies only by tariff level, and only positive factor of such performance may be a low tariff (in opinion of consumers). Consumers think that the main factor is that the tariffs stay the same, but what will the future be like - doesn't matter. However, this approach may lead to unfortunate outcome in the very nearest future.

Tariff of power plant is expression of costs for electric power generation. These costs consist of a lot of expenses incurred by power plants and main of which include: costs for fuel (mainly, coal), costs for railway transportation, systematic services provided by the operator (KEGOC JSC) of the national power system, costs for obligations of purchase of energy generated by RES (renewable energy sources), salaries and costs for maintenance and updating of equipment. Increase in costs is inevitable due to inflation processes and the current general depreciation of generating equipment.

At the same time, it shall be considered that tariffs of energy companies are regulated and approved with the use of multi-level procedure, approvals and permits, and main components of costs are not strictly regulated. As a result, amount of main costs for generation and transportation of electric power rapidly rises, and making the energy tariff unprofitable.

The small table showing difference in tariff growth at the example of our enterprises is presented below.

That is why Kazakhmys Energy LLP and other large energy-producing companies of the Republic of Kazakhstan addressed the President of the Republic of Kazakhstan with a request to support the energy industry. This measure was desperate for energy companies, which signed the request, and prior to that action each of us has taken practically all efforts: numerous appeals to the Ministry of Energy, and even court disputes, and it had no results, - the expert said.

Yevgeny Nikitin added that in previous publication about problems of electric power industry, D.Turganov, the first deputy of Central Asian Electric Power Corporation JSC, explained the current overwhelming situation in energy sector and its reasons. He fully agrees with these arguments and wants to talk on that issue again.

Energy-producing companies in the Republic of Kazakhstan receive income from the provision of two services: distribution of electric power and maintaining the readiness to carry electric power. Based on the principles of the Law "On power industry" and the relevant regulations, the threshold tariff for power distribution shall cover costs for power generation and include profit. Funds from services of capacity implementation shall be directed to modernization and reconstruction of enterprises, and that is also based on the principles stated above. However, the real situation is not so perfect. Threshold tariffs, which are lower than electric power production cost, were approved for all industry enterprises for 2019 without any rationale. There was no issue of profit - the Ministry of Energy approved the level of profitability in the amount of "0" (zero). Approved tariff for capacity was also reduced, and it does not cover costs for implementation of modernization and reconstruction of enterprises, - the expert said.

As a result, according to him, industry enterprises only thought about one thing - to make repairs of equipment and to avoid failures, directing all available funds (including from the power fee) mainly on covering of current operating costs.

Concerning our company, tariff for Kazakhmys Energy LLP was approved as 4,80 KZT/kWh, while the production cost is 8,62 KZT/kWh. Tariff for Topar GRES was approved as 4,80 KZT/kWh, while the production cost is 6,39 KZT/kWh. In October 2019, the threshold tariffs were adjusted (to 8,42 and 5,83 KZT/kWh, respectively), but they do not reach the production cost. As a result, we have suffered huge losses from electric power generation (Kazakhmys Energy - 6856,771 mln KZT, Topar GRES - 5637,827 mln KZT, TOTAL - 12 494,5 mln KZT), and the whole long-term program of modernization of power plants was disrupted. Thus, due to failure to provide payment under long-term contract for supply of boiler equipment, the supplier terminated the contract. Now we are offered to buy the same equipment at the twice of the price. Taking into account that the equipment is required, we will pay the double price for it. All these increased costs are not stipulated in the tariff and will be incurred as additional costs, Yevgeny Nikitin said.

He added that a similar long-term contract for supply of turbine equipment "hangs on a thread". Supplier is one step away from termination of the contract due to failure of payments. Consequences from contract termination are similar to those stated above.

This situation has affected every enterprise in the industry. Some enterprises have tariffs lower than production cost, and they are not even able to perform current maintenance to a full extent. At some enterprises payment for capacity does not cover costs for equipment modernization. Some enterprises have all these factors (like us). In our certain case we made it only due to support of Kazakhmys group, but the overall economic recession and decrease of world prices for copper in future exclude such support in future.

Profit was not stipulated in the threshold tariff, although actions of the Ministry of Energy on setting the profit to zero are recognized as illegal by all instances of the judiciary system of the Republic of Kazakhstan. Cancellation of profitability excludes possibility to consider the activity on electric power generation as "entrepreneurship activities", and if it would not be fixed, investors will leave the industry.

There are no chances that anybody will want to invest into business without profitability, - Yevgeny Nikitin explained.

According to him, if the measures would not be taken now, the consequences will be quite overwhelming. Of course, it does not mean that all industry enterprises will cease its activities tomorrow. However, reduction of generation due to withdrawal of obsolete equipment and inability to enter new equipment, accidents and equipment shutdowns due to absence of repair because of lack of funds - it is the prospect of tomorrow.

It should be considered that modernization projects in the industry are highly capital-intensive, implementation terms are measured in years, in other words, if problems would be solved today, we will see effects in about five years.

The second important point to be mentioned is a draft of new environmental code. Basis  of the draft environmental code is the obligation of introduction of new expensive technologies by natural resource users or sanctions. Naturally, we did not invent all these innovations based on our current realities, but copied them from "more advanced countries", in particular based on European standards.

Coal generation of Kazakhstan has an unavoidable problem – the Kazakhstani coal fuel is high-ash, and it is an unavoidable disadvantage in implementation of environmental programs. For example, in order to reach European standards on particulate emission, the "environmental superstructure" becomes more capital-intensive and is not always technically feasible in the conditions of existing power plants.

Proposed incentives for enterprises through setting emission rates to zero do not solve problems with financing of environmental projects of enterprises. Are energy-producing companies ready for this? No, they are not. Reason - requirement for investment of huge funds into re-equipment of plants, and, as a result, need for increase of tariffs. Considering that currently there is a lack of funds for modernization of existing equipment, the issue of financing of environmental projects has no decision at the moment, - Yevgeny Nikitin said.

He added that even at the most modest estimate, investment into the industry should be increased by 50% and then 30% of production cost is required for maintenance of introduced "environmental superstructure" at the equipment.

Environmental protection is care about our future generation, and, of course, this area shall be developed, but these measures shall be more reasonable and be based on clear and understood arrangements of industry support in order to avoid environmental effect due to stop of enterprises, - the expert said.

Summing up, Yevgeny Nikitin noted that it is necessary to radically change the attitude of the state and society to the industry and direct all efforts to help industry enterprises in their efforts to maintain existing capacities and invest in modernization.

At the same time, it should be understood that such support should include refinancing and long-term financing of the industry in the national currency. If the measures would not be taken now, it will be much more expensive and harder for the society in future.

Link to the material: https://www.zakon.kz/5018396-tma-v-kontse-tonnelya-naskolko-serezny.html