Project description

In August 2020, the Republic of Uzbekistan signed an Energy Climate Policy Based Loan (PBL) Phase 1 with AFD in co-financing with the Asian Development Bank (ADB). The aim of the PBL was to implement reforms in the energy sector to ensure low-carbon development.

In addition to this, AFD provided the 1st Technical Assistance (TA) amounting to 400 000 EUR to perform some activities in different areas such as energy regulation, electricity tariff, bioenergy, energy sector modelling, gender support and screening of future transmission projects.

More than 3 years after the signing of the PBL Phase 1, Uzbek authorities should renew an action plan backed by a coherent budgetary and fiscal strategy aimed at tackling power sector restructuring, strengthening of the regulatory environment, improvement of financial stability, power sector decarbonisation, and energy efficiency.

Within the framework of this political commitment, the Ministry of Energy (MoE) and the Ministry of Economy & Finance (MoEF) confirmed their interest for an Energy Climate Policy Based Loan (PBL) Phase 2 in 2024 with a co-financing from AFD and ADB.

As with PBL Phase 1 and in accordance with the request letter (№ 07-65-06348) of the Ministry of Investment, Industry and Trade (MIIT) dated June 8th 2023, AFD provide a Technical Assistance of 1.5 M€ related to the PBL Phase 2 to support the authorities’ efforts in line with the previous TA described above.

Expertise France (EF) is implementing this Technical Assistance to the benefit of the Uzbek government (notably MoEF and MoE) for a period of 3 years (2023-2025).

Context

One of the Technical Assistance’s objectives is to contribute to creating a positive view on fair and understandable increase of energy prices among population. Starting from 2017 Government of Uzbekistan (GoU) launched wide-scale reforms, also including energy sector. The government succeeded in conducting unbundling of vertically-integrated monopolies, attracting private investments into generation using public-private partnership, and assured pipeline of contract focused on developing renewable energy assets (utility scale solar PV and wind). Nevertheless, one of the key reforms in the sector is related to raising tariffs and bringing them to cost-recovery levels.

Uzbekistan also spends significant amount of its financial resources to subsidize energy sector. Due to pause in energy tariffs raise from August 2019 to October 2023 (partial raise affected only entities, not population) the share the total subsidies as a share of GDP rose dramatically from 2020. According IEA, energy subsidies to GDP was 6.6 % in 2020, while in 2022 it reached astonishing 28.2% (second in the world)[1].

Electricity and natural gas prices are among the lowest in the world, with average electricity tariffs standing at around US¢4.5 per kWh, which is around 70 percent of its cost, placing the country among the top 10 countries with the cheapest prices out of 230 countries. Similarly, natural gas tariffs are among the lowest in the world, with the average tariff of around US¢72 per m³, which stands at about half of its prevailing cost and at around 40 percent of its opportunity cost (as of 2021).

In April 2019, the GoU adopted a new electricity tariff setting methodology, defining a path for tariffs to be systematically adjusted in the future. The GoU also established a separate tariff commission under the Cabinet of Ministers to set out a path for tariffs to be adjusted towards full cost recovery levels. GoU also implemented three tariff adjustments in 2018-2019 that collectively doubled the weighted-average tariff of electricity and gas. Although tariff reforms were paused in 2020-2022 due to the impacts of COVID-19, some regional and internal challenges (uprest in Kazakhstan due to fuel price increase, Ukraine war impact) the GoU further adjusted electricity and gas tariffs for selected non- residential customers in May 2022. Only in October 2023, GoU succeeded to increase electricity and natural gas tariffs for non-residential consumers. It Is supposed that in May 2024, GoU will increase tariff for population also.

*For several electricity consumers (Almalyk Mining Company, Navoi Mining Company, Uzbekistan Metallurgical Plant, public organizations and irrigation pumps) GoU set up higher tariff – 1000 UZS per kWh.

**For several natural gas consumers (Almalyk Mining Company, Navoi Mining Company, Uzbekistan Metallurgical Plant and public organizations) GoU set up higher tariff – 1800 UZS per m3.

Even though, GoU has not raised the tariffs for population, authorities introduced “multiplying factor” for the residential consumers starting from November 1, 2023. According to Cabinet of Ministries Resolution, consumption over 1000 kWh and below 5000 kWh per month would be charged two times higher than regular tariff (290 UZS/kWh*2), consumption over 5000 kWh and below 10,000 kWh per month would be charged three times higher (295 UZS/kWh*3), and consumption above 10,000 kWh per month by residential consumers would be charged four times higher than existing tariff (295 UZS/kWh*4).

MoE informed that out 7,6 million residential consumers only 146 thousand consume above 1000 kWh per month, out of that about 10 thousand residential clients consume above 5,000 kWh, and there are about 4 thousand residential users are consuming above 10,000 kWh per month[2]. However, these 2 percent of households (consuming more than 1000 kWh per month) in total consume about 6.4 billion kWh (or 32.2% of electricity supplied to residential sector). In contrast, 6.4 million households (84.6 percent of connected to the grid) consume only less 300 kWh per month per household, and their total consumption is 7.4 billion kWh or 37 percent of residential sector usage (data for 2023). These kind data can be instrumental in convincing population to increase tariffs to cover costs and making them just, instead of keeping them at level requiring huge subsidies.

Transparency of tariff formation is also one of key concern among population and business. In September 2023, the MoE informed that the cost of electricity production and delivery is 970 UZS per kWh, while retail tariff for population is 295 UZS per kWh, and 450 UZS per kWh for entities (before increase in October 2023). Similarly, cost of natural gas production is 1890 UZS per m³, whereas final price for residential consumers is 385 UZS per m³, and 660 UZS per m³ for entities.[3] To cover the difference, GoU is subsidizing energy sector. According to IEA, in 2022 Uzbekistan spent 5.7 and 15.3 billion USD on subsidies for electricity and natural gas accordingly.

However, experts and population in general are demanding the full disclosure of production costs, particularly how costs are formed along the supply chain. Sharing up to date information about energy sector and factors influencing to the cost will be one of the key elements in establishing supportive and trusting communication between GoU and energy consumers.

In September 2023, the GoU approved the decree No-166 “On measures to implement for the next stage of reforming the energy sector” that envisaged the establishment of the regulator entity for the electricity sector (Energy market development and regulatory Agency) and single purchase/seller of electricity (Uzenergosotish). Also, the decree outlined further changes in the market rules up to 2030, particularly creating day-ahead and intra-day market. In January GoU approved the decree No-28 that approved the structure and functions on the Agency and also listed the activities to focus on. 

EF will support the MoEF and MoE, and other needed governmental institutions in the establishment of an appropriate communication plan for future energy sector tariff strategy to raise awareness to the population and companies, stimulate energy efficient behavior, alleviate potential negative public opinion on the matter, and create conditions for positive or at least not hostile adoption of tariff increase by various consumers. EF is looking for a specific expert on this aspect: the communication strategy expert on energy price transition will prepare a communication strategy on how to accompany tariff increase to enhance public acceptability of those price changes for population.