The blackout that hit much of Central Asia in January 2022 was a stark reminder of the region’s need for reliable and sustainable supply of electricity to power its economies. In cities and provinces across Kazakhstan, Kyrgyzstan, and Uzbekistan, offices and computer screens went dark, small and medium enterprises had to interrupt their work, and traffic came to a halt.
The widespread power outage demonstrated that to support a growing economy and population, Central Asian governments will need to double up ongoing efforts to invest and attract private capital in energy infrastructure and maintenance. It also showed that interconnected countries– which is less the case for Central Asian republics since independence – can draw power from neighbors in times of need and can achieve their energy demand at lower cost.
Over the past year such concerns have become more pressing. The war in Ukraine sent a shock through energy markets, causing further shortages in natural gas supplies, which were already strained. Prices spiked, forcing many countries to reconsider their mix of energy resources. This winter, colder than normal temperatures in Central Asia have heightened these concerns. Against the backdrop of energy supply chain disruptions and rising global energy prices, energy security has once again emerged as the crucial question of our time.
For Central Asia, a clear solution is within reach. It lies in the region’s considerable resources of untapped, affordable renewable energy. To unlock this rich potential, Central Asian governments need to accelerate domestic energy reforms, thereby creating an enabling environment for the development community and the private sector to invest in energy infrastructure with adequate returns.
With Large-scale Investment, Central Asia Can Become a Clean Energy Hub
Central Asia has the potential to become a hub for a clean energy transition to meet regional energy demand, which is expected to increase more than 30 percent by 2030.
In 2021, about 80 percent of Central Asia’s electricity came from fossil fuels – mainly coal and gas. Hydropower accounts for about 90 percent of the power supply in Tajikistan and 80 percent in the Kyrgyzstan, and these countries have the potential to increase power generated from this source by 10 times and 25 times respectively – thus becoming the basis for affordable renewable energy and storage. Kazakhstan has some of the world’s best wind resources and, like Kyrgyzstan, Turkmenistan, and Uzbekistan, also has great potential to expand solar power generation. The deployment of these domestic and regional renewable energy resources will enhance energy security in Central Asia, reduce dependency on fossil fuel generation, and contribute to the region’s decarbonization objectives.
The region’s governments also recognize the need for greater cooperation, trade, and investment. Building trust in electricity trade requires reforms to improve sector governance and transparency, strengthen the planning framework, gradually remove fossil fuel subsidies, and expand generating and grid capacity. It is vital that these reforms protect the interests of the most vulnerable communities by ensuring vulnerable households are protected from price adjustments. For many households in the region, high inflation and rising food prices have made it difficult to balance heating with other essential needs. Such efforts should also be accompanied with robust communication campaigns.
Should that take place, the region would benefit from increased economic activity and welfare. The World Bank estimates that investments of at least $20 billion would be needed to expand Central Asia’s renewable energy supply and modernize national and regional grids for improved trade and interconnectivity within the next five to 10 years. Identified renewable projects include wind, renewable grid integration, and hydro modernization in Kazakhstan; large-scale hydro and pilot solar in Kyrgyzstan and Tajikistan; and grid expansion, distribution modernization, and solar in Uzbekistan, as well as upgrade and expansion of cross-border interconnections.
Boosting Trade and Interconnectivity
A regional electricity market that draws on a diverse energy mix can strengthen supply, boost domestic and regional economic growth, and support decarbonization.
Although Central Asia’s electricity transmission systems are interconnected, only 2.5 percent of demand is currently met through trade, amounting to about 40 percent of interconnection capacity. This low level of trade is due to the lack of a market platform, weak regional network management, aging infrastructure, and limited coordination. Trading in the Central Asian Power System, which was created in the 1970s, is primarily based on bilateral agreements; decisions are generally made on a political level, rather than commercially based, and take time to finalize.
Globally, regional energy trading is not limited to developed countries. In the Southern African Power Pool, for example, a suite of short-term markets, including a day-ahead, intraday, and balancing market, have been functioning successfully for years now. In the Nordic countries and the European Union, regional markets have helped to lower utilities’ operating costs and reduced the need for state support. Regional markets have incentivized countries to convert untapped potential into energy for the regional market, boosting export revenues. The production and trading of electricity from different sources (hydro, solar, thermal, wind) stabilizes the regional grid against seasonal fluctuations and spikes in demand, increasing resilience.
Regional markets are technically complex to design and implement, and the World Bank’s world-class group of experts can help assure that such an ambitious project is successful for the whole Central Asian region. To facilitate such development, there is a need for political commitment in Central Asia toward regional energy cooperation, including through piloting and ultimately fully-fledged integration of market principles.
Collaboration to Boost Trade and Green Growth
The World Bank is working with Central Asian governments to scale up energy interconnectivity through a mix of investments, technical assistance, and capacity-building activities.
A key feature of this initiative is a proposed pilot for a day-ahead market that would provide a template for a more permanent solution. The pilot will demonstrate proof of concept, while encouraging cooperation that balances different levels of domestic market development. A benefit of this flexible, decentralized approach is that governments can control their national markets and power systems. Minimum harmonization of market rules and regulatory changes in the early stages of the initiative would allow for rapid rollout.
These are among the issues that are under discussion at the Central Asia Energy Trade and Investment Forum 2023, which convenes in London on March 2-3. This event brings together senior representatives of the Central Asian governments, development partners, and investors to discuss the interlinked challenges of energy supply, decarbonization, and economic growth.
For Central Asia, energy security is within reach, through amplified use of renewable energy resources and regional trade, and enabled by political commitment and private investment, as well as critical sector reforms. The investment needs are massive – as are the investment opportunities. With coordination and action, the region could become a model of success for countries and regions confronted with similar challenges.