In pursuit of heat: Kazakhstan to adopt Law on Heat Power Industry

Background

Sustainable heat supply plays a critical role in Kazakhstan, which is located in a sharp continental climate zone, where temperatures can reach below 40-50 degrees Celsius in the northern regions during the winter. Although considered part of the energy sector, heat power industry is a separate segment of Kazakhstan's economy, with specific economic, technical, social characteristics and relations.

There is currently no unified legislation regulating technical, commercial and economic aspects of heat power industry in Kazakhstan. Some issues of heat power industry are partially regulated by the Law of the Republic of Kazakhstan dated July 9, 2004 No. 588-II "On Electric Power Industry" (hereinafter – the “Electric Power Industry Law”), and technological issues of production, transmission and supply of heat power are not fully reflected and for the most part are indicated in conjunction with electric power. Some norms of the Electric Power Industry Law are not applicable and provide, inter alia, safety requirements for the operation of equipment of thermal power plants and boiler houses, design and operation of heat supply facilities and heat networks at an insufficient level. Measures defined in the Law on Electric Power Industry for prevention and elimination of emergency situations are also not applicable to the sphere of heat power industry, as they are intended to solve problems in the unified electric power system of the Republic of Kazakhstan.

No less important is the fact that there is no single authorized body for the industry. For instance, the Ministry of Energy is responsible for heat sources in public district heating systems and in centralized systems of autonomous heat supply, while the Ministry of Industry and Infrastructure Development is in charge of heat supply within settlements (except for CHP and boiler houses that produce heat in the district heating zone).

In order to eliminate the aforementioned gaps and establish a full-fledged legal framework for the regulation of heat power industry, the Ministry of Energy has developed a draft law "On Heat Power Industry" (hereinafter - the “Draft Law”), which is currently under consideration in the Majilis of Parliament.

Unicase LLP was directly involved in the development of the Draft Law, amendments to related legislation and bylaws, as well as provided assistance in conducting the necessary expertise in accordance with the Lawmaking Rules of the Government of the Republic of Kazakhstan (Decree No. 907 of the Government of the Republic of Kazakhstan dated December 29, 2016).

Draft Law

This Draft Law includes the following main chapters:

Planning and Monitoring

• The functioning and development of the heat power industry of regions, cities and districts of regions is carried out on the basis of long-term and medium-term?master plans for the development of the heat power industry. The introduced concept of a master plan means a document describing and substantiating a set of actions to develop the heat power industry of the respective territory (region, city, district of the region) in order to meet the future demand for heat power supply services taking into account the characteristics of the respective territory, which is developed and approved in accordance with the Draft Law.?
• The Draft Law also provides for the introduction of a?monitoring system?in the heat power industry, which will be based on actual and planned indicators of the industry, including segments of production, transportation, sale (supply) and consumption of heat energy.

Tariff Setting

In the field of tariff setting, it is planned to adhere to a number of principles, including, but not limited to, the following:

• Covering?justifiable economic costs?and predictability of revenues for heat supply companies, which are subject to price regulation;
• Providing?incentives?for heat supply entities, to which price regulation applies, to improve operational efficiency, reduce losses, improve reliability and quality of heat supply, including support for the use of heat obtained from sources using energy efficient technologies and equipment, and (or) renewable energy sources (hereinafter – “RE”) and other energy sources;
• Affordability?of heat energy for consumers, including through subsidies;
• Implementation of the state's priorities on the?transition to low-carbon development?and improvement of the country's ecology.

Heat Power Industry Subjects and Systems

Pursuant to the Draft Law, heat power industry subjects include heat supply subjects and consumers. Individual entrepreneurs and legal entities engaged in the production, transportation and sale (supply) of heat energy will be recognized as?heat supply subjects.??Heat consumers?will include individuals or legal entities purchasing heat energy (capacity) production service or heat energy supply service for their own consumption or further sale (supply) to a sub-consumer.

Regulation of the entire heat power industry implies a clear division into three heat supply systems:

• A centralized heating system?- a system of heat supply from one or more heat sources with transportation of heat carrier to consumers through public heating networks.
• An individual heat supply system?is a heat supply system in which heat energy is produced, transported and consumed by a single consumer (an individual) for the heating of a dwelling.
• A local district heating system?is a heating system owned by one person or an association of property owners for one or more consumers from one or more heat sources via heating networks that are not public networks.

Contracts between heat supply entities and consumers

To eliminate the gap in the absence of clearly regulated contractual relations in the sphere of heat power industry, the Draft Law provides for the following types of contracts between heat power industry entities:

• Contracts of purchase and sale of heat energy?concluded between individual heat-generating and heat-transporting entities;?
• Contracts for the provision of heat transportation services?concluded between heat-generating and heat-transporting entities;
• Heat supply contracts?concluded between consumers, on the one hand, and heat-generating or heat-transporting entities selling (supplying) heat energy, on the other hand.
• RE, energy saving and energy efficiency
• The adoption of the Draft Law should facilitate the expansion of?RE, which will depend on economic and technical feasibility. Moreover, heat sources using RE must also be used to cover the base load of the heat network.
• Heat supply entities will also be required to comply with the?energy conservation and energy efficiency requirements?provided for in the Kazakhstan legislation in the area of energy conservation and energy efficiency.

Investments

Projects in the heat power industry will have to?comply with master plans?for development of the heat power industry and provide for measures, technologies and (or) equipment that will promote energy saving, energy efficiency, reduction of heat losses during production, transportation, supply or consumption of heat energy, including those based on sources with the use of energy efficient technologies and equipment and (or) RE and other energy sources.

In addition to other ways and methods allowed by the Kazakhstan legislation, heat power industry entities will be able to attract investments through?public-private partnerships?(hereinafter – the “PPP”) and the provision of energy services. At the same time, documentation of PPP projects in the heat power industry and the provision of energy services must ensure a balance of interests of the parties (including through such sources and mechanisms as payment for capacity, affordability, energy and resource conservation of consumers), taking into account the requirements of the Draft Law, master plans for the development of the heat power industry and the target indicators of the heat power industry in the region.

When selecting a supplier (contractor, private partner, concessionaire, trustee) to implement a project in the heat power industry, a number of criteria will be taken into account, including, but not limited to:

• reliability of heat supply;?
• security of heat supply;?
• duration of operation without repair or replacement of a heat power industry facility, building, facility, equipment or technology;?
• level of harmful emissions into the atmosphere;?
• indicators of energy efficiency and energy saving, the level of heat energy losses.

Reliability and Safety of the Heat Power Industry

According to the Draft Law, heat power industry facilities that do not comply with minimum reliability indicators and safety requirements will not be allowed to operate. Regulatory technical documents in the area of operation of heat sources will have to contain a procedure for calculation and approval of planned and minimum reliability indicators for heat power industry facilities belonging to centralized heating systems and local district heating systems.

The Draft Law also provides for provisions on ensuring preparedness for the heating season. If there is a threat of a heat deficit, local executive authorities of cities and regional districts, which have received information on termination of operation of a heat source, will offer the heat supply entity to implement one of the following options, at its discretion:

• sell the heat energy source to another entity with the condition of continuing its operation;?
• sell the heat energy source to the local executive body at a price no higher than the market price determined by the appraiser, agreed upon by the parties (if the conditions are fulfilled consecutively, the sale of the facility is carried out in the event that the bidding did not take place).

We hope that the adoption of the Law on Heat Power Industry will contribute to the formation of a legal and economic framework to ensure the reliable and uninterrupted functioning of the heat power industry, clearly regulate the competencies of the authorized bodies, achieve carbon neutrality, and increase the investment attractiveness of the heat power industry.

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