Draft Final Report

PROMOTION OF RENEWABLE ENERGY, ENERGY EFFICIENCY AND GREENHOUSE GAS ABATEMENT (PREGA)

Kazakhstan
Country Report

April 2006

TABLE OF CONTENTS List of Tables List of Figures Abbreviations INTRODUCTION 1 CURRENT CONDITION OF KAZAKHSTANS ELECTRIC ENERGY SECTOR AND PROSPECTS FOR ITS DEVELOPMENT 1.1 The Northern region 1.2 The Southern Region 1.3 The Western Region 1.3.1 Atyrau-Mangistau Generation Center 1.3.2 Aktobe Generation Centre 1.3.3 Ural Generation Centre CURRENT ENERGY EFFICIENCY OF THE KAZAKHSTAN ECONOMY 2.1 Economic Aspects 2.2 Technological Aspects 2.3 Institutional Aspects CURRENT SITUATION AND THE POTENTIAL FOR RENEWABLE ENERGY BY REGIONS AND KAZAKHSTAN AS A WHOLE 3.1 Hydraulic Power 3.2 Wind Energy 3.3 Solar Energy 3.4 Geothermal Energy 3.5 Energy of biomass and solid household waste BARRIERS BLOCKING THE INTRODUCTION OF RES TECHNOLOGIES 4.1 Current situation in development of power generation on the basis of RES 4.2 Classification of barriers and ways to overcome them 4.3 Legislative Barriers 4.4 Economic Barriers 4.5 Tariff Barriers 4.6 Tax Barriers 4.7 Institutional Barriers 4.8 Technical Barriers 4.9 Information Barriers THE STATUS AND PROSPECTS FOR DEVELOPMENT OF FINANCIAL AND ECONOMIC SECTORS OF THE REPUBLIC OF KAZAKHSTAN 5.1 The tariff policy and investment environment 5.2 Main problems of tariff policy 5.3 Required resources and sources of tariff reform funding 5.4 Expected outcomes from the Concepts introduction: 5.5 Need for Investment 5.6 Sources of project funding 4 4 5 6 12 13 13 14 14 14 15 15 15 16 16 20 21 22 24 25 26 28 28 28 29 31 32 33 33 34 34 34 34 35 35 36 36 38

5.6.1 Review of international methods for encouraging investments and sources of financing 38 5.6.2 Review of sources of financing and preferences available in Kazakhstan 40 5.6.3 Commercial banks 42 5.6.4 Leasing Companies 42 5.6.5 Financial, investment institutions and development banks 43 5.7 Brief description of RES and ES project financing 47 5.8 Economic and financial mechanisms for implementation of RES and ES projects 48 5.9 Possible mechanisms for financing of RES and ES projects 48 5.10 International Financial Organizations and Development Organizations 49 5.11 Possibility to employ foreign schemes for financing 50 5.12 Investment opportunities of the Kyoto Protocol 51 5.12.1 Economic mechanisms of the Kyoto Protocol 51 5.12.2 Opportunities for SMEs to use the Kyoto Protocol mechanisms 56 5.12.3 Problems connected with introduction of Kyoto mechanisms 57 6 EXISTING STATUS AND ECOLOGY ISSUES DEVELOPMENT PROSPECTS IN THE REPUBLIC OF KAZAKHSTAN 59 6.1 Government Policy and Legal Base in the Environment Protection Sphere in the RK 59 6.2 Environment Protection Management System 62 6.3 Norm-fixing for the pollutant emissions into the atmosphere 64 6.4 Analysis of the Environment State 64

List of Tables Table 1. Table 2. Table 3. Table 4. Table 5: Table 6. Table 7. Table 8. Table 9. Table 10. Table 11. Table 12. Table 13. The structure of installed capacity (as of 1/1/2005) & power generation The structure of electric power generation (in 2000 and 2004) Electric power balance by regions & Kazakhstan as a whole till 2015 General characteristics of the period 1990-2004 Estimated technological potential for energy saving by types of production Estimated technological potential for energy saving by individual industries Estimated potential for energy saving, million Distribution of small hydroelectric power stations by regions Wind energy resources on the territory of Kazakhstan Solar Energy Availability by regions of Kazakhstan Data on Leasing Companies The total greenhouse gas emissions with direct greenhouse effect Emissions of 4 and 2 in the category Industrial Processes 7 7 8 12 13 13 14 16 18 19 38 49 63

List of Figures Figure 1. The pattern of total emissions and GHG emissions with direct greenhouse effect by main categories of sources Figure 2. The Scheme of financing of the small and medium-sized enterprises participating in flexible mechanisms of the Kyoto Protocol Figure 3. Structure of total emissions and effluents of GHG with direct greenhouse effect by their basic categories sources Figure 4. Basic categories of GHG emissions sources in the module Energy Engineering in 2004 Figure 5. Input of categories of sources into the total emissions from agriculture Figure 6. Input of categories of sources into the total emissions from the category Waste Figure 7. The share of the input from the emissions sources categories into the total national emissions of GHG in 2004 Figure 8. Actual and Forecasted GHG Emissions in Kazakhstan from the from the firing mln tons of 2-equiv Figure 9. Emissions of pollutant substances from the stationary sources Figure 10. Dynamics of the emissions of pollutant substances from the motor transport, and the quantity of used fuel Figure 11. Share of the biggest enterprises in the pollution of the ambient air of the Republic of Kazakhstan 49 52 61 62 63 64 65 66 67 68 68

Abbreviations ADB AIEC CDM CES CIS CMEA C4 DW DBK EBRD ES ESM ESCO GDP GEF GHG GHS HPS IBRD IFC JI JIP MEP MPE NEDO PES RES RE RK SHEPS SDW SHW SME TACIS Tfe UIF UNDP UNEP UNFCCC WB WEPS WPP Asian Development Bank Almaty Institute of Energy and Communication Clean Development Mechanism Concepts of the Environmental Safety Commonwealth of Independent States Council for Mutual Economic Assistance Climate Change Co-ordination Centre development works Development Bank of Kazakhstan European Bank for Reconstruction and Development energy saving energy saving measures energy service company Gross Domestic Product Global Environment Facility greenhouse gas geothermal heating stations heating and power stations International Bank for Reconstruction and Development International Financial Corporation Joint Implementation Joint Implementation Project Ministry of Energy and Power maximum permissible emissions New Energy and Industrial Technology Development Organization potential for energy saving renewable energy resources renewable energy Republic of Kazakhstan small hydroelectric power stations solid domestic waste solid household waste small and medium enterprise Technical Assistance in CIS countries ton of fuel equivalent Unit Investment Fund United Nations Development Program United Nations Environment Program United Nations Framework Convention on Climate Change World Bank wind-driven electric power stations wind-driven power plants

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INTRODUCTION The Republic of Kazakhstan (RK) has sufficient energy potential to completely meet the long-term energy needs of the national economy and to create significant energy export potential. Yet, owing to the current geographical and structural dissociation of the Kazakhstan fuel and energy complex, the Republic still has to import part of its energy resources from other Commonwealth of Independent States (CIS) countries. It is necessary to note that the current growth of the Kazakhstan economy is due mainly to recovery and resumption of operations at idle factories and enterprises. Thus, as a rule, they still use very outdated technologies and equipment mostly with rather low energy efficiency. Kazakhstan is thus burdened with low energy efficiency of the national economy. The efficient use of energy is the necessary prior condition of economic and social development as well as improvement of the environment. This is particularly relevant to Kazakhstan, since the economy of the Republic is characterized by a high share of old and energy intensive technologies. The importance of energy saving for country can be illustrated by the following parameter the energy intensity of Kazakhstans Gross Domestic Product I (GDP) s 1.03 ton of fuel equivalent (t.f.e.) per thousand US dollars, which is 2.5-4 times higher than that in developed countries. This very high-energy intensity is a huge economic loss to the economy. Another reason to speed up the introduction of the energy saving process is the fact that in 17/05/1995 Kazakhstan signed the United Nations Framework Convention on Climate Change (UNFCCC) and thereby committed itself to stabilize greenhouse gas emissions (GHG), basically 2 (comprising more than 80 % of all Kazakhstans GHG), at the 1990 level. Kazakhstan is currently in the process of ratifying the Kyoto Protocol as an Annex 1 country and thereby accepting legally binding GHG emission levels. As such, Kazakhstan will be able to participate in Joint Implementation (JI) activities under the Kyoto Protocol flexibility mechanisms. From 1999, by request of the Ministry of Energy and Power (MEP), annual GHG emission inventories have been undertaken by the Climate Change Co-ordination Centre (C4) in the Republic of Kazakhstan. There are now GHG inventories for the 1990, 1992, 1994 and 19902004 years. For the year 2004, the common national GHG emissions with direct climate change effects constituted 213,3 mln. ton CO2 including 172,2 mln ton from energy activities. The electric power system makes the largest contribution to CO2 emissions, in particular from coal use. GHG emissions in 2004 were 66,7 % with respect to a 1990 Kyoto Protocol base year, and with respect to a 1992 base year were a 60% reduction. Economic development in Kazakhstan is being accompanied by energy consumption expansion and CO2 emission increases, in particular from the growth of generation of electrical energy and especially from district heating and power stations (HPS) (such stations account for 90% of electrical energy generation). emission. However, the development of the national economy has been, and will continue to be closely connected with further increases in energy consumption; and as a result, this will lead to the growth in electricity generation mainly by heating and power stations.

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CURRENT CONDITION OF KAZAKHSTANS ELECTRIC ENERGY SECTOR AND PROSPECTS FOR ITS DEVELOPMENT

Kazakhstan is rich in all types of energy resources and capable not only of completely meeting its own long-term needs for energy resources but also exporting them in significant amounts. In terms of electricity resources, Kazakhstan can be divided into three main regions: Southern, Northern and Western. The Southern region includes: Almaty, Zhambyl, Kyzylorda and Southern Kazakhstan oblasts and Almaty City. The Northern region includes: Eastern Kazakhstan, Pavlodar, Karaganda, Akmola, Northern Kazakhstan and Kostanai oblasts. In terms of electricity resources the Western region of Kazakhstan in its turn is presented by three main generation centers: Atyrau-Mangistau, Aktobe and Western Kazakhstan. At present, Kazakhstans power plants possess certain potential for increase in their capacity to meet domestic needs; however, due to the current structure of fuel resources in the Republic, the configuration of the transmission network and market conditions, the Southern and Western regions import electric power and capacity. Table 1 shows the structure of installed capacity of Kazakhstans power stations. Table 1. The structure of installed capacity (as of 1/1/2005) and power generation 1 2 3 4 Types of power stations Thermal steam-turbine on organic fuel Gas-turbine Hydraulic TOTAL Megawatt 15755 483 2247 18485 % 85.2 2.6 12.2 100

The structure of electricity generation by power stations in 2000 and 2004 is presented in Table 2. Table 2. The structure of electric power generation (in 2000 and 2004) 1 2 3 4 Types of power stations Thermal power stations on coal Thermal gas-and-oil-burning power stations Hydroelectric power station Total 2000 Billion kWh 37.3 6.61 7.51 51.42 % 72.5 13 14.5 100 2004 Billion kWh 50.85 7.7 8.1 66.65 % 76.4 11.5 12.1 100

It is necessary to note that the peak of electric power generation in Kazakhstan was reached in 1989 when 88.9 billion kWh was produced with installed capacity of power stations of 16.82 million kWh. Table 3 shows the electric power balance (energy consumption and electric power generation) by regions and for Kazakhstan as a whole for the last decade and for the future period till 2005-2015 (best case scenario) taking into account the development of new generating capacities.

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Table 3. Electric power balance by regions & Kazakhstan as a whole till 2015, billion kWh 1990 Electricity consumption TOTAL: 104.72 Including by regions: Northern Kazakhstan 66.42 Southern Kazakhstan 26.43 Western Kazakhstan 11.87 Electric power generation TOTAL: 87.38 including by regions: Northern Kazakhstan 63.89 Southern Kazakhstan 16.27 Western Kazakhstan 7.22 Balance (shortage -; surplus +) TOTAL: -17. 4 including by regions: Northern Kazakhstan -2.53 Southern Kazakhstan -10.2 Western Kazakhstan -4.65 1992 96.87 64.01 21.63 11.23 82.86 61.27 14.77 6.82 -14.0 -2.74 -6.86 -4.41 1994 79.43 53.73 16.45 9.25 66.4 52.04 9.2 5.16 -13.0 -1.69 -7.25 -4.0 1998 53.40 37.04 9.70 6.66 49.59 37.42 7.4 4.77 -3.81 +0.38 -2.3 -1.89 2000 54.38 37.92 9.49 6.97 51.42 40.43 5.82 5.17 -2.96 +2.51 -3.67 -1.8 2005 67.5 45.0 12.5 10.0 67.7 52.4 7.7 7.6 +0.2 +7.4 -4.8 -2.3 2010 83.0 52.8 14.7 15.5 88.1 64.4 8.5 15.2 +5.1 +11.6 -6.2 -0.3 2015 97.0 62.0 17.0 18.0 99.3 70.2 11.7 17.4 +2.3 +8.2 -4.3 -0.6

These data on projected levels of electricity consumption and electric power generation (best case scenario) in 2005, 2010 and 2015 are taken from the Program for the development of a unified power grid in the RK or the period till 2010 with prospects till 2015 developed by the RK Ministry of Energy and Mining. 1.1 The Northern region The region has surplus energy, possessing the cheapest and most accessible fuel resources and the most developed power-generating sector. The basis of the power industry in the region is the coal-based power generation using intrinsically low cost Ekibastuz coal. Coal deposits are located mainly in Northern and Central Kazakhstan where there also are the richest deposits of rock minerals - raw material for the basic industrial potential of Kazakhstan. Here also are main sources of electric energy. These regions are potentially selfsufficient in electric power, which may be in excess. Without any significant difficulties, the electric power generation in the region can be increased to meet its own needs and to transfer required amounts to the South, including for export on to other Central Asian countries. Development of electric power generation for export to China and to increase exports to the Russian Federation is also possible. 1.2 The Southern Region

The Southern Kazakhstan region is electricity deficient. It does not possess sufficient primary energy resources, and those that are available are out-of-the-way and underdeveloped. The electric power industry in the region is based on imported coal, imported gas and partially on black oil produced locally as refinery waste. However, a part of the need for electric power is

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met by transfer from Northern Kazakhstan and partially by import from electric power systems of other Central Asian countries. In order to connect Southern Kazakhstan to the electric power systems of other Central Asia countries, power grids with voltage of 500 and 220 kV and capacity of more than 10 billion kWh per year were built earlier - which is a good material basis for future cooperation and participation of Kazakhstan in the Central Asian electricity market. Self-balancing and even creation of export potential in the future in this traditionally electricity deficient region can be achieved by reconstruction and re-equipment of operating HPS and construction of new HPS. In particular, there are the following promising projects: Construction of Moynak hydroelectric power station on the Charyn river with capacity of about 300 megawatt (0.7 billion kWh); Construction of Kerbulak hydroelectric power station on the Ili river with capacity of 50 megawatt (0.3 billion kWh); Increase in utilization of associated gas at Kumkol oil fields to be used in energy generation by means of expansion of existing Kumkol GTPS or construction of new gasturbine power stations with a capacity of 200 megawatt (1.2-1.3 billion kWh per year); Construction at small gas fields in Zhambyl oblast distant from areas of electricity consumption of gas-turbine power stations with a total capacity of up to 200 megawatt (1.3-1.4 billion kWh); Construction of small hydroelectric power stations on mountain rivers with a total capacity of 100-120 megawatt (0.5-0.6 billion kWh); Implementation of the Wind Energy Program that provides for construction of windmill electric generating plants (WEPS) with a total capacity of up to 125 megawatt (up to 0.5 billion kWh).

Prioritization and sequence of implementation of these projects are subject to subsequent detailed studies. 1.3 The Western Region

At present, the Western region as a whole is electricity deficient. In the Caspian area, the intensive development of the oil-and-gas sector of the economy leads to considerable increase in electricity consumption. However, electricity supply varies by oblasts of the region. 1.3.1 Atyrau-Mangistau Generation Center

Available capacity can meet short-term needs since the capacity of Aktau power stations is 1350 megawatt and the current need is less than 700 megawatt. Inadequate connection between Aktau and Atyrau electric power systems prevents the transmission of surplus power available in Aktau oblast to meet growing electricity consumption. At the same time, Atyrau oblast possesses highly favorable opportunities for development of electric power generation based on associated gas from oil production. 1.3.2 Aktobe Generation Centre

Aktobe generation centre is electricity deficient. Deficiency of electric power and capacity is offset by electricity imports from Russia. The existing power grid is capable of

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transmitting from Russia more than 600 megawatts, which can completely meet the needs of the oblast till 2015. Nevertheless, the problem of power deficiency in the oblast can be resolved in two ways: By putting in operation additional generating capacities. Growth in oil production in Zhanazhol will increase the yield of associated gas that is sufficient to ensure operation of new power stations with a total capacity of 300 megawatts and power generation of 2 billion kWh/year. By building on the territory of Kazakhstan a transmission line connecting the Northern Kazakhstan integrated energy system with Aktobe generation centre.

1.3.3

Ural Generation Centre

At present, Ural generation centre is electricity deficient. New gas-turbine power stations based on natural gas are being built in this zone, initially in Karachaganak where the gas-turbine power station with a capacity of 250W (to date, 4 blocks with a total capacity of 160 megawatt have been commissioned) is under construction. In connection with the planned development of the oil-and-gas cluster near Uralsk (Gremyachenskie, Tokorevskoe, Chinarevskoe) where high yields of associated gas are predicted, it is necessary to plan the construction of fastassembling container gas-turbine power stations. 2 CURRENT ENERGY EFFICIENCY OF THE KAZAKHSTAN ECONOMY

The problem of energy saving is an integral part of the problem of resource saving; however, amounts of energy consumed and its impact makes it a separate issue. Almost all countries during the 1974 energy crisis started to pursue active state policies aimed at energy saving and have achieved significant results in this area. Besides, electricity price generally increased, and this is important cause of intensified energy efficiency efforts through relevant government agencies. So, energy intensity of national income for 15 years (1970-1985) in the USA dropped by 71 %, in the Great Britain by 72 %, in Japan by 78 %. In the USA, partly due to the energy saving policy, emissions from combustion of energy resources reduced by 40 %. The analysis of reasons why CIS countries, in particular Kazakhstan, are lagging behind western developed countries in energy efficiency of equipment and technologies shows that several aspects of this issue should be considered, such as: economic, technological and institutional. 2.1 Economic Aspects

Economic aspects of low energy efficiency of equipment and technologies include the following factors: Low prices of energy resources which deprive consumers of economic incentives to practice energy saving; Low (if at all) economic recoupment of any cost reductions from energy saving measures; A pricing policy that automatically includes costs of energy resources in the cost price which do not stimulate energy saving;

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 2.2

Uniform average prices of energy resources; No time of use tariff policies in place; Adoption of energy intensive technical and design solutions at the design stage to ensure lowest costs of capital construction and equipment production. Technological Aspects

The technological lag of Kazakhstan behind western developed countries is due to the following reasons: 2.3 Basic technological equipment for most energy intensive industries in the RK was imported from Council for Mutual Economic Assistance () countries - which produced equipment with low energy efficiency as compared with world equivalents; The lag in technical level and quantity of automation equipment for adjustment and control of technological processes; Insufficiency and poor quality of accounting systems for all types of supplied energy resources; Low level of use of secondary and associated resources.

Institutional Aspects

It is necessary to note that institutionally in Kazakhstan there were, and partially still are, various monitoring systems for energy resources consumption, both departmental and interdepartmental. Institutional aspects of the decrease in energy efficiency in the RK can be explained by the following reasons: Liquidation of the harmonious and adjusted system of state control over energy resources consumption; Discontinuation of operations of some state agencies responsible for supervision of energy resources consumption; Reduction in efficiency of the remaining supervising agencies due to financial, institutional and staffing reasons; Effects of crisis factors during the transition of the RK to market economy, which resulted in a slower pace of reduction of energy consumption in comparison with production decline (principal causes disuse of process equipment, ageing and deterioration of equipment, non-compliance with repair schedules, etc.).

The effect of all the above aspects in Kazakhstan was the decrease in integrated energy intensity indicator GDP specific energy intensity. In 1996, GDP energy intensity in Kazakhstan was 1.03 t.f.e. /thousand US dollars which was higher than in developed countries by 2.5-4 times, for example, it was higher than in the USA, the UK and Germany by 2.5 times; in Denmark and Italy by 3.5; in Japan by 4.0 times. On average, the energy intensity in the Organization for Economic Cooperation and Development (OECD) countries is 3 times lower than in Kazakhstan.

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Table 4. General characteristics of the period 1990-2004 1 2 3 4 5 6 7 8 Indicator Population Electricity consumption Specific electricity consumption Gross domestic product, (GDP) Per capita GDP Specific electric intensity of GDP Installed capacity of power stations Electric power generation Unit of measurement million billion kWh kWh per capita billion $ $ per capita kWh / $ million kilowatt billion kWh 1990 16.79 104.7 6236 37.55 2236 2.79 17.57 87.4 1995 16.6 74.38 4480 22.08 1330 3.34 18.42 66.98 2000 14.84 54.38 3664 18.22 1228 2.98 18.10 51.42 2004 15.01 64.74 4313 41.985 2797 1.54 18.48 66.6

The basis of the Kazakhstan economy is the mining-metallurgical and fuel-energy complexes, which accounts for most of power-consuming plants. The low level of technologies, deteriorated and obsolete equipment at a number of factories in the Republic predetermined high-energy intensity of Kazakhstan production. Analysis of available world data on specific energy intensity in various sectors of the economy indicates a wide scope for energy saving, including from out-of-date technologies and non-compliance with technological procedures at enterprises in the Republic. The Kazakhstan economy has a significant potential for energy saving which is specified by the above reasons. The potential for energy saving (PES) is the quantity of energy which can be saved for a period of time by technical, institutional and other measures with effect of its use. According to tentative estimations, the potential for energy saving in the RK significantly exceeds current and projected deficit of energy resources. Also it is necessary to take into account that according to world experience a unit of money invested in energy saving by efficiency measures corresponds to three to five units invested in production of energy resources or power generation. The estimation of PES for Kazakhstan as a whole and for individual industries and types of energy resources is conditional since it depends on choice of specific indicators of energy consumption (which varies depending on technical progress) and on the choice of limiting factors. Three types of PES were estimated: Technological PES is the maximum potential that can be realized with possible introduction of all technological achievements available to date. Economic PES is the potential that can be realized under real economic restrictions of possible investments in energy saving measures. Market PES is the potential that can be realized taking into account the entire complex of possible restrictions of the real economic, political, structural, and

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institutional situation in the country. Market PES is often included in forecasts of energy demand and emissions of carbon dioxide. The absolute value of the potential for energy saving is determined as the difference between specific indicators of energy intensity in the Republic of Kazakhstan and developed countries multiplied by the volume of the respective gross domestic product. Specific energy intensity of GDP in Kazakhstan is 1.03 t.f.e./thousand US dollars, specific energy intensity (average) in the countries of the OECD is 0.39 t.f.e./thousand US dollars, the Kazakhstan GDP in 2001 was 22.39 billion US dollars and in 2004 almost 42 billion US dollars. Table 5 contains estimated values of the technological potential for energy saving by types of production (here and hereinafter, data on the potential for energy saving are assumed according to the Republican Program for energy saving developed by the Ministry of Energy and Coal Industry of the RK in 1995). Table 5. Estimated technological potential for energy saving by types of production, in million t.f.e. 1 2 3 4 5 6 7 Products Electric power Thermal energy Coal Natural Gas Oil & Oil Products Non-traditional energy TOTAL 1995 17.82 3.16 5.92 1.79 13.0 3.91 45.6 2000 14.91 2.5 4.92 1.45 11.64 3.58 38.5 2005 12.74 2.04 4.6 1.24 9.85 2.83 33.3 2010 8.8 1.21 3 0.75 7.1 1.4 22.6

In Table 5, it can be seen that energy supply potential is assumed to wane over time. This is connected to the assumed Kazakhstan development of improved energy effectiveness by force of technology improvement as existing estimated energy savings potentials are realized. Table 6 presents the estimated technological potential for energy saving by individual industries. Table 6. Estimated technological potential for energy saving by individual industries, in million t.f.e. 1 2 3 4 5 6 Sectors Electric power industry Machine-building and metalworking Oil and gas industry Oil-refining industry Public motor transport Ferrous metallurgy 1995 7.9 2.1 1.4 1.4 0.5 4.3 2000 6.6 1.8 1.2 1.2 0.4 3.6 2005 5.8 1.5 1.0 1.0 0.4 3.1 2010 3.86 1.0 0.7 0.7 0.3 2.1

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7 8 9 10 11

Non-ferrous metallurgy Coal industry Agriculture Others TOTAL

5.9 4.2 4.8 13.1 45.6

5.0 3.5 4.0 11.2 38.5

4.3 3.1 3.5 9.6 33.3

2.9 2.0 2.3 6.4 22.26

Table 7. Estimated potential for energy saving, million t.f.e. 1 2 3 Type of potential Technological Economic Market 1995 45.6 22.0 19.26 2000 38.5 17.3 13.42 2005 33.3 10.8 7.0 2010 22.26

For the purpose of visual demonstration, the potentials are recorded and subtracted as they are realized. In practice, upper boundaries would be moved every year according to technical progress and economic conditions. PES can be realized in three stages: Low cost measures that are limited to putting the use of fuel and electricity in order, preventing losses of energy resources during transportation and storage, application of energy efficient modes of operation, replacement of energy consuming equipment having redundant capacity, equipping consumers with meters (counters), etc.; Capital-intensive measures that require significant target investments and can be carried out only if the energy saving effect recovers costs within an acceptable period of time; Associated measures that are carried out during modernization of the national economy when the energy saving is a concomitant factor; they also include the change in structure of materials used, technologies and end products.

According to calculations done by Russian institutes, costs of realization of the technological potential for energy saving are in multiple ratio for the above categories of energy saving measures. Thus, up to 20 % of the potential for energy saving could be realized at the cost of up to 15 US dollars per 1 t.f.e. The most expensive measures are those with cost above 60 US dollars per 1 t.f.e. account for about 15 % of the potential for energy saving. The realization of the remaining two thirds of the potential for energy saving, which is comparable to the estimated volume of structural economy of energy resources by 2015, will require significant target investments which are only by 10-30 % lower than the investments required for corresponding volumes of development of production facilities of the Fuel-Energy Complex. Analysis of world experience in the realization of energy saving policy in various countries shows that market economy alone is not the complete catalyst and not the only solution for implementation of measures promoting increase in efficiency of energy consumption. To start the process of energy saving in Kazakhstan it is necessary to establish a mechanism for realization of this process. Thus, in addition to the introduction of market energy

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prices, the state is also required to launch the process of energy saving in the country by means of various measures, including institutional, tax, investment and other measures. 3 CURRENT SITUATION AND THE POTENTIAL FOR RENEWABLE ENERGY BY REGIONS AND KAZAKHSTAN AS A WHOLE

In foreseeable future, world electric power industry, transport, buildings, heating, industrial processes and others, particular in Kazakhstan, will be based mainly on organic (fossil) fuels. However, resources of organic fuel on the planet are not limitless and are shrinking due to their development by billions tons per year. In addition, the prospects for organic fuel use are limited by environmental factors whose pressure increases every year. Air and water pollution, acid rain and the greenhouse effect represent an incomplete list of negative environmental impacts of energy industries operating on organic fuel. Till the mid 1980s, the dynamically developing atomic energy sector had been considered as an alternative to organic fuel. However, under influence of some unsolved problems the pace of its development has considerably slowed down. Taking into account the factors as stated above, some countries have sped up their efforts in the area of research, development and large-scale introduction of economically competitive, environmentally friendly and clean energy installations operating on renewable energy sources (RES). Total theoretical RES potential is dozens of times higher than current level of world consumption of primary fuel and energy resources. The annual energy potential of solar radiation on Earths surface alone is 3000 times higher than total world primary energy consumption. Significant theoretical potentials are also attributed to other renewable energy sources such as biomass, wind, geothermal and tidal energy. However, owing to the existing level of technological development and current conditions on world energy markets, only an insignificant part of theoretical RES potentials are used cost efficiently at present. Nevertheless, this value is considerable and exceeds total annual needs for electric power. On the territory of Kazakhstan, RES are presented by energy of rivers, the sun, wind, thermal waters and biomass. Potential resources of these sources exceed not only current, but also prospective needs. The use of RES in the Kazakhstan economy would solve the following tasks: Improvement of the environment Improvement of social conditions for the population, particularly in rural areas where centralized power supply and district heating are not available Replacement and economy of organic fuel spent mainly for low potential processes.

However, there is an essential drawback of RES diurnal and seasonal variations of supply which results in the need for backup energy sources and energy accumulating equipment. This is the cause of high capital cost of specific capacity and high cost price of energy and energy accumulating equipment. Nevertheless, RES can find a niche in the Kazakhstan energy sector.

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3.1

Hydraulic Power

The hydro potential in Kazakhstan is rather high; however, water and water energy resources in Kazakhstan are distributed unevenly across its territory. The major part of these resources is concentrated in three regions: Eastern, Southeastern and Southern zones of Kazakhstan. Technically feasible waterpower potential for industrial use is 62 billion kWh, including 7.84 billion kWh from small hydroelectric power stations (with installed capacities of 10 megawatts and less). At present, not more than 8 billion kWh per year is used; small hydroelectric power stations account for 0.36 billion kWh of the utilized potential. In Kazakhstan, small hydroelectric power stations were developed and built before the mid 1950s. At that time, intensive construction of large power stations, electrification of remote areas and villages, and introduction of reduced prices for rural consumers weakened competitiveness of small hydroelectric power stations. This process was connected with closedown of major part of these stations, and laying-up or disassembling of equipment. The restructuring of electric power industry, higher prices of organic fuel, cancellation of privileges and subsidies, introduction of market relations, and problems of power supply to some settlements has revived interest in small hydroelectric power stations (SHEPS). It is necessary to note that earlier in Kazakhstan about 90 SHEPS were built. The field survey demonstrated that 21 SHEPS with a total capacity of about 78 megawatt producing on average 357 million kWh are operational, and the others are destroyed. Of disturbed stations, only buildings and dams remain. The equipment has been used for scrap and spare parts. Institute AlmatyGIDROPROEKT conducted research on the possibility to use energy resources of Kazakhstan rivers. As a result, the possibility for construction of 564 new hydroelectric power stations and restoration of 14 earlier operational hydroelectric power stations were identified. The total number of new potential hydroelectric power stations is 578. Large hydroelectric power stations (with capacities above 30 megawatts) are 38; small and mediumsized (with capacities of up to 30 megawatt) are 540. The total installed capacity of 38 large hydroelectric power stations is 3296 megawatts; power generation is about 12 billion kWh. The total capacity of small hydroelectric power stations is 2412 megawatts; power generation is about 11 billion kWh. Table 8 shows the distribution of prospective SHEPS across the territory of Kazakhstan. Table 8. Distribution of small hydroelectric power stations by regions of the country Region Eastern Kazakhstan oblast Almaty oblast Southern Kazakhstan oblast Zhambyl oblast Number of SHEPS 89 227 118 98 Installed capacity, megawatt 594 1147 437 234 Power generation, million kWh 2566 5336 1926 1150

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The greatest prospects for development of small hydroelectric power stations are in Almaty oblast that possesses a significant potential, but nevertheless imports a significant amounts of electric power from other regions. Thus, Institute Almaty GIDROPROEKT singled out more than 15 projects of the most promising new SHEPS. From the economic point of view, the restoration of dozens of abandoned and laid-up small hydroelectric power stations, which would involve almost complete replacement of hydro mechanical and electromechanical equipment, is also feasible. As a rule, water-intake and water-pressure facilities and roads to hydroelectric power stations are still in good condition. Conclusions 3.2 Kazakhstan (southern and southeast part of the Republic) has significant technically feasible hydroelectric resources of 62 billion kWh per year. The use of technical hydro potential in the Republic is insignificant, about 12 % (7 billion kWh). The technical potential of SHEPS (with installed capacities less than 10 megawatt) is 7.84 billion kWh; however, at present only about 0.4 billion kWh per year is generated. Development of SHEPS in Almaty oblast is most promising. Institute AlmatyGIDROPROEKT has singled out a number of the most promising new SHEPS projects. In addition to construction of new SHEPS, it is economically reasonable to rehabilitate many abandoned and dilapidated SHEPS. Wind Energy

Today, world windpower engineering is developing rapidly and has become one of important methods for energy saving and use of environmentally clean renewable energy. During the last 10 years, the installed capacity of wind-driven electric power stations (WEPS) increased by 10 times and by the end of 2004 was about 50,000 megawatts. For the same period of time, the price for wind-driven power plants (WPP) dropped by 2-4 times. The cost of large system installations and WEPS is 1000-1500 US dollars per 1 kW of installed capacity, and the cost of equipment is 500-1000 US dollars per 1 kW. The cost of 1 kWh dropped from 15-20 to 4-7 cents. Wind-power engineering has become an important factor in electricity supply of environmentally clean electric power in Denmark, Germany, Holland, Spain, India, China and other countries. At present, the installed capacity of WPP in Germany is about 7000 megawatt. In 2000, the country commissioned new wind-driven power plants with a total capacity of 1500 megawatt and average capacity per unit of about 600 kW. In Denmark (in 2000, the capacity of WEPS was 2300 megawatt), wind-driven power plants account for up to 10 % of electric power produced. A number of countries have national long-term (2010-2020) programs providing for rapid development of wind-power engineering and a common goal is to increase its share in electric power generation to 5-10 %. At present, the unit capacity of commercially produced WPP is 2-3 megawatts. Winddriven power plants with a capacity of 4 megawatt and more are being tested. WPP with unit capacity of 5-6 megawatt are being developed for marine WEPS.

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According to international experience, the price for electric power generated by modern WEPS can be reduced to 2-4 cents/kWh Thus, the cost of electric power generated by a wind energy complex with a capacity of 300 megawatt (under construction at the border between states of Washington and Oregon) will be less than 2.5 cent/kWh. By their basic parameters, WEPS can be compared with some modern traditional power stations even today. Main advantages of wind-power engineering are short periods of construction and commissioning. A WPP with a capacity of 1-2 megawatt can be installed during 3-10 days. The entire construction-and-assembling stage takes 1.5-2 months. A WEPS with a capacity of 10-50 megawatt can be built during one to two years. The wind potential on the territory of Kazakhstan was measured by standard methods at about 400 meteorological stations. Usually, the wind speed was measured at a height of 10 meters. At present, a number of meteorological stations are closed, and only more than two hundred stations are operational. Analysis of available data on wind pattern shows that virtually all the territory of Kazakhstan possesses significant wind energy potential. Very high wind potential was recorded at Dzungarian Gateway and Shelekskiy Corridor in Almaty oblast. Average annual wind speed in these areas is from 7 to 9 m/s and from 5 to 9 m/s respectively. The conditions for wind energy use in this region are among the best in the world as compared with other existing wind grounds where this type of energy is already being used. Table 9 shows potential wind energy resources on the territory of Kazakhstan based on measurements at existing meteorological stations. It is necessary to note that at present a number of projects designed to study wind potential in regions are carried out on international standards by means of computerized meteorological posts. This work has been already done at Dzungarian Gateway and Shelekskiy Corridor. Similar works are planned on promising wind platforms. Table 9. Wind energy resources on the territory of Kazakhstan Area, thousand 2 Potential resources, billion kWh Potential taking into account WPP performance index and requirements for their location, billion kWh 30 31 56 27 91 87 322

Regions

1 2 3 4 5 6 7

Eastern Kazakhstan Southeast Southern Kazakhstan Northern Kazakhstan Central Kazakhstan Western Kazakhstan TOTAL for Kazakhstan

277.1 223.2 499.9 237 762.2 7292 2718.1

3000 3100 560 2700 9100 8800 32200

In spite of very significant wind energy potential, at present there is no significant wind electric power industry in Kazakhstan. Windmills are used mainly to pump water from wells for agricultural purposes.

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At present, in Kazakhstan at Dzungarian Gateway with UNDP/GEF support, a construction project of a demonstration WEPS with a capacity of 5 megawatt is being carried out; the project cost is 7.61 million US dollars out of which 2.9 million US dollars is the GEF grant component. The cost price of electric power generated by this WEPS will be 3-3.5 cent/kWh. In Southern Kazakhstan oblast, a joint project aimed at building two windmills with a capacity of 250 kW each is carried out together with Indian company NEPC Group. Conclusions 3.3 Kazakhstan possesses very high wind energy potential 322 billion kWh. By its wind energy potential, virtually all the territory of Kazakhstan is suitable for construction of powerful wind-driven electric power stations. The best conditions for construction of powerful WEPS are at Dzungarian Gateway and Shelekskiy Corridor where WEPS with a capacity of 1000 megawatt could be operated. Wind-power engineering in Kazakhstan is underdeveloped which is due mainly to relatively high cost price of generated electric power. In Kazakhstan, two pilot WEPS projects are being carried out: 5 megawatt WEPS at Dzungarian Gateway and 500 kW WEPS in Southern Kazakhstan oblast. Solar Energy

Solar energy ranks high among renewable energy sources. Using various technologies (photo-electric transformation, thermal use, etc.) solar energy even today can meet a significant part of existing need for energy. The location of Kazakhstan, available solar energy resources, and number of sunny hours (2200-3000 hours per year) ensure favorable conditions for the use of solar energy to generate low-grade thermal energy and also for the use of solar electricity generation in those locations where centralized power supply is not available, in particular, portable photovoltaic equipment for public needs. Using solar systems with battery storage it is possible to provide electricity for basic lighting for homes or other uses. Table 10 contains data on solar availability in some regions of Kazakhstan. Table 10. Solar Energy Availability by regions of Kazakhstan 1 2 3 4 5 Region Shymkent Aktau Astana Semey Taldykurgan kW/m2/year 1780 1442 1297 1441 1703 kW/ m2/day Average 4.88 3.95 3.55 3.95 4.67 June 7.95 6.71 6.47 6.74 7.40 December 1.65 0.98 0.83 12.05 1.58

It is necessary to note that the cost price of electric power generated by a power station operating on photo cells is very high - 20-30 US cents/kWh However, nowadays the production of photo cells is growing fast. In 1999, world annual production was 200 megawatts. Leading countries: the USA 60 megawatts, Japan 80 megawatts, Germany 50 megawatts. In

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Kazakhstan, this technology can be used in special cases; for example, to meet household needs of population engaged in distant-pasture cattle breeding. Thermal solar energy is the simplest to use and promising in terms of practical application, in particular for water heating, as well as for space heating and crop drying applications. Owing to high prices of primary energy resources, on the one hand, and welldeveloped development of the technology for the use of solar thermal energy, on the other hand, this energy source becomes competitive, i.e. can be applied on equal terms with traditional energy resources. Conclusions Solar energy potential in Kazakhstan is very high. Solar energy is used mainly to heat water in solar collectors. Power generation with the use of photocells is almost non-existent in Kazakhstan. In Kazakhstan, there is a potential for wider application of solar energy to generate both heat and electric power locally. 3.4 Geothermal Energy

Geothermal energy literally is the heat inside the Earth, which is generated by geological phenomena globally. However, the term geothermal energy as used now refers only to the part of terrestrial heat that can or could be used by man. By their availability for energy generation, thermal waters are conditionally divided into three categories. First category of geothermal water has temperatures above 100-150. It is used directly in low-pressure steam turbines. Second category of water has temperatures about 80-100. It is convenient for heating systems. Third category of water is most difficult to use since its temperature is 60-80. However, such low temperature geothermal fields are the most widespread. In 2000, total capacity of all geothermal power stations in the world was 7975 megawatt; the capacity of geothermal thermal stations was 16210 megawatt. In Kazakhstan, the practical use of geothermal energy is of certain interest to communities in remote or desert and mountain areas. However, it is necessary to note that the use of available geothermal resources in Kazakhstan is very insignificant and limited to agricultural and household needs. Sub-thermal waters with temperatures below 40 are used for early watering of farmlands in spring (Pavlodar, Almaty, Zhambyl and Southern Kazakhstan oblasts). It is necessary to note that near Zharkent there are two 3-kilometer deep geothermal wells with water temperature of about 96. In 1998, Almaty Institute of Energy and Communication (AIEC) at the request of the RK Ministry of Energy, Industry and Trade carried out the study Geothermal resources of the Republic of Kazakhstan and prospects for their use for heat and power generation. The study conducted by the Institute shows that Kazakhstan possesses essential geothermal energy resources. Potential resources of rocks are 317.6 trillion t.f.e., and technically accessible reserves (to the depth of industrial drilling of 5 km, taking into account

25

recovery ratio and specified temperature range of the consumer) of geothermal power sources in sedimentary basins are estimated to be 4.1 billion t.f.e., including those with temperatures: 820 281 billion t.f.e., 20-40 332 billion t.f.e., 40-60 903 billion t.f.e., 60-90 1239 billion t.f.e., and more than 90 1356 billion t.f.e. Analysis of available geothermal resources in Kazakhstan shows that a major part of them can be used for heating and not less than one third of resources are suitable for power generation both by direct method and with the use of binary cycles. Geothermal electric power can be generated in 9 out of 14 oblasts; however, 92 % of these resources are concentrated in Mangistau, Western Kazakhstan and Atyrau oblasts and another 6 % in Aktobe, Shymkent and Almaty oblasts. The most promising electric power generation is forecasted in UstyurtBuzashinskiy and Mangyshlakskiy sedimentary basins. Their geothermal resources with temperatures of more than 150 are 100 and 62 billion t.f.e. respectively. It is necessary to note that the temperature of rocks at a depth of 5 km on major part of the Kazakhstan territory exceeds 90, and in Mangistau, Almaty, Shymkent and the Pavlodar oblast it is as high as 140-180 which makes it possible to further develop electric and thermal stations with direct (with well heat exchangers) use of geothermal heat. The developers did tentative technological calculations that demonstrated economic feasibility and market competitiveness of construction and operation of geothermal heating stations (GHS). In order to ensure industrial development of thermal energy resources in Kazakhstan, the developers have suggested a number of priority measures. It is necessary to note that geothermal power generation and heating systems require high capital investments. However, in spite of high capital costs, the cost price of thermal and electric energy generated by geothermal stations can be lower than that generated by HPS due to zero cost of the fuel component. Conclusion 3.5 The available data show that Kazakhstan possesses significant potential and technical geothermal energy resources; however, the scale of its utilization is extremely low. On the territory of Kazakhstan, there are a number of geothermal sources with very high potential of working medium that can be used in power generation by direct method. The use of geothermal energy can be very promising in a number of Kazakhstan regions, particularly in remote, desert or mountain areas. Preliminary technological calculations show that geothermal heating stations are feasible virtually on all the territory of Kazakhstan. Energy of biomass and solid household waste Biomass and solid household waste (SHW) are used according to two technologies: thermochemical; biochemical (microbiological).

The most widespread thermo chemical method of biomass use and disposal of SHW is direct burning, which is practiced most widely. The technology of production of combustible gas and other chemical compounds (methanol, acetone, phenols, etc.) by method of biomass and

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SHW pyrolysis, gasification, liquefaction, and synthesis is almost non-existent in Kazakhstan. However, the above technologies are widely used in a number of countries (Brazil, the USA, China, India, EU countries and others). It should be noted that these technologies are going to have a great future. One of the reasons for insignificant scale of the use in Kazakhstan of biomass technologies is the very insignificant potential of biomass resources. This is due to the absence of large forests of practical importance, which is the reason for insignificant development of wood processing industry that is the major source of biomass to be used for processing. However, important biomass source can be cattle breeding, where manure can be dried and burned as a traditional nomadic peoples fuel for heating and cooking. The biochemical technology that is of interest to Kazakhstan is microbiological conversion for production of methane or so-called anaerobic digestion. According to experimental data, fermentation of one ton of organic substance produces 350-500 3 of fuel gas with calorific value of 4300-6000 kilocalorie/m3 , which is equivalent to 0.6-0.8 kg of liquid organic fuel equivalent. It can be used as fuel for heating and power generation as well as an engine fuel. Anaerobic biomass fermentation produces (along with biogas) organic residue which can be used as decontaminated odorless fertilizer of higher fertilizer quality than ordinary manure, which is especially important to agriculture. It is necessary to note that in Kazakhstan this technology is used very rarely mainly due to relatively high initial capital costs. As to the production of biogas from SHW stored on dumps, this technology is not applied in Kazakhstan at all. Such technology is being widely used abroad. Biogas can use for habitation and food heating. Using of Biogas from SHW stores can help Kazakhstan avoid groundwater pollution, to reduce smoke near the SHW stores, and to reduce GHG emissions. Hence, non-availability in Kazakhstan of biomass resources in industrial volumes predetermines the impossibility to use biomass for generation of any significant amounts of electric power by means of fixed power stations. Nevertheless, the available widespread biomass potential in Kazakhstan is the reason to explore the possibility of its wider use, in particular for power and heat generation by small farm plants for household use or by small industrial plants for local use. Solid household wastes have a significant potential as primary energy resources that should be used. Conclusions Kazakhstan possesses very small biomass resources to be processed. The current use of available biomass and SHW potential in Kazakhstan is insignificant. To process biomass and SHW, basically thermo chemical methods are used; biochemical methods are almost not used. Of all thermo chemical methods, direct burning is only used to produce heat; technologies for electric power generation are not used. Biochemical biomass processing (individual instances) is used to produce biogas subsequently used for heat generation and household use; technologies to generate electric power are not used.

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4 4.1

BARRIERS BLOCKING THE INTRODUCTION OF RES TECHNOLOGIES Current situation in development of power generation on the basis of RES Currently, in Kazakhstan there exist a number of political and institutional possibilities for development of RES and energy saving processes. They are the following: Further development of market economy; Privatization measures in the electric power sector of the national economy; Creation of the electric power and capacity market; Adoption of RK Laws On energy saving and On electric power industry; And a number of others.

It is also necessary to note that with all of the above possibilities and with the high potential for renewable energy resources and energy saving, in Kazakhstan there is not yet large-scale application of technology for heat-and-power generation on the basis of renewable energy sources. Basic provisions of RK Law On energy saving have not been implemented. 4.2 Classification of barriers and ways to overcome them

Analysis of the problems hindering the development of electric power generation on the basis of RES and increase in energy efficiency of the national economy indicates a number of interfering factors (barriers). The key barriers include: Legislative barriers; Economic barriers; Tariff barriers; Tax barriers; Technical barriers; Institutional barriers; Information barriers.

The barriers listed above indicate a wide range of reasons why the level of development of renewable energy and energy saving processes in Kazakhstan is low. It is necessary to note that the major parts of the same barriers are faced by renewable energy sectors in virtually all countries. The successes attained by a number of countries in the area of renewable energy sources would be impossible without implementation of comprehensive state measures, basically of cost-is-no-object nature, aimed at overcoming the causes hindering the development of power generation, heating, cooking and etc on the RES basis. However, it is necessary to note that this basically refers to developed and rich countries. Renewable energy is used not only for commercial energy, but is also used for heating food and space heating, but is now also starting to be used in the transport sector as well. However, the economic situation in Kazakhstan and other CIS countries is not yet favorable for implementation of the entire set of economic and financial measures listed below to promote the development of RES and energy saving processes. Nevertheless, it is necessary to consider all possible ways, taking into account world experience, to overcome barriers hindering the development of RES and to increase energy efficiency.

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4.3

Legislative Barriers

As was noted above, Kazakhstan has adopted framework Laws of the Republic of Kazakhstan such as: On energy saving and On electric power industry. As was stated above, RK Law On electric power industry in principle allows all participants in the electric power and capacity market to participate in generation and sale of electric power in this market. Moreover, the participants in the market are not limited by patterns of ownership of generating capacities. However, the Law does not address issues of participation of generating companies operating on RES in the Kazakhstan market of electric power and capacity. RK Law On energy saving constitutes the legal basis for implementation of its provisions, development of institutional opportunities and economic incentives in the area of energy saving and renewable energy. Nevertheless, some basic provisions of the Law are of declarative character only. It is necessary to supplement them with appropriate by-laws and normative documents in order to establish practical mechanisms for their implementation. This, in full measure, concerns the use of renewable energy sources. According to article 15 of chapter 4 of this Law, the use of renewable energy resources is a priority for power generation development programs and settlement of environmental problems in Kazakhstan. Program for development of electric power industry in Kazakhstan till 2030 developed by the Ministry of Energy, Industry and Trade of the Republic of Kazakhstan provides for construction of wind-driven electric power stations with a total capacity of 520 megawatt, and rehabilitation of dilapidated, and construction of new, small hydroelectric power stations. Yet, analysis of current legislative and normative acts and documents promoting the development of RES and analysis of prospects for development of electric power industry in Kazakhstan show that without implementation of additional measures promoting the development of RES, the main provisions of Program concerning renewable energy will hardly be realized. The similar situation is seen in energy saving. This is due to the fact that the adoption of RK Law On energy saving has not laid the necessary legal and institutional foundation for the process of energy saving. Hence, the available legislative documents are not enough for development of renewable energy generation and process of energy saving in Kazakhstan. It is therefore necessary to launch additional legislative initiatives. Availability of a well-developed and adapted normative legal basis is the guarantee of financial stability in the sphere of RES for private investors which would allow them to evaluate in advance all economic advantages and disadvantages of their projects. Besides, ways of realization of electric power generated on the basis of RES due to its higher cost in comparison with traditional sources is of vital importance to independent producers. Normative legal acts are to promote real development of RES power generation and give impetus to the process of energy saving in the country. It is necessary to note that a number of developed countries have adopted relevant laws. It is useful to examine the main provisions and experience in implementation of these laws. Yet, the issues related to granting legislative economic privileges and preferences would be addressed below in sections dealing with overcoming of economic, tax and tariff barriers.

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Greece. The new (second) law of Greece on RES (1994) obliges the state monopolist Public Power Corporation - to purchase all electric power generated on the basis of RES by independent producers for a competitive price. Denmark. Law on RES (1992) obliges power supply companies to purchase full volume of electric power offered by independent producers and generated by wind-driven plants and guarantees reimbursement to private electric power producers using wind-driven plants of a rate not less than 85 % of the retail price for electric power generated with the use of organic fuel. Israel. Israels legislation demands that all new buildings up to 23 m high be equipped with solar water-heating systems. Italy. Under conditions of state monopoly in power industry, Law 10/91 guarantees to private producers of electric power generated on the basis of RES that their energy would be sold for privileged prices that will allow them to cover costs. Also, the private sector enjoys the right to RES grants. For example, grants can cover up to 30 % of capital costs of wind-driven plants with a capacity of more than 3 megawatt. Hence, appropriate legislative policies pursued by governments in a number of countries have sped up processes of energy saving and development of power generation on the basis of RES. One of such initiatives in the area of normative legal acts could be adoption in Kazakhstan of law On the state policy concerning the use of renewable energy sources. The Law should provide for relevant privileges and preferences for power and heat producers using renewable energy sources. It is necessary to note that laws dealing directly with RES have been adopted only in a limited number of countries. Nevertheless, legislative support for development of renewable sources exists in the overwhelming majority of developed countries and in a number of developing countries. Such support is provided by introduction of corresponding articles in laws on energy policy, energy saving and increase in productivity of fuel and energy resources as well as by introduction of taxes on use of various types of organic fuel, limitations on emissions, new more strict energy efficiency specifications for buildings, etc. Taking into account the stated factors as above, a legislative initiative concerning renewable energy sources and energy saving in Kazakhstan could include the following basic aspects: Law On electric power industry should be amended to read that independent energy produced using renewable sources, whatever their pattern of ownership, would enjoy full rights of participants in the electric power and capacity market in Kazakhstan and have the rights equal to other participants in this market; All produced electric energy should completely and first of all be let in the national or regional power grid and sold to consumers; Establishing priority, and streamlining procedures for approval and granting permits to implement renewable energy projects; Simplification of procedure for obtaining licenses to produce and sell electric power generated on the basis of RES; To develop standards and requirements that certain percent of energy should be generated on the basis of RES; and if possible to develop regulations for sale of renewable energy credits, i.e. to introduce in this process a market mechanism

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according to which any energy producer could purchase credits from producers that have surplus renewable energy; To develop requirements concerning mandatory purchase by utility companies of all electric power generated on the basis of RES which will significantly increase the confidence of potential developers that they will be able to sell all their RES produced electric power; To provide for a market mechanism to purchase and sell threshold amounts of emissions, which will stimulate the development of, power generation on the basis of RES. To develop regulations for bank deposits. Bank deposits are a unique policy followed in India where wind energy producers can deposit a certain percent of produced energy and withdraw this energy during certain period of time. This idea is used to offset the problem of intermittent character of wind energy which allows owners of wind stations to accumulate energy during high wind periods and to take it back during low wind periods. Also, the consumer can receive this energy if required.

4.4

Economic Barriers

One of the most critical factors hindering the development of RES and the increase in energy efficiency of the Kazakhstan economy is the relatively low level of current prices of primary (fuel) and secondary (electric power and heat) energy resources. Cost of electric power for the consumer is 2-4 cent/kWh; however, the sale price for electric power at energy sources is 0.9-1.5 cent/kWh depending on region. By experience, cost price of new RES electric power is 3-15 cent/kWh, which is several times higher than sale price established on the electric power market in Kazakhstan. The growth in the Kazakhstan economy and, accordingly, the increase in energy consumption and the need to cover this growth require that investments in the electric power sector should be increased to restore existing and build new generating capacities. As a result, there needs to be an increase in the sale price for electric power generated by the traditional power sector which will somewhat improve economic conditions for power generation on the basis of some types of RES. Some European and other countries have positive experience in wide application of economic mechanisms for support of RES development programs. It is useful to examine some aspects of economic support mechanisms suitable for Kazakhstan, as follows: Government grants. The purpose of grants is to encourage businessmen to implement projects in certain areas and types of renewable energy generation determined by the government as a priority for a specific period of time. For example, Denmark gives tax-free grants for projects focused on re-equipment of heating stations from organic fuel to biomass or biogas. In Sweden, investment grants issued by the government cover about 85 % of expenses for windmill construction and 25 % of expenses for construction of solar heating systems. In addition, investment grants cover about a quarter of the costs of re-equipment for combined generation of heat and electric power on biofuels. Grants are widely used in Australia, Austria, France, Germany, Italy, and Switzerland.

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Soft loans. For example, in 1994 in Canada, a 50 million dollar credit line was open to encourage projects on production of ethanol from biomass. Japan widely uses soft loans for geothermal and solar projects. Green certificates. This support mechanism offers RES energy producers two sources of income. First, the produced energy is sold for the price prevailing on the market. In addition, the producers receive green certificates for their production. They circulate on the market and can serve as certificate of compliance with requirements imposed on energy suppliers or buyers according to which a certain share of energy should be purchased from green RES generators. As the market of these certificates expands, RES stations will receive additional revenue from their sale. This is the second source of income. The percent of energy generated from RES, which is to be bought by suppliers, will increase in time. RES power stations will compete with each other in sales of energy in the form of green certificates, which will establish a mechanism for ensuring profitability and attaining the assigned goals. Government guarantees. Owing to the fact that renewable energy is a high-risk area due to the instability of the source of power, its conditions are not so favorable as those of traditional sources if financing comes from external sources. In this connection, many governments guarantee loans, provide grants with low level of payment or offer low interest loans. Such privileges in respect to capital investments help owners of power stations to make payments due in the first years of the projects. 4.5 Tariff Barriers

As was stated above, among most difficult barriers hindering the development of RES power generation and the increase in energy efficiency of the Kazakhstan economy is the relatively low level of current prices of electric power and heat. In view of significant capital costs of construction of RES stations, low prices of energy lead to rather long payback periods for stations and their commercial non-competitiveness. In a number of countries, to ensure commercial attractiveness of RES, governments take special support measures in the area of tariff policy, as follows: Guaranteed tariffs. Electric power generation is paid for under a special tariff that can be both independent rate and bonus rate established as an extra charge to the market price. The bonus rate is determined by the regulating agency, and in fact it is a subsidy. The guaranteed tariffs cover production costs and ensure some profit. This support mechanism is most popular with European Union states. In Denmark, for example, independent producers of electric power from biogas and wind energy that sell it through the national distribution network, starting from 1992, were granted the right to subsidies in the amount of 4.2 cents per kWh which covers an essential part of production costs and increases economic competitiveness. In addition, the Danish government also grants subsidies for electric power generated from utility, wood and agricultural wastes. Competitive price. The regulating agency or an independent agency selects projects on the basis of their relative competitiveness. Energy is supplied under long-term contracts with tariffs established in the tender process. Such a mechanism allows the regulating agency to control the development, technology and siting of RES plants. This scheme was supported by four European countries (the UK, Ireland, Portugal and France), but now it is still in use only in Ireland and Portugal whereas France and the UK have abandoned it. The competitive price scheme showed its effectiveness in ensuring low project costs but entirely unsuitable for establishing large generating capacities. The lack of certainty of these tender schemes was also

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not successful in establishing suitable sustainable domestic manufacturing industries or support clusters either. 4.6 Tax Barriers

An important basic element of state regulation of renewable energy development and energy saving in the country is granting economic incentives, an important component of which is preferential taxation. Investment tax privileges usually reduce capital costs for the investor because the investor is allowed to reduce the tax burden for a part of the invested sum. Such economy on taxes results in investment cost reduction. Tax privileges in other countries that can be applied in Kazakhstan include: Production tax privilege provides annual tax abatement for energy producers in regard to the energy generated by a specific station. For example, in the USA the industrial tax privilege is 0.15 US dollar for all producers of renewable energy. This privilege encourages the potential developer not only to build a RES power station, but also to generate as much as possible energy to earn more production income. Exemption from customs duties or reduction of their size is another common type of investment privilege. The government of the importing country can reduce or entirely abolish customs duties on the imported energy saving equipment or RES power station equipment. Such a measure will effectively reduce capital costs and, accordingly, project costs as a whole since initial capital investments account for the main part of project costs. The exemption from property and land taxes or their reduction is a measure that can be used for the purpose of reducing the cost of a power station and all investments. As is well known, the cost of RES power stations is basically much higher than that of the stations operating on fossil fuel; therefore they are subject to a higher property tax. The stimulating role of the fiscal policy should consist of ensuring tax abatement for the following. 4.7 Expenses connected with procurement out of the profit generated through the RES use and the use of new energy efficient equipment, including control instruments and energy consumption meters; Expenses connected with development and introduction of RES technologies and energy saving technologies and equipment; Expenses for research and development (R&D) in the area of RES and energy saving; Reduction of customs duties on imported RES generating equipment.

Institutional Barriers The basic barriers are: No national agencies are directly responsible for development of renewable energy and energy saving processes in the Republic of Kazakhstan;

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 4.8

Lack of national and local level support of renewable energy and energy saving processes development; Low performance or lack of presence at the local level (rayon, town, oblast) of agencies directly responsible for development of renewable energy and energy saving processes in the Republic; Lack of economically feasible and financially secured development programs for renewable energy and energy saving at national and local levels Insufficiently developed system of state control over energy resources consumption; Low performance of existing supervising agencies.

Technical Barriers The technical barriers (most surmountable): Lack of ready supply systems for some RES systems; Low level of standardization and certification of equipment or absence thereof; Underdeveloped infrastructure; Insufficient R&D and technological development.

4.9

Information Barriers The basic barriers are: Low awareness of population, management, etc. about RES opportunities and energy efficiency; Lack of wide promotion; Unavailability of data on positive examples of the RES use.

5 5.1

THE STATUS AND PROSPECTS FOR DEVELOPMENT OF FINANCIAL AND ECONOMIC SECTORS OF THE REPUBLIC OF KAZAKHSTAN The tariff policy and investment environment

The state tariff policy is of great importance to the development of energy generation since the tariff is the major factor in profit generation as well as an important source of investments to support, upgrade and expand available capacities. Under the planned economy and the state monopoly on power capacities, the tariffs were set by Governmental Resolutions and were uniform across all the territory of the USSR, and unprofitable power generation enterprises were subsidized by the state budget. In the course of economic reforms there was a gradual transition to tariffs based on actual costs and standard expenses. The tariffs were approved by regional antimonopoly agencies. At present in Kazakhstan there is an electric energy market consisting of two levels the wholesale and retail electric energy markets. Prices in the wholesale electric energy market are subject to competition among producers on the basis of demand and supply. However, prices of electric energy supplied by power distributing organizations are set independently.

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As a result of the development of competition in the wholesale market the delivered price of electric energy generated by power stations dropped from 4.0 cent/ kWh (1996) to 0.7-0.8 cent/ kWh (2002). In 2002, for the first time a positive electric energy export/import balance equal to 130.5 million kWh was achieved. Electrical energy transmission services are related to the natural monopoly area, and their tariffs are set by anti-monopoly agencies. In some regions of the country the tariffs on electric and thermal energy supplied to the population were subsidized at the expense of industry. However, in practice the costs of providing energy services to the population are higher than of those to industrial consumers. Hence, owing to some subjective reasons, economically unsound differentiation of tariffs on electric energy are being kept unchanged in Almaty, Aktobe, Atyrau, Eastern Kazakhstan, Western Kazakhstan, Karaganda and Mangistau oblasts. The same situation exists with thermal energy tariffs in Eastern Kazakhstan and Zhambyl oblasts. Unsound differentiation of tariffs hinders efficient industrial development. Industrial enterprises that subsidize other consumers, in particular population, through excessive tariffs on thermal and electric energy bear unreasonably high costs which, as a result, negatively affects the competitiveness of such enterprises. In 2003, the Regulation for approval and introduction of mid-term tariffs on natural monopoly services, which was aimed at encouraging investments in energy generation, was developed and adopted. 5.2 Main problems of tariff policy Low level of investments in reconstruction and renovation of electric and heat facilities. The problem of reasonable sharing of costs of combined generation of electric and thermal energy taking into account the need to maintain the competitiveness of electric energy generated by cogeneration plants has not been solved yet. The tariff policy does not duly encourage the introduction of RES. The primary tasks to be fulfilled to improve the tariff regulation system are: To improve mechanisms that ensure the transparency of tariff setting, to introduce mechanisms for separate accounting of income, costs and assets involved in provision of services by natural monopolies; To ensure depreciation of relevant assets for the purpose of creating conditions for regular replacement of fixed assets, in accordance with the principle of application of new technologies and equipment, ensuring low emissions and low thermal and electric energy losses and increasing investment attractiveness of the sector.

5.3

Required resources and sources of tariff reform funding

The new Tariff Concept is funded through the Republican budget. The financial resources required for the introduction of the Concept is 1361.8 million tenge, including: in 2005 399.4 million tenge; in 2006 496.9 million tenge; in 2007 465.5 million tenge.

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However, the introduction of an investment component in the tariff will result in higher prices of electric and thermal energy. Tentative calculations show that if investment in electric energy generation is about 2 billion US dollars during the period till 2015, sale prices of electric energy at stations will grow on average by 0.25 0.3 cent per kWh. Yet, reduced tariffs that do not include the investment component do not encourage energy saving and lead to higher specific energy consumption. Obviously, a rise in tariffs will encourage energy consumers to save energy and stimulate investments in this sector. 5.4 Expected outcomes from the Concepts introduction: The introduction of this Concept will bring the following outcomes: Establishment of a mechanism for financing of infrastructural sectors rehabilitation; Establishment of conditions for transition from economic policy of survival to economic policy of development; Establishment of conditions for transition to setting limiting mid- and long-term tariffs and reducing administrative economic regulation mechanisms; Higher investment attractiveness due to predictability of tariffs; Transparency of natural monopolies due to the application of a progressive pricing methodology, separate accounting and methods for profit calculation; Improvement in the quality of delivered services due to the modernization of production, increase in management efficiency and decrease in above-standard losses; Removal of barriers to integration of Kazakhstan into the world economy by means of implementation in the Republic of requirements of the World Trade Organization and European Economic Community.

5.5

Need for Investment

At present, the structure of the electric energy industry resulting from reforms has three basic segments: Large national electric energy stations generating significant volumes of electric energy - State District Power Stations 1 and 2 in Ekibastuz; State District Power Station in Aksu; State District Power Station 2 in Karaganda; and Irtysh coordinated hydroelectric system including - Buhtarminskaya, Ust-Kamenogorskaya and Shulbinskaya hydroelectric power stations; The national power grid (operated by G) providing services in transmission, controlling and regulating electric energy as well as coordinating interstate electric flows from and to electric power systems of neighboring CIS countries; Regional energy companies generating electric and thermal energy as well as distributing energy: regional power stations, distribution power grid companies and municipal heating systems.

Renewable energy sources are virtually not included in the energy balance of the country and have not yet aroused due interest of the Government and business. Taking into account significant reserves of natural and associated gas in the West and the South of Kazakhstan, cheap open-cut coal in the North, and coordinated hydroelectric system in the East, RES cannot compete with large producers in the open energy market without state

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support. The development of RES requires a number of legislative measures to encourage RES producers, suppliers and consumers measures, which are not in place yet. According to the Program for development of power grid in the RK for the period till 2010 with prospects till 2015 the mid-term energy consumption in Kazakhstan will be: in 2005 65.6 71.0 billion kWh (minimum option maximum option); in 2010 - 78 88 billion kWh; in 2015 - 91 - 97 billion kWh.

In order to meet growing electricity consumption, by 2015 it will be required to increase electric power generation at existing and newly built power stations in Kazakhstan by more than 1.5 times in comparison with the 2004 level. However, according to experts, without special rehabilitation of national block stations the economic life of primary equipment will be significantly spent: by 2010 by 1900 megawatt, by 2015 by another 1400 megawatt. By 2015, at regional stations by 2700 megawatt. Thus, there is a pressing need to take measures to extend economic life of primary equipment at power stations in Kazakhstan. According to experts, the restoration of economic life of existing national and regional power stations will require investment of $800 million. Two large projects (more than $300 million each) are being implemented at the national power grid operated by OJSC KEGOC: 1. Kazakhstan NPG modernization project. 2. Construction of the second North-South 500 kV high voltage transit line in Kazakhstan. In addition, at present KEGOC has completed feasibility study for construction of Northwest high voltage line with a throughput capacity of 350 megawatt. The project cost is estimated at more than $100 million. Very significant investments are also needed for distribution power grid companies. The major part of generating sources in the power sector of the country operates on mineral fuel. The coal thermal power stations account for about 84 % of the energy balance. The contribution of hydro-power is estimated at less than 12 %; a little more than 4 % remaining is generated by gas-turbine power stations which is obviously too low taking into account the large amounts of associated gas that are currently flared without any productive use. Wind and solar energy is virtually absent in the energy balance of the country. The RK is a significant greenhouse gas emitter. In the mid 1990s, at the initiative of a number of international organizations, an inventory of GHGs was carried out in Kazakhstan. As a result, the annual volume of GHG emissions at the 1990 level was estimated at 320 million tons of carbon dioxide equivalent. According to the International Energy Agency, specific greenhouse gas emissions indicators per unit of gross domestic product rate first in the world and Kazakhstan by per capita emissions thirteenth. By absolute greenhouse gas emissions it is rated twenty third in the world, third among CIS countries and is the leader among Central Asia countries.

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The economic crisis that took place during the transition period led to considerable reduction in energy consumption and, accordingly, in greenhouse gas emissions which reduced in comparison with the year of 1990 by almost a factor of two. However, as the economy grows, the energy consumption restores and, accordingly, the emissions increase. The major consumer of fuel and, naturally, the main source of greenhouse gas emissions in the Republic is the energy sector. A few years have passed since the time when results of this study were obtained; however, the situation has not changed or, at least, improved. It is evident that for this period of time there have been neither essential structural changes in the resource basis of the Kazakhstan energy sector, nor essential growth in its efficiency. According to the 2001 inventory, the major source of GHG emissions is electricity energy generation, which accounts for 79.2 % of total emissions of 2 equivalent. The high volume of emissions is primarily due to the prevailing use of solid fuel (coal) in the national energy sector. In order to meet the projected growth in demand for electric power, investments in generating sources of $2400 million are needed (only for the domestic market), including: 5.6 Rehabilitation and reconstruction Expansion and new construction $800 million; $1600 million.

Sources of project funding Possible sources of financing can be subdivided into five basic categories: Own funds Commercial loans Financial leasing External share capital Preferential financing.

The categories indicated above can seen as a priority list of financing options. In other words, the project initiator should evaluate first of all their own funds that may be allocated for the project before they calculate and seek a commercial loan or a lessor. External investorsshareholders can be the next step. And, finally, preferential financing can be sought. 5.6.1 Review of international methods for encouraging investments and sources of financing

Foreign countries, in addition to loans and leasing of equipment, employ methods for direct and indirect stimulation of RES and energy saving (ES) as well as development of new traditional power generation technologies. Taking into account the fact that RES and ES technologies are, as a rule, innovative, close attention is paid to research and development that cannot be financed on a strict commercial basis alone. Such activities are generally funded through the public budget or specialized public (private) funds. Methods for direct stimulation are: Development and implementation of targeted research and development programs; Budget financing of scientific research institutes and design offices; Conclusion of contracts with private companies on specific activities in the area of RES and ES;

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Establishment of scientific and technical information centers; Establishment of centers for training and advanced training.

Direct stimulation of works on RES and ES in various countries has some specific examples, as follows: In Germany, direct stimulation is the main principle of the innovation policy. Companies can develop projects on the basis of programs of the Ministry of Research and Technology. If such is the case, the Ministry grants financial support to private firms. Large scientific research institutions can play the role of intermediaries between the government and businesses. In Japan, the share of direct state allocations for research and development is relatively lower. The government initiates and organizes national research and development programs, disseminates information about state-of-the-art technologies, purchases patents and licenses abroad and subsequently resells them to private companies. In the USA, the Government allocates public funds for most capital-intensive activities and dissemination of information.

Unlike the direct stimulation approach, the indirect stimulation approach is mostly aimed at introduction of new developments and purchased patents. Indirect stimulation includes: Public subsidies; Preferential crediting (long term low interest and interest-free credits); Discounts for utility services, tariffs, prices of equipment; Depreciation privileges (accelerated depreciation); Tax privileges.

Developers of new equipment, producers of modern equipment, sellers of equipment, and buyers of new equipment are generally eligible for stimulation. Each country employs its own set of privileges and stimuli to create a favorable innovative climate and arouse economic interest of companies in development and introduction of new technologies. In particular, in the USA and Japan the scale of indirect stimulation is much higher than in Europe (Germany and France). It is thus recommended that the Government of the Republic of Kazakhstan establish a National Commission for implementation of RES and ES programs, including representatives of the following target groups: The Ministry of Environmental Protection, Ministry of Economy, Ministry of Finance, Kazakhstan Energy Association, major private companies (which is more preferable than unions and associations of businessmen), Akimats of major energy generating oblasts, commercial banks, parliament, trade unions, non-governmental environmental organizations, associations and social movements of the population in the areas of hard environmental impact, experts and scientists. Performance Contracting A special form of attracting private capital to the area of energy saving is performance contracting (PC), i.e. a contract financed with actually saved funds.

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In other words, it is based on guaranteed future energy savings. The PC allows the customer, i.e. the industry, residential sector, hospitals, schools or businesses to use future energy savings for current modernization of enterprises and reduction of current costs. The scheme for implementation of PCs is as follows. The energy service company (ESCO): Carries out inspection of the building or industrial enterprise to find possibilities to save energy; Recommends energy saving measures (ESM); Introduces those ESM that are affordable for the owner (without his initial expenses).

ESCO guarantees that the volume of energy savings will cover expenses for capital modernization provided that prices of energy will not fall below a certain floor price. Thus, the client, without spending additional funds for new equipment or technology, upon the expiry of the contract obtains an energy effective technology. According to the US experience, originally the majority of projects were based on the principle that each party (to the PC contract) got its share of savings obtained from modernization. After the sharp drop in prices of energy in the mid 1980s, it became clear that to implement contracts based on joint savings ESCO would need more time to recover their costs. In this connection, performance contracts based on guarantee of saving were developed. Now, ESCO and energy companies can provide essentially new types of energy services: Energy performance contracts; Energy management systems; Load control; Energy marketing; Management and procurement of energy resources for enterprises; Risk management.

ESCOs can also attract funding for projects, ensure preparation of specifications and project development, deal with environmental issues, organize operation and maintenance of equipment, and so on. ESCO and energy companies are capable of packaging their services, providing them to customers separately or in packages. And finally, energy companies and ESCO are capable of finding more and more effective means to guarantee the recovery of investments. 5.6.2 Review of sources of financing and preferences available in Kazakhstan

To date, in Kazakhstan, financial development institutions and a number of service development institutions have been established. They are ready to share risks and participate in co-financing of joint projects. Resolution of the Government of the Republic of Kazakhstan of April 25th, 2005 approved the Program for formation and development of the national innovation system in the Republic of Kazakhstan for 2005-2015. In particular, the program provides for

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establishment and development of basic elements of the financial infrastructure regarding the expansion of types of grants and establishment of venture funds jointly with domestic and foreign investors. In accordance with the Strategy for industrial innovation development, special state financial institutions were established: Development Bank of Kazakhstan, National Innovation Fund, Investment Fund of Kazakhstan, Centre for Engineering and Technology Transfer, Fund of Science, Centre for Marketing and Analytical Research, and Small Business Development Fund. The program also provides for significant expansion of grant system to finance development works (DW) on a competitive basis through the public budget. Grants for sums up to 5 thousand US dollars are provided through the National Innovation Fund. These are so-called pre-project grants issued for the purpose of preparing a complete set of documents to patent inventions for sums up to 50 - 100 thousand US dollars, register DW patents abroad for sums up to 250 thousand, complete research and produce a useful model or an invention and get it ready for industrial production. In the framework of the financial infrastructure development, venture funds with noncontrol participation of the National Innovation Fund are foreseen. Thus, to date the National Innovation Fund together with private capital has established three venture funds in Kazakhstan with a total authorized capital of 28 million US dollars. The total cost of the Program for 2005-2015 is 139795.13 million tenge (more than 1 billion US dollars), including from the republican budget 77272.3 million tenge and local budgets - 2112 million tenge. There are plans to engage private national and foreign capital in the sum of not less than 60410.83 million tenge. It seems that program funds will be used basically to establish infrastructure for innovation development. Therefore, major investors can be banks and other financial institutions, among which venture funds can play a special role. The development of venture investment in Kazakhstan, especially at the first stage of implementation of the Program and the capitalization of the venture capital market are possible only with active participation of domestic institutional investors and financial institutions. They are the main sources of venture capital in developed countries. Thus, in 2000 in the USA, institutional investors accounted for about 60 % of venture capital; the share of banks was about 23 %. In Europe, institutional investors and financial institutions account for about 30 % of venture capital. At present in Kazakhstan, commercial banks, pension funds, insurance companies, financial and industrial groups have accumulated significant financial resources, a part of which after liberalization of regulation regime can flow into the real sector of the economy, including in the form of venture capital. However, in Kazakhstan there are significant barrier to participation of institutional investors and financial institutions in venture financing. Thus, according to the Law On investment funds the management company cannot be shareholder of an investment fund.

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According to the Law On insurance, insurance organizations are to invest their assets in liquid instruments, including in private securities of Kazakhstan issuers included in the official list of tender organizers under the highest category. Pension funds have the right to invest in private securities of Kazakhstan issuers included in the official list of tender organizers under category A. Investments by second level banks are made in accordance with the Rules for classification of assets and contingent liabilities and creation of provisions against them. According to these Rules, all investments are deducted for the purpose of calculating of regulatory capital. Therefore, in order to engage assets of these financial institutions it is necessary to amend the relevant legislation and develop real mechanisms to encourage investment in new technologies, including in RES and ES technology. The possibilities of financial institutions are examined below. 5.6.3 Commercial banks

Kazakhstan commercial banks are a major potential source for project financing by means of credit financing and through their affiliated leasing companies. The potential of the Kazakhstan banking system is high; it is regarded as the most developed in the CIS. Thus, Kazakhstan banks operate assets of not less than 22 billion US dollars. As of May 3rd, 2005, they have provided loans for a sum of 1523 billion tenge (about 12 billion US dollars). Banks also participate in investment activities. For example, in 2003 Kazkommertsbank granted a 14 million dollar loan for the period of 7 years to OJSC Aktobemunay-finance for construction of the second stage of Zhanazhol DTS in Western Kazakhstan. In October 2005 it was commissioned. 5.6.4 Leasing Companies

Main founders of leasing companies are commercial banks. They also grant loans to these companies for implementation of their programs. Being based on joint property right to assets and right to use these assets, a leasing transaction, as an economic activity combines elements of loan, lease and investment. It is believed that leasing has a number of advantages in comparison with other forms of financing. However, leasing has certain drawbacks connected, for example, with some accounting problems that have not been resolved yet. Besides, leasing transactions, which involve several parties simultaneously, require careful preparation and good management, which otherwise, due to the shortage of skilled personnel, can lead to financial losses. Simple listing of obvious advantages and disadvantages of leasing is enough to draw a conclusion that leasing is an effective form of investment financing. These advantages of leasing as a prospective financial technology have resulted in its wide application in developed

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countries with market economies (not less than 25-30 % of annual volume of direct investments). Such form of investment can be very effective particularly for RES and ES projects that are not too capital-intensive. The most essential advantage is the fact that all leasing transactions are prepared and managed by the personnel of the leasing company which is an important supporting factor for small investors that do not have relevant experience in ordering and importing equipment (for example, farmers). At present, Kazakhstan possesses a sufficient legislative basis on leasing (Civil Code, Law On financial leasing of July 5th, 2000), as well as leasing companies with skilled personnel and required financial resources. No information is available about participation of such companies in leasing of energy equipment; since main objects of leasing operations are agricultural equipment and machines, vehicles, trade equipment, etc. All these leasing objects are highly liquid which reduces risks of the lessor. However, some companies do not mind leasing energy equipment. Table 11 summarizes data on leasing companies. Table 11. Data on Leasing Companies Leasing company Centre-leasing Alpha-leasing Nur-Invest Halyk Leasing Temir-leasing Alliance Leasing BTA Leasing Sum of transaction, $ >35000 any >5000 >50000 >10000 5000 2000000 >50000 Period of leasing 3-7 years Advance payment up to 30 % Rate of leasing Specialization Any sector Any sector Any sector Any sector Any sector SME and private enterprises SME and utility services Any sector

3-5 years 1-7 years 1-6 years 1-5 years - > 1 year 3-5 years 3-5 years

ATF Leasing 5.6.5

any

Currency - 17-18 % Tenge - 20-24 % up to 30 % Currency - 12-18 % 30 % Currency > 12 % Tenge 18-23% Not Currency - 15-18 required % from 15% Currency - 17and up 21% from 20% Tenge 18-23% and up Currency - 12Utility services - 14% 10 % 2030 % 10-20% Currency - 1822%

Financial, investment institutions and development banks

Several different types of financial and investment institutions (besides banks and leasing companies) operate in Kazakhstan: funded pension funds;

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investment companies; venture funds, non-bank commercial finance companies (groups, concerns, credit partnerships and so on); foundations established with budget and private funds in oblasts, development institutions established by RK governmental resolutions.

As of yet, the Kazakhstan pension systems has accumulated more than 520 billion tenge; and the depreciation of he US dollar in 2004 revived the interest of management companies in bigger share of assets in tenge. The total capitalization of development institutions of Kazakhstan Development bank of Kazakhstan, Investment Fund of Kazakhstan and National Innovation Fund is more than one billion dollars. The project portfolio includes 116 projects worth 2.5 billion dollars, of which 70 of them are already being carried out. Loans are granted for long periods and at low interest rates. Besides, virtually all-major international financial institutions or their affiliated companies are present in Kazakhstan: World Bank European Bank for Reconstruction and Development Asian Development Bank Islamic Development Bank International Financial Corporation Global Environmental Facility.

International financial institutions can solve the problem of financing small projects aimed at increasing energy efficiency by means of target credit lines though local banks and cofinancing of projects. They would attain their goals using simplified, predetermined criteria for approval, which reduces project operational costs to a minimum. a) Development Bank of Kazakhstan (DBK). DBK is a joint-stock company with 100 % state capital. The founders of the bank are the Government and oblast akimats. The minimum amount of loan granted by the Development Bank for an investment project is established at an equivalent of 5 million US dollars. DBK loans and guarantees should be secured with highly liquid assets (state securities, guarantees of second level banks and others) and other securities provided for by legislation. Analysis of eligibility for DBK loans for investment projects shows that loans of the Development Bank differ from commercial loans by longer periods and lower interest rates. However, strict rules for security of credit, high minimum amount of loan and the cumbersome registration procedure set up barriers to the use of this source of financing by small and medium-sized RES and ES projects. b) Investment Fund of Kazakhstan. The Investment Fund of Kazakhstan is one of the state development institutions in the RK. The Fund began its operations in July 2003. The organizational and legal status is joint-stock company in which 100% of authorized capital belongs to the state. The size of the authorized capital is 28.9 billion tenge, or more than 220 million US dollars, which is to be gradually increased in the future. The purpose of the Fund is to provide financial support for private sector initiatives aimed at creating competitive enterprises in the non-extractive

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sector of the economy by participation in the authorized capital of new and existing organizations. The Fund plays a role of direct investor in projects through purchasing up to 49 % of stock. For the purpose of successful implementation of investment projects believe it is seems to be preferable to participate in the authorized capital of enterprises with a strategic investor (one investor or a group of investors) that ensures an appropriate level of project management, provides sufficient marketing and technological expertise to implement technical and technological aspects of the project and owns 50 % and more of stock. Participating in the authorized capital of enterprises, the Fund as an investor shares risks and benefits related to the implementation of projects. The Fund helps strategic investors to minimize local risks and coordinates interactions with state agencies and other participants in the investment industry in this region. As soon as the project has passed the stage of implementation and reached a stable level of sales and production, the Fund will exit the project by selling its share to strategic partners, other shareholders or portfolio investors. To date, the Fund has funded 14 projects for a total sum of 70 million US dollars (9.5 billion tenge). Before the end of 2005 the Fund plans to start co-financing another 16 projects for the total cost of above 800 million dollars. In 2006, the Fund plans to start financing about 22 projects for the total cost of more than 1.1 billion US dollars (145 billion tenge), which after examination were recognized as promising, and for which a decision was taken to develop their business plans. c) National Innovation Fund. Joint-stock company National Innovation Fund (hereinafter, Innovation Fund) was established by Resolution of the RK Government On establishment of joint-stock company National Innovation Fund of May 30th, 2003 502 and is completely owned by the state. The establishment of the Innovation Fund and other state development institutions is aimed at attaining goals and objectives of the Strategy for Industrial Innovation development of the RK for 2003-2015. The establishment of the Innovation Fund should fulfill a system task consisting of creation of effective market mechanisms for introduction of innovation and encouraging venture financing. To date, the Fund has developed its methodological basis and has gained practical experience in financing and controlling joint-stock companies in the course of implementation of relatively small projects. The basic areas of the Funds operations are investments and engagement of investments in venture funds, in companies implementing innovation projects, in elements of the national innovation infrastructure (techno-policies, techno-parks, business incubators, innovation centres) and financing of applied research and development. The Fund establishes the following limits: 1) By scope of investments: investments in venture funds - not more than 50 % of own capital of the Fund; Investments in elements of the national innovation system (techno-policies, techno-parks, etc.) - not more than 10 %;

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participation in the authorized capital of companies implementing innovation projects - not more than 35 %; Financing of applied research and development - not more than 5 %.

2) Limits on investments in one project: share of participation of the Fund in venture funds - not more than 10 million US dollars; share of participation of the Fund in the project concerning creation of an element of the national innovation infrastructure - not more than 300 thousand US dollars; share of participation of the Fund in the authorized capital of companies implementing innovation projects - not more than 2 million US dollars; The sum of a grant for applied research and development - not more than 55 thousand US dollars.

The share of participation of the Fund in the authorized capital of companies implementing innovation projects which are of strategic importance to the state can be more than 2 million US dollars if a corresponding decision is taken by a stockholders meeting of the Fund at the recommendation of the RK Government. In the modern environment, as a result of growing competition in the scientific and technical sphere, life cycles of science intensive products become shorter which makes demands for limitation of payback periods of innovation projects financed by the Fund. The period of applied research and development should not exceed 18 months. To date, in Kazakhstan three venture funds with total authorized capital of 28 million US dollars have been established. For the first half-year of 2005 the Fund received for consideration: proposals for establishment of venture funds with a total amount of capitalization of 33.1 billion tenge (out of which the share of the Fund is 4.6 billion tenge); 12 innovation projects for a total sum of 11.6 billion tenge (share of the Fund is 4.7 billion tenge); 74 research and development projects for a total cost of 0.64 billion tenge (the share of the Fund is 0.59 billion tenge). d) Venture funds. Venture funds are a new phenomenon in the financial market of Kazakhstan. The first funds emerged only in 2005. The founder of all existing venture funds is the National Investment Fund. It is important that the National Investment Fund according to the Program of Industrial Innovation Development should gradually decrease its share of participation in venture funds and abandon its function of the founder in seven years. The ideology of venture technology development in Kazakhstan implies encouragement of private capital to participate in such funds. This means that funds during several years before the National Investment Fund leaves should ensure profitability of investments, at least not less than in other incorporated companies. In the USA and Europe, national venture industries have been one of most stable and profitable financial markets. According to data presented to internet edition "Kursiv" by Nikolay Podguzov, Vice-President of the Russian Investment Bank "Trust", in the USA the average

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profitability of all funds for 1980-2000 (taking into account crashes of Internet companies) was 18 % per year. In Russia, average profitability of venture funds for 1994-2004 was 11 % (taking into account the losses caused by the 1998 default). The prospects for venture capital growth in Kazakhstan are conditioned by factors both favorable and unfavorable. The favorable fact is that during the last five years of intensive economic growth, Kazakhstan financial institutions have gathered significant financial assets that need to be profitably invested. However, due to underdeveloped stock market the opportunities to invest free assets are very limited. In such an environment, venture companies can be of interest as a highly profitable financial instrument. Yet, there are significant legislative limitations on investment of free assets and reserves virtually by all major financial institutions. It is necessary to remove these legislative barriers as venture activities in the country develop. e) Funded Pension Funds. As of June 1st, 2005, in the Republic there were 14 operational funded pension funds with 74 branches and 74 representations in the regions of the Republic. Having grown during June by 14.4 billion tenge (2.7 %), pension accumulation of depositors amounted by July 1st, 2005 to 556.5 billion tenge (about 4.15 billion US dollars). The main problem for pension funds is the lack of financial instruments required to ensure a corresponding level of profitability. The funds possessing significant assets can become major investors in the real sector provided that legislative limitations are removed. However, at present their presence in the Kazakhstan industrial investment market is not noticeable. We can consider their assets only as a potential reserve to be invested. f) Unit Investment Funds (UIF). To date, in Kazakhstan a number of the financial investment companies have started to establish UIF. The market of unit investment became more active after the adoption in July this year of Law On investment funds aimed at engaging peoples money.

Since the population possesses significant savings, that according to some estimation are comparable to assets of pension funds, it is possible that new important players may come to the financial market. It may be sensible to establish specialized UIF focused on investment in RES and ES technology since this area is attractive to the population. However, it is too early to discuss possible participation of UIF in investment in RES and ES projects. 5.7 Brief description of RES and ES project financing

Owing to the fact that development institutions were established in Kazakhstan rather recently and have only started to expand their operations, it is too early to say whether their financial and institutional capabilities are likely to have any significant influence on investment in RES and ES projects. At present, it is possible to rely on loans of commercial banks, and as far as small projects are concerned on grants of international organizations. Some large projects can be financed with participation of international financial institutions (such as construction of a wind-

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driven power station at Dzungarian Gateway where the Global Environment Facility (GEF) contribution is 2.5 million US dollars out of 5.2 million). The use of leasing agreements for the purpose of procurement of equipment can spare some types of projects the need to engage in long-term borrowing. Besides, the state support should be more systematic and multidimensional. At present, the introduction of RES and ES technologies is guided by GEF mainly through grant financing of demonstration projects with small budgets (wind plants, solar batteries, optimization of apartment block heating systems). 5.8 Economic and financial mechanisms for implementation of RES and ES projects

The major financial implementation instrument is the complex of sources of nature conservation projects financing. Nature conservation projects can be divided into three broad categories: Projects that are viable financially i.e. those that have revenues that are sufficient to cover all costs and where the financial risk is considered to be acceptable; Projects that ensure attainment of essential outcomes in the area of environmental protection, but are not financially viable; at least a part of such projects, as a rule, should be funded through the budget or grants; Projects that are not completely financially viable and require preferential financing.

The first category of projects can be considered as safe, since ecological benefits will derive from financially ensured investment. Some of such projects can be funded by means of commercial loans at market rates. However, RES projects of this type are rare. Examples would include small budget projects of the use of biogas produced from animal wastes (and replacement of expensive mineral fertilizers). As far as energy saving is concerned, it is possible to rely on loans from commercial banks (for customers that are legal entities). The social sphere and residential sector can not expect direct loans from banks problems connected with collection of payments for energy are well known to banks, and cooperatives of apartment owners are not even commercial organizations. Preferential financing has more favorable conditions in comparison with commercial sources. Preferential character of financing is ensured by various methods. They include: reduction of interest rates, combination of subsidies with loans, longer grace periods, and extension of repayment period (maturity date). 5.9 Possible mechanisms for financing of RES and ES projects

Subsidy is direct financing and can be used for funding a part of a project. The application of subsidies requires modifications in the Kazakhstan budget system and development of mechanisms for planning, allocating subsidies and controlling their use. Obviously, this mechanism cannot be introduced in the near future and requires thorough preparation.

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Loans. Internal and external loans are the most important instruments of financing investments into the RE and ES measures to complement public financing. Financial provision of loans. It is worth studying the system of financial provision of loans (there is a positive Russian experience). Subsidizing loan interest rates. The subsidy is the difference between the conditions of a loan and the conditions offered by commercial and financial institutions. The result of a subsidized loan can be identical to that of a non-subsidized loan combined with a subsidy. In Kazakhstan, subsidizing requires legislative support and cannot yet be applied widely. Participation financing of RES and ES projects. Participation financing means investing money by the investor in a company or a project without a specific requirement for direct repayment (i.e. money are in a state of risk); it is expected that over a certain period of time the value of the company or the project will increase and will ensure significant income on the initial investment. In Kazakhstan, Unit Investment Funds have been already established and there are examples of participation financing of RES projects (wind-driven power station at Dzungarian Gateway financed by the RK Government and GEF). Joint implementation of projects takes place when one state can fulfill a part of its obligations under an international agreement by supporting activities in the territory of the other member-state. Joint implementation is possible when the country-donor investing in reduction of environmental pollution bears higher additional costs than the recipient country in which emissions are reduced. The donor country is credited with the reduction in emissions. 5.10 International Financial Organizations and Development Organizations

In an environment of economic and financial instability and persistent shortage of resources, international financial organizations and donor countries play a very positive role in financing \ into the RE and ES measures. Over the last decade, CIS countries have received more than 1 billion dollars from external financial sources for conservation of environment and rational use of natural resources, including finances for RE. Applying for a loan it is necessary to take into account the following: international financial institutions do not fund projects completely, i.e. other sources should be engaged; allocation of the loan should be agreed with the Government of the Republic of Kazakhstan; the project should comply with international standards, that is, first of all, it should be feasible and provide a suitable pay back on investment.

The following major international financial institutions promoting development are: GEF was established in 1991. Donor countries contribute their funds. The United Nations Development Program (UNDP), the World Bank (WB) and the United Nations Environment Program (UNEP) are among the key relevant RE & ES GEF executive agencies.

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The International Bank for Reconstruction and Development (IBRD), usually referred to as the World Bank, conducts its operation only on the basis of governmental guarantees, i.e. loans are granted to governments or agencies which are supported with governmental guarantees. International Financial Corporation (IFC). The IFC is a member of the World Bank Group and conducts its operations in the private sector granting loans and securities, providing technical assistance and investment services. Asian Development Bank (ADB). The work of the ADB is aimed at improving the welfare of the people in Asia and the Pacific, particularly the 1.9 billion who live on less than $2 a day. Despite many success stories, Asia and the Pacific remains home to two thirds of the world's poor. ADB is a multilateral development financial institution owned by 65 members, 47 from the region and 18 from other parts of the globe. ADB's vision is a region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their citizens. The European Bank for Reconstruction and Development (EBRD) is an institution for direct project financing. Its primary tasks are consultations, loans and guaranty of payment, support of market oriented structures and promotion of private initiatives. The Organization for Economic Cooperation and Development (OECD) provides consulting assistance, conducts research promoting the development of free market relations in the countries of the former USSR. Technical Assistance in CIS countries (TACIS) provides technical assistance in all CIS countries for improvement of the potential of states to increase living standards and to help to countries with economy in transition, and is funded by the EU.

Thus, the list of available potential sources of funding for RE and ES measures includes: 1. Internal sources of funding State budget; State development institutions; Own funds of enterprises; Commercial loans of banks; Leasing companies; Venture investment funds.

2. External sources of financing 5.11 International organizations; Bilateral agreements; International financial institutions.

Possibility to employ foreign schemes for financing

It is obvious that foreign experience cannot be quickly adopted in Kazakhstan, mainly, due to differences in legislation. However, some schemes can be applied even today. Such methods include: Commercial bank loans; Loans of national development institutions; Leasing;

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Financing by international financial organizations; Share holding (in particular, with participation of major energy consumers); Financing without the right to turn-over or project financing; Leasing for small enterprises with application of revolving schemes; Performance contracting.

These schemes do not need to be commented on, since they are either well known to businessmen, or are described in detail in available literature. Performance contracting deserves special attention, since in order to use this scheme it is necessary to have a network of qualified energy service companies, which in Kazakhstan are few, especially in rural areas. 5.12 Investment opportunities of the Kyoto Protocol

Kazakhstan has not yet ratified the Kyoto Protocol. If the Protocol is ratified, Kazakhstan will become an Annex I country, which includes countries that undertook to reduce greenhouse gas emissions. CIS Annex I countries are Belarus, Russia and Ukraine. Research efforts are being applied to determine the potential influence on the Kazakhstan economy of quantitative obligations on reduction of greenhouse gas emissions and whether or not there is a good reason for Kazakhstan to ratify the Kyoto Protocol. A short-term outcome of the Kyoto Protocol could be the widespread introduction of energy saving technologies and technologies minimizing GHG emissions. In the future, as new technologies develop, the Protocol will facilitate transition to the use of alternative renewable energy sources, such as solar, wind, geothermal, etc. 5.12.1 Economic mechanisms of the Kyoto Protocol The Kyoto Protocol contains only general provisions and no details about how to meet obligations. In autumn 2001, the Seventh conference on the United Nations Framework Convention on Climate Change met in Marrakech, where the Marrakech agreements (actually they are by-laws of the Kyoto Protocol) were unanimously agreed, adding some missing details. The most important parts of the Marrakech agreements are the following economic mechanisms: Trade in Credits According to the Kyoto Protocol, if a country over-fulfils its obligations on reductions of emissions for the period 2008-2012, it can sell a part of the un-used quota to other countries, provided that all requirements in regard to access to trade in credits are completely met. Credits can be traded between countries on the basis of bilateral agreements. Countries can also allow companies directly or indirectly (with the state as intermediary) to participate in trade in credits and emission reductions. To date, some levels of the system of trade in credits have been developed: Intracorporate; Intercorporate regional; Intercorporate national; Transnational (EU system of trade in credits).

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CIS countries, that are Parties to Annex I, that are regarded as main potential sellers of credits even today, enjoy advantages in the credit market. It is expected that before 2012 they will not reach the 1990 baseline emission level. This means that starting from 2008 they are able to sell credits. Taking into account the low efficiency of technologies, there is a high potential for energy savings at relatively low cost, which can be used to obtain additional credits to be sold.

Joint Implementation Projects Another Kyoto mechanism to reduce emissions is Joint Implementation Projects (JIP) of the countries that are parties to Annex I. This means that if two countries that assumed obligations on the reduction of emissions in the framework of the Kyoto Protocol (or enterprises registered in these two countries) implement a joint project on reduction of emissions, register it with the UNFCCC Secretariat, and then pass all necessary procedures for verification of outcomes, the reduced emissions can be handed over by one party to the other. For example, if a Danish company invests in a Kazakhstan company for the purpose of decreasing GHG emissions from a coal power station and in return it could receive an additional credit for emissions equivalent to the reduced amount of emissions. Clean Development Mechanism (CDM). The purpose of the Clean Development Mechanism is to help countries that are not parties to Annex 1 to ensure sustainable development, to facilitate attainment of the ultimate goal of the Convention and to help the Parties included in Annex I comply with quantitative obligations on limitations and reductions of emissions. In connection with Kazakhstans course to be in Annex 1, it would be possible for Kazakhstan to invest in other states. As such, JI has some advantages for Kazakhstan at this time. Preparation and Implementation of Joint Implementation Projects The Kyoto Protocol and Marrakech agreements establish a number of requirements for countries wishing to participate in trade in credits and implementation of JIP. Such countries should ensure valid recording of emissions, create a registry of greenhouse gas emitters, establish a monitoring system, etc. For this purpose, it is necessary before launching flexible mechanisms in 2008 to carry out intensive preparatory work. The government of the country that wishes to start the process of attracting investments by selling credits on reduction in emissions and implementation of JIP should therefore take measures without delay to develop a suitable legal basis and infrastructure for flexible mechanisms of the Kyoto Protocol: To establish an authorized national agency for selection and registration of Joint Implementation Projects. It is necessary to develop and get approved national criteria in place for documentary registration of JIP, especially ensuring transparency and reliability of recording of emission reduction units under such projects.

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To develop and get approved the procedure for submission of Joint Implementation Projects to the authorized national agency. Such a procedure should include control, approval and monitoring. To develop schemes and principles for financing Joint Implementation Projects. To establish a national agency to make an inventory of emissions and absorbers of greenhouse gases and establish their registration in accordance with UNFCCC rules. To establish a national system for greenhouse gases inventory with legal, technical, institutional and financial capabilities. To develop internal reporting formats and software compatible with the international greenhouse gases inventory system. To train personnel in establishing a suitable inventory on the entire territory of the country. To sign memorandums of understanding with potential buyers of emission reduction units. To establish the National Register of ownership, buy-and-sale and transfer of greenhouse gas emission units. To establish a normative legal basis for trade in credits. To found a trading platform (an auction, exchange, or similar) for trading in GHG emission reduction units.

Possibilities of Kyoto mechanisms for Kazakhstan According to data of the Coordination Centre for Climate Change (Astana) published on website www.climate.kz, the greenhouse gases inventory in Kazakhstan shows that in 2003 total GHG emissions were 188.8 million ton of CO2 equivalent, including 150.9 million ton of CO2 equivalent emitted by energy-related activities. Total specific GHG emissions in 2003 were above 12.6 tons per capita, out of which CO2 accounts for 10.0 tons. Figure 5.1 shows the pattern of greenhouse gas emissions by basic categories of sources. The total greenhouse gas emissions by all categories of sources tended downward before 1999; however, since 2000 they have tended upward. In 2003, the total emissions were at 53 % of the 1990 level. As the Figure shows, over the entire period the basic sources of greenhouse gas emissions in Kazakhstan were energy-related activities whose share was about 80 %.

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Figure 1. The pattern of total emissions and greenhouse gas emissions with direct greenhouse effect by main categories of sources

Energy-related usage Agriculture Wastes

million ton, CO2 equivalent

Industry Forestry

Energy generation activities that include two basic sectors thermal power stations and oil-andgas sector - are the major emitters of greenhouse gases. According to the Coordination Centre for Climate Change, emissions produced by these sectors were as follows (Table 12): Table 12. The total greenhouse gas emissions with direct greenhouse effect, million ton, CO2 equivalent

Categories of sources CO2 Energy-related usage including firing volatile emissions Industry CH4 Energy-related usage including firing volatile emissions Industry Agriculture Wastes N2O Energy-related usage

1990 238.4 218.3 213.5 4.8 20 58.1 38.7 1.5 37.2 0.04 16.5 2.7 26.9 0.8

1992 274.7 257.8 252.9 4.9 16.9 51.3 32.6 1.9 30.7 0.03 16.1 2.7 24.9 0.9

1994 179.4 171.9 168.1 3.8 7.5 39.5 23.6 1.1 22.5 0.02 13.4 2.5 17.2 0.6

2002 142.6 128.3 119.4 8.9 14.4 25.7 13.2 0.4 12.7 0.03 7.9 4.6 10.2 0.4

2003 150.4 134.5 124.9 9.7 15.8 28.1 15.9 0.5 15.4 0.03 7.9 4.3 10.3 0.5

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Categories of sources including firing Agriculture Wastes TOTAL EMISSIONS

1990 0.8 25.6 0.5 323.3

1992 0.9 23.6 0.4 351

1994 0.6 16.1 0.5 302.7

2002 0.4 9.4 0.4 178.5

2003 0.5 9.4 0.4 188.8

Energy-related usage includes burning of fuel and aircraft emissions. The Table demonstrates that Kazakhstan currently possesses about 130 million tons of 2 emissions annual reserve, in the case that 1992 would be the base-year and Kazakhstan would have to stay at the level of 1992 emissions (100%). Even taking into account the industrial growth and plans to increase generating capacities of thermal stations, it is clear that Kazakhstan can sell annually, starting from 2008, not less than 50 million tons of carbon dioxide credits. At the minimum price of 5 US dollars per ton this means that the energy sector would engage investments for the amount of 250 million US dollars per year by carbon credit trading. Preparatory measures for ratification of the Kyoto Protocol Kazakhstan continues to implement preparatory measures for ratification of the Kyoto Protocol and continues conducting the necessary international negotiations. The Conference of the Parties to the Convention (COP-7) took the decision to include the Republic of Kazakhstan in Annex I. Kazakhstan participates as an observer in the informal group of countries Umbrella Group and as a coordinator in the group of countries of Central Asia, Caucasus and Moldova. The development of the necessary normative legal and institutional bases required to implement the UNFCCC and the Kyoto Protocol continues, as follows: Rules for examination, evaluation and approval of JIP/CDM greenhouse gas emissions reduction projects have been developed; The format of application procedures for implementation of GHG emission reduction projects Unified document on project development has been developed; Kazakh Scientific Research Institute of Environment and Climate Monitoring has developed the methodology for inventory of greenhouse gas emissions and sinks in Kazakhstan; The Ministry of Natural Resources and Environmental Protection carries out annual inventories of greenhouse gases; Law On protection of atmospheric air has been passed.

Creation of favorable conditions for investments on the basis of flexible mechanisms of the Kyoto Protocol for Joint Implementation Projects The Interdepartmental Commission and RK Coordination Centre for Climate Change started preparations to launch pilot projects in the framework of the Kyoto Protocol for the purpose of working out mechanisms of their approval, establishing normative legal basis and engaging investors. The Interdepartmental Commission approved two GHG emissions reduction projects:

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Hurricanes project on utilization of associated gas at deposit Kumkol with expected annual reduction in greenhouse gases of 500 thousand tons (estimated investment is about 35 million US dollars). The model energy saving project at Ural cogeneration station to be carried out by New Energy and Industrial Technology Development Organization (NEDO), a Japanese state company together with the Ministry of Energy and Mining (investment will be 15 million US dollars). Preparation of bilateral agreements on JIPs with other countries continues; The standard project reporting format has been developed; The project at Ural cogeneration station was launched jointly with NEDO. Note: Data of the sites are available on: http: //www.climate.kz/. NEDO is Japan's largest public R&D management organization for promoting Kyoto mechanisms. In 1980, NEDO was established under the Ministry of Economics, Trade and Industry of Japan. The capital base of NEDO was about $4.2 billion as of April 2004 and the budget for the period from April 2004 to March 2005 was $2.3 billion. In April 2004, a 30-month long TACIS regional project sponsored by the European Commission was launched in Central Asia to provide technical assistance to Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan for strengthening institutional and technical potential for participation in the UNFCCC and the Kyoto Protocol. A European Consortium led by the French company SOFRECO is carrying out the project. In Kazakhstan, the beneficiary is the RK Ministry of Environmental Protection; the national coordinator and chairman of the Supervisory Committee is Vice-Minister Zh. Bekzhanov; the European Commission carries out project monitoring. Unlike neighboring countries, Kazakhstan is interested in participation in the Kyoto Protocol not only in terms of the CDM, but also in the mechanism of JIPs. For this purpose, JIP feasibility study, analysis of institutional basis and legislative basis for infrastructure formation, training in JIP procedures and development of criteria for evaluation of GHG emission reduction projects are planned only for Kazakhstan in the TACIS framework. 5.12.2 Opportunities for small and medium enterprises (SMEs) to use the Kyoto Protocol mechanisms In addition to large energy objects (state district power stations, cogeneration stations), in Kazakhstan there are hundreds of small boiler-houses that are often in bad technical condition since their owners cannot afford to purchase modern equipment or invest in energy saving. Opportunities for such objects to independently use mechanisms of the Kyoto Protocol are very limited, since they lack skilled personnel and funds to prepare necessary documentation. In addition, about 8 million tons of 2 equivalent are produced in agriculture, mainly in the form of methane generated by animal wastes. As the livestock numbers grow, so will such emissions. Reduction in these emissions even by half in theory will engage 20 to 80 million US dollars in the rural energy sector by means of trade in credits; however, for this purpose emissions from small activities should be aggregated in larger units or projects. In order to involve small and medium-sized activities emitting greenhouse gases in flexible mechanisms of the Kyoto Protocol, it is necessary to organize special schemes with involvement of banks and energy service companies (ESCO) which will also clearly require support from local administrations and ministries.

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One possible scheme is presented in Figure 5.2.

Purchase of reduction units (ton CO ) (2 2)

ton CO CO2

Financial company

External credits market

ESCO
ton CO2 CO2 ton CO2 CO2
Equipment

Credits Insurance Leasing

ton CO2 CO2

Equipment

1 Object

2 Object

N Object

Domestic credits market

Figure 2. The Scheme of financing of the small and medium-sized enterprises participating in flexible mechanisms of the Kyoto Protocol In order to ensure viability of such schemes, it is necessary to prepare a package of normative documents and support the key link of this scheme the ESCOs. 5.12.3 Problems connected with introduction of Kyoto mechanisms The main problem hindering the introduction of Kyoto mechanisms lies with the national economy and legislation that are not yet ready to participate in world trade and distribution of credits and joint projects; and there is also a need to arouse the interest of industrialized countries in Kazakhstan projects. The positive factor is that dozens of foreign companies already operate in Kazakhstan, particularly, in the oil-and-gas and energy sectors. However, a determinative factor in preparation is a lack of available time. Even if Kazakhstan ratifies the Kyoto Protocol in early 2006, there will be only one and a half years to complete all preparations before 2008. Obligations on emissions may be sold to other countries only if the countries comply with articles 2, 5, 7 and 10 of the Kyoto Protocol: possesses the national register of emissions (on an inventory basis), keep the register of change in credits, the register of transactions based on validated inventory of emissions, have a suitable national reporting system, etc. This will require development of a ratified legal framework based on legal acts with the status of laws of the Republic of Kazakhstan and international agreements. With the most resolute institutional

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measures taken as a priority by the Government, such requirements could probably be met within two to three years. Of particular importance is the establishment of a national network of experts on emissions, their training and certification, equipment of offices, purchase of gas analyzers and other equipment, development of software and its coordination with international standards. All these measures would entail significant costs and they should be taken next year since before entering into the international credit market it is necessary to work out trading mechanisms on the domestic market. Since such expenses must be covered by the public budget, they should be included in the 2006 budget, which has been already approved by the Parliament. However, they could not have been included, since Kazakhstan has not ratified the Kyoto Protocol yet. This can make financing more complicated; though, there is no doubt that the Government possesses the necessary financial reserves required. Kazakhstan can accede to the Protocol at the first stage from 2008 to 2012. During this period the international system of emissions trading will not be completely worked out. In order to make it operational, the member states should undertake obligations to strictly control operations of enterprises and conclude bilateral agreements providing for state guarantees for credits trading or establish an insurance system for such transactions. To engage investments on the basis of JIPs, investors will need a guaranty that reduced emissions could be sold. For this purpose it is necessary to make legislative and financial arrangements. However, it is impossible to make such arrangements on the basis of current legislation. It is known that energy equipment rehabilitation projects take time three to four years can pass from preparation of feasibility study and technical documentation to ordering of equipment, its delivery, installation and commissioning. In the meantime, to reduce emissions from 2008 on the basis of JIP and CDM, it is necessary to start to invest and prepare arrangements for modernization of facilities and reduction of emissions right now. Only taking very vigorous measures, adopting at the highest possible level the necessary Action Plan, supported with adequate financial resources, and establishing a special state agency without delay to coordinate all the efforts required can attain these goals.

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6 6.1

EXISTING STATUS AND ECOLOGY ISSUES DEVELOPMENT PROSPECTS IN THE REPUBLIC OF KAZAKHSTAN Government Policy and Legal Base in the Environment Protection Sphere in the RK

Energy growth, based on the primary use of organic fuel in Kazakhstan, mainly, of highash and high-sulfur coals, results in a number of stubborn environmental problems: air pollution, greenhouse effect, growth of fuel burning capacity, of motor transport exhaust in the cities, exhaust of radioactive isotopes, etc. That is why increase of energy efficiency and energy savings, as well as wider use of renewable energy sources and their involvement into the energy mix will support the development of an efficient policy in the solution of environment problems, in the struggle against air pollution and improvement of its quality management. The RK as an independent state constantly confirms its adherence to the ideas of environment safety and sustainable development. During its independence years, Kazakhstan has joined 19 international nature protection conventions, including, to the conventions for climate change and protection of the ozone layer, for preservation of the biodiversity and rare flora and fauna species, for the control over desertification, for trans-boundary transport of air pollution for large distances, for access of the community to the environment information and others. At the end of 1997, the RKs Development Strategy up to 2030 was announced, which attached a great importance to environmental protection. In 1998, a National Action Plan for environment protection and sustainable development was drafted, and a National Strategy and Action Plans for preservation and balanced use of biological diversity and desertification control were made. For implementation of Point 7.5.1 of the Action Plan for implementation of the RK Government Program for 2003-2006, the Program Environment Protection of the Republic of Kazakhstan for 2005-2007 was developed and financed from the funds of the Republican budget. The Program is aimed at the reduction of environmental pollution and development of a set of measures for its stabilization. A range of laws, legislative and normative acts, regulates the environment protection issues in the Republic of Kazakhstan. The basic law is the Law On Environment Protection" dated on 15 July, 1997. It defines legal, economic and social bases of the environment protection for the sake of present and future generations. It is aimed at the provision of environmental safety, prevention of the harmful impact of economic and other activities on the natural environmental systems, preservation of biological diversity and the arrangement of rational use of nature. Other important laws in the sphere of the environment protection include the following laws, including Concerning the Protection of the Ambient Air dated on 11 March, 2002, "Concerning Power Industry" dated on 9 July 2004, 588-II, as well as Concepts of the Environmental Safety of the Republic of Kazakhstan for 2004-2015 dated on 10 December, 2003, and so forth. In the Concepts of the Environmental Safety (CES), the stage-by-stage improvement of the environment quality was outlined through legislation systematization, improvement of economic mechanisms to be used in the nature use, through government control and ecologic monitoring, optimization of the licensing system for nature use and environmental impact assessment. In compliance with the CES the required measures for prevention of the increased environment pollution threat will be provided in the CES implementation plans through some short-term programs for environment protection.

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The existing legislative base of the RK that regulates the relations in the sphere of the environment protection includes the following normative documents: Constitution; Water Code; Land Code; Forest Code; Administrative Code; Criminal Code; Tax Code; Customs Code; Law of the Republic of Kazakhstan Concerning the Environment Protection; Law of the Republic of Kazakhstan Concerning the Environment Impact Assessment; Law of the Republic of Kazakhstan Concerning the Ambient Air Protection; Law of the Republic of Kazakhstan Concerning the Protection, Reproduction and Use of the Animal World; Law of the Republic of Kazakhstan Concerning the Specifically Protected Nature Territories; Law of the Republic of Kazakhstan Concerning the Use of the Atomic Energy Law of the Republic of Kazakhstan Concerning the Radiation Safety; Law of the Republic of Kazakhstan Concerning the Energy Savings; Law of the Republic of Kazakhstan Concerning the Extraordinary Situations of the Natural and Man-caused Character; Law of the Republic of Kazakhstan Concerning the Sanitary and Epidemiological Well-being of the Population; Law of the Republic of Kazakhstan Concerning the Social Protection of the Citizens who suffered from the Environment Disaster in the Aral Sea Areas; Law of the Republic of Kazakhstan Concerning the Social Protection of the Citizens who suffered from the Nuclear Tests in Semipalatinsk Nuclear Testing Area; Law of the Republic of Kazakhstan Concerning Standardizing; Law of the Republic of Kazakhstan Concerning the Plant Quarantine; Decree of the President of the Republic of Kazakhstan Concerning Subsoil and Subsoil Users; Decree of the President of the Republic of Kazakhstan Concerning Oil; Law of the Republic of Kazakhstan Concerning the Introduction of Alterations and Addenda into Some Legislative Acts of the Republic of Kazakhstan on the Nature Use and Oil Operations Issues in the Republic of Kazakhstan; # 79-ShZRK, dated by October 14, 2005; Law of the Republic of Kazakhstan Concerning the Obligatory Environment Insurance, # 93- ShZRK, dated by December 13, 2005.

In compliance with Article 20 of the Law Concerning the Ambient Air Protection, physical persons and legal entities that have sources of pollution emissions shall take inventory of pollutant emissions into the atmosphere and harmful physical impacts on the ambient air. This procedure was determined by the order of the Acting Minister of Environment Protection of the RK, dated August 4, 2005, which approved the Regulations of Inventory of the Pollutant Emissions.

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In compliance with the Regulations, determining an inventory is the first stage of the development of the draft norms for the maximum permissible emissions (MPE) into the atmosphere and shall be approved by the nature user. Emission is understood as entrance of the harmful pollutant from the movable and stationary sources into the ambient air. Harmful pollutant is recognized as chemical or biological substance, or mixture of such substances, which in some certain concentrations, exceeding maximum permissible norms, make a harmful impact on human health and the environment. The basic objectives for inventory are: receipt of the input data for atmospheric pollutant emissions impact assessment and establishment of maximum permissible emission norms both for an enterprise, and for the separate air pollution sources; determination of quality characteristics for the pollutant emissions; determination of a list of harmful substances to be subject to the government registration and regulation for the item involved; assessment of efficiency of the dust and gas cleansing equipment that is intended for the arrest of emissions or ventilated air to prevent air pollution; assessment of efficiency of the use of raw material resources and recycling of wastes in the enterprise; planning works in the ambient air protection sphere.

The inventory is made through metering and calculations of the polluting substances. It is made once every five years, as well as in the case of reconstruction or change of the production technology, or appearance of some new stationary pollutant emissions sources. Inventory is methodologically guided by the territorial units of the central executive body authorized for the environment protection (territorial departments for the environment protection). Nature managers, that have stationary pollutant emissions, shall take registration of pollutant emissions; take control over the observance of the norms established for the maximum permissible emissions. The work related to the inventory of the pollutant emissions includes the following stages: preparatory; taking inventory inspection of the pollutant emissions; processing of the inspection results and drawing up of the inventory results. In the preparatory stage an enterprise such as an air pollution source is briefly characterized, its scheme and basic technological processes are described. At the stage of inventory inspection the pollutants and emission sources shall be defined, and the efficiency of dust and gas cleansing equipment is identified. According to the results of the inventory of emissions, in compliance with the appendix to the Regulations, the forms of pollutant emissions shall be filled in. Harmful physical impact is understood as the harmful impact from noise, vibration, ionizing radiation, temperature and other physical factors, that change the temperature, energy, wave, radiation and other physical characteristics of the ambient air and effect on a human beings health and environment. Inventory of the harmful physical impacts is also made once in five years and in the same procedure as the inventory of the pollutant emissions into the ambient air.

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Information about the inventory of emissions and harmful physical impacts shall be submitted for coordination purposes into the territorial units of the central executive body authorized for the environment protection and into the body authorized for ensuring the sanitary and epidemiological safety of the populations well being. The information to be submitted for the coordination purposes shall contain: explanatory message, including some brief characteristics of the sources of pollutant emission and physical impacts on the ambient air, as well as documents on the basis thereof a nature manager is entitled to operate the object and for designated use of the land plot; calculations or results of the instrumental measuring that characterizes the emissions of the harmful (pollutant) substances and of the physical impacts on it; maps of location of the sources of pollutant emission and physical impacts, a list of documents, on the basis thereof the characteristics of emissions and of the harmful physical impacts on the ambient air were received.

In the case of the submitted materials not complying with the requirements of the Regulations, the inventory is rejected from the coordination until all the violations are removed. Coordination period shall not exceed three weeks. 6.2 Environment Protection Management System

The Ministry provides management and inter-branch coordination of the government policy development and implementation in the environment protection sphere, as well as the nature use management, for Environmental Protection of the Republic of Kazakhstan. The basic task of the Ministry is improvement of the environmental quality and achievement of the favorable level of the environmentally sustainable development of the society. The structural units of the Ministry include: Committee for Nature Protection Control; Department for Strategic Planning and Analysis; Department for Normative and Legal Provision and International Cooperation; Department for Environment Impact Assessment and Nature Management Regulation; Department for Administration and Finance.

The republican state enterprises within the MEP of the RK include: Environment Protection Information Analysis Center; Kazakh Scientific and Research Institute for Environment and Climate; KazHydroMet; KazAviaMet.

Basic tasks in the air management are: arrangement and keeping of systematic observations of air pollution and emissions of the enterprises;

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collection, storage and processing of the input information on the air pollution state and emissions of the enterprises; assessment of the factual state of the air pollution; assessment of efficiency of the actions taken for the air environment enhancement, reduction of the environment tension in the objects and territories.

International obligations: Convention on the environment impact assessment in the transboundary context (February 1991, city of Espo, Finland); Convention on the transboundary air pollution for big distances (November, 1979, Geneva, Geneva, Switzerland); Convention on the transboundary impact of the industrial emergency (March, 1992, Helsinki).

Local executive bodies in the environment protection sphere, such as Oblast departments for nature protection actions within Akimats and municipal (cities of Astana and Almaty), make monitoring and control in the sphere of environment protection in the way of reporting to the Central body, approve programs for the environment protection and nature management in the oblast, approve the payment rates for the environment pollution (payments within the norms, beyond the norms) to ensure environment protection and enhancement in the funds of the local budgets, take decisions and introduce suggestions into the environment objects protection. Central Executive Body, Ministry of Environment Protection of the RK, presides over the territorial departments for the environment protection, organizes the government monitoring of the environment and presides over the unified system of the environment monitoring, organizes implementation of the government programs in this sphere, that are funded from the republican budget, develops and introduces the new forms of the environment protection government management system. Local level of monitoring is made within the limits of the administrative units, includes nature management plots and objects; regional level of monitoring is made within the administrative boundaries; republican level of monitoring is made in the whole territory of the RK. In order to prevent the environment pollution in relation to each pollution source, the norms are established for maximum permissible pollutant emissions into the environment in compliance with the GOSTs: GOST 17.2.01-76 Nature Protection. Atmosphere. Classification of emissions by their composition; GOST 17.2.1.03-84 Nature Protection. Atmosphere. Terms and definitions for pollution control. GOST 17.2.3.02-78 Nature Protection. Atmosphere. Regulations for establishing the permissible emissions of the harmful substances by the industrial enterprises. GOST 17.2.4.02-81 Nature Protection. Atmosphere. General requirements to the methods of determination of the pollutant substances. Methods of fixing payments for pollution of the ambient air from the movable pollution sources. Almaty, 1996.

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Temporary instructions on the procedure of making the works to establish the norms for permissible emissions of the harmful substances from the industrial enterprises for which some separate norms are applied. Sectoral methodology of calculating the quantity of the harmful substances spent, entrapped and ejected into the atmosphere by their specific values.

The existing system of environment protection management played a great role in the establishment of the general government management system. However, as long as the economy has become stabilized, the lack of compliance between the existing systems of its management and macroeconomic conditions, which develop towards the liberal market becomes more and more apparent. Recently, as the independence of enterprises increases, the legislation needs reforms in the sphere of environment protection related to the requirements of the investment activity; economy and legislation should be more environmentally oriented, as well as the international obligations on the ratified conventions should be fulfilled. That is why on September 8, 2004 the Concepts for reforming the legislation in the sphere of the environment protection was adopted to support some further improvement of the environment protection management system, to optimization of the level of the nature protection requirements, attraction of the nature [protection investments], as well as the increase of the efficiency of the environment protection management, introduction and development of the economic tools of the management that would comply with the requirements of the market economy. 6.3 Norm-fixing for the pollutant emissions into the atmosphere

Fixing the norms for emissions is aimed at reducing the injurious effect of the enterprises on the state of the ambient air, which can be achieved through the following measures: development for each emission source and for each enterprise as a whole of the norms for the MPE, which will ensure to achieve the sanitation norms of the ambient air quality in the settlements, that is, in the regions intended for building, in the frontier of the sanitation protection zones, etc.; establishment of plans-schedules for MPE norms achievement by enterprises; establishment of the norms for specific emissions by the movable and stationary emission sources, technologic processes and equipment.

Norm-fixing for pollutant emissions into the atmosphere shall comply with the Law of the RK "Concerning the Environment Protection", dated by 15.07.97 # 160-I, Law of the RL " Concerning the Ambient Air", dated by 11.03.02 # 302-II, the requirements of the general governmental and sectoral standards and normative documents. 6.4 Analysis of the Environment State

In Compliance with the Concepts for Environment Safety, the most urgent environment issues of the country are related to the climate and ozone layer changes, to the reduction of the biological diversity, desertification, pollution of the top-soil, water, air, accumulation of the solid domestic and industrial waste sand etc. Climate change. Kazakhstan having ratified the UNFCCC (1995) and having signed the Kyoto Protocol to this Convention, joined the worldwide movement for the protection of global

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warming caused by the constant increase of greenhouse gases from the combustion of the hydrocarbon fuels. In March 1999, Kazakhstan signed the Kyoto Protocol on the rights of the country that was not included into either of the UNFCCC and Kyoto Protocol Attachments. In April it announced its wish to enter Attachment I of the UNFCCC. This means that Kazakhstan intends to take quantitative obligations for reduction of the greenhouse gases emissions in the first budget period of Kyoto Protocol (years 20082012), on the assumption that their fulfillment would not prevent Kazakhstans sustainable social and economic development. The required condition for participation in the emissions reduction projects within the frameworks of the international cooperation according to Kyoto Protocol mechanisms is availability of a suitable inventory of GHG emissions. This inventory needs to be prepared in compliance with the unified methodology (Article 4.1 of the UNFCCC). Besides, by January 1, 2007 a national system for assessment of man-made emissions from the greenhouse gas sources and effluents shall be established. Guidelines for such national systems, in compliance with Article 5.1 of the Kyoto Protocol, were adopted by the Conference of Parties, acting as a meeting of Kyoto Protocol Parties in its First session, which took place in December 2005 in Montreal. At present, the inventory of the GHG in Kazakhstan is made without using any national system. In Kazakhstan, the inventory of the GHG sources was made. Emissions of gases with direct and indirect greenhouse effects were calculated. Forecasts of greenhouse gases emissions were also made. According to the specific index of the greenhouse gases emissions per GDP unit (3.38 kg/USD) Kazakhstan holds the first place among the Central Asia countries. Starting from 1999, an annual inventory of greenhouse gases emissions has taken place in the RK by request of the Ministry for Environment Protection. In 2004 the total national GHG emissions with direct greenhouse effect were 213,3 million tons of 2-equivalent, including 172,2 million tons of emissions from the power engineering activities. Power engineering makes the biggest input into the 2 emissions, and coal is the biggest energy carrier. In relation to 1990 the total emissions of the GHG in Kazakhstan were 66,7 % in 2004, in comparison with year of 1992 60 %. According to the forecast data, the share of coal will increase by the intensive tempos and by 2010 it will total 63 %, by 2020 66 % in the capacity of the gross emissions which arise from combustion of all fuels. Effect of the global warming on the economy of Kazakhstan also requires some special surveys. A suitable normative legal base has not yet been established in Kazakhstan for inventory of the greenhouse gases emissions so far. In case Kazakhstan ratifies the Kyoto Protocol and joins Appendix I countries, then a national system for greenhouse gases emissions inventory must be established within the shortest period of time to comply with Article 5.p.1 of the Kyoto Protocol. Kazakhstan needs to establish a normative legal basis in the sphere of monitoring and reporting on GHG emissions inventory and government environment impact assessment of GHG inventory held by some enterprises which express their wish to participate in the projects by Kyoto Protocol mechanisms.

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First of all, it is necessary to draft and approve the handbook on arrangement of information collection for holding a suitable inventory. It should establish the responsibilities of the subjects in the input information collection process, its procedures, deadlines and requirements of the information contents for establishment and keeping both a national register of the GHG emissions and for establishing an inventory of the GHG emissions by the enterprises, the activities thereof result in GHG emissions. It is necessary to identify a list of government bodies and legal entities to provide the information for the inventory, and forms of provision of such information. On the eve of accession to the Kyoto Protocol, Kazakhstan should choose its basic year, from which the quantitative obligations to the reduction of GHG emissions shall be fulfilled. There was a suggestion to consider 1992 to be such a year, during which the total emissions of GHG taking into account effluent (absorption) came to 340,6 million tons of CO2 equivalent. Error limits in the assessment of the total national emissions of GHG is in the range of 15 %. On the grounds of the economic recession, the total national emissions of the greenhouse gases from all categories of sources in Kazakhstan from 1992 to 1999 decreased. In 1999 they accounted for 39 % of the level of 1992. As a result of the revival of the economy from 2000, their growth was observed. In 2004 the total emissions of GHG were 59,8 % of the level of 1992. The share of GHG emissions for the period of 1990-2004 from agriculture is within 13,0 9,5 %, from technologic processes in industries - from 3,1 up to 8,4 %, from Waste category - from 0,9 % up to 2,9 %.

Energy-related usage Agriculture Wastes

million ton, CO2 equivalent

Industry Forestry

Figure 3. Structure of total emissions and effluents of greenhouse gases with direct greenhouse effect by their basic categories sources As it is seen in Figure 3, during the whole period considered, the major source of greenhouse gasses emissions in Kazakhstan was energy engineering; the share thereof forms near 80 % from the total national emissions. GHG emissions in the Energy Engineering sector in Kazakhstan come from many sources. They are united into two subcategories 1) firing of organic fuel and volatile emissions from coal production, 2) transportation and processing and activities related to the extraction,

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transport, storing and oil and gas processing. The biggest input into the total national emissions (71,4 %) is made by firing of fossil fuel, which formed 152,4 million tons of CO2-equ. in 2004. Input of volatile GHG emissions in 2004 was 19,7 mln t of CO2-equ., or 9,2 % from the total national emissions (Figure 4).

Volatile emissions (oil and gas) 5% Volatile emissions (coal) 6% Other sources 3%

Power engineering 56%

Other sectors 7%

Transport 5%

Processing industry and construction 18%

Figure 4. Basic categories of GHG emissions sources in the module Energy Engineering in 2004 Total emissions of the greenhouse gases category Energy Engineering in 2004 formed 172,2 mln tons of CO2-equivalent, which corresponds to 81,1 % of the total national emissions. The category Volatile Emissions is one of the most significant sources of 4 emissions, the input thereof grows on a constant basis and in 2004 formed 49,5 % from the total methane emissions in Kazakhstan. This is the second most significant source of GHG emissions in Kazakhstan, the share thereof amounts to 9,3 % from the total national emissions in 2-equivalent. The total volume of the volatile emissions in this category in 2004 achieved 18,9 mln tons. Out of this, the oil and gas sector accounted for 8,8 mln tons, and nearly 11 mln tons for the activity related to extraction, transport and storing coal. Share of emissions from the category Industrial processes forms 7,8 % from the total national emissions in 2-equivalent in 2004. GHG emissions from this category in 2004 were assessed as 16 680 thousand tons in 2-equivalent, which was 5 % more than in 2003. Of that, the methane share formed less than 0,22 % (Table 13). As it is seen from Table 13, the emissions from both gases decreased in comparison with 1990 for all the years of the inventory. However, after the significant reduction of emissions in the middle of the 1990s, by 2002 the growth of emissions from the industrial production was observed, when its volumes nearly exceeded the level of 1994 by a factor of two, and in 2004 the GHG emissions in this category practically came to the level of 1992.

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Table 13. Emissions of 4 and 2 in the category Industrial Processes in Kazakhstan, thous. tons in 2-equivalent. year CO2 CH4 1990 20 033 40 1992 16 881 34 1994 7 524 21 1999 8 896 26 2000 11 797 27 2001 12 937 32 2002 14 365 32 2003 15 823 32 2004 16 642 38 Note: Amounts cannot come together due to rounding errors Total 20 073 16 915 7 545 8 922 11 824 12 968 14 398 15 855 16 680

In 2004 the emissions in the sector Agriculture amounted to 19184 thousand tons in 2-equiv., that exceeded the emissions of the year 2003 for 6 %, which was 2,2 times less than those in 1990, and 2,1 times less than the basic index of 1992. (Figure 5).
GHG from Agriculture

30000

25000

20000 Internal Fermentation Manure related usage Rice production Burning of agrowaste Agricultural Soils

tonnes of CO2 eq 15000

10000

5000

0 1990 1992 1994 1999 2003 2004

Figure 5.

Input of categories of sources into the total emissions from agriculture

The share of methane in this sector in 2004 amounts to 47 %, the share of the nitrous oxide 53 %. The volume of methane emissions was equal to 8953 thous. tons in 2-equiv., nitrous oxide 10231 thous. tons in 2-equiv. In the natural equivalent the annual methane atmosphere emission forms 426 thous. tons, nitrous oxide - 33 thous. tons (Figure 6).

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In 2004, in the sector Waste 4870 thous. tons of GHG emissions in 2-equiv. were produced. It exceeds by 1 % the emissions of 2003, from 52 % - the emissions of 1990, t 53 % the emissions of the basic 1992. The share of methane from the flow of GHG emissions in 2004 forms 92 %, the share of nitrous oxide - 8 %. As it is seen from the Figure, the basic GHG source in the category Waste is the activity related to landfill of the solid domestic waste (SDW). The share of the SDW in 2004 forms 77 %, and from the systems of the water treatment - 23 % from the total emissions in this sector (Figure 6).

5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1990 1992 1994 1999 2003 2004

thousand tonees of CO2 - eq

Nitrous oxide from the analization Methane from sewage Methane from Solis wastes

Figure 6. Input of categories of sources into the total emissions from the category Waste In 2004, in the sector Land Tenure, Land Tenure Change and Forestry the calculations were made for the first time with the application of the new handbook on the efficient practice. The assessment of the GHG emissions absorption from the land tenure was made. It amounted to 3,8 mln tons, and in the forestry 4,7 mln tons. As a result of holding the inventory of greenhouse gases in Kazakhstan in 2004, the total emissions of gases with the direct greenhouse effect amounted to 213,3 mln tons in CO2-equ, including 172,2 mln tons in CO2-equ of emissions from the energy engineering, 16,6 mln tons in CO2-equ from the industrial processes, 19,7 mln tons in CO2-equ from the agriculture, and 4,8 mln tons in CO2-equ from the waste, as it was shown in Figure 5. Absorption of CO2 in the forestry and in the sector of land tenure in 2004 formed 7,5 mln tons. Thus, net-emissions, taking into account the absorption (sequestration) of CO2 by the forests were assessed as 205,8 mln tons in CO2-equivalent. The total specific GHG emissions in 2004 formed more than 13,6 tons per capita. Out of them nearly 11,4 tons account only for CO2. In Figure 7, the percentage shares of the input from each category of the emissions sources into the total national emissions are put in. The share of the energy engineering in

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2004 forms 81 %, in the second place the agriculture is (9,0 %), the third place is given to the industrial processes (7,8 %). The share of the waste sector forms 2,3 %.

Industry Processes; 7,80% Agriculture; 9% Wastes; 2,30%

Energy related usage; 81%

Figure 7. The share of the input from the emissions sources categories into the total national emissions of GHG in 2004 Total GHG emissions in 2004 amounted to 69,4 % of the level of emissions in 1990 and they formed 59,8 % of the 1992 level. In relation to 2003, the total GHG emissions in 2004 grew by 25 mln tons. The forecast of GHG emissions in Kazakhstan for two versions of the macroeconomic forecast, in compliance with the data from the Coordination Center for the Climate Change, is shown in Figure 8.

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330 280 230 180 130 80 1990* 1992* 1994* 1999* 2000* 2001* 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

mln tons 2-equiv.

1 -

2 - .

Figure 8. Actual and forecasted GHG Emissions in Kazakhstan from the firing mln tons of 2-equiv In compliance with the forecasts, by year of 2010 mid of the first budget year of Kyoto Protocol, 2 emissions will form 101,5 %, 115,0 % in relation to the level of emissions of 1990. Correspondingly, the level of 1990 will be achieved by 2010 according to the basic version (shortly, Scenario 1 - minimum), by 2012 - according to the realistic version (Scenario 2 - realistic). Scenario 1 will correspond to the economic development if the Strategy for innovation and industrial development is not implemented. Scenario 2 assumes implementation of such a Strategy. According to Scenario 1, emissions growth tempos will constantly increase from 4 % a year in 2002 up to 6 % in 2015. According to Scenario 2 growth tempos will increase up to 2005 (from 4,2 up to nearly 7,7 %), then they will decrease down to 4,7 % in 2015. Thus, the 2 emission forecasts from the basic source Fossil fuel combustion, the share thereof in the total GHG emissions forms 68-73%, allows to estimate the possible budget of the greenhouse gases emissions in Kazakhstan for the period of 2008-2012. Projects devoted to the GHG emissions reduction, recommended to the national companies relate, first of all, to the increase of power efficiency (modernization of the existing traditional energy sources, putting new heat and power stations into operation), utilization of associated gases in the oil and gas sector, change of power demand and introduction of renewable power sources into power balance (hydroelectric power stations, wind power stations, solar water heaters and power stations, use of geo-thermal energy). Air Pollution. Intensive development of the mineral and raw material complex of the country has resulted in the situation that the basis of the modern industries now includes industries which are the most dangerous for the environment, such as fuel-energy, metal manufacture, chemical and petrochemical industries. The air is polluted with the emissions from the enterprises of non-ferrous metallurgy, heat-and-power engineering, ferrous metallurgy, oil and gas complex and transport. Observations over ambient air pollution take place in 19 cities of the republic. The worst pollution is observed in the following cities, like Ridder, Shymkent, Ust-Kamenogorsk, Karaganda, Almaty. Sometimes maximum concentrations of the pollutant substances exceed by

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10-20 times the maximum permissible coefficients (for example, in the cities Balkhash, UstKamenogorsk concerning sulfur dioxide). A positive tendency towards the reduction of the ambient air pollution has been observed in some cities of the republic. If at the beginning of the 1990s the pollution index in the cities Ust-Kamenogorsk and Ridder achieved 35-40 units, now it has decreased to 12-17. However, some opposite tendencies also takes place (Atyrau oblast). In Figure 9, the dynamics of the gross emissions of the pollutant substances into the ambient air from the stationary and movable sources is shown. As a whole, some relative stabilization of emissions has been observed during 1995-2002 at the level of 3,5-3,6 mln tons with the growing manufacturing tempo.
4500 4000 3500 3000 2500 2000 1500 1000 500 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 4282

4090 3791 3261 3097 2608 2437 2490 2615

2958 2600 2309 2310

Figure 9. Emissions of pollutant substances from the stationary sources, thous. tons The share of emissions from the movable sources in the cities has a tendency to growth on the account of increase of the number of motor transport in the cities. The most negative impact is made by the transport of old models; the specific emissions of the pollutant substances in the outgoing gases thereof significantly exceed the specific emissions of the new motor transport models, in particular, in carbon monoxides.

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1400 1200 1000 ths t 800 600 400 200 0 2000 2001 2002 2003

60000 50000 40000 TJ 30000 20000 10000 0 1 2

Figure 10. Dynamics of the emissions of pollutant substances from the motor transport, and the quantity of used fuel thous. tons More than a half of emissions of the pollutant substances (nearly 58%) is supplied by the biggest enterprises of Kazakhstan: Balkhash Mining and Smelting Complex, shortly, BMSC (20% from all the pollutions in the republic), OSJC Ispat-Karmet (15%), JSC Aksu HEPS, OJSC KazZink, OJSC Aluminum of Kazakhstan, JSC Ekibastuz HEPS-2, PLL TengizChevroil (Figure 11). Figure 11. Share of the biggest enterprises in the pollution of the ambient air of the Republic of Kazakhstan

JSC Alluminium of LLP JSC Ekibastuzskaya TengizChevroil Kazakhstan 2,4% GRES-2" 3,1% 2,6% Atyrau CJSC ITsA Kazakhmys Corporation 1,0% (DGMK) JSC Kazakhoil-Emba 5,9% 0,9% JSC SSGPO JSC Ozenmunaygas 1,8% 0,8% APK TETs-2 "Ispat-Karmet Aktobemunaygas 1,4% 14,9% 0,6% Astana TETs-2 KNGKM 1,3% 0,6% 10,0% BGMK Turgai petroleum 19,7% 0,6% Atyrau Refinery 0,5% Others JSC ShNOS 32,4% 0,3% Huricane Kumkol Munay 0,3%

JSC Aksuskaya Power Station JSC Kazzink 5,4% 3,7%

CO2 in Kazakhstan is not enlisted as a hazardous gas therefore it is not included in emission list on single enterprises.

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Law Concerning Protection of the Ambient Air adopted in 2002 requires development of the efficient mechanisms for the reduction of the volumes of harmful emissions. Actions taken for the protection of the ambient air are aimed at registering the emissions from the enterprises and collection of the payments for the pollution of the environment from the stationary and movable sources. Unfortunately, no noticeable effect has been achieved so far by these methods to reduce the quantity of the harmful emissions, as the cost of environment payments of enterprises is just included into the production cost (heating, electricity, services), which finally is paid by the consumers. So the mechanism of using environment payments has not yet provided any introduction of clean production technologies and support to environmentally clean manufacturing and processes. Significant input into the pollution of the ambient air of the country is made by the transboundary transport: for example, according to the preliminary calculations made by the methodological synthesizing center of Moscow SC-Vostok, share of sulfur emissions from the own source of Kazakhstan in its territory is 380 thous. t/year, and share of the emissions transported from the outside is 446 thous. t/year. In its turn, Kazakhstan supplies significant volumes of the pollutions into the atmosphere that are transported to the territories of neighboring countries. For on-line testing and obtaining a fuller picture of the air pollution in the urban territories, it is advisable to use the quality management systems based on the mathematical models of pollutant substances dissipation. Similar models enable the establishment of calculated levels of pollution for all possible substances which exist in the emissions from the city (region) enterprises for any spot of the examined territory, to keep calculated monitoring and to get calculated values of the background concentration for those ingredients which are not instrumentally observed on a constant basis. According to the calculations, nearly 5 mln residents of Kazakhstan live under conditions of the polluted ambient air, 2 mln under the conditions of the extremely high level of pollution. Kazakhstan scientists developed a model to calculate the damage caused to the health of the population as a result of deterioration of the environment taking into account the total costs for treatment, diagnostics and measures to prevent pathologies of the population, average lifetime, costs for sick-lists payments, and costs for disability pensions. According to the data from the Center for Health Protection and Environment Projecting, losses of Kazakhstan form 8355 KZT ($55,7) per resident per year or 9000 KZT ($60) per ton of emissions into the atmosphere. It means that the negative impact on the Kazakhstan populations health from the pollution of the ambient air forms not less than 225 billion ($1,5 billion) per year.

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