How is the electric power market regulated in the Kyrgyz Republic

Murat Madykov, Senior lawyer

Kyrgyzstan has significant hydropower resources, and therefore electricity should be regarded as one of the most important sectors of the economy. However, power industry’s potential capacities are not fully utilized, and currently it is experiencing certain financial, economic and management difficulties. The largest power generation company (Elektricheskie Stantsii OJSC), power transmission company (Natsionalnaya Elektcicheskaya Set OJSC or “NESK”) and power distribution companies are the key players in the power market. As the government maintains corporate control over these power companies, the former actually manages the industry. At the same time, the continuous inefficiency of the electric power companies during the recent times has repeatedly led to the idea of their privatization.

As of today, the regulation of the electric power market in Kyrgyzstan is quite complicated because of plenty of legal loopholes. This means that a number of additional regulations should be put in place. First, the government should adopt the general policy, such as the National Energy Program outlining its vision of the development of the electric power industry. In addition, the industry lacks many specific regulations relating to the issues of initiation and implementation of power facilities construction/restoration projects, connection to the grid, standard contracts for sale/transmission/supply of electricity as well as tariff policies.

According to Kyrgyz laws, in order to access to and become a player in the power market, companies need to obtain a license. Law “On Licensing” dated March 3, 1997 requires companies to obtain a license to generate, transmit, distribute and sell electricity. Construction of power plants, substations and electric transmission lines is also a licensable activity. The licenses are issued for unlimited term. The license is not required to generate electricity for personal purposes if the generation capacity does not exceed 1000 kW. Kyrgyz laws provide that construction of huge electric power facilities shall be done under the National Energy Program or a separate resolution of the Government of the Kyrgyz Republic.

The Kyrgyz Republic operates the model implying that the participation of a company in the power market depends on the ability to connect to the national electric power grid under voltage of 110 kW and above, which includes a variety of technical and contractual aspects. An operator and owner of the grid is NESK. The Government plans to retain corporate control over NESK and, consequently, over the power market by defining the terms of connectivity and transmission of electricity. NESK services, such as transmission of electricity by electric lines shall be provided under standard contracts the form of which has not yet been approved.

Purchase and sale of electricity in the market among power generation or distribution companies, importers, and large industrial customers are shall be also carried out under standard electricity purchase and sale contracts. The law also established that generation companies shall first of all provide electricity to the domestic market and only after satisfying the demand for electricity in the Kyrgyz Republic, they can offer it for export.

As for the relationships with an end-user of electricity, the government has also competence in drafting the standard contract for electric power supply, regulating the rights and obligations of distributing companies and consumers.

The operation of the electric power market is also subject to tariff regulations. According to Kyrgyz laws the Government has a right to define the following prices and tariffs:
• the price for the power as specified in the sale and purchase contracts between the parties in the domestic market;
• the fee for connection to and use of the national grid;
• tariffs for end-user.

The legislation does not define specific methods for calculating tariffs. However, the tariffs shall cover all costs associated with production, transmission and distribution of electric and heat powers, including operating costs, costs for technical maintenance, capital costs and an element of profit.

It is obvious that political risks and the absence of proper regulations will make investors very cautious when taking a decision to start business in Kyrgyzstan’s electric power sector. Apart from the above, the risks related to strategic assets, environment protection, safety, antimonopoly, construction regulations would also be important to take into account.