Kazakhstan 2022

Executive summary

Overview

The Republic of Kazakhstan is the largest of the former Soviet Republics in Central Asia, as well as the region’s largest energy producer. It is bordered in the north by the Russian Federation (hereafter, “Russia”), in the east by the People’s Republic of China (hereafter, “China”), in the south by Kyrgyzstan and Uzbekistan, and in the west by Turkmenistan and the Caspian Sea. The country has a land area of 2 717 300 square kilometres (km2), a coastline of 1 894 kilometres (km) on the Caspian Sea, and a population of 18.7 million.

The oil and gas industries and related sectors accounted for 17% of gross domestic product (GDP) in 2020. Oil provides most of the country’s export earnings and serves as the main source of government revenue. 

Energy supply and demand

Oil accounted for over 50% of Kazakhstan’s domestic energy production in 2020. Its second main source of energy production is coal, which accounted for 28%, followed by natural gas (17%).

Kazakhstan’s significant overall energy surplus has remained stable over the last two decades, averaging 230% of the energy supply needed to cover domestic demand. This has allowed Kazakhstan to be a large net exporter of fossil fuels, particularly oil.

Almost one-third of total final energy consumption (TFC) in 2020 was covered by oil (31%), followed by coal (22%), while heat, natural gas and electricity each accounted for around 15%. The residential sector consumed 33% of TFC in 2020, surpassing industry (32%) that year as the largest consuming sector. Transport accounted for 18%, while the remainder (16%) was consumed by services and other sectors.

General energy policy

The 2013 Concept for the Transition to a Green Economy (Green Economy Concept) calls for the country to generate 50% of its electricity by 2050 from “alternative or renewable” sources, which could include nuclear. It also calls for a 15% reduction in carbon dioxide (CO2) emissions in electricity production by 2030, and a 40% reduction by 2050. It envisions achieving these targets by, among other actions, phasing out ageing infrastructure, particularly in the power sector, increasing the use of renewables and alternatives to coal and oil, and promoting energy efficiency. In 2020, the government adopted an Action Plan for implementing the Green Economy Concept.

In 2014, the government approved the Concept for the Development of the Fuel and Energy Complex until 2030, and in June 2020 introduced an amended version of this document. The update provides an overview of the various energy subsectors, including the main issues and broad outlines regarding the government’s plans to address them.

The collection, validation and dissemination of official statistics are the responsibility of the Bureau of National Statistics (BNS). Since 2015, the BNS increasingly has produced data following relevant international methodologies and standards. The Master Plan for Development of the National Statistical System of the Republic of Kazakhstan for 2017‑2025 defines priorities for energy statistics.

The first household energy consumption survey was conducted in 2018, and the next one is planned for 2023. Such surveys are essential for obtaining disaggregated information that helps support the development of energy efficiency indicators to track the impacts of energy policies.

Kazakhstan has made ambitious commitments to reduce greenhouse gas (GHG) emissions and increase the share of renewables in electricity production. However, the country’s current dependence on large reserves of inexpensive coal makes achieving these objectives a challenge.

Apart from renewables, prices for energy in Kazakhstan generally are not directly subsidised, but kept low through regulatory and administrative means. For example, tariffs for conventional power producers do not fully account for maintenance and replacement costs nor for environmental and climate externalities. As a result, renewable energy sources (RES) and other new generation capacity must compete with amortised coal plants that do not need to fully account for externalities.

Energy prices are a sensitive social concern in Kazakhstan. However, Kazakhstan may be able to learn from the experience of other countries that have successfully reduced or eliminated price distortions, for example by introducing increases over time and targeting end-user subsidies or welfare payments to the most vulnerable.

Oil and natural gas

Kazakhstan is the largest oil producer in Central Asia and a major gas producer. Most gas is associated with oil production, and around one-third is reinjected in order to boost liquids output. Production of both oil and gas is dominated by three international projects that began operations in the 1990s.

Kazakhstan has been successful in attracting the interest of major international investors in its oil and gas sector. However, a worldwide trend towards decarbonisation is making oil and gas companies more selective about developing new acreage. Given Kazakhstan’s relatively high development costs for new upstream projects, coupled with long export routes, attracting investment is increasingly expected to depend on ensuring that fiscal and other policies are internationally competitive.

Around 80% of oil is exported. Almost all exports pass through Russia, mainly via the Caspian Pipeline Consortium (CPC) pipeline to the Black Sea port of Novorossiysk. A smaller pipeline to China is currently underused, while minor volumes are sent by tanker across the Caspian Sea to Azerbaijan, where they can enter the Baku-Tbilisi-Ceyhan pipeline. Diversification of export routes is important for securing the flow of oil and gas to lucrative export markets, which provide important revenue for the Kazakh treasury.

Following a major refinery refurbishment programme, completed in 2018, Kazakhstan is essentially self-sufficient in oil products. However, very low domestic prices for oil products relative to those of its neighbours have led to unauthorised exports, in turn leading to periodic domestic shortages for some products.

Kazakhstan has been successful in rapidly expanding its domestic gas network. However, increasing gas supplies to meet domestic consumption and export goals appears to be a growing challenge. Producers generally have been reluctant to sell gas to the country’s gas monopoly, QazaqGaz, because it is more economic for them to reinject the gas in order to boost oil production. QazaqGaz is limited in the price it can offer producers due to low retail prices set by the regulator. More attractive prices for gas would provide incentives for producers to sell more of it, as well as to explore for and develop new sources of supply for the government’s ambitious plans to expand gas consumption.

Coal

Kazakhstan’s coal reserves are among the largest in the world and relatively inexpensive to mine. Coal currently accounts for around 50% of Kazakhstan’s energy supply, over 70% of its electricity generation and over 20% of final consumption. Kazakhstan has one of the highest rates of household coal use in the world.

Kazakh coal emits relatively large amounts of particulate matter and sulphur dioxide (SO2) when combusted. As in many countries, more work is required to accurately quantify and control methane emissions from coal mines.

Many of Kazakhstan’s coal-fired power plants are old, inefficient and highly polluting. The International Energy Agency (IEA) welcomes the government’s plans under the new Environmental Code to promote investments in best available techniques (BAT) for the mitigation of certain non‑CO2 pollutants. 

Electricity

The government aims to significantly reduce the share of generation from coal in order to help meet its environmental and climate goals. However, the country’s abundance of inexpensive coal makes this a challenge.

Gas-fired power accounted for about 20% of generation in 2020, though most of this was in the oil- and gas-producing western power zone, which is isolated from the rest of the country. Most of the electricity generated from renewable sources in 2020 came from large hydropower plants (HPPs), much of whose capacity is tightly regulated by agricultural irrigation schedules. Wind and solar represented only around 1% of generation each in 2020.

Kazakhstan lacks flexible generating capacity and in practice relies significantly on parallel operation with the Russian power system to cover imbalances and maintain frequency stability. The shortage of flexible capacity is likely to become an increasing challenge as more intermittent renewables are added to the system.

As in other energy subsectors, the authorities are concerned about keeping end-user tariffs low for social welfare reasons. Although the country has introduced a number of market mechanisms over the years, these appear to have had limited impact, particularly for stimulating investment.

Kazakhstan ranks first in the world in uranium mining and is involved in other stages of the nuclear fuel cycle. The government has been publicly discussing the idea of building a commercial nuclear plant.

Renewable energy

The potential of Kazakhstan’s RES is substantial, though the share of RES in total energy supply is currently low, varying between 1% and 2%. Kazakhstan is to be congratulated for meeting its target for producing 3% of power from RES by 2020. The country aims to generate 15% of its electricity from RES by 2030, not including large hydropower.

Currently over 130 RES facilities supply power to the grid with a total installed capacity of more than 2 gigawatts (GW), a 20-fold increase since 2011. Most RES is solar and wind, in addition to some 1.6 GW of large hydropower generating capacity.

Kazakhstan employed feed-in tariffs (FiTs) for several years, but began using auctions to determine tariffs for RES projects from 2018. Between that time and 2021, Kazakhstan organised auctions for over 1 700 megawatts (MW) of RES capacity, resulting in 75 projects. Auction-based power purchase agreements (PPAs) allow a project to sell all of its power to the designated centralised buyer of RES and benefit from prioritised dispatching.

Integrating Kazakhstan’s growing RES capacity is increasingly becoming a challenge. Kazakhstan’s power system has a large amount of coal-fired baseload capacity, but very little of the flexible capacity that can be quickly powered up or down to complement the intermittent nature of RES.

In December 2021, Kazakhstan began using auctions similar to those for RES to attract investment in new flexible generating capacity, such as large gas-fired and hydropower projects. The IEA welcomes this initiative, which the government should consider further expanding.

There is currently no incentive for RES projects in Kazakhstan to include storage, since auction rules do not require it and the resulting PPAs absolve developers of any financial responsibility for balancing. Unfortunately, including storage would add significant costs to RES projects, in turn requiring tariffs that may be substantially higher than those currently in use.

If tariffs fully took into account long-run upgrade and replacement costs and environmental and climate externalities of conventional power producers, RES probably would be in a substantially better position to compete in the power market, including for the development of flexibility in the form of energy storage.

Energy efficiency

Kazakhstan has experienced significant GDP growth without a concurrent increase in energy intensity. However, its economy remains highly energy-intensive, with a strong reliance on fossil fuels across most sectors. Both residential and transport sector consumption have increased considerably in absolute terms since 2010.

Policies to increase energy efficiency are present across all sectors, and energy efficiency has been identified as a priority by the government. However, efforts to achieve progress are complicated by low energy tariffs, lack of secondary legislation and implementing measures, and the absence of a central co‑ordinating body for energy efficiency across governmental departments.

Very low energy tariffs that do not fully cover costs create barriers to investment and effective policy design and implementation across many sectors. As a result, end consumers are not aware of the full cost of energy and have few incentives to reduce their consumption through the purchase of more energy-efficient equipment.

In the buildings sector, existing measures do not equate to a comprehensive set of codes covering new construction and major retrofits, while energy passports are not being effectively enforced by local authorities. In rural areas reliance on coal creates climate and health concerns, and in urban settings outdated district heating systems and lack of metering reduce efficiency.

The potential to increase the efficiency of appliances and energy-using equipment remains largely untapped, though efforts are under way with support from international partners to improve existing frameworks for minimum energy performance standards (MEPS).

In transport, vehicle fuel economy standards and import bans on older vehicles are not effectively enforced, and robust testing regimes are lacking. In the industry sector, existing energy performance and energy audit requirements are also poorly enforced, resulting in energy efficiency potentials in industry remaining largely untapped.

Energy, environment and climate change

Kazakhstan joined the United Nations Framework Convention on Climate Change (UNFCCC) in 1995 and ratified the Kyoto Protocol in 2009. In 2016, it ratified the Paris Agreement and pledged to reduce its GHG emissions to 15% below 1990 levels by 2030 (including land use, land-use change and forestry [LULUCF]) as an unconditional target, and by 25% conditional to receiving additional international assistance. Kazakhstan’s 2021 Environmental Code requires state bodies to take actions aimed at ensuring the fulfilment of these targets.

The CO2 intensity of Kazakhstan’s GDP is nearly 70% higher than the world average, reflecting the structure of its economy, which includes energy-intensive heavy industries and a reliance on coal in electricity generation. According to Kazakhstan’s latest national inventory report to the UNFCCC, energy-related emissions in 2020 accounted for around 80% of its total GHG emissions, excluding effects from land use. In 2020, fuel combustion was the largest source (90%) of emissions from Kazakhstan’s energy sector, while fugitive emissions accounted for the remaining 10%.

President Kassym-Jomart Tokayev’s pledge in 2021 to achieve carbon net neutrality by 2060 gave a significant boost to the development of climate policies. The draft Strategy to Achieve Carbon Neutrality by 2060 is currently undergoing a revision and discussion process. A revised Nationally Determined Contribution (NDC) and implementation roadmap for it have also recently been developed, though not yet approved.

Kazakhstan has made considerable progress in improving its Environmental Code, which entered in force in July 2021 and includes policies to promote BAT. It also envisages policies for climate change mitigation and adaptation and establishes a “carbon budget”, which is to be co‑ordinated with the country’s international commitments.

Kazakhstan is the first country in the Former Soviet Union (FSU) to introduce an emissions trading scheme (ETS). Despite several amendments and fine-tuning, however, the number of transactions has been extremely low. Important reasons for this include the large number of free quotas and relatively high benchmarking coefficients, particularly for coal-fired power plants. Non‑ETS sectors, including transport, the residential sector and services, are increasing their energy consumption and GHG emissions, while policies and measures to reduce emissions from these sectors have yet to be developed. 

Key recommendations

The government of Kazakhstan should:

  • To the extent possible, ensure that all energy prices take into account long-run marginal costs and environmental externalities, in order to provide sufficient incentives to pursue energy efficiency, and to level the playing field for and stimulate the development of new sources of supply. Any price rises should be accompanied by policies to mitigate their impact on the most vulnerable segments of the population.
  • Maintain close co‑operation with the BNS and continue using official energy statistics as the foundation for analysis in strategic documents and when drafting new legislation.
  • Prioritise the diversification of oil export routes.
  • Continue and expand auctions to build RES and flexible capacity.
  • Prioritise the development of an efficient balancing market in order to stimulate the efficient development and use of balancing capacity, which will be increasingly needed for the integration of RES.
  • Adopt the NDC implementation roadmap.
  • Adopt policy measures to reduce emissions from sectors not covered by ETS, including transport, the residential sector and services.
  • Intensify efforts to reduce emissions from coal-fired power plants by adopting more stringent air pollution standards for such plants, including through BAT, and ensuring enforcement. Ensure that Kazakhstan’s BAT and technical emissions standards are in line with international best practice.