A critical issue is how to increase efficiency, attract investments and new entrants, and diversify energy supply in Uzbekistan’s current energy system in which gas, electricity and heat are supplied by financially burdened monopolies at strongly subsidised prices. The policy response should include energy tariff reform, electricity and gas market reform, increasing the use of renewable energy, and improving energy efficiency. Encouragingly, this is what Uzbekistan’s energy reform promises to deliver.

The level of energy prices is central for attracting investment and for encouraging citizens to use energy efficiently. As part of the country’s social policy, the government sets end-user prices for electricity and natural gas below full costs of supply. The IEA estimates that in 2020, Uzbekistan’s implied subsidies on natural gas, electricity and oil amounted to USD 3.8 billion, or 6.6% of the country’s gross domestic product (GDP).

The low price of natural gas in particular creates distortions. For example, it discourages using renewable energy for electricity and, as it favours individual gas boilers for space heating, it discourages potentially more efficient system solutions including the combined generation of district heating (DH), cooling, electricity and the use of heat pumps. Retail oil prices were deregulated in 2020.

Subsidised tariffs do not encourage residential and industrial consumers to improve energy efficiency, even though it would make economic sense for the country as a whole. A tariff reform should be placed at the heart of Uzbekistan’s efforts to reform its energy sector. Natural gas could be saved through improved efficiency, substituted with renewable energy in power generation and turned into higher-value-added petrochemicals. The greenhouse gas (GHG) emissions avoided would help the country meet, and in due course raise, its climate target under the Paris Agreement. While climate policy is not a priority in Uzbekistan’s energy sector plans, as the government focuses on security of supply and economic growth, using gas, coal and oil more efficiently would also reduce GHG emissions and local air pollution.

In order to reduce subsidies in the longer term, more importance should be given to communicating to the public that energy subsidies are a highly regressive policy measure, benefiting mainly the well-off. The subsidies should be phased out gradually and accompanied with support mechanisms to cushion the effect on vulnerable groups.

Electricity demand in Uzbekistan is set to grow in the coming years and decades. The government expects it to roughly double to 2030. The whole population has access to affordable electricity, and growing electrification is set to increase demand from the current low level of supply of around 2 000 kilowatt-hours (kWh) per capita per year. Investments are required in new and more efficient generating capacity and electricity grids. The country needs a more flexible and secure dynamic electricity sector, and the IEA welcomes the government’s determination to reform the electricity system and gradually move from a state-dominated vertically integrated system to a more dynamic, efficient and environmentally sustainable one. The challenge now is to follow on the reform path and deliver the transformation.

The need for electricity reform is recognised in Uzbekistan’s Green Economy Transition Strategy for 2019‑2030 (from 2019) and the Security of Electricity Supply Concept for 2020‑2030 (from 2020). Several proposals have been drafted, including the draft law on electricity, the electricity network code and the presidential decree on further electricity market reforms. A well-structured three-stage reform plan exists for a transition to a competitive electricity market, but its implementation is largely yet to begin.

The IEA urges the government to adopt the pending legislation and to implement ambitious electricity market reforms for the benefit of the country and its economy. International experience suggests that reform approaches should be shaped by a country’s specific political and economic context, be tailored to achieve desired policy outcomes, and offer multiple institutional pathways to achieve these desired outcomes.

Uzbekistan’s energy reform is fundamentally changing the electricity sector, which was built on the monopoly of the state-owned Uzbekenergo. The monopoly has already been divided into separate companies for transmission, distribution and thermal power generation.

The government should first focus on governance issues and financial viability. Tariffs and subsidies should be revised to enable full cost recovery, and to encourage investment in power sector development. Reforms of this kind should help reduce operating costs and improve generation, transmission and distribution efficiency. It is therefore encouraging to see the government’s May 2022 proposals for revised tariffs. When implemented, they are an important step in the direction of full cost recovery and a manifestation of rational economic policy.

Specific policy objectives should also be set for a secure, efficient and clean electricity system. Although Uzbekistan has large gas resources to generate electricity, it is also in the enviable position of having excellent solar and wind power potential. Technology costs for solar and wind have declined dramatically over the past decade, making it more inviting for the country to tap into their potential and save more natural gas for petrochemicals production, for example. To enable the energy sector to allocate resources more efficiently, the IEA urges the government to also reform and gradually abolish subsidies for natural gas in electricity generation.

At the same time, diversifying electricity generation to include more renewable energy would help limit carbon dioxide (CO₂) emissions and air pollution. In this context, the IEA welcomes the government’s plans to raise the share of renewable energy in total electricity supply from 7.5% in 2020 to 25% in 2030. The significant solar and wind power resources are being developed, as international investors have responded positively to the tenders for capacity and signed power purchase agreements (PPAs) for power generation. The government also has plans to build the country’s first nuclear power units, with Rosatom, but it is not clear whether and when this project would be realised. Recent international experience has shown a real risk of major delays and cost overruns in large nuclear power projects.

The IEA supports the government’s plan to open up electricity generation to competition, and create wholesale and retail markets. This is best done gradually. The first steps should be to remove entry barriers for new participants and to transition towards unsubsidised cost-based economic dispatch of power plants to increase efficiency. This is already being done through tenders and gradual electricity tariffs increases.

To increase competition, the government should consider privatising some of the state-owned generating assets. Emphasis should be on privatisation as a potential means to increase competition and operational efficiency rather than as an end in itself, and full privatisation will probably not be necessary to achieve the desired goals. For example, in many European countries, the state remains the majority shareholder in electricity generators that operate in competitive wholesale markets. New entrants could also be entirely private or based on public-private partnerships, as long as market entry barriers are removed. An important point to consider relates to increasing the share of variable solar and wind power capacity. If the government plans to attract more investment through long-term PPAs, a mechanism should be designed to integrate such PPAs into the future wholesale market.

Gains from more efficient generation and grid operations would limit the need to raise end-user prices, and in any case social policy measures could be targeted to vulnerable customers. Network operations need to be remunerated sufficiently to enable the transmission system operator (TSO) and the distribution system operator (DSO) to modernise, maintain and, in light of rising electricity demand and solar and wind power generation, expand the networks.

A major necessary step in Uzbekistan’s electricity market reform will be the establishment of a market regulator. This should be done without delay. The more independent the regulator, the better for the market participants and, eventually, the customers. It will be essential to grant the future market regulator the legal right to take binding decisions and issue recommendations.

Energy consumption per capita is low in Uzbekistan, around one-quarter below the world average. At the same time, the country’s economy remains one of the most energy-intensive in the world, with energy consumption per unit of GDP more than 50% above the world average.

As is the case for other countries with legacy infrastructure and subsidised energy prices, Uzbekistan has plenty of opportunity to improve energy efficiency. The IEA strongly encourages the government to consider energy efficiency as a source of revenue, clean air and jobs, and to adopt without delay laws, strategies, policies and measures to help realise the potential it offers.

Key influencing factors for energy efficiency in Uzbekistan are subsidies and pricing mechanisms notably for natural gas, the main energy source in all sectors. While reform efforts are under way, experts broadly agree that current pricing structures limit incentives for energy efficiency improvements across key sectors of the economy, particularly in buildings and industry.

Instead of subsidising energy use for everyone, the government should target social policy measures to those in real need and also consider gradually switching to supporting more efficient use of energy. For example, it could launch programmes to replace the highest-consuming household appliances (refrigerators, washing machines, etc.) with highly energy-efficient new models. As low energy prices have been seen as a form of social policy, these programmes could target the less well-off.

The case for introducing financing mechanisms for efficient housing is strong. Renovation of the existing building stock, especially residential and public buildings, would save energy and bring health benefits and would help offset the impacts of tariff increases. The government should also ensure that residential buildings will comply with future energy efficiency regulations. In many IEA countries, compliance is verified by public-sector building inspectors, and the government should consider this approach.

There is also a strong case for a perspective beyond 2030. In the coming years and decades, more buildings will be constructed, more appliances and equipment sold, and more vehicles bought. Strong policies on energy efficiency will become all the more relevant, and a long-term approach is needed to guide the country on an environmentally sustainable path.

Experience in IEA member countries shows that minimum energy performance standards (MEPS) are among the most effective and cost-efficient energy efficiency policy instruments. Uzbekistan introduced MEPS for appliances and equipment in 1997, and the IEA encourages it to intensity MEPS use and expand it to other sectors, such as transport. MEPS use should be underpinned by implementing an effective mechanism for energy efficiency audits.

The population of Uzbekistan, around half of which still lives in the countryside, is set to continue to grow, urbanise and become wealthier. The country needs to build more urban infrastructure over the coming decades, including new heating solutions. Space heating is today based on subsidised gas used in individual boilers. However, modern district heating and cooling (DHC) systems, combined with electricity generation, heat pumps, waste heat use and thermal storage, could offer a solution that is more efficient and cost-effective while helping to reduce CO₂ emissions.

Uzbekistan’s energy use decreased by 14% from 2010 to 2020 to reach 33 million tonnes of oil equivalent (Mtoe). By sector, total final energy consumption (TFC) grew only in transport, by one-quarter. The private car fleet is expanding very fast, and although it is mostly fuelled by compressed natural gas (CNG), instead of oil, Uzbekistan should still avoid becoming locked into private car-dominated inefficient and energy-intensive urban structures. Public transport should be modernised and expanded ambitiously, and energy and climate aspects should be an integral part of long-term transport and urban development policies. For example, if private car ownership in Uzbekistan were to increase to today’s average EU levels, the country’s car fleet would grow fivefold, or by around 14 million.

Reliable data are the basis of sound policy making. The IEA commends the State Committee of the Republic of Uzbekistan on Statistics (UzStat) for improving energy data collection and monitoring, and it encourages UzStat to further develop national energy statistics to improve data coverage and quality and to inform policy decisions. To achieve this, it is critically important that the government provide UzStat with the necessary resources.