One of the significant risks for investors in renewable energy projects in Kazakhstan is the risk associated with the volatility of the national currency. Today, all auctions for renewable energy projects are held in the national currency. According to the current regulations, certain deadlines established for construction of renewable energy facilities: for solar stations - 24 months, for wind stations - 36 months, for hydroelectric power plants - 60 months. Capital expenditures for construction of facilities by investors are spent during this period, while it should be noted that high-tech generating equipment is purchased abroad in foreign currency. To cover currency risks, the authorized state body uses the mechanism of tariff indexing. Unfortunately, today this mechanism does not cover the construction period of RES facilities, indexing begins after the project is put into operation.

For projects with credit obligations in foreign currency, auction prices are indexed once a year on October 1, taking into account inflation and changes in the exchange rate of the national currency to convertible currencies. At the same time, the indexation formula takes into account the 30% of impact of the consumer price index (inflation) and 70% of impact of the volatility of KZT/USD exchange rate. The average KZT/ USD exchange rate is taken as a basis, calculated for the period of twelve months preceding the date of indexing, established by National Bank of the Republic of Kazakhstan.

Investors are constantly contacting Qazaq Green RES Association and note the fact that in fact the formula and the entire indexing mechanism does not cover the risks of investors. Especially this problem becomes relevant in the context of the geopolitical situation and turbulence in the currency markets, beyond the control of investors. In this regard, "Qazaq Green" RES Association, with the support of the Ministry of Energy of the Republic of Kazakhstan, conducted a survey among the players of the renewable energy market on possible options for improving the indexing mechanism, as well as existing problems faced by investors. The survey covered representatives of more than 50 organizations and companies: international financial institutions, national companies, domestic and foreign investors in the renewable energy sector. "Qazaq Green" RES Association presents the results of the survey.

At the beginning of the survey, Qazaq Green asked the players to give answers to the following questions.

RESULTS OF A SURVEY OF RES BUSINESS COMMUNITY ON INDEXING AND MARGINAL AUCTION PRICES

A. What financial risks do you experience when implementing the project (for example, exchange rate volatility, lack of financing in the national currency, high loan rates, etc.)?

B. What are the main disadvantages of the current indexing mechanism?

C. How do these shortcomings of the indexing mechanism affect the financial stability of your project?

D. Are there any risks of project insolvency due to the lack of an indexing mechanism for the construction period?

E. Your suggestions for improving the indexing mechanism.

A. Ushurov, Development Director, Elcomtel LLP:

"Currency risks strongly affect all market participants".

Ye. U. Abubakirov, Deputy Director of Ak-su Kuat LLP:

"High loan rates and other bureaucracy".

• Hsu Matthew, Head of Representative Office in Kazakhstan, Sungrow Renewables Development Co., Ltd., Director of Borey Energo LLP:

A. The biggest risk may be exchange rate volatility.

B. The current indexing mechanism cannot reflect actual exchange rate fluctuations, therefore it cannot coverthe riskof a FOREX investor,since investors will use US dollars to purchase equipment during construction and will have to exchange tenge for US dollars during operation.

C. This can seriously affect the financial return of the project due to FOREX risks, such as the sharp depreciation of the tenge against the US dollarfrom the end of February 2022.

RESULTS OF A SURVEY OF RES BUSINESS COMMUNITY ON INDEXING AND MARGINAL AUCTION PRICES

A. What financial risks do you experience when implementing the project (for example, exchange rate volatility, lack of financing in the national currency, high loan rates, etc.)?

B. What are the main disadvantages of the current indexing mechanism?

C. How do these shortcomings of the indexing mechanism affect the financial stability of your project?

D. Are there any risks of project insolvency due to the lack of an indexing mechanism for the construction period?

E. Your suggestions for improving the indexing mechanism.

A. Ushurov, Development Director, Elcomtel LLP:

"Currency risks strongly affect all market participants".

Ye. U. Abubakirov, Deputy Director of Ak-su Kuat LLP:

"High loan rates and other bureaucracy".

• Hsu Matthew, Head of Representative Office in Kazakhstan, Sungrow Renewables Development Co., Ltd., Director of Borey Energo LLP:

A. The biggest risk may be exchange rate volatility.

B. The current indexing mechanism cannot reflect actual exchange rate fluctuations, therefore it cannot cover the risk of a FOREX investor, since investors will use US dollars to purchase equipment during construction and will have to exchange tenge for US dollars during operation.

C. This can seriously affect the financial return of the project due to FOREX risks, such as the sharp depreciation of the tenge against the US dollar from the end of February 2022.

1. Asian Development Bank

2. British Embassy,Trade Department

3. NC KazMunayGas JSC

4. Eurasian Resources Group, ERG

5. Samruk-Green Energy LLP

6. Total Eren Services Kazakhstan

7. Sungrow Renewables Development Co., Ltd.

8. Borey Energo LLP

9. HEVEL KAZAKHSTAN LLP

10. Kaz Green Tech Solar 1 LLP

11. KB Enterprises LLP

12. TechnoBazalt LLP

13. HEK-KT LLP

14. KZTSolarLLP

15. KapashagaiSolarPark LLP

16. First wind power station LLP

17. CP Zenchenko and K

18. Central Asian Renewable Energy Resources LLP

19. Elcomtel LLP

20. Eco Watt AKA LLP

21. Ak-su Kuat LLP

22. UNICASE

23. KPM Delta LLP

24. YUKSES50LLP

25. AlmatyEnergoProject LLP

26. EC ENERGYQazaqstan LLP

27. ASPMK-519LLP

28. Korinskaya HPP LLP

29. Agrofirma Kurma LLP

30. Energoinvest Ltd. LLP

31. NwComp-Solar

32. Energiya Alemi LLP

33. Hydro-Power LLP

34. AnnarLLP

35. Nurly WPPLLP

36. SarybulakWPPLLP

37. Sarybulak 2 WPP LLP

38. KerbulakWPPLLP

39. Kerbulak2WPPLLP

40. Golden Energy Corp LLP

41. PF ElectroSetStroy LLP

42. CharskVeterLLP

43. Wind Charsk LLP

44. WPPCharskLLP

45. DES Consulting LLP

46. EastWindEnergy LLP

47. Ventum Energy LLP

48. Zheruyk Energo LLP

49. Engineering Arena LLP

50. Hyperborea LLP

51. KaDi Company LLP

D. Yes, I have. It will take about 4years from the moment of signing the PPA to the first indexing in accordance with the current indexing mechanism.

V. Kashkarov,ASPMK-519 LLP:

A. Lack of long-term financing for a period of7-10years, lack of project financing providing for the use of future assets and cash flows for the project as collateral for the loan, high loan rates.

B. The current indexing mechanism has the following disadvantages:

• The tariff is not indexed during the design and implementation of CIW, i.e. by the time the facility is put into operation, the tariff becomes irrelevant and does not provide the required level of return on investment.

• The level and dynamics of the consumer price index (CPI) does not fully reflect the dynamics of changes in prices of industrial goods, works and services, as a result, tariff indexing may not be carried out in full.

C. Tariff indexing affects both the project payback parameters and the ability of the project initiator to provide loan servicing.

D. Yes. This is especially true for projects, implementation of which takes a longtime (for example,the construction of hydroelectric power plants).

E. Indexing by the amount of exchange rate deviations, or switching to a fixed tariff pegged to a foreign currency with appropriate control of the validity of PPA and the payback period of the project.

M.A. Tukenov, Director of Korinskaya HPP LLP:

A. Lack of long-term financing (7 years or more), high loan rates.

B. The current indexing mechanism has the following disadvantages:

• The tariff is not indexed during the design and implementation of CIW, i.e. by the time the facility is put into operation, the tariff becomes irrelevant and does not provide the required level of return on investment.

• The CPI level does not fully reflect the dynamics of changes in prices of industrial goods, works and services, as a result, tariff indexing may not be carried out in full.

C. Tariff indexing directly affects the project payback parameters.

D.   Absolutely, yes. This is especially true for hydraulic engineering projects due to a long-term of implementation.

S. Kaspakov, Head of biogas plant, Agrofirma Kurma LLP:

"It is necessary to raise the tariff for BioPP, since it is completely unprofitable to build such facilities."

A. V. Shkarupa, Energoinvest Ltd LLP:

A. Unambiguously low level of marginal REStariffs, exchange rate volatility, high credit rates.

The existing indexation "fait accompli after 9 months" leads to losses of RES in the current period and often to the inability to fulfill obligations to banks due to the time lag and the significant influence of the exchange rate...

D. Definitely exist,since the main equipment is purchased forforeign currency and the delivery timefrom the moment

of loan approvalto the actual delivery can reach 12 months...

E. Set tariffs in US dollars.

M. Davreshev, Founderof NwComp-Solar:

"Exchange rate volatility, lack of financing in the national currency, high loan rates in the national currency".

R. Raisov, Director of Hydro-Power LLP:

A. Exchange rate volatility, high interest rates on the loan, the difficulty of obtaining a loan fora longtime, no repayment holidays before the launch of the project.

B. Different tariffs - for different types of power plants and their indexing.

C. Increase in the payback period of the project.

D. Yes.

Creation of the same market conditions for all types of power plants, a single tariff and a single method of their indexing.

Omasheva A., Director, "Annar" LLP, "WPP Nurly" LLP, "WPP Sarybulak" LLP, "WPP Sarybulak 2" LLP, "WPP Kerbulak" LLP, "WPP Kerbulak2" LLP, "Golden Energy Corp" LLP, "PF Electrosetstroy" LLP, "CharskVeter" LLP, "Wind Charsk" LLP, "WPP Charsk" LLP, "DES Consulting" LLP, "EastWindEnergy" LLP, "Ventum Energy" LLP, "Zheruyk Energo" LLP: "We see big risks in the volatility of the exchange rate because we buy equipment in foreign currency, and there is also a shortage of equipment,which leads to higher prices. Our suggestion is that any project at any stage of the project should be indexed. We, as a group of companies, unfortunately, have already terminated contracts with SFC of RE LLPfor2 HPP projects with tariffs of 15 KZT because the projects today are economically unprofitable, because of this we lost the funds that were provided for the issuance of guarantees".

S.Agafonov, Head of SM, First Wind power Station LLP:

"Increase in capital costs, as equipment and spare parts are imported and directly depend on KZT in relation to foreign currencies".

I. Chernodarov, Executive Director of Total Eren Services Kazakhstan:

A. The main risks are the volatility of the national currency, which, in turn, affects the high interest rates on loans in tenge and their insignificant volumes.

B. The main drawback of the current auction price indexation formula is the use of the average rate when calculating the exchange rate change. This approach is absolutely not objective and distorts the result of indexing.

C. Specified above.

D. Given the current instability of the economic situation, the lack of indexation for the construction period clearly increases the risk of project insolvency.

E. The indexing mechanism influences the decision-making when calculating the optimal price when participating in an auction. All the risks of project insolvency as a result of biased indexing lead either to a higher auction price, or to the non-implementation of projects that won the auction as a result of price dumping, which does not allow eventually achieving the targets for the development of renewable energy.

In this regard, we believe that it is necessary to adopt a mechanism for indexing the tariff for the construction period and adjusting the current formula regarding the application of the rate at the end of the period (not the average for the period), as well as to provide for the possibility of quarterly indexing.

A. B.Abylkalikov, Deputy Directorforthe energy market of HEVEL KAZAKHSTAN LLP, authorized representative of Kapashagai Solar Park LLP, Techno Bazalt LLP, KZT Solar LLP, HEK-KT LLP, Kaz Green Tech Solar 1 LLP, KB Enterprises LLP:

A. Exchange rate volatility, lack of financing in the national currency at low loan rates.

B. The difference in the exchange rate from the date of the auction (investment decision) and the date of commissioning of the facility (the period of actual investment in the project) is not taken into account;

A sharp change in the base rate of the National Bank of the Republic of Kazakhstan is not taken into account.

C. The risk of critical decrease in the profitability of the project (up to its unprofitability), and, accordingly, increased rates for attracting project financing (at the time of attracting financing) and sharp increase in the credit rate in the event of

a sharp increase in the base rate of the National Bank of the Republic of Kazakhstan.

D. Exist,since all loans for the implementation of projects are issued in foreign currency.

E. Introduce the price adjustment under the contract, taking into account the change in KZT/USD exchange rate. In case of a sharp decrease in KZT value to USD value (more than 10% in a calendar month) - provide for price indexing within 1 month after such a decrease.

The possibility of choosing the indexing method annually.

The maximum auction rate is determined according to the maximum rate of the last auction, taking into account the indexation at the exchange rate for this period.

D. V. Zaitsev, General Director, Almaty Energo Project LLP, Engineering Arena LLP, KaDi Company LLP, Hyperborea LLP:

A. After the auction in November 2021, there was a significant change in macroeconomic conditions in terms of a decrease in the tenge exchange rate, an increase in the cost of financing and the availability of financing on the international market. In fact, all financial risks were realized at the same time to an extreme extent.

In addition, renewable energy projects of significant capacity do not fall under the criteria of key state support programs (DAMU, Baiterek).

B. Firstly, there is no indexation of the tariff during the investment period of the project. Taking into accountthe fact that the auction tariff is fixed in tenge,and the investment cost of the project is almost completely denominated in hard world currencies, the depreciation of the tenge in the investment phase leads to an imbalance between the tariff and the amount of capital expenditures. Thus, with a sharp decline in the tenge exchange rate, projects that are

in the investment phase become difficult to implement.

C. Secondly,there is a disadvantage in the current tariff indexation formula in the operational phase in peg to KZT/USD exchange rate, which consists in comparing the exchange rate on the date (October 1)

to the average rate forthe previous 12 months - this entails risks that, under certain conditions, the tariff indexation may lag behind the actual depreciation (for example, if the exchange rate dropped significantly immediately after October 1). This disadvantage prevents the widespread attraction of financing in foreign currencies, since investors and banks do not see full protection from exchange rate shocks in the current formula.

Third, the indexing formula implicitly implies that costs denominated in US dollars do not increase overtime. At the same time, in fact, the cost of maintenance and repair of equipment by suppliers in practice is fixed in dollars/euros and is subject to indexing to Question 1

At the moment, the Ministry of Energy of the Republic of Kazakhstan proposes to apply the following measures in terms of indexing renewable energy tariffs: increase the rate of tariff indexation in relation to the change in KZT/USD exchange rate from the current 70 to 100%, while rejecting the annual indexation of the tariff by the inflation rate in this formula (the 30% peg to the CPI is canceled). At the same time, when signing the PPA contract, it is assumed that it is possible to choose either the above formula with peg to the currency, or the existing indexing formula with peg to the CPI. Which indexing option would you prefer?

«100%pegtochange in CIP

• 100% peg to exchange difference

100% peg to the change in the consumer price index (inflation)? Formula: T+1 = Tt* CPI, where T+1 is the indexed auction price calculated accordingtotheabove formula, rounded down to whole tiyns; Tt is the auction price taking into account the previously conducted indexing; CPItis the consumer price index accumulated overthe twelve months preceding October 1 of the year of indexing, determined according to the data of the state statistics authorized body.

• 100% pegtothe change in KZT/USD exchange rate? Formula: where T+1 is the indexed auction price calculated accordingto the above formula, rounded down to whole tiyns; Tt is the auction price taking into account the previously conducted indexing; USD+1 is the current KZT/USD exchange rate effective on October 1 of the year of indexing, established by the NationalBank of the Republic of Kazakhstan; USDt is KZT/USD exchange rate as of October 1 of the previous year, established by National Bankof the Republic of Kazakhstan.

Question 2

As it is known, according to the current indexing standards for projects with credit obligations in foreign currency, auction prices are indexed once a year on October 1, taking into account inflation and changes in the exchange rate of the national currency to convertible currencies. At the same time, the average KZT/USD exchange rate is taken as a basis, calculated for the period of 12 months preceding the date of indexing, established by National Bank of the Republic of Kazakhstan. The Ministry of Energy of the Republic of Kazakhstan proposes to adopt a rate which takes the exchange rate of the day of the previous year (October 1 of the previous year) and the day of the current year (October 1 of the current year), in which the indexation is calculated. Do you support this proposal?

Question 3

The preference for peg to changes in the level of inflation or the KZT/USD exchange rate depends on the currency of the loan of the company implementing the renewable energy project. At the same time, during the life cycle of the project, conditions may occur under which pegging to the dollar exchange rate will be preferable at the early stages of the project (for example, during the construction period), and then, for example, after the delivery of the facility, pegging to inflation will be more preferable. Do you support an option which provides the company implementing a renewable energy project with the opportunity to change the indexing peg 1 time during the life cycle (the validity period of the PPA contract) of the project?

Question 4

"Qazaq Green" RES Association has recently been receiving appeals on the risks of investors during the construction period on a regular basis. As it is known, at the moment, the indexing mechanism does not affect this part of the project lifecycle. Which of the options would be preferable for you?

Indexing 1 year after the auction according to the current formula.

• Following the auction, fix the auction price in US dollar cents (at the exchange rate effective on the date of the auction) and receive payments for construction period at KZT/USD rate, and after commissioning switch to the tenge tariff and receive indexation pegged to inflation or exchange rate difference.

Question 5

The Ministry of Energy of the Republic of Kazakhstan is working on the development of the Auction Schedule. It is expected that the power output will be in the ratio of wind power — 80%, SPP — 20% (for every 1 MW of solar energy — 4 MW of wind energy). At the same time, a number of technical requirements will be imposed on the WPP and SPP projects, including the equipment of energy storage systems. Thus, at the first stage, it is proposed to use an energy storage system with a capacity of at least 20% of the installed capacity of WPP/SPP and capacity sufficient for the full output of storage capacity during two hours. It is proposed to determine the maximum auction prices for WPP and SPP at a fixed tariff for SPP — 34.61 tg/kWh, for HPP (according to UNICASE) — 41.23 tg/kWh, for BioES at the current tariff — 32.15 tg/kWh. Do you agree with this level of marginal auction prices?

SURVEY RESULTS

The results of the survey identified a range of major problems related to currency and investment risks:

• High volatility of the national currency due to geopoliticalfactors beyond the control of the investor (force majeure).

• The current indexing mechanism does not cover investors' risks, the level and dynamics of the consumer price index (CPI) does not fully reflect the dynamics of changes in prices of industrial goods, works and services, the application of the average annual rate distorts the results of indexing.

• There is no practice of indexing for the construction period, whereas capital expenditures are spent during this period.

• Lackof long-term financing.

• High interest rates on loans.

According to the RES market players, the following measures may be potential solutions:

• At the time of the auction, record their results in US cents and make payments and indexation in the national currency based on the current KZT/USD exchange rate of the National Bankof the Republic of Kazakhstan.

• To carry out indexing for the period of construction of the renewable energy facility.

• Provide companies with the opportunity to choose the indexing method (pegging to the CPIorto the exchange rate difference) before conducting the next annual indexation. This choice should be based on the currency structure of the project financing.

• Despite the fact that 89% of respondents supported the issue of indexing taking into account specific dates (October 1 of the previous and current year), according to experts, there are risks that this approach will not take into account fluctuations in the exchange rate during the year. Some survey participants also note that quarterly indexing will also not coverall currency risks, especially during the construction period. Substantiating calculations are needed in this matter. All survey participants supported the need to peg the tariff to US cents.

• It is necessary to introduce the practice of open marginal auction prices, including for projects with energy storage systems. The application of marginal auction prices should take into account the change in the exchange rate.

• We need a program for long-term returnable financing (15-20 years) with low interest rates (3-4%) for renewable energy and maneuverable capacities through domestic development institutions.

• Low marginal auction tariffs, including the irrelevance of fixed tariffs used for the first auctions of 2018, including due to changes in KZT/USD exchange rate from 2018.