Since 2018, KOREM JSC has been the operator of the auctions for the selection of renewable energy projects. As practice and reality shows, the renewable energy market in Kazakhstan is firmly on its feet, as is the mechanism of auction trading for renewable energy projects. The Chairman of the Board of the "Kazakhstan Electricity and Power Market Operator” JSC, Bakytzhan Ilyas, told about the work conducted in this direction and what is still to be implemented.

-         Since 2018, our country has introduced the practice of RE auctions, following the international experience. Your organization is the operator of the auctions for the selection of renewable energy projects. Could you please share what indicators have been achieved over the past two years, and what difficulties have you encountered (capacities, applications, number of participants, countries represented, investors, auction results)?

-         The first auctions for the selection of renewable energy projects in the Republic of Kazakhstan took place in 2018. Looking back, we can say that less than one year has passed from the moment of adoption of amendments to the legislation in the field of supporting renewable energy (July 2017) to the first auction (May 2018).

A huge joint work has been performed during this period with the Ministry of Energy of the Republic of Kazakhstan, "FSC on RES” LLP, aimed at preparing a by-law base for the auctions. Significant support in preparation for the transition of the auction mechanism was provided by international consultants; a special contribution to the launch of the auction trading in Kazakhstan was made by the USAID Central Asia program team within the framework of the Power the Future project, which provided not only consulting assistance but also financial support for the development of a software and the purchase of necessary technical equipment.

A lot has already been said about the success of the transition to auctions and their results, I can only refer to it once again.

The 28 renewable energy auctions took place during the period of two years (2018-2019). As a result, 1070.82 MW of installed capacity was selected with the following breakdown by renewable energy type: WPPs - 609.84 MW; SPPs - 356.5 MW; HPPs - 89.08 MW; Bio-PPs - 15.4 MW.

An analysis of the prices received at the auctions of 2018 and 2019 for wind and solar generation shows a significant decrease in comparison with the starting maximum auction prices. So, at SPP auctions in 2018, the marginal price was 34.61 tenge/ kWh, while the minimum price received at the auctions was 18 tenge/kWh. In 2019, the marginal price was 29 tenge/kWh, while the minimum price offered at auctions was 9.9 tenge/kWh. The average price reduction for solar generation was about 40%.

At auctions for the wind power plants in 2018, the starting marginal price was 22.68 tenge/kWh, the minimum price received at the auctions was 17.39 tenge/kWh. In 2019,  with a starting marginal price of 22.66 tenge/kWh, the minimum bid price was 19.27 tenge kWh. The average decrease in prices for wind generation was about 13%.

"Such auction results definitely confirm the correctness of the selected government policy aimed at introducing a competitive project selection mechanism. "

- Since we started talking about investors, we would like to mention that today large international RE players, such as Acwa Power and Total Eren, do not participate in our auctions. The participants in our auctions are usually formed from the pool of domestic and foreign investors and developers, if I may say so, of “average performers” or completely unknown companies. In your opinion, what measures should be taken to attract the leaders of the renewable energy sector to come to us?

- Let's start with the fact that every investor is important to us and the status of the «investor» - is the only label that should apply to them. These are the companies that came to Kazakhstan, believing in the adopted state policy, and started investing in the economy of our country. Therefore, we are very happy to see each investor participating in the auctions.

Over the past two years, 145 companies have taken part in the auctions, the geography of the countries participating in the auctions includes 12 countries, and this, in our opinion, is a success. A transparent and understandable auction system was created, allowing the investor to participate in the auction from anywhere in the world. Investors accepted our rules and believed in the established system.

The auction rules adopted in Kazakhstan are aimed at ensuring that all bidders, both foreign and Kazakhstan companies, have equal conditions.

These factors indicate that investors believe in the established market rules and the created system of a state support for the development of the renewable energy sector. They are willing to scale up their business in Kazakhstan.

Investors express great interest in participating in the auctions. For example, the total proposed volume for WPP projects has two times exceeded the size of the volume proposed for the auction. As for the SPP projects, we can observe even more amazing results for the end of 2019. The volume of offers from investors six times exceeded the amount of the volume offered for the auction.

And the most important thing on this issue is that this year new RE projects that were previously selected through the auction bidding mechanism will start its commissioning. If they are introduced on time, this will be the main confirmation that investors came to the renewable energy sector.

As for global players, it should be noted that investors from the oil and gas sector, like Eni, Shell, who have been doing business in Kazakhstan for many years, have also come to the renewable energy sector now. We think no one has any doubt that these companies are world leaders in their industry.

Another specific feature of the 2019 auctions: among the participants, we saw companies that have already implemented projects in Kazakhstan or that have undergoing projects already under construction.

These factors indicate that investors believe in the established market rules and the created system of a state support for the development of the renewable energy sector. They are willing to scale up their business in Kazakhstan.

Investors express great interest in participating in the auctions. For example, the total proposed volume for WPP projects has two times exceeded the size of the volume proposed for the auction. As for the SPP projects, we can observe even more amazing results for the end of 2019. The volume of offers from investors six times exceeded the amount of the volume offered for the auction.

As for foreign investors who approach our company, they focus on several aspects.

Firstly, investors want to enter the market with large projects - we are talking about projects with an installed capacity of 100 MW or more. Secondly, investors want to see a long-term business perspective. Therefore, they all say that it is necessary to develop a schedule with the planned list of auctions for several years ahead.

This issue is within the competence of the Ministry of Energy of the Republic of Kazakhstan. However, we understand that in this matter, public policy has to not just take into account the interest of investors, but also to consider the ability of our economy to accept expensive electricity from the renewable energy sector. Even with the auctions excellent results, such electricity is still more expensive than the electricity produced from traditional coal-fired energy generators.

-         Last year, the renewable energy sector was excited by the results of the auction for solar power plants, which took place

on September 24, 2019, when the “Solar System” LLP company was recognized as the winner with a record price of 9.9 tenge/kWh. This price level can already compete with a coal generation. Now that the dust has settled, how can this result be determined: is it a technical error or a conscious pricing? Can you say a few words about the future of the project?

-         Yes, indeed, on September 24, 2019, according to the results of the auction, the “Solar System” LLP company won with a price of 9.9 tenge/kWh.

As a result of this auction, we carried out a full check of the software, and no technical complaints about its work were identified. Moreover, we conducted a survey among all auction bidders to understand whether it is technically possible to make a mistake when submitting applications to the trading system. Believe me, this is simply impossible, which is also confirmed by the bidders. Those who participated in the auction know that the software provides for insurance of operators against mechanical errors. The trading system several times asks to confirm the correctness of the submitted application.

Regarding this auction, we believe that it was a deliberate pricing, a kind of trading tactic selected. We could see that two companies were taking part in the auction, while both of the same owner. During the auction, one of them filed a price at which, as we believe it was planning to win the auction. Next came the company with a price of 9.9 tenge/kWh.

As a result, two companies were recognized as winners of the auction: Solar System LLP with a price of 9.9 tenge/kWh (10.5 MW) and KazSolar 50 LLP - 16.97 tenge/kWh (26 MW). As for the Solar System LLP, according to our information, it has not concluded a power purchase agreement with the “FSC on RES” LLP.

As we can see, the adopted trading strategy failed: the company that offered the best price won. By the way, the price of 9.9 tenge/kWh shadowed the best price at that time of the winner of the auction - KazSolar 50 LLP with 16.97 tenge/kWh. But these were not all the records with solar in 2019. Another project¬based auction for the Schaulder site was waiting ahead.

- If we assume that participants in the trading system can make technical errors due to the human factor, and the regulatory framework, in this case, does not allow for a step backward, then what should participants do? After all, if a mistake is made and the winner is not able to implement the project, it will lose its financial guarantee. Is there an organizational and normative understanding of how to prevent such disappointing cases?

- Let me repeat once again that such a human factor as cunning can never be completely ruled out. But it is possible to protect participants from mechanical errors, and this is implemented in the trading system. If the auction operator made a mistake, the program will offer him to once again confirm the correctness of the entered data in the application. If the participant confirms with the second step, then he takes responsibility for the accuracy of the submitted application.

All other questions that you ask are easily resolved. It may sound cruel, but the winner of the auction shall understand that if he refuses to implement the project at a price specified in the application, he will be punished for the mistake by depriving him of the financial guarantee for an auction bid. "

We consider it dangerous to start introducing a lot of subjunctive rules now, which will authorize the revision of the auction trading results. This will create a field for manipulating the auction results, which in no case should be allowed.

On the other hand, if we talk about what this particular case taught us, it is quite possible to provide for a requirement in the Auction Rules to verify the legal affiliation of participants during their registration.

And in general, to conclude on this question - with a significant number of participants in the auction, it is impossible to manipulate the auction results. This is a lesson for us and all bidders. To win auctions by offering pre-calculated prices - this is the key to success and the right tactics of bidding.

-The marginal auction price plays an important role in the bidding process. Now, according to the Rules for Determining Fixed Tariffs and Auction Prices, the maximum price for the current year is set at the maximum price of the winner of the previous year's auctions. That is, the whole mechanism is set to lower prices in the renewable energy sector. However, as practice and the results of the auctions show, today the market is able to determine the competitive price in an open competition on the KOREM JSC web-site. In your opinion, if the state determines and fixes one level of marginal prices in the medium term, for example, following the results of the auctions in 2018, will such an initiative be a positive impetus for investors?

- You are raising a very important and timely issue. Indeed, in 2020 we will start auctions with the following marginal auction prices for renewable energy project types: WPPs - 21.69 tenge/kWh, SPPs - 16.97 tenge/kWh, HPPs - 15.48 tenge/kWh, BioPPs - 32.15 tenge/kWh.

This is a significant decrease relative to those marginal auction prices that we had in 2018.

We, as the organizer of the auction, are concerned about this situation. We are well aware that the low starting prices of the current year may become a certain kind of negative factor for the mass involvement of participants in the 2020 auction.

Of course, the proposal that you are raising - the possibility of fixing marginal auction prices - deserves its place in the medium term. We understand that investors need long-term certainty. Price is a key factor in deciding whether to bid in an auction or not. The Ministry of Energy of the Republic of Kazakhstan is currently working on a solution to this problem.

- And in continuation of this topic: if appropriate marginal prices were determined, for example, until 2025 and taking into account country's goals for renewable energy, it might be more convenient to set up a schedule of auctions for the medium term (2-3 years)?

-         We have already touched this issue above. We can once again confirm that the long-term auction schedule is necessary. This will allow investors to plan their investment strategy in our country for the long term and will also confirm our state's commitment to achieving the target indicators for the development of the renewable energy sector

-         Last year, with the support of the UNDP - GEF project, for the first time in our country we had a project-based auction with the ready documentation for a 50 MW solar power plant project in the village of Shaulder, Turkestan region. The results are the following: we encountered another record at 12.49 tenge/kWh, and the winner is ArmWind LLP. What are the advantages of holding such auctions? Are there any plans to continue this practice?

-         The purpose of introducing the auction mechanism with documentation was to develop the project in accordance with international practice, when the investor is offered a prepared set of documents for the RE project for the auction, including aspects related to the preparation of the land plot, network connection points, environmental issues, and others. Thus, reducing the investors' risks during construction allows us to determine the lowest competitive price for electricity.

Despite the increase in financial support for participation in the auction, this auction attracted high interest from investors, both local and international, and allowed to exclude the participation of companies that do not have financial capabilities to implement the project.

The auction, held on November 27, 2019, was an important event last year. A historic day for Kazakhstan's solar energy. The day when the sun became cheaper than wind and water. The day when it became clear that renewable energy is the future of Kazakhstan. After all, the price determined during the bidding has become lower than the price of electricity of the end consumer in this region. In the Shaulder village end consumers pay more for electricity than the price at which the electricity will be supplied to the network from this 50 MW solar power plant.

"The result of the auction is the result of the work of many people and companies that were directly engaged in the implementation of this project. "

We express our gratitude to the UNDP team for the preparation of the project, and the Ministry of Energy of the Republic of Kazakhstan and “FSC on RES” LLP for participation in the development of the regulatory framework for the implementation of this project. Methodological support was provided by the Kazakhstan Solar Energy Association. We also thank NC Kazakh Invest JSC for the support of investors and the organization of webinars. We, in turn, are proud that technically this was a flawlessly conducted auction, and this is thanks to the team of specialists of KOREM JSC.

The past auction gave a good start for auctions of this kind. This year, we are expecting a project auction prepared by the “FSC on RES” LLP on the solar.

We must also say that the Ministry of Energy of the Republic of Kazakhstan together with EBRD plans to prepare a project-based auction on wind, tentatively - for 2021.

- An important issue on the agenda today is the problem of balancing renewable energy capacities. One of the solutions to this problem is the implementation of renewable energy projects with the storage systems, that is, using industrial batteries. Auctions for such projects are already happening abroad. Is our RE sector as a whole and the trading system in particular ready for the implementation of this kind of project and having an auction?

- Yes, indeed, such auctions have already started in the world. At the same time, they have not yet received widespread distribution, which, we think is largely due to the high cost of the storage systems themselves.

As for the preparation of the trading system, if a decision is made by the Ministry of Energy to launch such auctions, the goal of our company will be to ensure their arrangement. We would finalize the software and hold them. But that is the easiest question.

The most important question here - is the power system ready to use storage system? What has been done and what mechanisms will the power system undertake to integrate the unstable generation of renewable energy sources into the power system?

We know that at present, KEGOC as a system operator conducts comprehensive studies of the power system and, of course, studies technological solutions to this issue. We expect that following the results of such studies KEGOC JSC will be able to answer the question of what our power system needs and how the issue of integrating renewable energy into the power system will be resolved. If a decision is made on the need to install storage systems, we would go back to the question of holding such auctions.

-         In conclusion, we could not help but ask a question regarding the possibility of obtaining practical skills on participating in renewable energy auctions. What is KOREM JSC doing in this direction? How can a beginner get all the necessary information, test the trading system in order to feel confident at the auction?

-         As for the interaction with our company, we are fully open for cooperation with investors. We are happy to explain the entire process of participation in the auction. Potential investors can familiarize themselves with the information posted on our website. On this website you can also go through the online training procedure using software application of the trading system. In addition, our company employees are always available to provide a consultation and conduct an offline training on the use of the trading system.

Let me conclude by inviting all investors to participate in the 2020 auctions. After the release of the auction schedule, we will bring all stakeholders together and develop an investor awareness program. We are planning several seminar meetings with the potential participants. Follow the news and good luck with the 2020 auctions!