AMENDMENTS TO THE CURRENT LEGISLATION GOVERNING THE ESS

The legal basis for regulating the issues related to the ESS has become the adoption in 2024 of a number of regulatory legal acts in particular the Law of the Republic of Kazakhstan dated July 8, 2024 No. 121-VII “On amendments to some legislative acts of the RK in the issues of heat power, electric power and regulative services” according to which the concept of energy storage systems was introduced into the Law of the RK “On support of the utilization of renewable energy sources” and the possibility of conducting the auction selling for the selection of projects for the construction of new facilities on the utilization of renewable energy sources equipped with ESS. In addition, the Order of the Minister of Energy of the Republic of Kazakhstan dated October 14, 2024 No. 367 “On Amendments and additions to certain Orders of the Minister of Energy of the Republic of Kazakhstan” was adopted, according to which additions were made to the electric grid rules and rules for the technical operation of electric power plants and networks, which lay down the basic parameters and principles of operation of ESS within the energy system.

Despite the fact that the adoption of these amendments is the first step in the development of the ESS and acts as a positive signal for the sector, some of the adopted standards are likely to require adjustments.

Thus, according to paragraphs 4 and 9 of the electric grid rules for energy-producing organizations with a declared electric capacity of 5 MW, the condition for connecting to the electric grid is the development of a scheme for power output to a power plant and meeting the requirements of the technical specifications of the energy transmission organization in accordance with the developed scheme for power output.

At the same time, the above-mentioned order, among other things, made additions to the electric grid rules on the content of the scheme for power output to a power plant (Appendix No. 3), in particular, the following items are included:

2-1) the volume of annual available capacity and capacity of electric energy storage systems, taking into account the compensation of degradation of electrochemical electric energy storage systems;

2-2) annual availability coefficient of electric energy storage systems;

15) technical characteristics of electric energy storage systems specified by the instructions of the manufacturers, including the response time, the number of cycles of accumulation (charge) of output (discharge) of electric power per day, month, year.”.

Based on the literal interpretation of the legislation, the amendments imply that all energy-producing organizations, and primarily energy-producing organizations using renewable energy sources, are required to install renewable energy sources at power plants.

The issue of the need to provide renewable energy facilities is conditioned by the need for stable operation of the energy system in the context of an increase in renewable energy generation, that is, a balance must be maintained between achieving the share of renewable energy in generation and the stability of the energy system.

However, this approach seems controversial for a number of reasons, primarily with the introduction of a real¬time balancing electric power market in July 2023, after which energy-producing organizations using the RES that have concluded a long-term agreement with the SFC after July 1, 2023 or do not have such a long-term agreement should be responsible for deviations from planned generation.

However, this approach seems controversial for a number of reasons, primarily with the introduction of a real-time balancing electric power market in July 2023, after which energy-producing organizations using the RES that have concluded a long-term agreement with the SFC after July 1, 2023 or do not have such a long¬term agreement should be responsible for deviations from planned generation. Another aspect is the fact that deviations of energy-producing organizations using renewable energy sources can be compensated through other tools, for example, the implementation of a backup maneuverable generation project together or combining the RES with maneuverable generation under one balance provider. In other words, the legislation already encourages energy-producing organizations using RES to reduce generation deviations, and new amendments to the grid rules deprive energy-producing organizations using renewable energy sources of the right to choose which tools to achieve greater generation st ability.

In this regard, it is believed that the electric grid rules should be revised in terms of excluding the provisions concerning the mandatory availability of the ESS from the content of the power output scheme to the power plant. An alternative option may be to make a reservation that the provisions relating to the ESS are included in the scheme for power output to a power plant in the absence of other options for compensating for generation deviations.

Another area of work to change the current legislation governing the ESS in the future should be the revision of the parameters and requirements for ESS, taking into account the operation of ESS in the real conditions of the energy system, as well as taking into account the development of technologies in the field of ESS.

A separate study requires the issue of distinguishing the regulation and requirements for large ESSs operating in the wholesale electric power market and low-power ESSs that will be used in the retail electric power market. For low-power ESS, regulation should be as simplified as possible and aimed only at eliminating negative impacts on power distribution networks and the safety of consumers themselves in the retail market.

GENERAL CHANGES IN CURRENT LEGISLATION!

To ensure proper legal regulation of relations connected to the implementation of the ESS projects, first of all, it is necessary to form a conceptual framework.

In addition to the definition of the ESS introduced by the Law of the Republic of Kazakhstan dated July 8, 2024 No. 121-VIII “On amendments and additions to certain legislative acts of the Republic of Kazakhstan on thermal energy, electric power industry and regulated services” to the Law of the Republic of Kazakhstan “On support for the use of renewable energy sources” this concept should be included in the Law of the Republic of Kazakhstan “On Electric Power Industry”, as well as subordinate regulatory legal acts aimed at regulating the ESS. Similarly, in order to consolidate the legal status of persons owning or managing ESS, it will be necessary to establish a term denoting the operating organization/ESS operator reflecting the functions of buying and selling electric power. The composition of the subjects of the wholesale electric power market is also subject to change by including operating organizations/ESS operators. In order to implement the above recommendation on the differentiation of low-power ESS, the term low-power ESS should be provided for in legislation with the establishment of appropriate criteria for classification as such.

Currently, legislation provides for various types of activities in the field of electric power industry, including the production, transmission, distribution, and consumption of electric power. Taking into account the specifics of the ESS, it is necessary to provide for new types of activities in the Law of the Republic of Kazakhstan “On Electric Power Industry”, as well as subordinate regulatory legal acts regulating the ESS, namely the accumulation and storage of electric power.

Also, in order to increase the investment attractiveness of projects using the ESS, it is proposed to include activities related to the accumulation and storage of electric power in the list of priority activities that will be subject to investment preferences provided for by the Business Code of the Republic of Kazakhstan, such as exemption from import customs duties, payment of value added tax, provision of a government land grant, etc. In this regard, it will be necessary to make changes and additions to the list of priority activities approved by the Resolution of the Government of the Republic of Kazakhstan dated January 14, 2016 No. 13 and the General Classifier of Economic Activities of the National Tax Code of the Republic of Kazakhstan 03-2019 approved by the Committee for Technical Regulation and Metrology of the Ministry of Trade and Integration of the Republic of Kazakhstan.

CHANGES IN INDIVIDUAL LEGAL MECHANISMS FOR THE IMPLEMENTATION OF BATTERY ENERGY STORAGE SYSTEMS (BESS) PROJECTS

RES AUCTIONS WITH STORAGE DEVICES

As mentioned above, the Law of the Republic of Kazakhstan “On Support for the use of renewable energy sources” provides for the possibility of holding auctions for the selection of projects for the construction of new renewable energy facilities equipped with ESSs.

At the same time, for successful auctions and the implementation of such projects, it is necessary to take into account the specifics of renewable energy facilities equipped with ESS, in terms of the fact that long-term contracts with the SFC are concluded for a period of 20 years, while the service life of the ESS (taking into account constant degradation) is much shorter. Accordingly, during the period of validity of the long-term ESS agreement, facilities for the use of renewable energy sources will be fully renovated. In addition, equipping the renewable energy facilities with ESS will lead to a significant increase in the cost of projects.

In this regard, it will be necessary to take into account the above specifics in the tariff setting of renewable energy facilities equipped with ESS. Taking into account the degradation of ESS and the need to update them during the long-term contract with the SFC, as well as taking into account the variability of market prices for ESS, it is proposed to consider the possibility of setting tariffs (auction prices) for renewable energy facilities equipped with ESS, consisting of two parts. The first part will relate to payback and profitability for the facility as a whole (excluding ESS), and the second one is to only affect the ESS. At the same time, by the time it becomes necessary to update the ESS, the second part must be revised (while keeping the first part of the tariff unchanged), taking into account the costs that will arise by the time the ESS is renewed.

The implementation of such a mechanism will require amendments and additions to the Law of the Republic of Kazakhstan “On Support for the use of renewable energy sources” in terms of the tariff (auction price) of renewable energy facilities equipped with ESS consisting of two parts and the establishment of general requirements for the procedure for reviewing the second part of the tariff with the consolidation of a detailed mechanism at the level of rules for the centralized purchase and sale of electric power a single buyer of electric power produced by facilities for the use of renewable energy sources, facilities for energy waste disposal (approved by Order of the Minister of Energy of the Republic of Kazakhstan dated March 2, 2015 No. 164).

In addition, given the increased cost of projects due to the need to install the ESS, it is likely that the Order of the Minister of Energy of the Republic of Kazakhstan dated January 30, 2018 No. 33 "On approval of maximum auction prices" will need to be revised.

PRICE ARBITRATION!

This mechanism for implementing ESS projects, when the return on investment and profit is achieved through the difference in the purchase and sale price of electric power, seems to be the most market-oriented (without priority purchase of electric power/capacity), in this regard, legislative regulation should be minimal and, accordingly, no significant number of amendments and additions to legislation are required. The legal principle of “everything that is not explicitly prohibited by law” should be applied as much as possible in the regulation of the ESS projects implemented under this mechanism.

In this regard, it will be necessary to take into account the above specifics in the tariff setting of renewable energy facilities equipped with ESS.

At the same time, in order to attract potential investors, we consider it possible to provide in the Law of the Republic of Kazakhstan “On Electric Power Industry” a formal mention that ESS projects can be implemented on their own initiative (through the mechanisms of auctions of RES or on the electric capacity market) with the possibility of participation on a common basis in the wholesale electric power market, in the balancing electric power market (including within the framework of the balance provider), with the right to conclude a power control agreement with the system operator, etc. An analogy in this case may be the Law of the Republic of Kazakhstan “On support for the use of renewable energy sources", which in paragraph 1 of Article 9 provides that RES projects can be implemented both through the mechanism of centralized sale of electric power to the SFC and on the basis of free bilateral agreements with consumers.

Historically, the regulatory framework for electric power has not been created taking into account technologies such as electric power storage. This has led to a lack of legal clarity regarding its definition. BESS is often considered as a component of power generation and, as a result, is subject to the same requirements/ licensing/permits/network fees as traditional generating units. However, it is also a consumer subject to network charges (during charging), and this dual characteristic of BESS creates ambiguity in its legal definition and thus creates a barrier to its deployment. It is important that legislative regulation avoids double charging of network fees for BESS, as this will create a significant barrier to building an economic case for stand-alone BESS projects.

Also, a controversial issue regarding the ESS projects implemented under this mechanism is the consolidation in the legislation of the authority of the Ministry of Energy to prescribe the maximum spread, i.e. the marginal difference between the purchase and sale price of electric power by ESS operators. The argument for the establishment of such competence of the Ministry of Energy is the ability to influence pricing and limit the possible receipt of excess profits by ESS operators. However, from the point of view of potential investors planning to implement projects on market terms (without guaranteed return on investment), such a restriction will act as a deterrent.

AN AUCTION FOR THE CONSTRUCTION OF AN ESS IN THE FRAMEWORK OF THE ELECTRIC CAPACITY MARKET

 The selection of ESS projects within the framework of the electric capacity market through the auction mechanism seems to be the most effective, capable of attracting strong investors with competitive capacity tariffs.

At the same time, an electric power storage system is understood as an electrical installation designed for the accumulation, storage and delivery of electric power, with an automated control system, interconnected structures and infrastructure that are technologically necessary for their operation.

In this scheme, it is necessary to introduce the concept of an operator of an electric power storage system - an organization that purchases electric power and subsequently sells it through the ownership and (or) management of an electric power storage system. At the same time, the operator of the electric power storage system must be defined as a subject of the wholesale electric power market, with all its rights and obligations.

Unlike other subjects of the wholesale market - consumers of electric power, operators of the electric power storage system do not form forecast consumption requests, and their electric consumption capacity is not taken into account in the projected demand for electric capacity.

Since the operator will purchase grid electric power from different energy sources at different times of the day, and then supply it to the grid under the control of the system operator, it is necessa ry to determine price arbitration for electric power. In this regard, the authorized body needs to determine the procedure for determining the difference in the cost of purchased and sold electric power by the operator of the electric power storage system.

It is necessary to legally oblige the unhindered access of ESS to the networks of energy transmission organizations.

The mandatory requirements for the ESS will be the availability of an ACEMS, a telecommunications system and an ALFC connection.

When organizing ESS auctions, the authorized body, together with the SO in the auction schedule, must determine the locations of the ESS, with connection points, as well as the marginal cost per unit of capacity. The auction organizer needs to calculate the technical requirements for each individual site, which will differ from the location of the ESS in the energy system.

As part of the auction for electric power, it is necessary to develop requirements for the operation of the ESS, the number of charges/discharges, and other requirements that may affect the economics of ESS construction and operation projects. As a suggestion, we suggest considering the possibility of determining the number of charges/discharges - 400 cycles per year.

The winner of the auction has the opportunity to sign a contract with a Single buyer for the purchase of services to maintain the availability of electrical power. Power suppliers receive payment for their existing capacity (tenge/MW) and energy supplied to the grid (tenge/MWh) as requests are received from the system operator.

The BESS systems in the capacity market can earn income from the energy arbitrage mechanism, but in this case, they must always maintain a minimum capacity reserve if they are involved in the capacity market.

The contractual electrical capacity of electric power storage systems is subject to annual certification by the system operator from the date of their commissioning.

If, as a result of the next certification of electric power (capacity), the value of the certified electric power (capacity) turns out to be less than the volume of services specified in the contract with a Single buyer, the volume of services for maintaining the availability of electric power, taken into account when calculating the actual services provided for maintaining the availability of electric power, is reduced to the certified value before the next attestations.

During the operation of the ESS, penalty coefficients will be applied to the ESS Operator, in case of unavailability of the certified power (capacity) of the ESS, and in the case of SO, if the number of charges/discharges specified in the contract is exceeded.

This mechanism carries risks of uncertainty for investors related to vague conditions of participation in the capacity market and weak administration.

The mechanism of operation of the ESS in the capacity market requires changes both to the law on the Electric Power Industry and to the RLA, in particular to the PTE, Auction Rules, Electric grid regulations, etc.

IMPLEMENTATION OF THE ESS PROJECTS BY A SYSTEM| OPERATOR THROUGH SYSTEM SERVICES

The system operator is one of the key actors within the energy system and performs many functions, including providing system services such as transmission of electric power through the national electric grid, use of the national electric grid, technical dispatching services, balancing of production and consumption of electric power, etc.

In this regard, the implementation of ESS projects can be carried out within the framework of the above-mentioned system services, primarily services for balancing the production and consumption of electric power with reimbursement of the costs of the system operator through the appropriate tariff.

This approach can become one of the most effective, since the system operator, by virtue of its functions, is interested in stable and reliable operation of the power system and, accordingly, by independently implementing the ESS projects, will be able to use their potential most effectively1.

The electric power production-consumption balancing service involves organizing the functioning of a balancing electric power market in real time and is regulated by various regulatory legal acts, primarily the Laws of the Republic of Kazakhstan “On Electric Power Industry”, “On Natural Monopolies” and the rules for tariff formation (approved by Order of the Minister of National Economy of the Republic of Kazakhstan dated November 19, 2019 No. 90).

The determination of the tariff of the system operator for the balancing service of production and consumption of electric power is generally subject to the general procedure for the formation of tariffs for all subjects of natural monopolies and consists in the return of funds spent on the provision of services through the tariff. The current legislation does not explicitly prohibit the system operator from implementing ESS projects at the expense of the tariff for balancing the production and consumption of electric power. However, given the law enforcement practice, when the Committee for Regulation of Natural Monopolies and its territorial divisions approving tariffs of natural monopoly entities pursue a policy aimed at curbing tariffs and taking into account that the ESS projects are a new sector for the energy system, there are risks of not including the costs of implementing ESS projects in the system operator's tariff for balancing production and consumption of electric power.

To reduce this risk, it seems advisable to consolidate at the level of the Law of the Republic of Kazakhstan “On Electric Power Industry” and the rules for tariff formation special provisions stipulating that during periods of shortage of regulating capacity in the energy system, according to the projected balance of electric power and capacity (annually approved by the Ministry of Energy for 7 years), the costs of the system operator for the implementation of the ESS projects are included in the tariff for balancing services production¬consumption of electric power in a priority order.

THE ESS PROJECTS IN THE RETAIL MARKET “BEHIND THE COUNTER"

Currently and in the medium term, in conditions of a high level of depreciation of the grid economy and a tendency to annual tariff increases, the use of ESS in the retail electric power market may become a promising area. First of all, this applies to small and medium-sized businesses, net consumers of electric power, but it is also possible to use it in households.

In addition to the obvious positive effect of increasing the reliability of electric power supply and ensuring greater energy independence of consumers, economic incentives must be created for the development of this segment.

Currently, in the retail electric power market, tariffs of power supply organizations are regulated as a sphere of socially significant markets in accordance with the Business Code of the Republic of Kazakhstan, tariff formation is determined by the Rules of Pricing in socially significant markets. Tariffs in the retail electric power market are differentiated by consumer groups and consumption volumes, but under equal conditions (one group of consumers and one volume of consumption), the price is the same. In this regard, in addition to the indicated differentiation, it is also necessary to establish a differentiation of tariffs by zones of the day, that is, at different times the cost of electric power will differ. In general, this approach will correspond in a simplified form to the change in the cost of electric power in the wholesale market (where the price of a single buyer varies every hour).

The correct application of the tariff differentiation mechanism by zones of the day in the retail electric power market, in addition to becoming a tool for the sale of the ESS, will have a generally positive impact on the energy system, as it will help smooth peak loads, align consumption schedules and improve operational stability.

It should be noted that the differentiation of tariffs in the retail market by zones of the day is not a completely new tool. Thus, the current rules for differentiating electric power tariffs by power supply organizations depending on the volume of its consumption by individuals (approved by the Order of the Chairman of the Agency for Regulation of Natural Monopolies of the Republic of Kazakhstan dated February 20, 2009 No. 57-OD) until 2017, in addition to consumption volumes, also provided for differentiation by zones of the day. During this period, two- and three-zone consumption (differentiation) systems were provided with the establishment of periods of morning and evening highs, as well as daytime and nighttime dips. We believe that the rejection of this system was erroneous and was caused by incorrect planning and administration of the process, as well as the lack of flexibility of the tariff setting system in the retail electric power market (energy supply companies either suffered losses or received excess profits) and the timing of tariff adjustments. An important aspect is the fact that, from a technical point of view, there are no significant problematic issues for the implementation of the reform, since the vast majority of consumer metering devices allow accounting for consumed electric power at differentiated tariffs by zones of the day.

A significant issue that needs to be resolved is the distortion of pricing in the retail electric power market due to the application of the above differentiation by consumer groups. For example, as of December 31, 2024, in the city of Karaganda, the consumers, depending on the group, purchase electric power at the following tariffs (per 1 kWh excluding VAT):

1)           household consumers - 19.91 tenge;

2)           non-household consumers (legal entities) - 33.51 tenge;

3)           budget organizations - 89.80 tenge.

Such a significant gap in tariffs is non-market in nature, in contrast to the differentiation of tariffs by day zones, where tariffs will be formed taking into account supply and demand in the retail electric power market and contribute to the introduction of ESS.

To implement the above mechanism, minor amendments will be required to the Law of the Republic of Kazakhstan “On Electric Power Industry” in terms of consolidating the described type of differentiation and the relevant competence of the authorized body for the development of differentiation rules, amendments to Pricing Rules in socially significant markets regarding the exclusion of tariff differentiation by consumer groups, as well as the development of separate rules for tariff differentiation in the retail electric power market by zones of the day.