Limit Smartly: Kazakhstan Renewables and Wind Power Generation Equipment Capacity

Morgan Lewis
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The Kazakhstan renewables market has been gaining momentum during the last few years. Reasons for such development include (1) government support (including periodic amendments to industry laws and regulations to address renewables market concerns/problems), (2) social responsibilities of power-producing companies that use conventional energy sources, and (3) investors’ interest in renewables.

As of today, there are 117 renewable power plants operating in Kazakhstan, among which the greatest share belongs to solar and wind power plants. The government’s ambitious objective is to increase the renewables share in the power supply market in Kazakhstan to 10% in 2030 and 50% in 2050.

Before going into specific issues investors face in the Kazakhstan renewables sector, here are key regulatory terms that apply to any renewables project in Kazakhstan:

  • Renewable projects and private investors are selected via a competitive auction where the lowest bidding power sale price wins.
  • The government guarantees the purchase of power from a renewable power plant on the basis of a power purchase agreement (PPA) executed with a single buyer—a subsidiary of a national operator of a unified power system in Kazakhstan—the Financial and Settlement Center (FSC).
  • A PPA is entered into on the basis of a template agreement. Deviations from this template are generally disallowed. Among other things, the PPA sets the maximum aggregate capacity of the generating equipment of the power plant.[1]

Despite most of the laws and regulations concerning the renewables sector being fairly straightforward, investors face a host of practical issues, as the evolving legal framework is being tested and still has to be adjusted (improved) to meet the market realities.

We have been engaged to solve the practical legal issue arising from the disconnect between the law and practice. An international energy major sought our advice in connection with the deviation of the actual capacity of the supplied and installed generating equipment from the maximum power generation capacity set by its PPA.

Noteworthy is the issue concerning the wind power plant, the construction and completion of which has already been recognized as compliant with applicable documentation (including design documentation), and the deviation was not significant. The client was asked by the national grid operator and the FSC to bring the actual capacity below the threshold set under the PPA. This meant that the client had to effectively idle one of several generating units. Obviously, keeping one generating unit nonoperational presented a major challenge, both commercially and technically.

Given the importance of the technical aspect (i.e., equipment-generating capacity) of the matter in question, the client provided us with input from technical experts and the producer of the generating equipment. From a technical perspective, the generating capacity of equipment and, consequently, the power plant as a whole, can be adjusted downward through customized equipment alignment, i.e., by limiting the actual capacity of each generating unit under any operating conditions via software. This has been confirmed by the opinion of the technical experts and the producer of the equipment. Thus, the deviation becomes a moot point in practice; while in fact each generating unit and the power plant may not produce power beyond the limit, the nominal permitted generation capacity set out in the technical documentation formally remains.

Our legal analysis revealed that there is a clear disconnect between the formal rigid legal requirements and the available technical solutions, i.e., the lack of a proper regulatory mechanism allowing the client to adjust the actual capacity to the capacity limit set under the PPA, even where a deviation is immaterial. In order to provide a business-oriented solution and mitigate the risks associated with a late commissioning of the power plant,[2] we proposed the following short-term and long-term workarounds.

A short-term solution would be to enter into a memorandum of understanding with the competent authorities and entities concerned (including the FSC), which would acknowledge the de facto situation and understandings reached by the parties and thus achieve a temporary “no action” safe harbor. The disadvantage of this approach is that it technically does not fully comply with the rigid law, which is why it can only be viewed as a temporary workaround until a more robust and proper solution is put in place.

A more robust and holistic (but longer to implement) solution is to initiate and introduce amendments to the applicable laws and regulations that would expressly provide for the adjustment of the actual capacity of generating equipment as a proper and acceptable mechanism in order to ensure compliance with PPA terms.

In September 2020 a new clause was introduced into the Rules on Centralized Purchase and Sale by FSC of Power produced by Renewable Power Plants (Rules) that reads as follows:

In case actual aggregate capacity of the generating equipment of a wind power plant exceeds the capacity set under the PPA, the applicant[3] limits capacity of a generating unit (or several units) in order to comply with the aggregate capacity set under the PPA. The applicant must also submit data on hourly generation of power by generating units that have been subjected to limitation.

Along with that, it is prohibited to exceed the aggregate capacity of the generating equipment of wind power plant set under the PPA by more than 10%.

Apparently, the amended Rules are far more flexible now. Nevertheless, the key takeaway for investors is to always keep in mind (1) the restrictions and limitations provided for under the applicable renewables law, (2) a formalistic approach of state authorities that are typically unwilling to think “outside the box,” and (3) adverse effects of controversial (borderline) solutions and to seek amendments into the legal framework, especially now while the Kazakhstan government is open to constructive dialogue and eager to accommodate investors’ reasonable concerns.

 

[1] Since 2019 this capacity has been defined as the aggregate nominal capacity of the generating equipment as set out in the technical passport(s) of the equipment. However, in the case discussed herein, the PPA was executed in 2017, i.e., before the definition had been introduced.

[2] Such risks include, among other things, termination of the PPA.

[3] A person applying for entry into the PPA with the FSC.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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