S&P Global’s Matthew Sagers: What Is Holding Back Central Asia’s Energy Market

Structural complexity makes energy reform in Central Asia a slow and uneven process, with investor confidence undermined by long-term unpredictability. Matthew J. Sagers explains what it will take to move forward.

What Slows Down Energy Market Reform in Central Asia

The pace of energy market reforms in Uzbekistan remains very slow as well as in other Central Asian countries. It has been a number of years under the new president, who committed to a very different direction. It is still extremely difficult to change such a large ship and move it around but at the very least, it is moving in the right direction.

The challenge lies in the fact that this is not a process that can be carried out step by step. It is a Gordian knot. Everything must be done simultaneously.

New entities that are prepared to operate competitively must be created. One must consider what size these entities ought to be. If one entity is very large and the others are all small, that will not work particularly well.

These entities must understand what it means to operate commercially. Broader economic and market forces must be allowed to drive their behaviour. Money must ultimately matter? and for this to matter, prices must be meaningful. Consumers must also be in a position to purchase effectively.

Creating all of this at once is extremely difficult. It is a hard task.

As a result, progress tends to occur unevenly, faster on certain tracks for a period of time, then faster on others. There is a necessary oscillation between priorities. Having observed this process for forty years, I can say with confidence: it is extremely difficult.

From Promises to Performance: Missing Link in Investment Appeal

Central Asia is not yet an attractive destination for long-term foreign investors. The fundamental reason is the absence of conditions that are stable, understandable, and predictable, all at the same time and sustained over many years.

Foreign investors in energy are planning for forty-year horizons. That requires a clear view of what the conditions will be over those decades which is an inherently difficult prospect.

In addition, host countries must be acutely aware that they cannot change the rules once investors are committed. Certainly, policies may evolve, and adjustments may be discussed but the understanding must remain that these investors have many other places where they could choose to invest their capital.

Being good is not enough. A country must be the very best if it is to attract large-scale investment, particularly in projects with billion-dollar price tags.

International companies are willing to invest, but only when it is economically viable, and only when the opportunity fits within the company’s broader strategic objectives.

Some countries in the region have succeeded in doing this, albeit for certain periods. Kazakhstan is a clear example. Many would be eager to host the same logos and brands present there.

The resource base is not the same across the region. Other countries must therefore think differently about what investment would require.

Uzbekistan, for its part, has recently succeeded in attracting a few of what I would call «new brand-name» companies in the renewables sector. These names are now visible across the region. But again, it takes different kinds of conditions to bring in different investors at different times.

Why Common Electricity Market in Central Asia Is Not Feasible

The prospect of a shared electricity market across Central Asia is unrealistic.

Even in Europe — where integration efforts have been underway for fifty years — energy remains largely a collection of national markets. These countries trade electricity with one another, but the markets themselves remain distinct.

That is the reality — and it is likely to be the same in Central Asia.

However, can there be more electricity trade? Can it be done more efficiently? The answer is yes.

During the Soviet era, Central Asia had an integrated grid. Turkmenistan, Kyrgyzstan, Uzbekistan, Tajikistan, and Kazakhstan were all linked together. There are still complementarities that can be built upon.

Kyrgyzstan and Tajikistan, for example, have large amounts of hydroelectric power during specific periods of the year — but little at other times. Uzbekistan, by contrast, has electricity from gas-fired plants that could be traded in return.

If regional electricity trade could return to the volumes seen in the Soviet period — moving, for example, from the current 3% to something like 10 or 12% — that would represent a substantial efficiency gain.

At present, the most significant electricity trade takes place with Afghanistan. Uzbekistan trades with Afghanistan, and so does Turkmenistan. But Turkmenistan and Uzbekistan do not trade with one another — which is illustrative of the lingering legacy of the Soviet Union’s collapse.

Nonetheless, there are ways to restore and improve cross-border trade. These can be made more efficient and more effective, but the idea of a single, integrated electricity market for the region should not be expected.