Uzbekistan's Energy Transition Depends on Systematic Reforms
In the realm of global and energy security, 2024 was a year of unprecedented uncertainty. With issues ranging from ongoing conflicts in Ukraine and Gaza, tensions around Taiwan, and escalating populism and nationalism in the US and Europe, there were heightened concerns over energy security and the control of supply chains. US President Donald Trump’s first month in office has further fuelled the sense of an impending crisis, particularly with regards to his rhetoric around the conflicts in Ukraine and Gaza, the adoption of tariffs, and the abandonment of green policy.
Any discussion of energy transition trends must therefore be visualised in the form of a triangle, ensuring that the competing and often contradictory goals of energy security, minimising climate impact, and ensuring energy affordability are in tension. Each country, sector, and policy crystallise a set of trade-offs between different points on this triangle.
To achieve net zero by 2050, unprecedented changes in industrial structures and infrastructure are needed. The transmission and storage systems required to support a greater and faster reliance on renewable power generation may not yet exist. While energy efficiency is acceptable politically, it is a complex challenge that requires action in disparate area—not least in consumer behaviour.
Whilst the government of Uzbekistan has adopted ambitious plans to double GDP by 2030, it has underlined its aim to achieve this sustainably, scaling up its commitments to mitigate climate change and reduce the emissions intensity of GDP. In its Nationally Determined Contribution to 2030, Uzbekistan aims to generate at least 40 percent of its electricity from renewable sources and cut greenhouse gas emissions by 30 percent per unit GDP from 2010 levels. The challenge of reforming the energy sector and achieving such goals is inflated, however, by the predominance of outdated infrastructure, the continuation of unsustainable subsidies, and significant fluctuations in energy demand.
It should be noted that the decision as to when to promote what energy source is not binary; the process involves numerous trade-offs and, on occasion, political messaging, in order to achieve energy security. On a practical level, however, these resources cannot be deployed in an expedient and uniform manner that substitutes fossil fuels. In an inflationary cycle combined with facing the prospect of a global recession, the price of energy remains as important as energy security and climate change mitigation. An affordable energy transition is taking precedence and governments are opting towards the natural inclination of regulating prices and softening the price impacts for customers.
Yet with fluctuations in energy demand significant, the ability of a power system to cope with peak demand is crucial. The introduction of pricing that corresponds with demand is an unavoidable element in attracting investment in energy capacity. Power shortages have also triggered sectoral reforms and tariff increases. Electricity tariffs for businesses were increased in October 2023, and tariffs for households increased in May 2024, allowing the government to partially cut subsidies, as well as their plans to establish a unified platform for electricity trading by the end of 2024 and a liberalized wholesale power market by 2026.
That being said, Uzbekistan is making progress toward diversifying its power generation with the use of renewable sources. For example, in terms of the economy, over 80 percent of total energy use is still generated by gas; as far as power generation goes, its genesis remains equally dominant.
Although significant attention has been given to Saudi Arabia’s ACWA Power securing agreements to invest $15 billion in expanding power generation capacity, and the United Arab Emirates’ Masdar sponsoring both conventional and renewable power plants, Uzbekistan’s reliance on Russian gas continues to grow. Following a dramatic decline in domestic gas production, Uzbekistan started importing Russian natural gas in October 2023, annual gas imports of 2.8 billion cubic metres (bcm) agreed for a period of two years, with a potential increase up to 10bcm per year by 2030.
The economy’s heavy reliance on natural gas is a risk to the country’s decarbonisation, with gas consumption having to decline by 40 percent in order to achieve net zero in 2060. By minimising reliance on gas imports and pursuing the decarbonization of its economy, Uzbekistan can strengthen its energy security. Uzbekistan’s decarbonization efforts depend on strengthening cross-border energy flows, particularly through enhanced power transmission and a more flexible regional electricity trade. By optimising the use of regional energy resources, Uzbekistan can not only prevent power shortages but also contribute to greater regional stability and security.
It has been estimated that over $200 billion of investment is needed in the Uzbek energy system to achieve net zero by 2060. Given the scale of resources required and limitations within government finances, the private sector must be the primary investor for the green transition. In turn, accelerating the development of the country’s private sector is critical to absorb the costs and take advantage of the opportunities of the transition. The focus on decarbonisation and adaptation to climate change functions as a catalyst for the continuation of economic reforms and further support for investment.
The government has repeatedly expressed its intentions to create a better environment for private investment, using public-private partnerships (PPPs) in the energy and infrastructure sectors. Private capital can be secured to fund projects through the active participation of other stakeholders, including the use of blended finance. The strategic use of public money and development finance reduces the risk for private capital by allocating certain risks to governments or development financial institutions (DFIs). DFIs can play other roles beyond direct funding to incentivise the flow of private capital. They do this by developing new products and mechanisms that extend beyond political risk insurance to cover technology. Moreover, they ramp up risk for new technology, trade and foreign exchange risks, such as insurance products or co-lending mechanisms with the private sector through which a DFI provides subordinated debt.
What is necessary in the context of energy transition, however, goes beyond a project-by-project approach. Instead, a systematic approach and large-scale commitments by governments are required to encourage the development of a stable pipeline of investible and bankable projects, rather than a series of one-off projects in an uncertain regulatory environment. Global experience demonstrates that the key to attracting private capital for energy transition projects is assuring potential investors that political leadership remains committed to net-zero targets and will not change course. It also requires creating strong market demand through policies and regulations that encourage growth and establishing a competitive, stable tax regime that incentivises investment.
In Uzbekistan, structural reforms are needed to encourage foreign direct investment (FDI) as a capital flow. The government must implement a comprehensive package of reforms, including strengthening market competition, eliminating preferential treatment, increasing energy prices, and removing subsidies. Stronger financial regulations should be adopted, and trade should be facilitated through measures such as accession to the World Trade Organisation. Additionally, climate concerns must be at the core of public investment decisions.
On this foundation, local demand and market signals can be created through incentive programs. These may include standards and tradable certificates, tax credits, and feed-in tariffs or contracts for different structures. As is already the case in Uzbekistan, PPPs can also play a role, with governments supporting market development by acting as quasi-private offtakers or by creating markets for ancillary services.
Crucially, only by reforming state-owned enterprises (SOEs) and subsequently providing attractive investment opportunities can an accelerated privatization process and a decarbonised economy be achieved. Whilst the government has recognised the need to improve energy efficiency and reduce carbon emissions for effective policy adoption, several challenges remain. There is a need for greater transparency and information on the activities and impact of state-owned enterprises (SOEs), which are the largest carbon emitters. Additionally, an inventory of fossil fuel subsidies must be created to establish energy pricing, reduce subsidies, and introduce price incentives.
This remains a significant challenge due to ongoing concerns about the corporate governance and financial reporting of SOEs. Yet, only by addressing these issues can the government begin to implement a policy aligned with the country’s Nationally Determined Contribution and develop a realistic roadmap for the green transition. It will also enable better project prioritisation for climate change mitigation.
The Uzbek government must gain credibility through the implementation of consistent medium-term fiscal policies and by providing the predictability that is a prerequisite for medium term economic growth. Indeed, the quality of government expenditure is increasingly important, with policy trade-offs required in response to the reduction of the fiscal space available. This also extends to the need to manage the inevitable tensions arising from price increases.
Not only does the unbundling of utilities require consumer prices to rise to offset the cost of their modernization, there also needs to be a demand for the green transition. Goods and services with a higher environmental impact need to be made more expensive. With regards to the social aspect of the green transition, such price increases must be well-conceived and gradual. The raising of energy prices should not lead to the impoverishment of parts of the population: a just transition should be ensured through the protection of vulnerable households.
Finally, policies need to be adopted to promote and support regional connectivity—an important catalyst for regional economic growth in the face of global uncertainty, economic fragmentation, and increased costs. Regional policy dialogue and coordination can provide a foundation for the structural reform in trade, a process realised through the harmonisation of technical regulations and standards and their revision with international green standards and practices.
The development of cross-border connections and regional power trading platforms can facilitate the expansion of renewable energy generation while improving coordination in water resource management to prevent shortages and their consequences. Given the region’s diverse energy mixes, establishing a balanced system for regional trade is essential to ensuring its energy security and economic growth.
Photo: ACWA Power
