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 The challenge of reforming the energy sector and achieving such goals is inflated, however, by the predominance of outdated infrastructure, the continuation of unsustainable subsidies, and significant fluctuations in energy demand.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 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 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

Can 'Unitisation' of Oil and Gas Fields Power Diplomacy in the Persian Gulf?

In March, the Saudi Energy Minister met with his Kuwaiti counterpart to sign an agreement for the joint development of a shared offshore gas field. The Dorra field lies about 50 miles off the coast at the border between Saudi Arabia and Kuwait and is around the same distance from Iran’s southwestern shores. The field could produce 1 billion cubic feet of natural gas and 84,000 barrels of condensate per day.

Shortly after the Saudi-Kuwaiti declaration, Iran’s Foreign Ministry swiftly expressed its dismay and said that any step for the joint development of the field—called the “Arash” field in Iran—must be carried out in cooperation between the three countries. In a surprising response, Saudi Arabia and Kuwait invited Iran to hold negotiations to determine the eastern limit of the joint, energy-rich, offshore area. While the proposed talks have yet to take place, the Dorra-Arash field is a clear example of how an area of contestation has the potential to be turned into an area for cooperation, if the political and security environment of the region allows.  

As key regional players move towards de-escalation and dialogue, evidenced by the end of the intra-GCC conflicts as well as Saudi Arabia and the United Arab Emirates’ diplomatic engagements with Iran, it is worth considering potential for regional energy diplomacy. The shared oil and gas fields in the Persian Gulf and Gulf of Oman are largely untapped areas for bilateral and multilateral cooperation. Iran and Qatar share the largest gas reserve in the world and Iran shares a further two-dozen oil and gas fields in the Persian Gulf with the Gulf Cooperation Council (GCC) countries and Iraq. There are also numerous fields shared among the GCC states and Iraq. To move the energy produced by these fields, regional countries have long mulled pipelines projects, such as one between Iran and Oman, as well as talks for the re-exportation of Iranian gas as Liquified Natural Gas (LNG) by Qatar and Oman.  

But most of the shared fields amongst the Persian Gulf states are either inactive or are disputed. In the absence of cooperation agreements, countries have mainly opted to develop and extract the reserves on their own. Disputes over median lines, extraction rights, and varying concessions have often led to tensions between regional states.

Iran has disputed Kuwait and Saudi Arabia’s claims on the Dorra-Arash field since it was discovered in the 1960s. At the time, maritime boundaries in the Persian Gulf were poorly defined and bordering countries did not pay much attention to them. This was also the case for the South Pars-North Dome field—the shared gas field between Iran and Qatar—as the median line between the two countries had been negotiated before the gas field’s discovery in 1971. When Iran and Qatar determined their boundaries two years prior, the predominant factor underlying the delimitation was equidistance.  

Because of the fact that the boundaries continue to be poorly defined, Kuwait, Saudi Arabia, and Iran have each asserted their sovereignty on the Dorra-Arash field by awarding overlapping concessions throughout the past five decades. By the year 2000, Saudi Arabia and Kuwait had reached an agreement on the corresponding offshore zones where their concessions could be awarded. In retaliation for its exclusion in the negotiations, Iran deployed drilling equipment to the field the following year. A cycle of actions and retaliations that have largely continued to date, rendering the field underdeveloped on the Saudi, Kuwaiti, and Iranian sides altogether.

The output from the Dorra-Arash field will have an “inconsequential” impact on today’s global gas and LNG markets in the wake of the Russian invasion of Ukraine and rising global demands, as Wayne Ackerman argues. This is primarily because the three countries will need to use the outputs to satisfy their own domestic energy demands. But inconsequential as it might be, the output from the field is significant in both adding to the global gas reserves and establishing an area for inclusive multilateral cooperation in the region.

Economic diplomacy, if enacted through joint projects such as the development of the Dorra-Arash gas field,  could give new impetus to relations between Iran and GCC countries. The establishment of a long-term cooperation project to jointly develop the Dorra-Arash field would provide a way to measure the state of regional economic diplomacy in the region and provide Iran and its GCC neighbours to show good faith. Another possible area for cooperation is in the Salman field shared between Iran and the UAE. So far, Iran and Iraq appear the closest to putting join development plans into action. Following years of negotiations, they recently decided to form joint technical groups to develop energy ties and shared fields. 

In this context, the European, and Asian, countries and companies could step in to promote confidence-building measures between the Persian Gulf countries by proposing multilateral projects with their participation. External players, particularly those who have the capacity to mediate and work with both Iran and the GCC states, could assist the regional countries in defining their boundaries using international law, proposing win-win multilateral projects, and investing in the development of the fields.

The GCC states and Iran have largely overlooked the benefits of “unitisation,” the joint development of an oil or gas field extending across two or more territories. Unitisation would allow the GCC states and Iran, as well as external players such as European or Asian companies, to jointly develop shared fields and benefit from cost-effective solutions for extraction, processing, and export. Regional leaders should leverage energy cooperation to creating the shared incentives necessary to make regional diplomacy more durable.

Photo: Shana.ir

Iran Can Solve Turkmenistan’s Natural Gas Dilemma

Bordering Iran on the northeast, Turkmenistan is a Central Asian country with a population of 6 million. What Turkmenistan lacks in population it makes up in enormous energy reserves. Domestically produced natural gas accounts for 80 percent of the feedstock used for electricity production. In 2006, discovery of the world’s second largest natural field, Galkynysh, saw the country become the country with the fourth largest natural gas reserves worldwide.

From the first days of independence from Soviet Union, Turkmen energy policy has focused on the diversification of its export destinations. At the time, Russia was the primary customer. But tensions in energy negotiations with Russia in 1997 led to concerns over dependence on a single country for energy exports. Turkmenistan launched negotiations with Iran to create a new market for its natural gas exports. That same year, the Korpezhe–Kurt Kui pipeline was commissioned and began exporting 6 billion cubic meters (bcm) per year of natural gas to Iran as part of a 25 year-long contract.

Since then, Turkmenistan has pursued other destinations for its natural has exports, with mixed success. In 2006, Turkmenistan and China signed a production sharing contract to develop a large portion of Turkmenistan’s natural gas reserves as well as an agreement on the construction of the Turkmenistan–China gas pipeline. The initial phase of the pipeline was inaugrated in 2009. That same year, the Turkmen government failed to agree upon the new contractual terms with Russia, leading to a 75 percent decrease in the volume sold to their primary customer. China became Turkmenistan’s leading customer, with construction of parallel lines on the Turkmenistan–China gas pipeline continuing through 2014.

The collective capacity of the three pipelines equaled 55 bcm per year, making China the largest buyer of Turkmenistan natural gas with more than 30 percent share of exports. Today, Turkmenistan is seeking new customers to prevent over-dependence on the Chinese energy market. For this purpose, in 2015, Turkmenistan launched construction a new pipeline connecting Turkmenistan’s natural gas fields to Afghanistan, Pakistan, and India—this project is known as TAPI pipeline.

Despite these efforts, Turkmenistan has failed to find a reliable means to increase its export capacity and its natural gas production surplus is only set to grow. Turkmenistan’s largest natural gas field, Galkynysh, currently produces 30 bcm per year. Predictions show that the number may rise to 70 bcm per year by 2025. Moreover, offshore fields which are producing at their minimum capacities, may see production rise to 20 bcm per year in near future. In addition, there are several undeveloped small fields, production potential of which estimated to be 20 bcm per year. Turkmen officials have made even more optimistic predictions of future production of natural gas. For instance, Ashirguli Begliyev, CEO of state energy giant Turkmengaz, has declared that production totals will reach as high as 230  bcm per year by 2030.

Looking to consumption side, subsidies have led to natural gas consumption figures higher than international averages. In 2015, domestic consumption was 34 bcm and is expected to rise 5 percent annually. Therefore, domestic consumption will ultimately reach to 55 bcm per year by 2030. Looking at difference between production and consumption, and subtracting the 50 bcm per year of exports to China, Turkmenistan’s surplus natural gas production can be expected to rise to at least 40 bcm per year by the end of the decade.

For Iran, Turkmenistan’s growing surplus is not only a potential source of competition in the global natural gas market, but also an opportunity. Turkmenistan will need to find ways to export its production to various new and existing customers at higher volumes than every before. Turkmen policymakers have four options.

First, Turkmenistan may rely on the TAPI pipeline. This pipeline is designed to export 30 bcm per year of natural gas through Afghanistan and Pakistan to its final destination, India. Although TAPI is the main prospect for Turkmenistan’s natural gas exports, particularly because the project is supported by the United States as an alternative to the suspended Iran–Pakistan gas pipeline, also known as the Peace pipeline, the TAPI project remains hampered by instability and security issues in Afghan territory.

Second, Turkmenistan may rely on the planned Trans-Caspian pipeline. If constructed, the pipeline would connect Turkmenistan’s gas fields to the European customers through Azerbaijan. However, the technical complexities of pipeline construction in deep sea areas, legal issues around maritime boundaries, the negative views of Russia and Iran towards the project, and Azerbaijan’s reluctance to extend the pipeline to Turkmenistan all make implementation an unlikely prospect.

Third, Turkmenistan could seek the construction of a new pipeline to China, relaying on a route across its Central Asian neighbors of Uzbekistan, Tajikistan, and Kyrgyzstan. However, such an option would be at odds with Turkmenistan’s efforts to diversify its export destinations.

Finally, Turkmenistan could seek to increase export volumes to Iran, either through the full utilization of the 24 bcm per year of capacity available in existing pipelines or through the construction of new infrastructure. Increasing natural gas exports to Iran may prove Turkmenistan’s best option. For Iran, there are also numerous benefits. Due to Iran’s proximity to Turkemistan’s natural gas fields import costs would be low. The addition of supply from Turkmenistan would enable Iran to supply the northeast, while using its southern natural gas fields to increase export volumes to Iraq and other customers. Iran’s central role in the region can also enable the country to serve as a natural gas hub, including for liquid natural gas shipments through the Persian Gulf.

Considering the difficulties associated with facilitating exports to Azerbaijan, Afghanistan, and China, Turkmenistan and Iran have an opportunity to enter new gas deals on the basis of clear mutual benefits. Iran’s strategy to become the natural gas hub of the region depends on developing several gas corridors with its neighbors—gas-rich Turkmenistan ought to be a key partner in this strategy.

Photo: IRNA