Coal phase-out and Just Transition in Kazakhstan

During the Climate Ambition Summit 2020, Kassym-Jomart Tokayev, the President of Kazakhstan, announced the target of carbon neutrality by 2060. Toward this goal, the Ministry of Ecology, Geology and Natural Resources has developed the Doctrine for Carbon Neutrality. The United Nations actively supports key green initiatives in the country, notably through its UN-PAGE (Partnership for Action on Green Economy) programme.

The role of ESMIA was to evaluate socio-economic risks and benefits related to this transition and propose support policies to help reach mid-term milestones of 2030 and lay the foundation for the future long-term energy transition. The particular challenge lay in reconciliation of projects outcomes with stakeholders from various ministries, associations, and industrial and research organizations in Kazakhstan and from abroad.

ESMIA evaluated the mid-term effects of Kazakhstan’s coal-to-gas transition, analyzing industry competitiveness, energy costs, and labor issues, and assessed the impact of significant coal production cuts in Ekibastuz, home to one of the largest open-cast coal mines.

Among other factors ESMIA assessed industry competitiveness, gas supply shortage, increases in energy tariffs, energy costs and energy poverty, energy affordability subsidies, concentrated unemployment and labor shortages at a country level, and developed a 2030 Roadmap and Just transition plan. The implications of a substantial cut in coal production were assessed for a pilot city of Ekibastuz (Pavlodar region) which hosts one of the largest open-cast coal mines.

Factors contributing to the gas shortage in Kazakhstan include the reinjection of associated gas to maintain oil production, which limits gas availability for market use, and the strong regulation of domestic gas prices, coupled with rising demand and decreasing exports.

Kazakhstan accounts for eight major gas basins with total reserves for recoverable gas estimated at 4,432,602 Million m³. The extraction of natural gas is continuously increasing. In 2020 it reached 55.1 Billion m³ with more than 70% being associated petroleum gas, i.e., the by-product of crude oil production. Part of the produced gas is re-injected into oil reservoirs to enhance waning pressure within formations to maintain oil production.

This creates a vicious circle – to address the increasing demand for gas due to coal phase-out in Kazakhstan, crude oil production must be increased so more associated gas will be produced that will require an increase of re-injection. In 2022, 20.5 Billion m³ (36% of all gas produced in Kazakhstan) was re-injected, and during the period 2025-2050 the re-injection may reach 82 Billion m³ annually (almost 50% of total gas production). This means that in 2030 only half of all produced gas will be available for transformation into marketable gas, which may contribute to a gas shortage and compromise the coal phase-out in the country.

Important policy must be done in the mid-term to “decouple” oil and natural gas extraction. For example, Kazakhstan may explore and promote other forms of oil recovery, e.g., carbon reinjection, by providing incentives or subsidies for early adopters.

Another factor that may contribute to gas shortage in Kazakhstan and may compromise coal phase-out is related to strong regulation of domestic gas prices.

The coal phase-out will lead to the increase in natural gas demand in Kazakhstan. To address domestic market demand, exports to other countries must be reduced or even stopped. Because of the strong regulation enforcing national gas prices, marketable gas production and delivery in Kazakhstan are under the risk of being non-profitable. With the decrease in exports, the national gas operator will be no longer able to counterbalance financial losses from domestic sales with revenues from exports (which are subject to much higher gas prices than those in the domestic market). ESMIA estimated that the national gas operator may encounter losses exceeding 2 billion USD between 2022 and 2026 from domestic sales.

To keep up with various expenses to expand and upgrade gas infrastructure, it was found that end-use energy tariffs must increase as fast as possible while respecting regulation caps. Unfortunately, even this increase may not allow the operator to recover all costs. It was found that non-regulated retail residential tariffs for natural gas must be already at least two times higher.

This raises a fair question: Will it be acceptable for the government to relax regulations to make gas tariffs closer to their market level necessary for expenses recovery?

Regional disparities in income and energy tariffs create challenges for both vertical and horizontal energy equity: households in different regions or with different heating systems face significantly different energy costs.

Tariffs in Kazakhstan are highly dependent on the region and are very disperse, creating challenges for vertical energy equity (across income classes) and horizontal energy equity (within income groups) in the country.

• Vertical energy equity. Households using different fuels to satisfy the same end-use in different regions pay different bills. For instance, two equivalent households situated in Ekibastuz (Pavlodar region) and Oral (West Kazakhstan region), both relying on autonomous system or individual furnace for space and water heating, have substantially different energy expenses. A household in Ekibastuz uses coal for space heating, while a household in Oral relies on natural gas. The required heat to satisfy heating demand is slightly less for the household in Oral due to warmer temperatures throughout the year. By applying the regional residential tariffs effective in these regions, it was found that for the same end-use a household in Ekibastuz must pay almost 80,000 tenge per year. A household in Oral on average must pay less than 40,000 tenge per year to heat a home. While in Pavlodar region households with higher income have higher expenses for energy, in West Kazakhstan the difference in energy expenses per household income is less pronounced. One of the reasons for this is stronger regulation for gas prices compared to coal.
• Horizontal energy equity. Households living in the same community may pay drastically different bills for the same end-use. Two households in Ekibastuz (Pavlodar region), one relying on an individual heating system using coal, and another on central heating, will also spend substantially different amounts on energy. Living in a multi-apartment building appears to be more advantageous from the point of view of energy expenses. A household in an apartment pays on average almost half as much for space heating compared to the same household space (i.e., around 43,000 tenge per year). This is due to the fact that central heating prices are low and do not fully reflect all costs. As a consequence, households with the same income pays much more for coal creating an important energy burden gap within the same income class.

Households using natural gas only for cooking or water heating are excluded.

The energy transition under different energy price regulations presents a trade-off between supporting utilities and end consumers.

Strong regulation of energy prices has its advantages and drawbacks. On the one hand, it keeps energy affordable for end-users mitigating energy poverty. On the other hand, utilities may not entirely recover their expenses from energy sales in domestic market.

Market (non-regulated) energy prices provide incentives to utilities to expand energy production and distribution (avoiding energy shortages), invest in infrastructure modernization to gain efficiency and mitigate failures. However, the application of market prices will require to support low-income consumers to pay their energy bills.

Reference: ESMIA (2023). Energy Transition in Monocities. Coal Phase-out Roadmap and Just Transition Action Plan for Ekibastuz (Kazakhstan) Final Report, 45 p.