On November 10, 2020 the Asian Development Bank (ADB) approved a USD 200 million Policy Based Loan (PBL) to the country of Uzbekistan. The PBL can be used for general government budget support, but the loan is based on key policy updates that target the electricity sector, especially the distribution networks in the country. I was honored to provide support to the program by conducting the economic and financial analyses for the loan and policy reforms.
Policy-based lending has been a practice of the ADB since 1978 but has seen most of its growth since the Global Financial Crisis of 2009. A country’s primary motivations for seeking PBL are to achieve a quick response to immediate financing needs and for valuable policy advice / technical assistance for a particular sector’s growth. In Uzbekistan, the program provided critical budget support and targeted policy actions aimed at restructuring the power sector to enable competition and create a conducive environment for private investment. Specifically, the reforms target the following areas: 1) power sector restructuring and strengthened regulation; 2) financial sustainability for sector entities; 3) decarbonizing the sector; and 4) improving demand side energy efficiency. Economic benefits include: 1) loss savings, 2) carbon savings, and 3) demand side efficiencies.
The following summarizes the analysis:
Uzbekistan is the largest electricity producer in Central Asia and remains a net exporter of power. Total available capacity in Uzbekistan is about 12,500 megawatts (MW) from 25 power plants. Approximately 88.8% of electricity generated in 2019 was from fossil-fueled thermal power plants (93.5% of thermal power is from natural gas) and the rest was from hydropower (12%). However, sector assets are operating at low levels of efficiency, and energy losses across the system are high. These results are due to (i) a lack of investment, (ii) inadequate governance, and (iii) poor financial performance.
A lack of investment in new and existing assets has led to aging infrastructure and an overloaded system. Nearly 40% of the nation’s generation capacity is either past or close to the end of operating life. Because of their age, transmission and distribution line losses are high, approaching 20% of net generation. As a result, operation and maintenance expenses are on the rise, blackouts are becoming more common, and system performance is in decline. Costs to repair the system will be much greater than public money alone can provide, meaning private sector funds will be required.
Inadequate governance has also led to inefficiencies. Regulatory decisions have been made among a confusing array of entities and agencies, while tariffs were set at government levels that are out of touch with the immediate sector needs. Furthermore, there has been no clear investment planning process, nor a clear framework for introducing private investment into the sector. The consequence has been poor returns on investment because decision-making does not pursue least-cost options, nor do investments necessarily align with long-term needs.
Finally, financial performance has been in decline. According to World Bank analysis, the sector’s quasi-fiscal deficit (the difference between actual revenue and full cost and loss recovery) had grown to $550 million, which was 0.7% of GDP in 2016. The 2017 deficit was higher still, due to a local currency revaluation against the US dollar. One impact of the devaluation was an effective doubling of external debt; the episode cost the electricity sector about $870 million.
In response to the declining performance, the government has initiated the following reforms designed to improve performance and induce private sector investment: (i) demonopolize the sector, (ii) introduce a new tariff methodology, and (iii) develop a framework for tendering renewable energy projects. The ADB program is meant to support these policy reforms.
3.Benefits of the Program
Benefits of this program fall into three categories: 1) loss savings, 2) carbon savings, and 3) demand side efficiency.
With the reforms, the sector will be able to (i) fully capture anticipated growth and (ii) reduce system losses. The net present value of these benefits is estimated at $344 million. As a related fiscal benefit, the government will be able to reduce its significant subsidies, thereby saving budgetary resources for more strategic uses.
Fully captured growth. Load growth is expected to increase at a rate of 2.2% over the next 10 years based on historical demand trends and macroeconomic growth forecasts. Currently, inefficient generation and aging system assets have increasingly led to an inability for the sector to meet growing demand. Though Uzbekistan is fully electrified, the quality of service is poor and unreliable because of transmission bottlenecks and aging power plants. Unreliable power supply negatively impacts livelihoods and the profitability of many businesses.
According to a World Bank Enterprise Survey in 2019, electrical outages happen twice a month, on average, and each episode lasts 2.3 hours. Business losses due to outages amount to 3.0% of annual sales of enterprises, which is worse than the regional average. The issue is even more pronounced in rural areas, and during winter, when demand surges. In these cases, blackouts are common and last 2–6 hours a day. The policy actions will help the sector respond to increased demand through deployment of large-scale solar and wind projects. Investment in efficient combined-cycle gas turbine (CCGT) generation and improved transmission and distribution will also help to reduce this unserved energy.
Reduced line losses. Transmission and distribution losses have grown to nearly 20%, largely offsetting government attempts to modernize the system. Modernization of the network, paid for by sustainable revenues, will allow transmission and distribution companies to address technical and operational inefficiency problems, improving loss rates. Reforms include the digitalization of grid system by introducing a modern SCADA system and measures to “green” the distribution networks while improving service quality.
Under the reforms, the transmission network is expected to improve from loss rates of 2.4% (of energy supplied to the network) in 2020 to 2.2% by 2025. A more significant improvement is expected at the distribution level, where nationwide losses averaged 15.1% in 2017 (of delivered energy)—a figure five times higher than high-income nations. By 2019, losses were 14.5% of supply and, with the reforms, are expected to fall to 8.9% by 2030. The total energy savings over 10 years would be 21.9 TWh, and a cumulative benefit equal to 5.8% of 2019 GDP.
A second benefit to Uzbekistan emanates from carbon savings. The replacement of electricity sourced from natural gas with electricity from renewable sources will save significant amounts of gas that would normally be consumed by domestic power production, resulting in a mitigation benefit from lower levels of CO2 emissions. With the reforms, annual consumption of natural gas by the electricity sector is expected to fall from 12.3 billion cubic meters (bcm) in 2019 to 5.8 bcm by 2030, from the modernization of the generation fleet and the introduction of renewable energy. As a result, total carbon produced by the sector is expected to fall from 22 million tons (MT) per year in 2020, to approximately 17 MT in 2028 and beyond, leading to a cumulative savings of $383 million.
c. Demand side efficiency
Finally, demand-side efficiency is addressed through regulatory standards and energy savings targets. A government program aims at reducing energy intensity (energy per unit of GDP) by 8%–10% annually in key sectors. Advanced energy savings technologies will be introduced from 2020 through 2030, including the replacement of heating boilers in thousands of buildings, upgrading electric motors and water pumps operated by the Ministry of Agriculture, and outlawing the importation of inefficient household appliances. Demand-side efficiency benefits will especially accrue to the commercial sector as these initiatives help to modernize energy-intensive industries over time, allowing for cost savings and increasing global competitiveness.
The implementation of the reforms will result in significant, targeted improvements in the electricity sector for Uzbekistan. The combination of policy actions can help to address the country’s overarching development objective, inclusive and market-led power sector development. As part of the process, the policies will enable competition, facilitate private investment, and enhance governance, accountability, and financial sustainability, while driving operational efficiency. These outcomes are vital to sustaining long-term economic growth.
The complete economic assessment can be viewed here, and all documents related to the program can be found here
 ADB. 2020. Program Economic Assessment, Power Sector Reform (Subprogram 1) (RRP UZB 54269).
 Total incremental and non-incremental benefits are $3.31 billion over 10 years, against costs of 1.8 billion. The discount rate used was 9%.
 The social value of carbon is measured as $36.3 beginning in 2016; an inflation factor of 2% is added for subsequent years.
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.