Heat supply modernization Uralsk city - Feasibility Study (FS)

Within the framework of the "Infrastructure regulation and development of tariff policy in the Republic of Kazakhstan" EBRD project, Ernst & Yong analyzed the tariff policy of the regulatory legal framework for the regulation of natural monopolies in Kazakhstan. In general, during the analysis, the following shortcomings of the tariff policy were identified:

(1) Outdated regulatory policy. The EU countries carried out tariff policy reforms more than 15 years ago, Russia more than 5 years ago.

(2) Underrated asset value. The current state of assets and the incorrectly applied method of calculating profit in tariffs made a significant contribution to the further deterioration of their state.

(3) Over-regulation of the sector. Overregulation of the sector did not ensure the necessary incentives for companies to operate more efficiently.

(4) Lack of transparency in the tariff regulation process. The existing administrative barriers were the reason for the lack of trust among potential investors.

(5) Inappropriate revenue collection models that have contributed to higher operating losses

In 2017, the specialists from “CES clean energy solutions GesmbH” (Austria) and specialists from “BDC Consulting” provided a service for the development of a feasibility study.

Accordingly, within the framework of the development of feasibility study for the EBRD project on modernization of the heat supply system in Uralsk, experts from CES Austria and “BDC Consulting” LLP analyzed  modernization of “Zhaiykteploenergo” JSC, the company that manages the “Uralskaya” CHP, and justified the possibility of a loan from the European Bank for Reconstruction and Development in the amount of 6.2 billion tenge for these purposes.

The general municipal “Uralskaya” CHPP is the main supplier of heat energy with by-production of electricity. In the long-term development strategy of the enterprise, the goal set is to become a supplier of electricity with by-production of heat energy. This goal will allow the company to carry out cross-subsidization of tariffs for heat energy in the future at the expense of profit from the electricity sale. The forecasts of heat consumption for the district heating system show a slight increase in the hot water supply to consumers and a decrease in heat demand due to the restriction of the expansion of heating networks. At the same time, the consumption of heat energy in the regions, which are provided by 19 autonomous boiler houses, will practically not change, therefore, population growth will be compensated by energy saving measures.

Possible options for heat supply to the city, proposed by CES Austria and “BDC Consulting” LLP, show that gas is a cheaper source of heat and electricity, so this justifies an increase in the installed electrical capacity at the enterprise from the current 50 MW to 68 MW by installing a new 18 MW steam turbine.

All necessary work on urgent replacement of pipelines will be funded by "Nurly Zhol" state program and therefore are not subject to EBRD financing. Long-term Investment Strategy (LIA) includes replacing of old steam boilers with a more powerful condensing steam turbine with an increase in rated capacity up to 68 MW; implementation of process simulation to optimize the water/steam cycle (reduction of heat removal pressure, including replacement of heat exchangers); modernization of the existing control system and implementation of a hydraulic model for district heating networks and replacement of outdated water-heating boilers at "Zhaiykteploenergo” CHPP.

The calculation of the Project financial model is applied to the tariffs for district heating and electricity tariffs in accordance with the legislation of Kazakhstan. The electricity tariffs constantly increasing over the years (in line with inflation) that exceed the minimum required electricity tariff to cover the costs will generate the future cash flow in combination with additional generated electric power. This money will be used to finance modernization of the DH system, especially new boilers, in order to guarantee reliable operation of the CHP plant and therefore reliable heat production in the future. The replacement of pipes for the district heating network will be funded through the “Nurly Zhol” government program, which was launched by the Kazakh government specifically to upgrade infrastructure in Kazakhstan (e.g district heating networks). The implementation of the Project will lead to a reduction in CO2 emissions compared to the current one, as well as to a decrease in capital costs and a reduction in the unit cost of heat generation.