This article is an executive summary of the Planning for PPA Negotiations in the Republic of Tajikistan report. You can access the full Policy Lab report here.
Tajikistan has an opportunity to secure economic development, promote regional energy security, and increase population living standards by establishing long-term hydroelectricity export agreements with neighbouring countries. However, to realize this potential, significant hurdles must be overcome, including institutional reforms, regional instability and trade risk mitigation.
Tajikistan is undertaking energy sector reforms with the support of the World Bank and the Asian Development Bank. The recent Power Utility Financial Recovery Project, funded by the World Bank, aims to improve the sustainability of the energy sec tor through major reforms including:
- Rehabilitating and modernizing electricity infrastructure;
- Improving collection, mitigation of electricity losses and settlement of payables;
- Achieving cost-recovery tariffs; and
- Integrating sound governance practice s and transparency into operations.
As part of integrating sound governance practices, the Anti-Monopoly Committee is serving as a temporary regulator oversee ing the state - owned Barqi Tojik (BT) operations before a new independent regulator is established.
Regionally, Tajikistan is playing an active role in promoting regional energy integration, after years of disconnect. To complement reform efforts, this report provides a guide to hydroelectricity export best practices globally, indicating how they could be applied to achieve successful long-term export agreements between Tajikistan and its neighbours, Afghanistan, Pakistan, and Uzbekistan.
Tajikistan is currently expanding its hydropower generation capacity with significant investment from the World Bank and the Asian Development Bank. Exports to neighbouring countries present an economic growth opportunity and would be facilitated by long-term power purchase agreements (PPAs). However, there are multiple challenges in initiating and attaining such PPAs. This report includes analysis and recommendations to mitigate the economic, legal, and governance risks associated with negotiating PPAs with Afghanistan, Pakistan and Uzbekistan.
The mandate given by the World Bank was to provide guidelines on the:
- Principal economic factors for long-term future hydro generation/transmission;
- Institutional prerequisites for profitable hydro energy exports; and
- Main (legal) risks to consider before engaging in long-term PPA negotiations with neighbouring countries.
The recommended policy proposals fall into three broad steps that should be taken to enhance the management of legal, economic, and governance risks associated with hydroelectricity and export negotiations:
- Develop a Negotiations Plan
- Determine Export Tariff Structure
- Commence Regional Integration & Stakeholder Management
These recommendations are supplemented with a clear action plan (outlined in Section 4 of the full policy briefing), as well as a comprehensive summary of global best practices in hydroelectricity trade, highlighting how and why they should be applied to Tajikistan’s development. Policy transferability is of fundamental importance, which is why we have aimed to identify instances where there is similarity to the Tajik context.
Recommended Policy Proposals:
Develop a Negotiations Plan (Draft Negotiations Plans): Thorough preparation is fundamental for successful and mutually beneficial bilateral agreements. Preparation is not a generic term, it requires:
- Assessing the terms and conditions that Tajikistan would be prepared to accept and concede to attain an agreement.
- Gathering information on the interests and constraints of future counterparties.
- Identifying assumptions and assessing concurrent interests, whether in trade, water management or security.
- Identify new individual s to join the negotiations team beyond current personnel.
Negotiations preparation should go hand-in-hand with legal clause preparation. A list of preliminary clauses, including suggested dispute settlement mechanisms, has been included in Section 3, and are summarized in a practical tool, providing a starting point for Tajikistan to build on in preparing for PPA negotiations. Determining the domestic risk appetite for each clause, as well as which trading party is best placed to mitigate each liability will inform Tajikistan's negotiation.
Relevant case studies: Canada, (Churchill Falls), EAPP (Ethiopia), WAPP
Determine the Export Tariff Structure: At minimum, the central goal of the export tariff methodology should be full cost recovery for Tajikistan. This requires:
- Adopting a dual tariff structure including a capacity charge and energy charge, as it is the most cost reflective of energy generation and is increasingly being used worldwide. The capacity charge reflects the opportunity cost of making electricity generation available to an export partner (especially at peak hours). The energy charge covers average costs associated with the amount of electricity traded. This methodology mirrors ongoing reforms in Tajikistan’s domestic tariff, which will allow for incremental tariff increases for cost-recovery. This tariff structure will also enable easy transition to an eventual market-based system once the region’s electricity network becomes more integrated.
- Evaluating recent collection and loss reductions reforms for effectiveness, to ensure both domestic and export tariffs are truly cost reflective, decreasing reliance on government subsidies for the sector.
- Grounding capacity commitments for exports in careful assessments of domestic demand trends, and consider protecting domestic consumers from winter energy shortages through the application of Hydro-Québec's Heritage Pool Framework.
- Avoiding direct cross-subsidisation through price discrimination, and approaching any cross-subsidisation with caution. Revenues from exports should be managed separately so that domestic and export tariffs are not directly linked to one another. This will allow for reduced exposure to fluctuations in export levels and prices.
Relevant case studies: WAPP, EAPP, Canada-US, Europe
Commence Regional Integration & Stakeholder Management: If Tajikistan remains committed to the CAR's long-term aim of establishing a regionally integrated electricity market, then the opportunity should be seized to instigate regional integration alongside bilateral agreements. This requires Tajikistan to:
- Prioritize dialogue with a small number of countries regarding regional integration alongside PPA negotiations through the Central Asia Regional Economic Cooperation (CAREC), the most established regional organization. Proactively engaging a broader set of counterparts while conducting bilateral negotiations ensures agreements follow commonly agreed-upon market principles and are consistent with future developments.
- Create an energy-specific branch under CAREC, which will be entirely independent from any one country’s energy sector. This branch should be charged with creating template agreements, market principles and participation policies. An independent regulator should also be created to oversee regional energy agreements and avoid politicization of governance structures.
- Join the International Hydropower Association (IHA) to leverage their global cooperative platform, central sources of information, expert committees, training and fast response support. IHA is known to set the industry’s best practices a round governance planning.
- Launch an open data platform, disclosing signed agreements, production capacity and financial statements in order to signal the seriousness of ongoing governance reforms to export partners. This will increase transparency, a paramount step in creating trust in the region.
This proactivity will provide Tajikistan with a first mover advantage in setting the region’s agenda, ensuring regional development s align with domestic aspirations and yield mutually beneficial outcomes.
Relevant case studies: CAPP, WAPP, EAPP, Canada-US, Thailand-Lao PDR, Europe, LATAM
Roadmap for Key Interventions:
This Policy Lab was presented by our MPPs on July 10, 2020. Watch the video below:
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