Regulatory reform and market development in power sectors of transition economies: the case of Kazakhstan

Kazakhstan is at the forefront of power sector reform in the EBRD’s countries of operations. Starting in 1996, a regulator was set up, the industry was unbundled, some distribution and generation companies were privatised, and the large user market was liberalised. A number of reform challenges remain, however, in the areas of privatisation, regulation and competition. This paper proposes that the remaining distribution companies be privatised with a view to raising the level of cash collection. Before this takes place, the industry would benefit from regulatory changes, strengthened independence of the regulator, and modified regulatory rules to improve risk allocations and strengthen incentives. On competition, the paper proposes enhancing the present market arrangements by introducing a balancing pool, and re-balancing transmission tariffs to reflect location marginal costs. Implementation of the proposed changes should yield substantial welfare gains for Kazakhstan. The broad challenges in Kazakhstan are characteristic of those in the sector throughout the region. The case of Kazakhstan shows that any country can embark on radical power sector restructuring irrespective of reform progress in the wider economy.