Uzbekistan: Preparing Sustainable Energy Investment Projects

Energy / Electricity transmission and distribution - Energy utility services - Oil and gas transmission and distribution

The transaction TA facility will provide project preparation support to a series of ensuing projects, comprising: (i) Gas Sector Development Program ($750 million), (ii) Distribution Network Modernization Program ($300 million), and (iii) Regional Energy Transmission and Dispatch Enhancement Project ($200 million). All ensuing projects are among the Government's priorities for energy sector development under Uzbekistan 2030, and will require similar scope of safeguard, financial management and economic assessments. Social (labor), human resources, and training needs assessments will also be undertaken for the policy component of the proposed Gas Sector Development Program.

Natural gas is the most important indigenous source of energy in Uzbekistan and is regarded as one of the driving forces of the country's economy. At present, the energy sector contributes to over 20% of national tax revenues and 18% of the country's gross domestic product (GDP). Natural gas is over 80% of the country's energy mix and 85% of electricity generated.

Uzbekistan's aging and dilapidated infrastructure in the whole energy chain increasingly results in system inefficiencies, unreliable gas and electricity supply that dampens the economic development and business confidence, and uneven access to electricity across provinces contributing towards widening regional income disparities. The obsolete energy transmission and distribution systems have developed serious problems overtime, such as increasingly frequent electricity blackouts and insufficient gas available especially during peak demand times in the winter, putting social service systems such as education and health care at risk.

In 2017, Uzbekistan initiated comprehensive economic reforms liberalizing its exchange rate to solve long-standing difficulties associated with limited access to foreign exchange and requirements to surrender foreign exchange resulted in structural and economic distortions. The liberalization of the foreign exchange regime and local currency devaluation created additional challenges to energy utilities massively distorting their value of assets, capital structures and revenue generation under existing governance and financial management frameworks. To recover the sustainability of energy utilities, the government launched several initiatives and legislative acts for sector reforms that includes: (i) development of cost reflective energy tariffs (ii) adoption of international financial reporting standards (IFRS) and disclosures and (iii) strengthening financial management and corporate governance frameworks

Government development plan. Uzbekistan government formulated its vision for the country, _Uzbekistan 2030_ with the aim of overcoming social and economic challenges. The government recognizes the strong link between energy and economic growth, and the urgency to sustain gas supply modernizing transmission infrastructure. The key priority of the government is to maintain momentum on structural reforms and liberalization of economic activities that would lead to more financial resources for achieving long term economic growth. Development and implementation of cost reflecting pricing for natural gas is essential to successful energy reforms. In its vision of _Uzbekistan 2030_, the government is committed to promote resource-efficient growth model through: (i) institutional and governance reforms in the energy sector with potential unbundling of upstream, mid-stream and downstream functions; and (ii) rationalized and cost reflective pricing for gas and electricity.

Energy is one of ADB's priority sectors of engagement in Uzbekistan. The country partnership strategy for Uzbekistan indicates that energy sector operations will focus on reform and market development to meet energy demand with reliable, environmentally sustainable supply. The government's request is also consistent with ADB's priorities under Strategy 2030 and, based on the government's demonstrated commitment to reform.

The three ensuing projects to be prepared under the TRTA facility are of similar nature. These projects are aligned with the objectives of the government to strengthen reliability of energy sector to increase its sustainability, efficiency, and mobilizing private sector investments. The projects aim to improve the quality of energy supply, reduce aggregate technical and commercial losses, and improve the financial performance of energy utilities.