Uzbekistan is the most populous country in Central Asia. It is also gas-rich, the largest energy consumer in this region and perhaps the biggest future market for renewable energy, which is in its initial stage of development. Uzbekistan is a country with a continental legal system and republican system of power, which ratified the Paris Agreement in 2018 with the aim of developing clean energy sources and reducing greenhouse gas emissions per unit of gross domestic product by 10 per cent until 2030 compared to 2010 levels. Recently, a number of normative legal acts were adopted to regulate the renewable energy sector and stimulate the attraction of foreign direct investment (FDI)2 and international players for the development of the electric power industry in Uzbekistan. The terminology in the Law on Renewable Energy Sources3 defines renewable energy as energy from the sun, wind, heat of the earth (geothermal), natural movement of water flows and biomass, which are naturally recovered in the environment.

As part of the reforms,4 the government of Uzbekistan has identified a public–private partnership (PPP) structure as a preferred method of attracting foreign investment to develop the energy sector, while the Ministry of Investments and Foreign Trade, the Ministry of Energy and the Public–Private Partnership Development State Agency are the key players in transforming the market. Multilateral development institutions such as the International Finance Corporation (IFC), the Asian Development Bank and the European Bank for Reconstruction and Development (EBRD) have provided both advisory and funding support.

As a result of these efforts, agreements have been achieved with international alternative power energy companies such as ACWA Power, Masdar, Phanes Group and Total Eren, to name a few, with the aim of constructing solar and wind power generation plants and the development of existing thermal power plants. The President of Uzbekistan approved the State Action Plan on Renewable Energy, according to which 810 projects with a total value of US$5.3 billion are planned for the 2017–2025 period. These projects are being implemented within the framework of the 'Concept for the Provision of the Republic of Uzbekistan with Electric Energy for 2020–2030', adopted at the end of April 2020 by the government. This document sets the goal to increase production up to 5GW and 3GW for solar and wind power, respectively, developed by the Ministry of Energy together with the involved ministries and departments as well as international consultants.

The legal-regulatory framework for the development of renewable energy is primarily shaped by the Law on Investment and Investment Activities (the Investments Law),5 the Law on the Use of Renewable Energy Sources and the Law on Public–Private Partnerships (the PPP Law).6 The latter facilitates the conclusion of a power purchase agreement (PPA), which provides for the rights and obligations forming the relationship between the single offtaker and an independent power producer. The Ministry of Energy is entrusted with the implementation of a unified energy policy aimed at ensuring Uzbekistan's energy security, meeting the growing needs of the country's economic sectors and population for energy resources, and managing public companies Thermal Power Plants, National Electric Grids of Uzbekistan and Regional Electric Grids, which are part of the Ministry of Energy.7

The current legislation provides several land use regimes for the development of renewable energy power generation projects. Legal entities can have land plots on the basis of permanent ownership, permanent use (unlimited use), fixed-term use (for a period of three to 10 years with the right to extend no more than one period), lease and ownership.8 Non-residents are limited in the right to acquire ownership on land plots, with the exception of cases provided for by international agreements. The provision or sale of land plots for possession, use, lease and property is carried out on the basis of allotment.9 The provision of a land plot for lease to enterprises with foreign investments is carried out exclusively by the Cabinet of Ministers. Provision of land plots is possible in accordance with the decisions of the President and the Cabinet of Ministers of Uzbekistan in accordance with investment agreements.

As for tariffs, Uzbekistan has adopted a number of normative legal acts regulating the tariff policy in the field of the sale and purchase of electricity. In 2019, a new tariff policy was approved with a deadline of 2030.10 Tariffs will be determined based on reasonable costs of electricity generation, transmission, distribution and sales, taking into account full reimbursement of operating and capital costs. The participation of a foreign investor in the production and sale of electricity is not prohibited by the current legislation, which takes account of the guarantees for the sale of generated electricity, the setting of tariffs and the timing of the fulfilment of obligations for an enterprise. An electric energy producer must be provided for within the framework of signed PPP agreements within the framework of an investment agreement being concluded, including guaranteed connection to the national grid system.

The year in review

Uzbekistan's government has two basic approaches to the development of renewable power projects. In some cases when an investment agreement is signed between a foreign partner and a state partner, state support of the project is guaranteed. Another approach is a traditional PPP agreement for the development of a renewable project from zero with land allotment or on the basis of available objects of the power industry, as listed in investment programmes.

Until recently, there were two legal acts that regulated renewable project development on concessions and PPPs, not to mention the Investments Law. The law on concessions was abolished subsequently, while at the same time the concession remained as a type of PPP agreement11 according to the law, in which the state provides the private partner with property and land plots with the issuance of a permit to carry out a certain type of economic activity.

Development of renewable projects on the basis of investment agreements is under way and agreements are still popular that set the negotiated regime for FDI together with government support agreements. However, as PPP is a very flexible form and in some cases envisages allotment of land for the project – including the fact that most if not all of the agreements in renewable project development with the government are concluded on the basis of a PPP modality – this framework was recognised as the most convenient way of cooperation in infrastructure development in Uzbekistan. Obviously, both sides in both types of agreements – the state and private partners – conclude agreements on the development of infrastructure projects with the aim of socio-economic development and, in both cases, these agreements are interchangeable, but at the same time some peculiarities and differences remain.

The Investments Law does not list appropriate objects, but they can be the same as in PPP development projects. According to the legislation, additional guarantees and support measures are provided to investors when investing in priority sectors of the economy.

Before deciding on the choice of a project, one of the questions is the difference in the possibility to transfer a title of ownership on the object of investment. Thus, the PPP Law states that 'the agreement on public–private partnership establishes the procedure for transferring of ownership of the designed, created, financed, reconstructed, operated and maintained within the framework of the PPP project facility to a private partner in accordance with the decisions of the President of the Republic of Uzbekistan'.12 The legislation on investment activities does not provide for the obligation to transfer the investment object back to state ownership as the investor is the owner on the basis of fulfilling investment obligations.

The following similarities of state support have to be noted. Under the PPP agreement, the following types of financial support can be provided to private partners:

  1. subsidies, including those aimed at ensuring a guaranteed minimum income of a private partner from the implementation of a project;

  2. contributions in the form of assets and property required for the implementation of a project;

  3. funds from the budgets of the budgetary system allocated to pay for the consumption or use of a certain amount or part of goods (works, services) produced or supplied;

  4. provision of budget loans, loans, grants, credit lines and other types of financing; and

  5. state guarantees, tax and other benefits, and other guarantees or compensation.13

The following types of state support for an investment project can be provided as benefits and preferences:

  1. transfer of state property objects or property rights to the investor at a preferential or zero redemption value for the project;

  2. provision of tax benefits and payments, including customs; and

  3. subsidising interest rates on loans received by an investor for the implementation of an investment project.14

Concerning the stability clause or grandfathering rule applicable to investments,15 in accordance with the Investments Law in terms of guarantees against unfavourable changes in legislation for an investor, acts of legislation do not have retroactive effect in cases where compliance with new laws contradicts the interests of the investor. If subsequent legislation worsens the investment conditions, then the legislation in force on the date of investment is applied to investors' activity within 10 years of the date of investment. The investor has the right, at his or her discretion, to apply provisions of the new legislation that improve the investment conditions.

PPP agreements, on the other hand, are not subject to stability clauses, but the private partner has the right to demand a compensatory increase in the payment or payment for use, as well as demanding compensation payment if a change in the legislation in force was after the date of conclusion of the PPP agreement and resulted in an increase in the private partner's expenses, or a decrease in his or her income within the framework of the project. However, this provision does not apply in the case of a legislation change after the conclusion of a PPP agreement, with the exception of discriminatory changes in relation to a certain PPP project.

Recently, the government has partnered in renewable projects development with international players, as mentioned above. Several milestone projects were initiated very recently and some are already developed. For instance, United Arab Emirates-based Masdar Abu Dhabi Future Energy Company is developing landmark projects with a capacity of 1.5GW in solar and wind energy, having signed a PPA and an investment agreement for a planned 500MW wind energy project – the largest in Central Asia – and the 200MW Sherabad photovoltaic (PV) solar projects in Uzbekistan. Saudi Arabia's Acwa Power has signed strategic agreements worth more than US$2 billion with Uzbekistan's Ministry of Energy. The agreements will include the construction and operation of a 1,500MW combined cycle gas turbine (CCGT) power plant and an up to 1,000MW wind power plant.

United Arab Emirates-based Phanes Group has signed a PPA and other project agreements with the Uzbekistan government to develop a 200MW PV solar plant, which will be developed in the Navoi region of Uzbekistan.

One of the first projects in the sector is by Total Eren, which developed an entirely solar PV project named Tutly (100MWac1) located in the Samarkand region. The Chinese corporation Liaoning Leader has begun construction of a US$1.8 billion wind farm in the Gijduvan district of the Bukhara region.

In the hydroelectric sector, there are several joint venture projects active and under way with foreign investors, as well as a number of thermal power plant projects in the development stage.

The policy and regulatory framework

i The policy background

The government of Uzbekistan is trying to meet the increasing needs of its economy in energy, at the same time decarbonising the environment according to the energy development sector's concept 2030 road map that contains mechanisms and means to increase energy elaboration.

New laws on PPPs and the use of renewable resources of energy were adopted along with a new tariff policy, including a revised policy on creating favourable conditions for FDI in renewables.16

Investments in renewable energy sources are highly dependent on government support, although it would be better to introduce norms into legislation: on one hand, by reducing the influence of government bodies and, on the other, introducing transparent mechanisms of cooperation with foreign partners wishing to invest in the field of renewable energy. To support the development of renewable energy sources, it is necessary to amend laws regulating renewable energy sources to facilitate the integration of new renewable energy facilities into the energy system of Uzbekistan, including the creation of conditions for producers to invest and maintain energy storage facilities without over-control by regulatory authorities.

Some preferences and subsidies for investments in the hydrocarbon sector remain in comparison to the renewable energy sector, as the state is not able to move from dependence on hydrocarbon sources of energy for its internal needs and the national energy system still relies on hydrocarbons to a great extent. To change this situation, it is necessary to introduce more sustainable financial government support to the objects of renewable energy sources and give priority to energy obtained from renewable energy sources, as well as to introduce mechanisms liberalising the energy prices and developing the energy market, and moreover returning tax incentives to the producers of solar panels.

Special incentives are usually introduced by the government in investment agreements partnering with investors for big projects. The legislation does not contain fixed feed-in tariffs, but new tariff regulation introduced the rule that the margin cannot be less than 10 per cent and more than 20 per cent. Special rates for electricity are negotiated directly with the government, fixing them in US dollars. Tax and customs incentives are also applicable to construction projects for a fixed period of time. The IFC has signed an agreement with the government and received a mandate for conducting tenders and selection criteria for participants to construct renewable energy infrastructure to increase renewable power capacity, and stimulate and attract FDI.

ii The regulatory and consenting frameworkAuthorised bodies

The Cabinet of Ministers implements state administration in the field of policy development and development strategy for the use of renewable energy sources. The Ministry of Energy is entrusted with the function of implementing a unified energy policy aimed at ensuring energy security, and meeting the growing demand of the country's economy and population for energy resources. The Ministry of Energy, to diversify the structure of generation, is working on investment projects on the principles of PPP with the wide involvement of FDI.

The process of production, distribution and consumption of electricity determines the preservation of centralised management with the state joint stock companies Thermal Power Plants, National Electricity Grids of Uzbekistan and Regional Electric Grids, which are part of the Ministry of Energy.

Other government agencies that affect the electricity sector within their powers include the Anti-monopoly Committee, which, in accordance with the Law on Natural Monopolies and the Law on Consumer Protection, observes tariffs and prices for the sale of electricity.

The Ministry of Justice participates in the drafting and development of legislation in the field of renewable energy sources. The Ministry of Economy and Industry participates in the development and implementation of development and investment programmes that ensure sustainable development of economy for the medium and long terms. The Uzbek Agency for Standardisation, Metrology and Certification (state committee Uzstandard), being a government body, is authorised to solve problems in the field of technical regulation, standardisation, metrology and certification. It participates in ensuring functioning and development of standardisation systems in the electric power industry and harmonisation with international, interstate systems based on the application of international standards. The state committee of energy inspection provides state supervision over rational use, reduction of losses in the process of transmission, distribution and consumption of electricity, and improvement of energy efficiency.

The joint stock company National Electric Grids is a guaranteed single buyer (offtaker) of produced energy. At the same time, corporate entities producing electricity are required to approve tariffs in the Ministry of Finance. Uzbekgidroenergo is a state-owned company that controls the hydropower sector in Uzbekistan and formulates development strategies, implements construction and modernisation projects, negotiates on behalf of the government, and manages hydroelectric power plants and other related facilities. Current projects are being implemented under the Hydropower Development Programme.

Sources of law and regulation

According to Article 6 of the Law on Normative Acts, there are a number of types of legal acts regulating and directing renewable energy policy.

The President adopts normative legal acts in the form of decrees, decisions, resolutions and orders.

Regulations of state bodies adopted by the Cabinet of Ministers determine status, main tasks, functions, rights and obligations, including procedures for organising the activities of state bodies and their structural units, as well as procedures for regulating public relations in particular areas.

Strategies determine the priority directions for the development of the country or key industries for the medium and long term. Concepts define key priorities, goals, main directions, tasks and mechanisms for the implementation of state policy in particular areas.

The programme or road map defines a system of measures (interrelated in terms of objectives, implementation deadlines, funding sources and responsible executors) and mechanisms to ensure the achievement of the goals of state.

Connection to electric system

Unfortunately, there are no green criteria terms ascribed to the energy produced depending on the method of its production according to Uzbek law. A Resolution of the Cabinet of Ministers approved the regulations for connecting to the unified electric power system of enterprises producing electric energy, including renewable energy sources.17

Independent generators of electricity from renewable sources can be connected to a single electric power system on the terms of block stations or on a competitive basis.

Grid connection procedure

The procedure consists of 12 stages, including obtaining technical specifications, development, consideration, technical conditions, approval of projects, direct connection and sealing of metering devices. The whole process takes approximately six months. Monitoring compliance with the regulations and ensuring non-discriminatory access to power grids are entrusted to the Ministry of Energy and the Anti-monopoly Committee. To connect electrical installations to the unified electric power system, the manufacturer is obliged to pass technical conditions for the connection of new or additional generating capacities from the organisation to the electric networks of which the connection is projected.

Obtaining technical conditions is not required when the use of all generated electrical energy is provided for residential needs and, in this case, the manufacturer's electrical installations are not connected to a single electric power system. At the same time, the manufacturer commissions electrical installations for the production of electrical energy after inspection and obtaining permission from the state committee of energy inspection to begin operating, and is responsible for the proper technical condition of electrical installations and ensuring electrical safety. For manufacturers with a capacity of up to 20kW, approval from the state committee of energy inspection is not required.

Environment concerns and land use

As of 1 October 2019, new rules for the allocation of land plots have been established in Uzbekistan. The new procedure provides for only two options for acquiring the right to a land plot. Participation is in an open online auction or in accordance with decisions of the President or the Cabinet of Ministers.18

With the participation of a foreign investor in an open online auction, the rights to a land plot are acquired exclusively by paying the cost of the lot. Decisions of the President and the Cabinet of Ministers of Uzbekistan on the allotment of a land plot can be made within the framework of the signing of an investment agreement. When implementing the allotment of a land plot for an investor's project, the environmental control authorities may accrue compensation payments for compensation for damage to the environment.

Compensation payments can be charged for cutting down trees and shrubs, and in cases of violations of the habitat of wildlife objects in the process of construction and operation of an investment activity object.19

The current legislation provides for an environmental impact assessment within the framework of the construction and operation of an investment object to determine the negative impact on the state of the environment and the health of citizens.20

Renewable energy project development

i Project finance transaction structuresOwnership structure

With the introduction of PPP projects for major infrastructure sectors of Uzbekistan, the country has started seeing innovative financing structures for such projects. However, Uzbekistan's project finance law and practice are still in a stage of development. The law has yet to provide for the certain terms and concepts and their implications for practice, such as the Security Agent, the Inter-creditor Agent or the Pledge of Accounts and Assignment used as a security interest.

Under PPP structures and in accordance with the legislation, investors and sponsors are allowed21 (and sometimes required)22 to incorporate a local project company with 100 per cent equity ownership. Thus, such companies, under the Law on Foreign Borrowing, have the right to attract funding in the form of external loans, and by issuing and placing bonds in capital markets.23

In accordance with Article 33 of the PPP Law, a PPP agreement establishes the procedure for the transfer of ownership rights to a project object or facility to a public partner or a State Asset Management Agency of Uzbekistan. If a project stipulates transfer of ownership of any such property to a private partner, such a transfer shall take place in accordance with the decision of the President of Uzbekistan. The PPP agreement must indicate the time frame of transfer of ownership of the object or facility of the PPP. This time frame may be one of the following:

  1. the moment of putting the object of the PPP into operation;

  2. the moment of expiry of the PPP agreement; or

  3. another point in time specified in the PPP agreement.

Typical project development and ownership structures for renewable energy projects may take place on a design–build–finance–own–operate–maintain basis. In accordance with the project agreement, the private partner, in the case of solar PV power projects, may be obliged to decommission the plant and recultivate the land before transferring it back to the state body (usually the local government agency) or transfer the plant as it is to the government.

The government-owned joint stock company National Electric Networks of Uzbekistan signs the PPA with the project company with a term of 20–25 years and acts as an offtaker, while the Ministry of Foreign Investments and Trade enters into a government support agreement (also called an investment agreement) with the project sponsor. The latter usually provides for investment support undertakings, liquidity support mechanisms, exemptions and incentives for the investor (and project company), and other related provisions.

Lenders

The ability of the potential project sponsors to attract debt-based financing is usually ensured through a pre-bidding requirement for the bidders to provide a detailed financing plan in their bid submission, including a signed term sheet from potential financiers. International development banks are major players in the development of Uzbekistan's renewable energy sector as lender (both project finance lender and equity bridge loan provider) and as the government's transaction adviser. One of the first renewable project finance transactions in Uzbekistan led by Total Eren (France), the Tutly Total Eren 100-MW Solar PV Project, has successfully reached financing closure with loans totalling €87.4 million. The European Investment Bank, the EBRD and Proparco, an affiliate of the French Development Agency, are acting as lenders.24 As at early May 2021, the construction of the solar farm, located in the Samarkand region of Uzbekistan, has already started.

Commercial banks are showing interest in the Uzbek market too. Although the project involves non-renewable traditional gas-powered power generation (CCGT 1500MW), by way of example, ACWA Power (Saudi Arabia) has recently (as at May 2021) signed a financing package involving a syndicate of seven international lenders who will provide US$750 million senior debt for the US$1 billion project. The lead entities include the EBRD, the German Investment Corporation, Standard Chartered, Natixis, Société Générale, the Organization of the Petroleum Exporting Countries Fund for International Development and the Bank of China. The commercial banks are providing funding on the back of a Multilateral Investment Guarantee Agency four-point cover.

The PPP Law allows project sponsors to provide the project lenders with any types or forms of security, including rights under a PPP agreement and agreements concluded pursuant to this agreement, rights, assets, the right to use a land plot, pledge of shares, pledge or assignment of rights, profits and amounts due as part of a PPP project.25

Lenders in project finance transactions can also conclude a direct agreement with the public partner (or private partner) and such agreement must contain the following provisions:

  1. the rights and obligations of lenders in connection with the replacement or removal of a private partner (management of a private partner);

  2. in case of replacement or removal of the private partner, an obligation to make payments by the public partner to the lenders, with those payments otherwise payable to the private partner in accordance with the PPP agreement;

  3. provisions reducing the risk of termination of the PPP agreement;

  4. payments in case of early termination of a PPP agreement;

  5. the procedure for exchanging information on the implementation of a PPP project, on ensuring the rights and obligations of the parties.26

Certain transactional peculiarities

The project documents may include structural provisions allowing for a refinancing in the capital markets, such as future project bond take-out. The projects, as practice shows, may benefit from credit enhancement through a government support agreement (GSA) made between the Uzbek government, the sponsor (project investor) and the project company. While the GSA is structured and concluded under the Investments Law,27 procurement of an independent power producer and signing of the PPA take place under the PPP Law. This blended nature of the transaction is quite unique from a legal perspective.

In accordance with the PPP Law, the PPA can be concluded through direct negotiations without conducting a tender, if so provided in the decrees of the President or the Cabinet of Ministers.28

Single offtaker

The government-owned joint stock company National Electric Grids of Uzbekistan acts as a single purchaser of the renewable energy produced by independent power producers.

ii Non-project finance development

All current renewable energy projects are being developed under the project finance structure.

Distributed and residential renewable energy

Distributed (on-site) renewable energy generation is not widely practised in Uzbekistan, neither at the local government nor the community level. The current trend of development of the energy sector, including renewable power generation, for the period up to 2030 is coordinated by the Ministry of Energy through implementation of major investment projects. However, the legislation does provide tax incentives to homeowners for installing solar panels for private use by disconnecting from the grid.29

Mergers and acquisitions

Renewable energy supply chains

The Law on the Use of Renewable Energy Sources, when adopted in 2019, had a provision providing exemptions to the manufacturers of renewable energy equipment from all sorts of taxes, which was later abolished.30 However, the importers of technological equipment (including renewable energy-related equipment and installations) may benefit from custom duty and value added tax exemptions if similar products are not produced domestically.31 The process is not automatic. The importer must file an application to the Centre for Comprehensive Expertise of Projects and Import Contracts under the Ministry of Economic Development and Poverty Reduction to conduct an examination of whether the production of analogues of imported technological equipment exists or is absent in the territory Uzbekistan.

In the framework of individual projects, additional customs and tax incentives may be provided if so stipulated by presidential decree.

Other key considerations

Conclusions and outlook

The new leadership of Uzbekistan has taken a course on the development of energy production to increase the volume of generated energy with an increase in the share of renewable energy sources and a decrease in carbon dioxide emitted into the atmosphere. Recently, the construction of a nuclear power plant has begun, as well as works on the modernisation of electrical networks and infrastructure, and active negotiations are being conducted with the representatives of foreign companies that produce electricity from renewable energy sources.

Although there are some points that can be improved, investors have the opportunity to negotiate comfortable terms. The government is trying to reduce the prices for electricity as much as possible. The World Bank Group Scaling Solar Programme is being implemented and the potential of Uzbekistan in the field of renewable energy development has not yet been tapped. It is necessary to introduce a system of green tariffs, feed-in tariffs, subsidies and tax incentives for producers of electricity from renewable energy and equipment.