The historic spirit of cross-border trade in Central Asia is being revived in the energy sector.
The ancient web of connections that once made the Silk Road indispensable to world trade are making a comeback. Largely unnoticed, countries in Central Asia and South Asia are starting to implement a vision of working together on something just as vital to their economies – energy sharing. Greater cooperation could bring a cleaner, more secure energy future, and greater prosperity to a region stretching from the frozen hinterlands of Mongolia to Georgia and the shores of the Caspian Sea.
While countries in Central Asia region are rich in fossil and hydro resources, other countries, particularly to the south, face challenges in meeting rising energy demand from domestic resources alone. The uneven distribution of energy resources within Central Asia and their seasonal complementarities have been a driver for energy trade among these countries. Mountainous Kyrgyz Republic and Tajikistan serve as the region’s water table with significant hydropower while neighboring Kazakhstan, Turkmenistan and Uzbekistan have abundant oil and gas reserves. But the energy trade has been limited in Central Asia region due to a relatively small market size and modest demand growth.
More recently, the Central Asian countries have been exploring links to larger markets in South Asia, in particular, Afghanistan and Pakistan. This has provided a strong imperative for broadening and expanding the traditional Central Asian electricity system to these countries. Being part of a larger electricity network and gas pipeline system will allow energy to be traded at competitive prices, enable diversification of energy sources, and provide more reliable service to consumers.
This will also help address the underlying threat of climate change, which needs to be addressed simultaneously.
The fossil-fuels dominated energy sector is a major contributor to regional carbon dioxide emissions. Thus, changing the region’s energy mix to include a higher share of renewable energy is an essential consideration in investment decisions, especially since they are now cost-competitive to traditional fossil-fuel based plants. Despite being home to some of the richest solar and wind resources globally, the installed solar and wind energy capacity in Central Asia currently amounts to less than 1% of the total capacity.
Higher solar and wind energy deployment is traditionally viewed negatively due to the intermittent nature of these sources, which require adequate energy storage. But stronger regional cooperation to use large hydro reservoirs in some countries as low-cost regional storage options can facilitate larger solar and wind uptake in the region.
Throughout modern economies, reliable energy systems are the backbone of prosperity and people’s wellbeing. “Keeping the lights on” in a sustainable and resilient way is a fundamental, shared challenge for the region. This led the 11 countries that comprise the Central Asian Regional Economic Cooperation Program (CAREC) to sign a historic declaration in November 2019 embracing closer regional cooperation in three key areas of energy policy.
First, the countries have committed to take a new perspective on network development planning. So far, countries have focused on planning and operating energy grids within their own borders. Yet, at the dawn of a new decade, network operators want to come together more regularly in an effort to elevate grid operation and planning from a purely national to a regional level. Populations in border towns, for example, are often better and more cost-effectively served by neighboring countries rather than through extensions of the national grid.
Second, CAREC countries aim to establish more market-oriented structures with state-owned enterprises operating based on principles closer to those that drive private companies. This will lay the groundwork for competition and should lead to a higher quality of service for users at more cost-reflective prices. The latter can only be achieved by revisiting the generous subsidy policies that are still keeping end-user prices amongst the lowest in the world. Energy subsidies heavily deplete state budgets and create a vicious cycle: artificially low subsidized prices encourage wasteful use of energy, leading to even more consumption and subsidies.
To reduce energy consumption, CAREC countries committed to work jointly towards improving energy efficiency and using it a “fuel-of-first-choice”. Suitable energy efficiency measures and consumer campaigns should raise awareness for energy saving and enable investments to flow in this area. To this end, a new regional financing vehicle is planned with a view to attract green energy projects, including for renewable energy, throughout Central Asia.
Energy systems are among the most complex and sensitive sectors of any nation’s economy. They provide electricity and gas to millions of homes, offices, industrial complexes, and many other essential services. To meet energy demand by 2030, the region (excluding the People’s Republic of China) will need an estimated $400 billion in energy infrastructure investments. Only regional cooperation, increased participation of the private sector and access to financing can bridge this gap and lead to a more resilient and secure energy future.
Overall, the region is adopting a new mindset. It is starting to look increasingly beyond its own national borders. This is not only true for the energy sector but has also manifested itself in improved political relations. For example, more relaxed visa policies have enabled easier travel and exchanges within the region.
Despite the remaining challenges, there is now strong and historic momentum to achieve greater regional connectivity that will enable long-term economic competitiveness. For a region that is largely landlocked and made up of newly independent states, this is a remarkable turnaround reviving the spirit of cross-border trade along the old Silk Road.