This chapter assesses Uzbekistan’s policy framework to support investment for green growth, particularly in relevant sectors for mitigating climate change and increasing resilience against climate-related natural disasters. Uzbekistan is endowed with rich natural resources but remains strongly reliant on carbon-intensive fossil fuels and faces significant environmental challenges. The successful attraction and promotion of much needed investments to address such challenges will depend on whether the policy environment for the development of low-carbon and climate infrastructure is enabling. This chapter looks at the potential contribution of FDI to diversifying energy sources and supporting the transition a low-emissions, climate-resilient economy, and considers the institutional and policy frameworks that can help the government mobilise investment in support of such objectives.
Roadmap for Sustainable Investment Policy Reforms in Uzbekistan
Abstract
Uzbekistan is endowed with rich natural resources. The country enjoys high solar irradiation and wind speeds and large territories suitable for solar power plants are available in sparsely populated areas. The country’s technical solar and wind power potentials are estimated at several times the entire primary energy supply.1 Large-scale agriculture and animal farming, in turn, offer considerable opportunities for bioenergy. This large renewable potential could allow the country to become a renewable exporter to the region and hub for green hydrogen production.
Uzbekistan remains strongly reliant on carbon-intensive fossil fuels, however, and faces significant environmental challenges. The country has succeeded in decoupling GDP growth from carbon emissions and in reducing its economy’s energy and carbon intensities by more than 70% since 1990. Natural gas still constitutes 86% of energy supply, however, and energy intensity remains high throughout all economic sectors, making it one of the most carbon-intensive countries in the world. Furthermore, extensive irrigation and high water losses in the agricultural sector make Uzbekistan highly water-stressed. Climate change is likely to further exacerbate water stress. As a result of the desertification of the Aral Sea, Uzbekistan is also affected by significant air pollution.
Since 2018, green growth has become a policy priority for Uzbekistan. The country adopted its first Nationally Determined Contribution (NDC) to the Paris Agreement in 2018, which was replaced with a more ambitious GHG emission reduction target in its updated NDC in 2021. In 2019, Uzbekistan also adopted its Green Economy Transition Strategy 2019-2030, the framework document for green growth. The strategy aims at achieving long-term sustainable economic development and meeting Uzbekistan’s pledge under the Paris Agreement. In 2024, Uzbekistan revised the strategy’s target of 25% of renewable energy in installed capacity for electricity generation by 2030 to an ambitious 40% from only 14% in 2022.
Driven by government policies, investment in variable2 renewable energies has increased impressively. With the support of international financial institutions (IFIs), since 2022, tenders for solar and wind capacity equivalent to around 55% of total installed generation capacity have been awarded to foreign investors in the form of public-private partnerships (PPPs). Greenfield FDI in renewables increased from USD 1.4 billion in 2014-18 to USD 11.7 billion in 2019-23 (50.1% of total), almost three times as much FDI as in fossil fuels. PPPs have enabled this impressive amount of investment by reducing Uzbekistan’s country risk premium for private investors and ultimately the cost of electricity.
Investment in fossil fuels and energy-intensive industries remains, nevertheless, significant and investment in environmental technologies other than renewables is still negligible. Although greenfield FDI in coal, oil and gas in Uzbekistan has declined by almost 50%, it still accounted for 21.8% of total greenfield FDI between 2019 and 2023. While much of this investment targets modern, flexible natural gas-fired power plants, which can serve as flexible balancing sources for intermittent renewables and replace inefficient and polluting older plants, Uzbekistan also seeks to attract new investment in oil and gas exploration. In addition, its energy-intensive industrial sector continues to receive considerable investment. Private investment projects related to environmental technologies such as sewerage, wastewater treatment and water management, on the other hand, are still relatively scarce.
Deficiencies in Uzbekistan’s energy infrastructure combined with contingent liabilities from PPPs used to finance variable renewables generate financial risks. Even though Uzbekistan is already taking measures to render its electricity system more flexible, given the large volume of new intermittent renewable capacity, system flexibility remains a challenge. At the same time, large parts of the transmission and distribution grid are outdated, and transmission lines do not always reach those areas with the highest solar and wind potential. If not addressed, these deficiencies could impair the flow of the full amount of electricity generated by new solar and wind power plants to consumers. Such a scenario could generate significant financial losses for the public sector, given the contingent liabilities associated with the PPPs used to finance new solar and wind power plants, ultimately jeopardising the government’s ability to finance additional investments in clean energy infrastructure.
Uzbekistan would benefit from a clearer strategic and institutional framework for green investment. Despite several fora for dialogue and inter-ministerial co-ordination, a disconnect exists between ambitious green growth targets and policies, including for green investment, and plans to further expand highly polluting sectors such as petrochemicals and cement production. Likewise, due to limited strategic orientation and institutional overlap, Uzbekistan is still in the early stages of integrating green considerations into investment promotion and facilitation policies. The 2019 investment law contains significant environmental obligations for investors that have been reduced in the new draft law to be adopted in 2025. According to the government, the Presidential Decree on the implementation of the new Investment Law should cover a range of environmental requirements and norms aimed at fostering the development of a green economy.
Better enforcement of environmental regulations could incentivise more green business practices amongst investors. Energy efficiency regulations such as energy saving targets for energy efficient industries or energy performance requirements for buildings are not always applied in practice. Likewise, environmental impact assessments (EIAs) are frequently treated as a mere formality by investors rather than an obligation to adhere to and public participation requirements are not always respected.
Strategic priorities for investment in renewable energies
Carefully assess the timeline for investment in utility-scale solar and wind power plants. More gradually phasing in of investment in new utility-scale solar and wind power plants would allow for better designing new projects and for simultaneously investing in sufficiently in power system flexibility and upgrading Uzbekistan’s grid infrastructure. Extended timelines for project planning and preparation could also allow for using competitive tendering processes to award new projects to investors more frequently, thereby ultimately reducing electricity prices.
Further enhance the flexibility of Uzbekistan’s power system and upgrade and expand the country’s electricity grid. This involves strengthening co-operation and electricity trade with neighbouring countries, expanding battery storage and leveraging demand management. Recent reforms to liberalise the electricity market could facilitate increased public investment in the modernisation and expansion of grid infrastructure.
Improve the management of PPP-related fiscal risks and strategic planning and ensure the organisation of competitive tendering processes. It will be critical to assess PPPs for their affordability in the preparation process, to monitor fiscal risks throughout the project lifecycle and to disclose contingent liabilities in the government budget. Better strategic planning of PPP projects, in turn, could ensure that those projects with the largest benefits are implemented first and increase value for money. Finally, it would be important to ensure that all PPP projects are delivered through the PPP law and undergo competitive tendering processes.
Introduce competition in the power sector by establishing competitive wholesale and retail electricity markets as foreseen in recently adopted legislation. The country could also consider privatising part of its state-owned electricity companies and assets as the sector remains dominated by state-owned enterprises.
Phase out fossil fuel subsidies and progressively liberalise energy prices. This process could improve state-owned electricity companies’ financial viability and allow them to invest in the modernisation of grid and power generation infrastructure. It could also incentivise more private investment in energy efficiency improvements and in renewables. It should go hand in hand with an expansion of social assistance for vulnerable consumers.
Shift towards expenditure-based tax incentives for renewables while phasing out tax incentives for fossil fuels. This involves replacing corporate income tax (CIT) exemptions for green sectors and exemptions from indirect taxes for renewable producers with expenditure-based incentives. Such incentives lower the cost of specific inputs or expenses, thereby attracting investors, who would not have invested otherwise. Uzbekistan should also consider reducing its generous tax incentives for the geological exploration of oil and gas.
Strategic priorities for ensuring the environmental sustainability of investment projects
Promote and facilitate green investment more systematically. This requires streamlining Uzbekistan’s institutional set up for investment promotion and facilitation and adopting a national investment promotion strategy which addresses climate and environmental considerations.
Better enforce EIAs. This requires better enforcing public consultations prior to project development and ensuring that EIAs meet quality standards and are implemented in practice.
Establish a dedicated energy efficiency entity to co-ordinate and improve the enforcement of energy efficiency regulations. This institution should be endowed with sufficient financial and human resources and the mandate to lead and co-ordinate the country’s energy efficiency policy but also to monitor and enforce the implementation of existing regulation.
Leverage responsible business conduct (RBC) to promote environment- and climate friendly business practices (see also Chapter on RBC). To encourage the uptake of green business practices, the government can set out RBC-related expectations in investment and other policy areas, raise awareness and support businesses to apply RBC due diligence to address adverse impacts on environment, climate and biodiversity.
Improve the enabling conditions and framework for attracting green investment. This includes building the professional capabilities and skills in demand by green investors. Policies to promote more low-carbon and environment-related innovation and stronger intellectual property protection could also enable more green investment.
Create the framework conditions for attracting investment in green hydrogen. This requires defining a strategic vision and clear policy framework for green hydrogen. It also involves removing barriers to and facilitating investment into green hydrogen, reducing costs and risks for early investors and creating a business case for green hydrogen.
8.2.1. Uzbekistan’s strong reliance on fossil fuels and high energy intensity result in high carbon emissions
Uzbekistan’s total energy supply (TES) and electricity generation are dominated by natural gas, the main energy source in all sectors. Natural gas accounted for 85.9% of Uzbekistan’s TES in 2021, with the remainder being made up largely of oil (7.9%) and coal (5.3%) (Figure 8.1, Panel A). Likewise, natural gas represented 88% of electricity generation in 2021 while hydropower accounted for another 7% and oil and coal for the reminder (Figure 8.1, Panel B). The country is a large natural gas producer (the 15th largest worldwide in 2020) but relies increasingly on natural gas imports to meet domestic demand (Eurasianet, 2024[1]). Uzbekistan is also an oil producer but not self-sufficient for its oil supply and since 2018 a net oil importer. At the current rate of production, Uzbekistan’s natural gas reserves are predicted to be depleted in 18 years and its oil reserves in 35 years (IEA, 2022[2]).
Source: OECD based on (IEA, 2024[3])
Uzbekistan has succeeded in decoupling GDP growth from carbon emissions and energy consumption. CO2 emissions per capita have declined by more than 40% since 1990 whereas real GDP per capita has more than doubled over the same period (Figure 8.2, Panel C). As a result, carbon intensity of GDP (CO2 emissions per unit of GDP) has decreased by more than 70% since 1990 and almost 50% over the last decade (Figure 8.2, Panel A). This trend can be largely attributed to improvements in energy efficiency: Since 1990, Uzbekistan has reduced its economy’s average energy intensity by more than 70% and by more than 40% since 2011 (Figure 8.2, Panel B) thanks to energy efficiency improvements in the power, transport, industrial, residential and agricultural sectors (IEA, 2022[2]).
Note: Panels A and B: Kyrgyz Republic 2020 instead of 2021.
Source: Panels A and B: (IEA, 2024[3]) ;Panel C: CO2 emissions per capita: (IEA, 2024[3]); GDP per capita: (World Bank, 2024[4]).
Despite the impressive decreases in carbon and energy intensities, Uzbekistan remains one of the most carbon and energy intensive countries in the world. CO2 emissions per unit of GDP are higher than in most comparators, more than twice as high as in the OECD and 36% above the world average. This can be attributed to the country’s high energy intensity and the prevalence of fossil fuels in its energy mix (IEA, 2022[2]). To produce one unit of real GDP at purchasing power parity (PPP) Uzbekistan still uses almost twice as much energy as the OECD on average and more energy than most comparators in the region and elsewhere. Factors such as an old power generation infrastructure, a low technological base, a lack of investments, inefficiencies and high energy subsidies all contribute to the country’s high energy intensity (OECD, 2019[5]; IEA, 2022[2]). In contrast, CO2 emissions per capita are moderate in Uzbekistan compared to other countries, owning to its moderate level of GDP per capita, and its total CO2 emissions account for only a 0.33% of global emissions (MOEF, 2023[6]).
Uzbekistan’s energy sector accounts for the bulk of greenhouse gas (GHG) emissions. The sector’s GHG intensity has significantly declined thanks to a switch from oil to gas, power plant modernisation, the elimination of methane leaks in pipelines and the modernisation of natural gas production and transport infrastructure. Nevertheless, in 2017, the year of the latest available GHG inventory, it was the source of 76.3% of total GHG emissions (UNEP, 2021[7]). In 2021, the sector generated 39.1% of Uzbekistan’s CO2 emissions (IEA, 2024[8]). The sector is also the main source of methane emissions owning to fugitive emissions from natural gas leaks because of corroded pipelines and outdated valves and other equipment (IEA, 2022[2]). The energy sector’s large amount of GHG emissions can be attributed to Uzbekistan’s exclusive reliance on fossil fuels for its energy supply (IEA, 2022[2]).
Agriculture accounts for the second-largest share of GHG emissions (17.8%) and is highly energy-intensive. The sector’s direct GHG emissions are mainly methane emissions, driven by livestock breeding and the use of nitrogen fertiliser (IEA, 2022[2]). While the direct contribution to CO2 emissions is negligible (0.7% in 2021), the sector contributes indirectly through a high level of electricity consumption (16% of total consumption). This is significantly more than in most comparators, except Tajikistan (32%), the OECD (1.9%) and the Central Asian region (9.9%). The sector’s high electricity consumption is driven by the use of electricity to power irrigation and drainage pumping stations, which are often old and outdated and consume high amounts of energy (World Bank, 2016[9]; World Bank, 2022[10]; IEA, 2024[8]).
8.2.2. Uzbekistan faces significant environmental and climate change challenges
Despite a decreasing trend since 2011, air pollution remains high, driven by increasing desertification and has a significant health impact. Dust or fine particulate matter of less than 2.5 microns of diameter (PM2.5) air pollution has decreased by approximately 25% in Uzbekistan since 2011. In 2019, however, Uzbekistan was still the country worldwide with the 21st highest level of PM2.5 air pollution (WHO, 2024[11]) and air pollution has been consistently above the maximum level of 35 ug/m3, which is recommended by the WHO, over the last decade (WHO, 2021[12]). Levels of other pollutants in the air are also significant. Most air pollution is attributable to dust blown up from the dry bed of the Aral Sea, which can contain salt, pesticides and heavy metals (MOEF, 2023[6]; UNECE, 2020[13]). Driven by mass irrigation for cotton production, since 1960, water volumes in the Aral Sea have decreased by over 90% (OECD, 2023[14]; UNECE, 2020[13]; UNCCD, 2024[15]). In addition, vehicle use causes a large share of air pollution in Tashkent (MOEF, 2023[6]; UNECE, 2020[13]). The death rate attributable to ambient air pollution in Uzbekistan is the fourth highest in the world (WHO, 2024[11]).
There is scope to improve solid waste management and sewerage system. Although municipal solid waste, which is collected and discharged in urban areas, has increased significantly from 22.8% in 2017 to 48.7% in 2020 and solid waste treatment and recycling from 9% of solid waste generated to 21.9% over this same period, these rates remain low (State Committee of the Republic of Uzbekistan on Statistics, 2023[16]). Likewise, in 2020, only 37% of houses and apartments were connected to a sewerage system. Further, there are significant regional disparities in terms of waste management and sewerage: while close to 100% of houses and apartments in Tashkent are connected to sewerage systems, this is the case for less than 50% of houses and apartments in other parts of the country with the autonomous region of Karakalpakstan having the lowest rate of sewerage access (only 11.4% of houses and apartments) (2020) (State Committee of the Republic of Uzbekistan on Statistics, 2023[16]).
Climate change is predicted to affect Uzbekistan through higher temperatures, increased risk of droughts and lower agricultural yields. Between 2013 and 2022, annual temperatures were 1.6°C higher on average in Uzbekistan than between 1951 and 1980, compared to a world average increase of 1.4°C over the same time period (IMF, 2024[17]). At the same time, the frequency of droughts has increased in Uzbekistan, with one drought every five years on average during the 1980s and 1990s but four droughts between 2000 and 2012. By 2090, Uzbekistan could experience as many droughts and heatwaves as nine in every ten years (World Bank/ADB, 2021[18]; UNECE, 2020[13]). Temperature rises, more frequent droughts, water shortages, soil erosion, salinisation and desertification are predicted to reduce the yields of Uzbekistan’s main crops by 25-63% by the 2050s relative to 2000-2009 production levels (World Bank/ADB, 2021[18]; UNECE, 2020[13]). Higher temperatures could also raise demand for electricity for cooling in summer and for irrigation in the agricultural sector (World Bank, 2016[9]).
Climate change is expected to exacerbate Uzbekistan’s severe water stress. Uzbekistan is one of the most water-stressed countries in the world. This can be attributed to the country’s low renewable freshwater resources per capita, which amount to only 13.1% of average resources in the region and 5.1% of average resources in the OECD. Furthermore, while water productivity (output per m3 of water) has tripled over the last two decades, it remains the seventh lowest in the world (World Bank, 2024[4]). This is driven by water-intensive agricultural production, especially cotton and wheat, which both require large amounts of water, combined with inefficient irrigation practices and outdated irrigation infrastructure: Uzbekistan’s agricultural sector uses over 90% of freshwater withdrawals but nearly 40% of this water is lost (MOEF, 2023[6]; World Bank, 2016[9]; OECD, 2019[5]). Higher temperatures, an increase in irrigation needs and more rapid melting of glaciers in neighbouring countries due to climate change could further intensify existing water shortages (World Bank/ADB, 2021[18]).
8.3.1. Investment in renewables has increased impressively since 2020
Uzbekistan is endowed with significant renewable energy resources. The solar and wind power potentials are each estimated at several times the entire primary energy supply (IEA, 2022[2]; IEA, 2022[19]). Solar irradiation is on par with countries such as Greece, Singapore, Portugal or Spain and higher than in Italy or China (World Bank, 2024[20]). Likewise, Uzbekistan has high average wind speeds, which are comparable with offshore wind, in parts of the autonomous region of Karakalpakstan. Large territories suitable for solar power plants are available, especially in sparsely populated areas, which are not currently used for agriculture. Large-scale agriculture and animal farming, in turn, offer considerable opportunities for bioenergy, for example, through the use of cotton stems and other residues from crop production. Further opportunities exist in hydropower but are limited by irrigation needs and worsening water stress as a result of climate change (IEA, 2022[2]). Uzbekistan’s large renewable potential could allow the country to become an exporter of renewables to the region and hub for green hydrogen production (IEA, 2022[2]).
Despite the country’s significant renewable energy potential, the share of renewables in Uzbekistan’s energy mix remains small. Total installed renewable capacity in Uzbekistan amounted to 13.8% of total installed capacity for electricity generation in 2022, less than in most comparators and less than one third of the Central Asian average (Figure 8.3). Hydropower accounts for the bulk of installed renewable electricity capacity (12.3% of total installed capacity for electricity generation) while solar and wind power remain negligible. The country has two operational utility-scale solar plants, Nur Navoi Solar Plant (operational since 2021) (Masdar, 2024[21]; World Bank, 2020[22]; International Energy Charter, 2022[23]) and Tutly solar plant (operational since 2022) (Total Energies, 2024[24]), and one operational pilot wind power plant in the Tashkent region (International Energy Charter, 2022[23]). Additional solar and wind power plants are already producing electricity, which is fed into the grid, but have not yet fulfilled all legal requirements to be fully operational. While cotton residues are widely used for heating and cooking by Uzbekistan’s population, reliable estimates of the contribution of biomass to the country’s TES do not exist (IEA, 2022[2]). According to the government, by January 2025, the country has achieved progress in expanding its renewable energy sector. 11 solar power plants, with a combined capacity of 2,567 MW, and 3 wind power plants, totalling 900 MW, have been commissioned. This development underscores Uzbekistan's commitment to advancing sustainable energy and diversifying its energy mix.
Installed renewable electricity capacity by source (% of total), 2022
Source: OECD based on (IRENA, 2024[25])
With the support of international financial institutions (IFIs), Uzbekistan is in the process of expanding capacity for electricity generation from renewables based on foreign investment in the form of PPPs. According to the government, the country plans to install 21 GW of renewable energy by 2030 to achieve a 54% share of renewables in electricity supply and is on track to achieve this target: currently 2,567 MW of solar and 900 MW of wind capacity (16% of total installed generating capacity in 2024) are in the development stages by foreign investors. Approximately 50% of these solar and wind plants are already connected to the grid and producing electricity but from a legal perspective not fully operational and therefore not counted towards installed renewable capacity yet. Tenders for these projects were awarded to investors as PPPs based on state-guaranteed purchase power agreements (design, financing, construction and operation model, in most cases for 25 years) and many projects have benefited from guarantees and financing by IFIs. Approximately, 50% of this capacity was awarded to investors in 2023 (Figure 8.4, Panel A). Many of the solar projects are in the southern and south-western regions of Uzbekistan, where global horizontal irradiation is highest and the prices achieved are at competitive levels (IEA, 2022[2]). In addition, several additional small hydropower plants are in development and planning (International Energy Charter, 2022[23]).
Since 2023, Uzbekistan has started attracting foreign investment in electricity storage through tenders awarded to international investors. As of July 2024, electricity storage systems of a total capacity equivalent to at least 13.1% of total installed capacity for electricity generation (2 340 MW) are in the development and planning stages. Many of these storage systems were awarded in tenders and are developed jointly with large solar PV or wind power plants as PPPs. Since January 2024, it is mandatory for investors to integrate electrical energy storage systems of at least 25% of installed capacity in new solar and wind power plants with a capacity of more than one MW (President of the Republic of Uzbekistan, 2022[26]). Investment in storage capacity is critical to render Uzbekistan’s power system more flexible, thereby allowing the integration of variable renewable energies.
Source: Authors’ elaboration based on (Republic of Uzbekistan, 2024[27]).
Greenfield FDI in renewable energies and in coal, oil and gas (% of total)
Source: OECD based on (Financial Times, 2024[28])
Driven by international tenders, FDI in renewables in Uzbekistan has expanded remarkably over the last five years and significantly exceeds FDI in fossil fuels. Tenders for solar and wind power plants and electricity storage awarded between 2020 and July 2024 amounted to a total of USD 11.6 billion whereas tenders for only USD 3.3 billion were awarded for natural gas-fired power plants (Figure 8.4, Panel B) (Republic of Uzbekistan, 2024[27]). Greenfield FDI in renewables increased from USD 1.4 billion (9.1% of total and only one seventh of investment in fossil fuels) between 2014 and 2018 to USD 11.7 billion between 2019 and 2023 (50.1% of total greenfield FDI), almost three times as much as greenfield FDI in fossil fuels. This is in line with or higher than in most comparators and an almost twice as much as in the Central Asian region on average but lower than in top performers such as Jordan or Egypt (Figure 8.5) (Financial Times, 2024[28]). In addition to investment in renewable power generation, Uzbekistan has also received several investment projects in solar PV panel and solar heater manufacturing. The first automated solar PV panel production plant opened, for example, in 2024 in the city of Nukus as a Chinese-Uzbek joint venture (SC Solar, 2024[29]; SC Solar, 2024[30]; Daryo, 2024[31]).
First-mover advantages, economies of scale and access to affordable financing can explain the dominance of three large investors in Uzbekistan’s solar, wind and storage markets. The UAE based company Masdar, the Saudi company ACWA Power and the Chinese Gezhouba Group account for 77% of installed utility-scale solar and wind capacity and utility-scale solar and wind capacity in development and planning and 100% of utility-scale electricity storage capacity in development and planning. These companies’ dominant positions in Uzbekistan can be attributed to economies of scale, allowing them to offer lower prices as well as their access to financing at preferential conditions in their countries of origin. Further, they have a competitive advantage since they arrived first in Uzbekistan and know the market, laws and regulations and how to navigate regulatory and other constraints.
8.3.2. Investment in fossil fuels is declining but remains significant
While variable renewable capacity is expanding rapidly, Uzbekistan still targets significant new investments in fossil fuels. The Electricity Supply Security Concept 2020-2030 envisages the construction of six thermal power plants (TPPs) and the refurbishment, modernisation and expansion of six operating TPPs. Uzbekistan also plans to increase petrochemicals production and to conclude new upstream exploration deals with foreign companies and foreign investment in new and existing hydrocarbon wells and facilities in the context of a USD 3 billion Hydrocarbon Programme by the state-owned natural gas company Uzbekneftegaz (IEA, 2022[2]). Since 2020, tenders for natural gas-based electricity generation projects equivalent to 37.6-38.2% of total installed capacity for electricity generation (6 737 – 6 837 MW ) have been awarded to private investors, mostly as PPPs (design, financing, construction and operation model, in most cases for 25 years). More than 40% of this capacity has already started operations while the remainder is in the development and planning stages.
FDI in fossil fuels in Uzbekistan is decreasing and changing in composition but remains significant. Greenfield FDI in coal, oil and gas in Uzbekistan decreased by almost 50% from USD 9.2 billion (60.3% of greenfield FDI) between 2014 and 2018 to USD 4.7 billion (20.1% of greenfield FDI) between 2019 and 2023. Despite this decline, Uzbekistan remains one of the countries with the largest shares of greenfield FDI flowing into fossil fuels among comparators (Figure 8.10). While greenfield FDI prior to 2018 was largely directed towards natural-gas based petrochemical production and hydrocarbon exploration, greenfield FDI in coal, oil and gas in Uzbekistan since 2018 reflects mainly the construction of new, modern and flexible natural-gas fired power plants (Financial Times, 2024[28]). These plants can replace old, polluting plants and facilitate investment in renewables by serving as flexible baseload capacity to balance their highly variable electricity generation. Uzbekistan’s own natural gas supply is decreasing, however, and the country relies increasingly on more expensive natural gas imports (Eurasianet, 2024[1]). Furthermore, Uzbekistan has not yet phased out many of the outdated and polluting older plants.
8.3.3. The energy-intensive industrial sector is an important investment recipient
While FDI in Uzbekistan’s energy sector is increasingly shifting towards renewables, energy- intensive manufacturing industries continue to receive significant amounts of investment. Between 2019 and 2023, energy-intensive manufacturing of minerals, metals and chemicals received 19.5% of FDI inflows in fixed assets and the mining sector 14.7% (Figure 8.6). Likewise, between 2019 and 2023, the industrial sector received approximately 19.4% of greenfield FDI, roughly half of which was in chemicals, building materials, metals and minerals. The energy- and water-intensive agricultural sector, which contributes to carbon emissions through its high electricity consumption and is the main reason for the high level of water stress, received 6.1% of FDI in fixed assets between 2019 and 2023.
Source: Panel A: Consultations with the government on the RSIPR; Panel B: (Financial Times, 2024[28])
Uzbekistan hosts large chemicals, building materials and metallurgical industries. The metallurgical industry constituted 23.5% of manufacturing production in 2022, chemicals 13.6% and non-metallic minerals, largely building materials, 4.9%. Uzbekistan is one of the biggest cement manufacturers in Central Asia with nine large cement production facilities and plans to double the annual volume of cement production (OECD, 2019[5]; President of the Republic of Uzbekistan, 2019[32]). New large manufacturing projects, which were either recently completed or are planned in the petrochemicals and metals sectors with foreign contributions, include the Surgil Petrochemical and Natural Gas Complex, a USD 4 billion project financed jointly by Uzbekneftegaz, Lotte Chemical Corporation, Korea Gas Corporation and STX and the Tashkent Metallurgical Plant. In addition, several cement plants have either been recently completed or are planned (OECD, 2019[5]).
Cement, chemicals and metals account for the bulk of the industrial sector’s GHG emissions and energy consumption. In 2017, industrial processes and product use accounted for 4.7% of total GHG emissions and in 2021, industry emitted 11.2% of Uzbekistan’s carbon emissions. The cement industry (37%), the chemical industry (42.7%), largely through the production of ammonia (28%), and the metal industry (12.3%) account for the largest shares of the industrial sector’s CO2 emissions (2017). Nitric acid is the source of the sector’s nitrous oxide emissions (UNEP, 2021[7]; UNECE, 2020[13]). In addition to the sector’s direct contribution to GHG emissions, it also accounts for 36.4% of electricity consumption (2021), making it an important indirect contributor to GHG emissions through Uzbekistan’s fossil fuel-intensive power sector. Chemicals and petrochemicals (25% of the industrial sector’s total energy consumption), iron and steel (24%) and non-metallic minerals (21%), especially construction material manufacturing such as cement, account for the largest shares of the industrial sector’s energy consumption (IEA, 2022[2]). These industries are not only energy-intensive but rely also on old and energy-inefficient technologies (OECD, 2019[5]). Increasing energy efficiency and using increasingly energy from renewable sources and hydrogen in these industries constitutes an opportunity to make them less polluting.
8.3.4. Little FDI flows into environmental technologies other than renewables
Uzbekistan attracts only few greenfield FDI projects in environmental technologies other than renewables. In line with most comparators, only 0.2% of greenfield FDI in Uzbekistan targeted environmental technologies other than renewables between 2014 and 2023 (Figure 8.7). Existing projects include renewable equipment manufacturing and water and wastewater management. Since 2003, Uzbekistan has not attracted any greenfield FDI in environmental R&D (Financial Times, 2024[28]).
Greenfield FDI in renewables and other environmental technologies (% of total greenfield FDI), 2014-2023
Source: (Financial Times, 2024[28])
Uzbekistan is gradually attracting investment in water pumping stations for agricultural production and in wastewater treatment through PPPs. In 2021, the UAE-based company Metito was awarded the first wastewater treatment plant PPP in Namangan region through a competitive tendering process supported by the ADB. Metito is investing USD 100 million in this plant while benefiting from a USD 60 million loan from the EBRD (Metito, 2021[33]; EBRD, 2021[34]). Additional water and sanitation PPP projects are in development. Likewise, in 2023-24, the Ministry of Water Resources announced more than 100 tenders for the transfer of some of the country’s obsolete pumping stations to private companies for management and modernisation in different parts of the country (MOEF, 2024[35]). However, this remains only a small share of Uzbekistan’s 1 687 pumping stations, which are largely outdated and highly energy-intensive (World Bank, 2022[10]; President of the Republic of Uzbekistan, 2021[36]).
Uzbekistan has also received investments in electric and hybrid vehicle production. According to the government, electric vehicles imports in Uzbekistan, largely from China, increased from approximately 2 180 in 2022 to more than 16 000 in 2023 (ATO, 2023[37]). This is the result of the lower cost of electric vehicles as compared to traditional vehicles owning to import tax exemptions and the high cost of traditional fuels. Charging stations for electric vehicles are already easily accessible in wide parts of the country and the government has recently made the construction of charging stations mandatory at strategic locations and is providing subsidies for solar panel-based charging stations (President of the Republic of Uzbekistan, 2023[38]). In line with these trends, an electric and hybrid vehicle manufacturing plant – a joint venture between a Chinese electric and hybrid vehicle manufacturer and an Uzbek car manufacturer – opened in Jizzar region in 2024 and another plant is in development by a Chinese company in Fergana region (Zhazetova, 2024[39]; Interfax, 2024[40]; Daryo, 2024[41]; BNE Intellinews, 2024[42]; BYD, 2023[43]; BYD, 2023[44]; BYD, 2022[45]). However, driven by concerns over the quality of imported electric vehicles, Uzbekistan is in the process of imposing new import restrictions on electric vehicles that could stifle competition, demand and investment in the market and create monopolies (Donaev, 2024[46]; Janturaev, 2024[47]). Furthermore, challenges may arise with the recycling or disposal of battery cells. As the number of manufacturers and imports of electric cars in Uzbekistan increases, the need for recycling or disposal of batteries increases. Therefore, it is necessary to attract private investment for recycling or disposal of batteries in Uzbekistan, relying on advanced technologies and foreign experience.
Expanding FDI in environmental technologies such as water and waste management, wastewater treatment, clean air technologies or electric vehicles can help address Uzbekistan’s environmental challenges. Uzbekistan faces significant environmental challenges in areas other than the energy sector such as water management and use, waste management, wastewater treatment and air pollution from transport, industry and the residential sector. Tackling these challenges requires substantial financial resources and investment in different environmental technologies. While Uzbekistan is starting to gradually attract some private investment in these areas, investment could be significantly expanded. Batteries constitute a yet unexploited investment opportunity as the country has reserves of all critical minerals required for the production of batteries, including lithium and copper, and they could serve as inputs for electric vehicle production. There are also opportunities for electrifying road passenger and freight transport in Uzbekistan, which is largely provided by private companies.
8.3.5. Foreign firms’ performance in green business practices varies
If foreign firms outperform domestic firms in green business practices, there is scope for green technology and knowledge spillovers. In many cases, multinational firms tend to have access to innovative technologies and operating procedures, which make them strong performers in environmental and climate friendly business practices. Technology and knowledge spillovers from foreign to domestic firms can occur through linkages with local suppliers and buyers, ranging from increased compliance with environmental regulations to innovations in energy use and industrial processes. Such spillovers are more likely to occur in manufacturing industries and services sectors, as the opportunities for local linkages are greater than in the energy, building and transport sectors. Local partnerships, strategic alliances and joint ventures, competition between foreign and domestic firms, the movement of workers between them and corporate spin-offs originating from foreign MNEs are other important transmission channels for green business practices. However, spillovers can also be negative if, for example, foreign investors are attracted by weaker environmental regulation (the so-called “pollution haven hypothesis”) (OECD, 2022[48]).
In Uzbekistan, few firms integrate environmental and climate issues into their strategy and human resource allocation. Even though foreign firms are more likely to appoint a manager responsible for environmental and climate issues in Uzbekistan, overall, few firms – whether foreign or domestic – report either employing such a manager or mentioning such issues in their strategic objectives (Figure 8.1, Panels A and B). Foreign firms’ somewhat greater likelihood of employing an environmental manager could be attributed to their larger average size: they report 3.5 times as high sales than domestic firms and have 34% more employees on average.
Note: Data for Armenia covers 2020.
Source: OECD FDI Qualities Indicators based on (World Bank, 2024[49])
Both foreign and domestic firms in Uzbekistan perform strongly in energy efficiency measures. 53% of domestic firms and 56% of foreign firms report implementing energy efficiency measures while 71% of domestic firms and 80% of foreign firms report monitoring their energy consumption (Figure 8.8, Panel D). The low foreign premia in energy efficiency measures could be attributed to domestic firms’ very strong performance in this area. Domestic firms are twice as likely as foreign firms to set targets for energy consumption (Figure 8.8, Panel C). This, in turn, could be explained by the government’s measures for energy efficiency in the industrial sector targeting domestic companies, including mandatory energy audits for energy-intensive industries and mandatory energy management systems for companies with public funding.
Foreign firms in Uzbekistan significantly outperform domestic firms in the use of renewable energy sources and waste management, creating opportunities for spillovers. The share of foreign firms using energy from renewable sources in Uzbekistan is almost twice the share of domestic firms (Figure 8.8, Panel E). In terms of waste management, 41% of foreign firms report implementing measures to minimise waste compared to only 24% of domestic firms (Figure 8.8, Panel F). This could be attributed to Uzbekistan’s moderate overall performance in waste management and limited awareness of the general public and the business community of waste and renewables. This opens up opportunities for renewable energy and waste management technology and knowledge transfers from foreign to domestic firms through market interactions, competition and mobility of workers (OECD, 2022[48]).
Uzbekistan’s policy framework can support the attraction of more investment in green sectors and better business practices by firms. A policy framework for green investment is in many respects comparable to an enabling environment that is conducive to investment in general. In addition, policy makers will also need to improve specific enabling conditions for low-carbon and environmentally friendly investment by developing targeted policies and regulations (OECD, 2022[48]). A policy framework for green investment includes a clear strategic and institutional framework, the design and enforcement of environmental regulations in line with international best practices, well-designed green tax incentives, policies to generate sufficient green skills, a sound enabling environment for green innovation and a strong framework for green responsible business conduct. Attracting investment in renewable energies specifically requires the creation of the right enabling conditions for the integration of intermittent renewables in the electricity mix and a strong regulatory framework for public private partnerships.
8.4.1. Institutional framework for green investment
Uzbekistan’s institutional setting for policies at the intersection of investment and climate, energy and environment is complex, involving many institutions (Figure 8.9). Institutions dealing with energy, climate and green growth issues such as the Ministry of Energy (MoE), the Green Economy Transition Council or the Climate Change Council have been established relatively recently owning to the country’s new strategic orientation towards environmental sustainability and green growth since 2019. It may therefore take some time for the impact of these new institutions to fully materialise.
Several fora for the co-ordination of green policies exist, but co-ordination could be further enhanced. Existing fora include the Green Economy Transition Council and the newly established Climate Council. However, despite these channels for dialogue and inter-ministerial co-ordination, a disconnect exists between ambitious green growth targets and policies, including for green investment, and plans to further expand highly polluting sectors such as petrochemicals and cement production.
The following institutions are most involved in policies at the intersection of investment and green growth:
Ministry of Energy (MoE): The MoE, established in 2019, is responsible for energy policymaking. Its responsibilities encompass the preparation and implementation of energy sector regulation, energy policies, plans and programmes in the power, renewable energy, and oil and gas industries in co-ordination with its affiliated institutions to ensure energy security. The MoE centrally manages, supervises and regulates the state-owned electricity generators JSC Thermal Power plants, JSC UzbekHydroEnergy and “Central Asia Energy” LTD, the state-owned transmission system operator JSC National Electricity Grid of Uzbekistan, the state-owned distribution system operator JSC Regional Power Grids and the power market operator Uzenergosotish. The Ministry is also tasked with investment promotion in the energy sector (see Chapter on Investment Promotion) (MOEF, 2019[50]; IEA, 2022[2]).
Ministry of Ecology, Environmental Protection and Climate Change: The Ministry is responsible for ecology and environmental protection matters, natural resource management and household waste management. The Ministry is also in charge of environmental education, and training specialists in the areas of ecology and environmental protection. It is the entity responsible for conducting EIAs, so-called state ecological expertise (SEEs) and issuing permits for maximum allowable concentrations of pollutants (Ministry of Ecology, Environmental Protection and Climate Change of the Republic of Uzbekistan, 2024[51]).
Ministry of Investment, Industry and Trade (MIIT): The MIIT is responsible for implementing investment and trade policies and for managing SEZs. Uzbekistan’s Investment Promotion Agency (IPA) is part of the MIIT. While the MoE is the main entity in charge of promoting investment in the energy sector, the MIIT’s Department on Investment Generation and Project Development, which signs contracts for and manages foreign investment projects of a minimum of USD 10 million, is involved in the contractual arrangements and management of large energy sector foreign investment projects. The Department has a specific unit dedicated to energy sector projects.
Ministry of Economy and Finance: The Ministry is leading the implementation of the Green Economy Strategy 2019-2030 and oversees public-private partnerships (PPPs). The PPP Development and State Reduction Functions Department (PPP Department) manages PPP. The Fiscal Risk Assessment and Management Department (Fiscal Risk Department) manages and assesses PPPs’ fiscal risks. The Green Economy Department is responsible for co-ordinating, monitoring and reporting on the implementation of the Green Economy Strategy — adopted in 2019 – and serves as a Secretariat to the Interdepartmental Council for co-ordinating measures for the transition of the Republic of Uzbekistan to a “green” economy (IEA, 2022[2]; MOEF, 2019[50]). The ministry’s leading role in the implementation of the Green Economy Strategy allows for more easily mainstreaming green growth considerations into public finances as recommended by the Coalition of Finance Ministers for Climate Action (The Coalition of Finance Ministers for Climate Action, 2023[52]). The Ministry also serves as an executive body for the Interdepartmental Commission on Tariff Setting, which determines energy tariffs (IEA, 2022[2]; MOEF, 2019[50]).
National Scientific Research Institute of Renewable Energy Sources (Renewable Energy Research Institute): The institute is in charge of testing renewable equipment, providing information on renewable resources in Uzbekistan and offering training on renewables and other clean technologies. It also offers training courses to government officials and private companies on topics such as solar PV system installation or energy efficiency in buildings and develops maps of Uzbekistan’s solar and wind potential. It was created in 2022 as a merger of several existing renewable energy and hydrogen research institutions and laboratories (Republic of Uzbekistan, 2022[53]).
Agency for Development and Regulation of the Energy Market: The agency is Uzbekistan’s energy market regulator. It was created in early 2024 and reports to the Cabinet of Ministers. Its main tasks are to ensure the phased organisation of the wholesale and retail electricity markets, as well as to support competition in the market, ensure the attractiveness of the market and balance supply and demand.
Interdepartmental Council for co-ordinating measures for the transition of the Republic of Uzbekistan to a “green” economy (Green Economy Transition Council): The Council was created in 2022 in order to co-ordinate, monitor and oversee the implementation of the Green Economy Transition Strategy 2019-2030. The Council is chaired by the Minister of Economy and Finance and meets and reports on the implementation of the strategy on a quarterly basis four times a year. The Minister of Ecology, Environmental Protection and Climate Change has the role of deputy chairman. Other members of the Council include the Ministers of Energy, Agriculture, Water Resources, Transport, Digital Technologies, Construction and Housing and Communal Services, Emergency Situations, the Deputy Ministers of Economy and Finance and Higher Education, Science and Innovation and the Directors of the Statistics Agency and of Uzhydromet (President of the Republic of Uzbekistan, 2022[26]). Going forward, it would be highly beneficial to include the MIIT into the council to allow for better co-ordination between ministries on green investment policies.
Source: OECD’s elaboration.
Climate Change Council: The Climate Change Council under the President was established in July 2024 as the highest advisory body on climate change mitigation and adaptation. The council meets three times a year and is chaired by the President. Members include a wide range of national and subnational stakeholders including scientists and local activists.3 The council’s main tasks are the development of a national strategy on climate change mitigation and adaptation and improving legislation and co-ordinating the work of government institutions in these areas. Tasks also involve monitoring the implementation of national commitments to the UNFCCC and the Paris Agreement and identifying sources of financing for climate change mitigation and adaptation, including private investment. The National Centre for Climate Change under the Ministry of Ecology, Environmental Protection and Climate Change serves as the secretariat of the Council.
8.4.2. Strategic and legal framework for green investment
The Green Economy Transition Strategy 2019-2030, adopted in 2019, is Uzbekistan’s framework document for green growth. It aims at achieving long-term sustainable economic development and meeting Uzbekistan’s pledge under the Paris Agreement. The Strategy sets out nine goals targeting increased energy efficiency, 25% of renewables in electricity generation and a reduction in GHG emissions by 2030 (President of the Republic of Uzbekistan, 2019[32]). In 2024, Uzbekistan raised its renewable energy target to 40% of installed capacity for electricity by 2030 (Enerdata, 2024[54]; Ismailov, 2024[55]; Daryo, 2024[56]). In 2022, the strategy was complemented with a programme of measures and objectives and a detailed action plan (President of the Republic of Uzbekistan, 2022[26]).
Supporting green investments features among the strategy’s priorities. Specifically, the strategy aims at promoting private investment in green projects and green venture capital and at providing fiscal and other financial incentives for more green investment. The strategy also targets 20% higher energy efficiency in industrial enterprises by 2030 through the modernisation of the energy- and emissions-intensive industries, including chemicals, building materials and oil and gas production. The strategy seeks to introduce energy management systems and conduct energy audits in energy-intensive companies (President of the Republic of Uzbekistan, 2019[32]; IEA, 2022[2]).
Even though Uzbekistan has strengthened its GHG reduction ambitions in 2021, they are still not aligned with the Paris agreement. Its updated NDC to the Paris agreement aims at reducing GHG emissions per unit of GDP by 35% by 2030 compared to 2010 levels, significantly more ambitious than its first NDC, submitted in 2018, which aimed at decreasing GHG emissions by 10% per unit of GDP compared to 2010 levels. This was already achieved in 2013. However, Uzbekistan’s updated NDC still targets emissions per unit of GDP rather than an absolute amount of GHG emissions and the country does not yet have a net zero target for any future date. To meet the emissions reductions target, the NDC aims to increase solar and wind generation capacity to 8GW by 2026 and 25% of power generation or 12 GW by 2030. It also seeks to introduce more energy-saving, clean and environmentally safe technologies in industry and construction, agriculture, gas production and the energy sector to achieve a 20% increase in industrial enterprises’ energy efficiency. Targets and measures in the NDC are aligned with the Green Economy Transition Strategy (Republic of Uzbekistan, 2021[58]; IEA, 2022[2]).
Uzbekistan’s national development plan, the Development Strategy of New Uzbekistan 2022-2026, includes a range of measures, which could facilitate more green investment. This includes increasing the energy efficiency of the economy by 20%, reducing emissions and increasing the share of renewables to 25% by 2026, expanding renewables throughout the economy, reducing losses in industrial sectors and incentivising the production and use of electric vehicles. The strategy further covers critical energy sector reforms such as the liberalisation of electricity and natural gas markets and the better integration of the electricity grid with neighbouring countries’ energy infrastructure. Other objectives are linked to the modernisation of the agricultural sector’s irrigation infrastructure, electrification of public transport infrastructure, the reduction of environmental pollution and measures to improve waste management and wastewater treatment. The strategy intends expanding PPPs, particularly in water infrastructure and wastewater treatment (President of the Republic of Uzbekistan, 2022[59]; Development Strategy Center, 2022[60]).
However, the Development Strategy of New Uzbekistan 2022-2026 also seeks to expand energy-intensive and polluting industries. It aims at doubling the production of copper and of construction materials and at increasing the production of chemicals and gas-chemicals through an increase in natural gas processing. Metals, construction materials such as cement, chemicals and mining are the most energy- and carbon-intensive industries in Uzbekistan. The strategy also seeks to expand Uzbekistan’s mineral resource base and the production of hydrocarbon raw materials based on local and foreign investors in geological prospecting and mining in new areas (President of the Republic of Uzbekistan, 2022[59]; Development Strategy Center, 2022[60]). While copper is a critical mineral required for the production of many clean energy technologies, Uzbekistan could consider revising the production targets for the remaining energy- and pollution-intensive sectors.
Uzbekistan’s national strategies, which provide the overall framework for green growth and investment, are complemented with strategic documents for specific sectors and green policy areas and a comprehensive legal framework (Table 8.1 and Table 8.2). While these strategies and laws provide a comprehensive strategic and legal framework for different areas of green growth and green investment, Uzbekistan could further improve their implementation and application. There is also scope to improve and further prioritise the legal and strategic framework for climate adaptation, including private investment in this critical area, given Uzbekistan vulnerability to climate change (OECD, forthcoming[61]). A draft climate adaptation strategy exists but has not been adopted yet.
8.4.3. Improve the enabling conditions for investment in intermittent renewables through the continuation of structural reforms
Attracting private investment in intermittent renewables and effectively using the electricity generated from existing investment projects requires creating appropriate framework conditions. This includes most importantly rendering Uzbekistan’s power system more flexible and modernising and extending the coverage of the electricity grid. Without sufficient flexible balancing sources and significant improvements of the electricity grid, it could be difficult to distribute the full amount of electricity generated by the new solar and wind power plants, which are currently in development by private investors. Furthermore, a competitive power market is crucial to allow private investors in electricity generation from renewables to enter the market and to compete with other power producers on a level playing field. Gradually phasing out fossil fuel subsidies could free up public financial resources for upgrading grid infrastructure and provide better incentives for private investment in renewable electricity generation by rendering fossil fuels more expensive and renewables more bankable. Finally, making more detailed and reliable data and information on the energy sector and renewable energy potential available could allow private investors to maximise the return of renewable energy investment projects.
Power system flexibility
To integrate more variable solar and wind power into its electricity mix, Uzbekistan requires greater flexibility in its power system.4 Integrating the electricity generated by intermittent renewable energy sources such as solar or wind requires a highly flexible power system. At present, concerns exists over whether the power system is sufficiently flexible to raise the share of variables renewables in the country’s electricity mix to 40% by 2030. The flexibility of hydropower as a balancing source is limited by irrigation needs and expected future water shortages in the context of climate change. The gas-fired power plants are barely sufficient to meet electricity demand. At the same time, many of the coal- and gas-fired power plants are outdated and cannot be quickly switched on and off (IEA, 2022[2]).
To render its power system more flexible, Uzbekistan is constructing flexible gas power plants and modernising existing plants. As of 2022, 27% of Uzbekistan’s largely natural-gas fired TPPs were energy-efficient, modern and flexible plants commissioned between 2012 and 2021 and another 18.% of TPPs had been modernised, but the remaining 55% of TPPs were outdated with low efficiency levels and dating back to the 1970s to 1990s (IEA, 2022[2]). Modern, quickly dispatchable natural gas-fired power plants of a combined capacity equivalent to 21% of Uzbekistan’s installed capacity for electricity generation as of 2024 have started operations since 2020 and additional capacity equivalent to 22% of total installed capacity for electricity generation are in the development and planning stages (Republic of Uzbekistan, 2024[27]). While these plants could render Uzbekistan’s power system more flexible, one caveat remains that their flexibility could be constrained by limitations in the gas network and storage (IEA, 2022[2]). Further, as Uzbekistan is no longer self-sufficient in natural gas but relies increasingly on gas imports, generating electricity from natural gas becomes more expensive (Eurasianet, 2024[1]).
Enhanced co-operation with neighbouring countries constitutes another option to increase power system flexibility. Interconnections and co-operation with neighbouring countries enable electricity trade and can enlarge the area, where energy balancing to address mismatches in demand and supply patterns can be undertaken, beyond national borders. The power system is part of the Central Asia Power Grid with Kazakhstan, Kyrgyzstan, Tajikistan and Turkmenistan. Uzbekistan’s grid is also interconnected with Afghanistan. Going forward, to render its power system more flexible, Uzbekistan could enhance co-operation with these countries. Electricity trade in the region has decreased by more than 90% since the collapse of the Soviet Union (OECD, 2023[14]). Notably, Tajikistan and the Kyrgyz Republic offer opportunities for balancing since both are rich in hydro resources, which can be complementary with solar power. Co-operation could include joint projects, such as the construction of hydropower plants in these countries for balancing purposes as well as improving regional interconnection (IEA, 2022[19]; IEA, 2022[2]).
Uzbekistan has taken steps to enhance co-operation on electricity with neighbouring countries but there is scope for additional reforms to facilitate this process. In 2021, Uzbekistan negotiated the construction of two hydropower plants of a capacity of 140 MW and 135MW respectively on the Zarafshan river in Tajikistan (IEA, 2022[19]; IEA, 2022[2]). Geological exploration and surveys in preparation of the construction of these plants started in 2023. Uzbekistan also entered an agreement with Kazakhstan and Kyrgyzstan for the joint construction of a 1 860 MW hydropower plant on the Naryn River in Kyrgyzstan that will supply the three countries with electricity. The construction of this plan is expected to take 10 years (International Journal of Hydropower and Dams, 2023[62]; Global Flow Control, 2024[63]). Moreover, two new cross-border interconnectors with Afghanistan and Tajikistan are in development (IEA, 2022[19]; IEA, 2022[2]). Uzbekistan’s recent power market reforms, which target the creation of a competitive wholesale market, could facilitate increased cross-border electricity trade and eventually the creation of a single electricity market among neighbouring countries.
Batteries and other types of storage and demand response management could allow Uzbekistan to render its power system more flexible. Uzbekistan has taken initial steps to develop hydrogen, batteries and other grid-integration technologies. As of March 2024, tenders for electricity storage systems of a total capacity of 2 340 MW (approximately 13.1% of Uzbekistan’s total installed capacity for electricity generation), frequently constructed conjointly with utility-scale solar PV or wind power plants, had been awarded to international investors and were in the development and planning stages (Republic of Uzbekistan, 2024[27]). Since January 2024, it is mandatory for investors to integrate electrical energy storage systems of at least 25% of installed capacity in new solar and wind power plants with a capacity of more than one MW (President of the Republic of Uzbekistan, 2022[26]). Uzbekistan has further established an institutional framework for research on hydrogen technologies. Going forward, demand response measures could provide additional flexibility by reducing electricity demand during peak hours through incentives for consumers (IEA, 2022[19]). There is also potential to scale up concentrated solar power systems to serve as baseload through thermal storage.
Electricity grid infrastructure
Integrating a larger share of renewables into Uzbekistan’s electricity system also requires modernising and extending the coverage of the electricity grid. Many of the transmission and distribution lines are outdated and inefficient. This reflects underinvestment in grid infrastructure and significant population growth and results in high technical losses and frequent power outages. Uzbekistan’s network losses amounted to 15.5% in 2020 (transmission losses 2.7%, distribution losses 12.8%) (IEA, 2022[2]). This compares to 6.7% in the OECD (2017) (IEA, 2019[64]). Further, transmission lines are frequently lacking in areas with a high solar and wind potential, which tend to be in the sparsely populated West. Therefore, connecting solar and wind power plants in these areas to the grid often requires additional investments in transmission infrastructure. Without sufficient public investment in grid infrastructure, this lack of transmission lines combined with the deficiencies in existing infrastructure could potentially prevent Uzbekistan from distributing the full amount of electricity generated by the new solar and wind power plants in development to the main centres of consumption.
Uzbekistan has already taken measures to upgrade and modernise its electricity grid. In the Electricity Supply Concept 2020-2030, Uzbekistan plans to develop more than 700 km of transmission lines in the less developed North-Western part of the country by 2025. In 2021, the World Bank approved a project, which aims at rehabilitating, upgrading and expanding 22 high-voltage substations and the construction of a new transmission substation and transmission lines (IEA, 2022[2]; IEA, 2022[19]). Other IFIs such as the ADB are also financing and providing technical support for different grid modernisation projects in the country. Further, the construction of new grid lines is integrated into several recent large utility-scale solar and wind power projects by private investors, which are implemented as PPPs. Going forward, modernising the electricity grid would not only reduce technical losses and facilitate the integration of a larger share of variable renewables but also offers opportunities for introducing digitalisation and automation technologies such as smart meters, digital substations and other new technologies, which can facilitate demand response management (IEA, 2022[2]; IEA, 2022[19]).
Uzbekistan’s recent electricity market reforms could support public investment in electricity grid infrastructure. In the past, transmission tariffs did not reflect the fixed cost of Uzbekistan’s transmission system operator in terms of investments in upgrading and expanding the country’s transmission network. This impaired the transmission system operator’s financial solvency and capacity to access financing to invest in the transmission system infrastructure as well as its ability to provide private investors with the guarantees required to access financing for such investments at affordable terms. According to the government, the functions of the Uzbekistan transmission system operator will be divided into two, with the creation of a single main transmission system operator specialising in the transportation and transit of electricity, as well as an operator of the electricity market, which performs the function of centralised purchase and sale of electricity. This, in turn, could facilitate the gradual introduction of wholesale and retail electricity markets by 2030 and a recent increase in retail electricity tariffs for end consumers, adapting network tariffs to the constant and variable costs of network operators.
Competition in the power sector
Introducing competition in the power sector is crucial for supporting private investment in renewables. Unbundling monopolies in the power sector by separating power generation, transmission and distribution can help create more space for foreign investment in power generation. New entrants can in turn exert competitive pressures towards conventional power generators and spur the wider diffusion of renewable power investments across domestic actors. The decentralised nature and the smaller generation capacity of clean energy projects compared to their fossil fuel counterparts makes independent power production well-suited for mainstreaming clean energy technologies. Competition can be supported through effective regulators as dominant incumbent enterprises may deter independent renewable power producers from entering a market through tender procedures even where structural separation has been implemented. Therefore, countries in which regulators adequately address anticompetitive practices by incumbent utilities, including state-owned enterprises (SOEs), are likely to be more attractive destinations for multinationals seeking investment opportunities in renewable power (OECD, 2022[48]).
Uzbekistan started liberalising its power system in 2019. Until 2019, electricity supply was monopolised by the vertically integrated state-owned electricity company Uzbekenergo. In 2019, Uzbekistan unbundled Uzbekenergo into separate companies responsible for generation, transmission and distribution respectively: the state-owned transmission system operator National Electricity Grid of Uzbekistan JSC, the state-owned distribution system operator Regional Electricity Grids JSC (combining 14 regional distribution companies) and the state-owned generators JSC Thermal Power Plants, Central Asia Energy LTD and JSC UzbekHydroEnergy (IEA, 2022[2]; International Energy Charter, 2022[23]; President of the Republic of Uzbekistan, 2019[65]). On January 17, 2024, Presidential Resolution No. RP-28 established the Energy Market Development and Regulation Agency (Energy Market Regulator). The first independent power producer (IPP) and grid-scale renewable energy project, Nur Navoi Solar Plant, was completed and connected to the grid in 2021 (Masdar, 2024[21]; World Bank, 2020[22]) and tenders for more than 20 additional solar and wind power plants and several flexible gas-fired power plants have been awarded to private investors as PPPs through competitive bidding processes.
In 2024, Uzbekistan continued creating the conditions for more power sector competition by unbundling the state-owned transmission system operator into a transmission system operator and an electricity market operator. The creation of an independent electricity market operator allows for the creation of a competitive wholesale electricity market and increases the financial stability of the transmission system operator. The electricity market operator Uzenergosotish is responsible for the purchase of electricity from producers and the sale of electricity to distribution companies and large consumers at fixed prices until a competitive electricity wholesale market has been established. Once such a market has been established, it will be charged with selling electricity through an online trading platform at market prices determined by supply and demand. The transmission system operator JSC National Electricity Grid of Uzbekistan, in turn, is tasked with electricity transmission, ensuring stability of the electric power system and stability in the integration with the electricity systems of neighbouring countries and further expanding and upgrading the transmission grid (President of the Republic of Uzbekistan, 2023[66]).
Uzbekistan also established an energy regulator and plans the gradual introduction of competitive electricity wholesale and retail markets until 2030. The Agency for Development and Regulation of the Energy Market of the Republic of Uzbekistan’s main tasks are to ensure the phased organization of wholesale and retail electricity markets, as well as to support competition in the market, ensure the attractiveness of the market and proportionality of supply and demand. The objective is allowing to consumers to freely choose their electricity supplier. The Agency is also responsible for licensing market participants of wholesale and retail electricity markets and currently a licensing procedure has been developed with the support of IFIs. Starting from 2026, it will approve the amounts of relevant tariffs and fees for the transmission and distribution of electricity (Presidential Resolution No.PP-28 of 17 January 2024). The creation of an energy developer and regulator will improve competition in the energy sector, which is crucial for incentivising more private investment in power generation. While this regulator enjoys a significantly larger degree of independence than the regulators in neighbouring countries on paper, it will be important to also ensure its full independence and impartiality effectively in practice.
In June 2024, Uzbekistan approved a new “Rules for the use of main electrical networks” that could facilitate access to the power grid for IPPs. Uncertain grid access can increase project risk for renewable energy investors (OECD, 2022[48]). Uzbekistan’s new rules provides detailed regulations, technical requirements and standards for the connection, operation and performance of intermittent renewable energy facilities and energy storage systems its transmission and distribution grid, for the construction of distribution and transmission infrastructure at the point of connection and technical requirements for all parties operating in the wholesale electricity market (Cabinet of Ministers of the Republic of Uzbekistan, 2024[67]). The new rules are an important element for ensuring non-discriminatory access to the power grid for independent power producers and electricity system stability and reliability in the context of the integration of increasing volumes of variable renewables into Uzbekistan’s electricity system.
To ensure free competition in its energy sector, it will be important that Uzbekistan finalises its ongoing power market reforms and avoids oligopolies in the solar and wind segments. This includes gradually establishing wholesale and retail electricity markets and ensuring free competition in these markets. Uzbekistan should also adopt a recently developed master plan for the development of the industry. In addition, gradually privatising some of the state-owned power plants could increase competition and efficiency in the power sector (IEA, 2022[2]; IEA, 2022[19]). Competition among a larger number of companies in the solar and wind segments, which are currently dominated by three large investors, could further reduce prices and promote innovation and efficiency gains.
Fossil fuel subsidies
Fossil fuel subsidies in Uzbekistan as a share of GDP are amongst the highest in the world (Figure 8.10, Panel A). Subsidies for gas, electricity and oil amounted to 28.3% of GDP in 2022, more than twice as much as in 2012. Subsidies for natural gas account for more than two-thirds of total subsidies, electricity subsidies for 25% of total and subsidies for oil for 7% (2022). Uzbekistan also subsidises district heating, but reliable estimates are not available. Subsidies decreased during the Covid-19 pandemic when energy consumption declined and increased in 2021-22 in the context of high international energy prices and increasing energy consumption in the aftermath of the pandemic (Figure 8.10, Panel B). Subsidies include cross-subsidies between consumer groups, where one consumer group covers part of the cost of the consumption of another group, and direct subsidies from the state budget (IEA, 2022[2]).
Phasing out fossil fuel subsidies could incentivise investment in renewables and energy efficiency in Uzbekistan ( (OECD, forthcoming[68]). Fossil fuel subsidies in Uzbekistan support electricity and natural gas tariffs below cost-recovery levels. In the absence of other support mechanisms for vulnerable consumers, low tariffs below economically justified levels act as social policy to support consumers. However, below-cost recovery tariffs also compromise the energy sector’s financial viability and impair utility companies’ ability to invest in modernising and expanding outdated electricity, gas and heat infrastructure, thereby contributing to high transmission losses and power outages and rendering the integration of intermittent renewable in the power system difficult. They also limit the government’s fiscal space for investments in renewables and other ancillary services and infrastructure. Moreover, the current pricing structure does not incentivise private investment in renewable energies and energy efficiency improvements by reducing the cost of consuming electricity and natural gas and making energy efficiency improvements less bankable and attractive for owners. Below-cost recovery tariffs also discourage new market entrants in utility-scale renewables without government price guarantees (IEA, 2022[2]).
Source: (IEA, 2023[69])
Reforms to liberalise electricity and gas tariffs since 2018 could bring the electricity and gas sectors closer to financial viability (IEA, 2022[2]; International Energy Charter, 2022[23]). The country had single natural gas and electricity tariffs for all categories of consumers prior to 2018. In 2018, Uzbekistan introduced different electricity tariffs for residential and commercial consumers, with the latter approximately 30-50% higher, and in 2019, it introduced natural gas tariffs for legal entities, which were 58% higher than for residential consumers. While these reforms resulted in cross-subsidisation of residential electricity and natural gas consumption, they also increased electricity tariffs’ coverage of operation costs from 70% to 92% (IEA, 2022[2]; International Energy Charter, 2022[23]). In April 2024, Uzbekistan introduced a new block tariff structure for natural gas and electricity for household consumers, including a so-called “social norm tariff” – a reduced tariff rate up to a certain maximum volume of consumption (for electricity 200 kWh/month and for natural gas 100m3 in summer and 500m3 in winter). In parallel, Uzbekistan also introduced different types of subsidies for the electricity and natural gas consumption of low-income households (Cabinet of Ministers of the Republic of Uzbekistan, 2024[70]).
Going forward, additional reforms are required to incentivise more investments in renewables and energy efficiency. To promote more investment in renewables and energy efficiency, it will be crucial to fully liberalise energy prices in a gradual and carefully implemented process accompanied by policies to protect the poorest and most vulnerable consumers (IEA, 2022[2]; International Energy Charter, 2022[23]). It could also be beneficial to introduce time-of-use and level-of voltage tariffs for all industrial consumers to align the price of electricity with the cost of supply and to facilitate demand response management (IEA, 2022[19]).
Data and information availability
More detailed and reliable data and information on the energy sector and renewable energy potential will allow to maximise the return of renewable energy investments and help inform investment promotion. This includes assessing the actual wind and solar energy potential of individual regions, particularly underdeveloped and sparsely populated areas with high solar irradiation and wind speeds such as the autonomous region of Karakalpakstan in more detail, including seasonal and time-of-day variations, and to make this information publicly available (IEA, 2022[2]). The National Scientific Research Institute for Renewable Energy Resources has developed solar and wind maps but these are not publicly available online. An assessment of infrastructure needs is also required, including road and power grid networks, water availability and other technical and economic factors for producing and evacuating green electricity or hydrogen. This information would enable renewable investors to take informed decisions and encourage more investments. Uzbekistan also requires more reliable data and information on biomass use to be able to develop policies to replace traditional inefficient biomass stoves with modern ones (IEA, 2022[2]).
Uzbekistan could also make information on electricity infrastructure and markets publicly available on a regular basis. To maximise the benefits of renewables, renewable plants need to be installed where they can generate most power but also where this power is needed the most. This depends on the grid network as well as on the distribution of demand for electricity. Currently, information on the location and capacity of existing major power plants and transmission lines is available on the MoE’s and the state-owned electricity companies’ websites but data on generation by technology and network load are not published. Going forward, it would be important to publish more detailed information on these different parameters. For example, in the EU, information such as generation, load and transmission is published through the ENTSO-E electronic platform. In Germany, one of the transmission system operators publishes its hourly network load data (IEA, 2022[19]).
8.4.4. Enhance the management of PPP-related fiscal risks, strategic planning and project selection
Uzbekistan’s PPP capital stock has increased significantly since 2022, driven by investment in low-carbon energy infrastructure, but remains smaller than in other countries. Whereas there were only seven large PPP projects in Uzbekistan worth USD 369.5 million up to 2019, PPPs in utility-scale variable renewable energies started expanding rapidly in 2020 driven by the ambitious renewable energy target for 2030 (Figure 8.11, Panel A). In 2022, the PPP capital stock amounted to USD 5.6 billion, the equivalent of 6.9% of the GDP, which is almost twice as much as in the Central Asian region on average but lower than in most comparators (Figure 8.11, Panel B).
Additional PPP projects worth USD 8.8 billion are currently in development. They consist in PPPs worth USD 1.8 billion in electricity generation (21.1% of total) and a PPP worth another USD 1.6 billion for the modernisation of Tashkent’s district heating system (18.2% of total) (PPPDA, 2024[71]). The PPPs in development in electricity generation are largely composed of solar and wind power plants and electricity storage systems (see section 1.3.1). The remaining large PPPs projects target the transport sector, waste management, education and health. In addition, 253 small PPPs were initiated between 2019 and 2022 (World Bank, 2023[72]). In its national development strategy Uzbekistan aims at attracting an additional USD 30 billion in PPP projects by 2030 (the equivalent of 37% of its GDP in 2022).
PPPs combined with guarantees and financing from IFIs have facilitated energy investors’ access to affordable financing. The guarantees provided to investors in renewable energies through PPPs have reduced Uzbekistan’s country risk premium and allowed investors to access financing on international financial markets at better conditions. Without the guarantees provided through PPPs and the financing at preferential conditions and guarantees provided by IFIs for many renewable energy projects, investors would most likely have invested significantly less in Uzbekistan and targeted smaller projects.5
Since 2019, Uzbekistan has developed a comprehensive legal, regulatory and institutional framework for PPPs. In 2019, the country adopted a Law on Public-Private Partnerships, developed with the support of IFIs (World Bank, 2023[72]). The law was supplemented with implementing regulations of PPP projects in 2020 (Cabinet of Ministers of the Republic of Uzbekistan, 2020[73]) and amended in 2021 (Republic of Uzbekistan, 2021[74]). According to this legislation, PPPs are awarded through competitive bidding processes. PPP projects with an investment value above USD one million are subject to a two-stage PPP procurement process while this process is simplified for smaller projects. Additionally, the PPP law also allows for direct negotiations between public authorities and contractors, albeit subject to a competitive bidding process. The government authority responsible for PPPs in Uzbekistan is the PPP Development and State Reduction Functions Department (short PPP Department) under the Ministry of Economy and Finance (prior to 2022 PPP Development Agency) (World Bank, 2023[72]).
Source: OECD based on (World Bank, 2024[75])
Uzbekistan has significantly improved its regulatory and institutional framework for the managements for PPP-related fiscal risks. This includes the creation of the Fiscal Risk Assessment and Management Department within the Ministry of Economy and Finance in October 2023 through Resolution No. 558, which is responsible for reviewing, assessing, managing and regulating the fiscal obligations for the state that may arise from PPPs (Cabinet of Ministers of the Republic of Uzbekistan, 2023[76]). The Contingent Liabilities Unit within the Ministry of Finance’s Macroeconomic and Fiscal Risk Department, which was responsible for monitoring the fiscal exposure of the PPP portfolio previously, had been dismantled in 2022 (World Bank, 2023[72]). Through Resolution 558, Uzbekistan also adopted regulations for the day-to-day management of the fiscal obligations for the state arising from PPPs (Cabinet of Ministers of the Republic of Uzbekistan, 2023[76]). The Fiscal Risk Assessment and Management Department should have evaluated all PPPs’ fiscal obligations and risks and published the results in 2024.
Despite recent reforms, past shortcomings in the management of fiscal risks combined with the sharp increase in PPPs since 2022 could generate significant financial liabilities. PPPs can generate contingent liabilities for governments if fiscal risks are not appropriately managed, leading ultimately to an increase in public debt. This constitutes a risk in Uzbekistan, given that PPP investment increased rapidly over a short period of time without an assessment, public disclosure or appropriate management of the fiscal obligations and risks linked to PPP projects. A significant expansion in public debt from contingent liabilities, in turn, could jeopardise Uzbekistan’s ability to finance those investments in its energy sector infrastructure required for a clean energy transition. The results of the ongoing assessment of PPP-related fiscal risks might indicate that PPP-related fiscal obligations are not sustainable and could potentially push the country to scale down its ambitious PPP pipeline until 2030.
Going forward, it would be critical that Uzbekistan further improve the management of PPP-related fiscal risks. This includes assessing PPPs for their affordability in the preparation process to determine the exact amount of expenditures and contingent liabilities for the government and whether they can be accommodated in the budget throughout the project cycle as well as monitoring fiscal risks throughout the project life-cycle. Further, all costs and contingent liabilities linked to PPPs should be disclosed in the government budget (OECD, 2012[77]). Improving the institutional and regulatory framework for PPP contract management could also facilitate the management of PPP-related fiscal risks. At present, shortcomings, which render access to information for effective risk management difficult, include restrictions on site visits, limited information sharing between public and private partners and a lack of digital tools for monitoring the execution of PPP projects (World Bank, 2023[72]).
Ensuring that all PPPs are regulated by the PPP law and go through competitive tendering processes could enhance value for money. 76% of PPP projects in solar and wind power and battery storage and 90% of PPPs for the construction of natural-gas fired power plants concluded with international investors since 2020 were structured and signed based on the Investment and Procurement Laws without competitive tendering processes. Only those projects, benefiting from the support of IFIs went through such processes (Republic of Uzbekistan, 2024[27]). This results in higher electricity prices, uneven processes and varying standards for project preparation, ultimately diminishing value for money. Further, different public institutions oversee projects under the PPP and Investment Laws, potentially leading to co-ordination challenges and the failure to prioritise those projects with the largest benefits (World Bank, 2023[72]).
Uzbekistan’s new draft investment law (LOI) ensures that PPPs are covered by general guarantees and protections. In the past, PPP investors preferred implementing PPP projects under the 2019 Investment Law, as projects implemented under the PPP law did not benefit from the 2019 Investment Law’s guarantees and protections. The new investment law to be adopted explicitly states that PPPs are covered by the law’s guarantees and protections in line with international best practices. The draft law also notes that PPPs are to be regulated under the PPP law for what concerns “special and/or procedural” conditions. According to international practices, PPP projects should be regulated exclusively under a dedicated PPP law. During consultations held in Tashkent in preparation of this Chapter, concerns were raised that the wording used by the draft law would leave a door open to the adoption of presidential decrees or other special regulations for individual PPP projects, creating uncertainty as to the source of regulation of PPPs. An explicit reference to the PPP law in the draft LOI would be beneficial to remove persisting doubts as to the circumstance that the implementation of PPP projects will be regulated exclusively under the PPP law.
Better strategic planning of PPP projects could ensure that projects with the largest benefits are implemented first and increase value for money. Uzbekistan has a three-year rolling state investment programme, which is updated annually and covers public infrastructure investment projects funded by the state and IFIs, through FDI and as PPPs. While there are formal criteria for projects’ inclusion in the investment programme, in practice, however, prioritisation of projects is strongly influenced by the availability of funding through IFIs, FDI, as a PPP project or through prior inclusion in the state budget. In the case of PPPs, to date, 60% of all PPP projects have been initiated by the private sector. These practices for project prioritisation risk not only that projects with limited benefits might be prioritised but also projects with significant fiscal risks. The modernisation of the Tashkent District Heating System, Uzbekistan’s most costly PPP project (USD 1.6 billion), implemented by Veolia, provides an example of an unsolicited PPP that faces challenges. Limitations in the natural gas supply and cold winter temperatures jeopardise the system’s sustainability (World Bank, 2023[72]). Going forward, Uzbekistan could base the investment programme on a holistic cost-benefit analysis rather than on the availability of funding. The decision of how to procure and finance investment projects should be made separately only once the project pipeline has been established and should be determined through a careful assessment of which investment method is likely to yield most value for money (OECD, 2012[77]).
There is scope to improve PPP project preparation in Uzbekistan beyond the evaluation of fiscal risks. Deficiencies in project preparation and the ex-ante management of fiscal risks are reflected in Uzbekistan’s relatively weak performance on the World Bank’s benchmarking PPP score (Figure 8.12). Currently, project feasibility studies are not explicitly required by the existing legal and regulatory framework and rely on funding from international donors. Line ministries lack technical capacity and financial resources for project preparation. These deficiencies in project preparation in Uzbekistan have contributed to the proliferation of a large number of small-scale PPP projects. Going forward, it would be important to create a dedicated project preparation facility and to establish pre-feasibility and feasibility study templates and guidance for line ministries (World Bank, 2023[72]).
Benchmarking public-private partnerships score (0-100)
Source: (World Bank, 2024[78])
Uzbekistan is planning to better reflect climate-related criteria in the prioritisation and approval process of PPP projects. While climate-related criteria are not yet officially part of the set of criteria which are used to prepare the country’s state investment programme, in practice, criteria such as the environmental impact of proposed projects, their sustainability and their contribution to official climate goals and commitments, are increasingly being taken into account in the preparation of the state investment programme. Uzbekistan has already prepared an amendment to Decision No. 206 on the state-investment management system to formalise the better reflection of climate-related criteria in the preparation process of the state investment programme. Going forward, it would be beneficial to screen and analyse projects’ climate risks and to consider climate-related criteria in the project selection process in a systematic manner (World Bank, 2023[72]).
8.4.5. Improve the enforcement of environmental regulations
Energy efficiency and environmental performance standards and inspections
Adopting regulations and standards that reinforce climate and environmental goals can help create the right framework conditions for foreign investments in low-carbon technologies, services and infrastructure. Environmental performance standards, such as emissions standards, restrict the emissions or energy use of vehicles, power plants, buildings, appliances and industrial processes and require the uptake of more efficient and less polluting technologies. For instance, fuel economy standards apply to the fuel efficiency of new road vehicles, and blending mandates apply to the use of biofuels in transport. Building standards apply to the thermal insulation of new buildings or to the retrofitting of old ones. Emissions standards of power plants regulate the carbon intensity of their electricity mix. Efficiency standards for consumer appliances remove certain products from the markets. Counter to the pollution haven hypothesis, there is little evidence that investors locational decisions are driven by differences in stringency of environmental standards and regulations. On the contrary, these standards can promote less polluting and more energy efficient investment projects (OECD, 2022[48]).
Since 2006, energy audits and periodic inspections are mandatory for energy-intensive companies in Uzbekistan. Mandatory energy audits and inspections cover companies consuming more than 500 tonnes of fuel equivalent, down from 2 000 tonnes of fuel equivalent until 2022, and periodic inspections take place at least every three years. In 2020-22, 285 companies were affected by this provision. The MoE is the public entity responsible for organising and monitoring energy audits while audits are carried out by private legal entities. A presidential decree from 2020 introduced energy savings indicators and targets for 25 energy-intensive sub-sectors starting from 1 January 2023, which require companies indirectly to implement energy audits’ recommendations (International Energy Charter, 2022[23]; President of the Republic of Uzbekistan, 2020[79]).
The implementation of energy savings targets could be better enforced and the implementation of energy audits’ recommendations better incentivised. In practice, energy audits have little impact on actual energy consumption and savings as the implementation of their recommendations is not mandatory unless they reveal irregularities in energy use in this area. The decree introducing energy savings indicators lacks information on measurement and verification of actual energy savings achieved and on sanctions for failing to meet targets (International Energy Charter, 2022[23]; President of the Republic of Uzbekistan, 2020[79]). Furthermore, in practice, even though the MoE has started collecting data on energy savings indicators, the institution does not have the mandate and resources to monitor and verify energy consumption in the industries concerned and ensure that targets are met. Moreover, the private entities undertaking energy audits are not required to obtain specific certifications, permits or licences or subject to other requirements to perform these audits. As a result, many of them lack specialist knowledge.
In addition to mandatory energy audits, energy-intensive industries with public participation are required to deploy energy management systems. A presidential decree from 2019 mandates all energy-intensive industries with public funding or under state ownership to deploy energy management systems in line with the international standard ISO 500016 by January 2023. As of January 2021, 95 companies had been certified. The implementation of the standard is monitored by the Agency Uzstandard (International Energy Charter, 2022[23]; President of the Republic of Uzbekistan, 2019[80]).
Uzbekistan has introduced energy performance standards and energy labelling for electric appliances but not yet for industrial equipment and vehicles. The minimum energy performance standards (MEPS) framework, adopted in 2016, covers 18 product groups, including washing machines and refrigerators as well as lighting and air conditioners. In addition, Uzbekistan has an energy labelling programme with an A-to-G class rating system in line with international standards. The import and sale of D to G-rated appliances and incandescent lamps above 40W is banned. In 2019, a presidential resolution banned the import of certain inefficient industrial equipment starting from 2022. The import and production of Euro-3 and Euro-4 equivalent passenger vehicles are forbidden as well. Going forward, it would be beneficial to also introduce energy performance standards for industrial equipment such as pumps and motors. Furthermore, Uzbekistan could incentivise energy efficiency improvements in its transport sector through the introduction of minimum fuel efficiency standards and a labelling regime to indicate vehicles’ fuel economy and carbon footprint (IEA, 2022[2]).
Minimum energy performance requirements for new and renovated buildings exist in Uzbekistan since 2000 but could be better enforced in practice. Such standards can improve the energy efficiency performance of foreign projects in the construction sector and buildings owned or used by foreign companies. Existing standards and requirements in Uzbekistan include energy performance certificates for new buildings, energy audit passports for new public and commercial buildings, certified solar water heating systems for all new and refurbished buildings except individual houses, the mandatory integration of renewable energy in multistorey commercial buildings in urban areas and energy efficiency surveys for new building projects receiving public funding (IEA, 2022[2]). In practice, however, energy audit passports are not issued yet and energy efficiency surveys are rarely conducted. Likewise, while renewable energies are being integrated in multistorey commercial buildings in urban areas, energy systems are not always installed in the most effective way: for example, in some cases, solar panels are installed next to high-rise buildings and remain in the shade for most of the day. According to the government, subsidising the purchase and installation of batteries or directly lending them on preferential terms through credit lines attracted from IFIs could help promote the installation of solar panels.
Uzbekistan could consider establishing a dedicated energy efficiency entity to improve the co-ordination of energy efficiency policies and the enforcement of existing regulations. This could be either an energy efficiency agency or a dedicated department in a ministry. At present, while renewable energy policies are largely centralised at the MoE, the responsibility of energy efficiency policies is divided between several institutions: whereas the MoE is responsible for the design and formulation of broad energy efficiency policies and targets, the Ministry of Construction, Housing and Communal Services is in charge of energy efficiency policies in the building and construction sector. Energy efficiency policies in the transport sector, in turn, fall under the Ministry of Transport’s responsibility. The MIIT is responsible for certain energy efficiency policies and measures in the industrial sector. While involving line ministries in the design and implementation of energy efficiency policies is important, establishing a dedicated institution will foster co-ordination and monitoring the design and implementation of these policies and help define a coherent national energy efficiency policy. Such an institution could also accelerate and improve the implementation and enforcement of the existing policies and regulations in different areas.
Environmental licensing and permitting
Environmental licensing and permitting can help mitigate adverse effects of FDI on emissions and the environment more broadly but can also generate red tape. Environmental licensing and permitting typically applies to investments with potentially significant environmental impacts. Whereas such regulations can prevent or reduce negative externalities, they can also be perceived as burdensome by investors, resulting in additional red tape, delays and increased uncertainty (OECD, 2022[48]). In a weak rule of law and high corruption context, environmental screening and approvals regulations can create opportunities for rent seeking in certain cases. It is important to keep the right balance between establishing such regulations while avoiding generating too much additional red tape for activities, which are likely to have a limited environmental impact.
Uzbekistan has a system of permits and standards for pollutant emissions for certain regulated activities. The system covers air emissions, wastewater discharges and waste generation and disposal and applies to activities falling in four environmental risk categories. Permits are awarded to companies as part of the EIA system, following the review of EIAs by the Ministry of Ecology, Environmental Protection and Climate Change. Companies submit sources and quantities of pollution to the Ministry of Ecology, Environmental Protection and Climate Change, which then calculates limits for air emissions, wastewater discharges and generation and disposal of waste based on maximum allowable concentrations defined by relevant regulations (UNECE, 2020[13]). In addition to pollution permits, permits for water and forest use, exporting or importing ozone depleting substances and for the use of wild fauna and licences for underground resources and high-risk facilities also exist (UNECE, 2020[13]). Uzbekistan introduced more stringent standards and requirements for pollution abating equipment in high- and medium- risk facilities in 2023 (President of the Republic of Uzbekistan, 2023[38]).
Simplifying Uzbekistan’s system for air, waste and water pollution charges could facilitate enforcement. Pollution charges are applied to emissions of air pollutants from stationary and mobile sources (vehicles owned by enterprises), discharges of water pollutants and the generation of waste by enterprises. The system covers 171 air pollutants for emissions from stationary sources and 84 water pollutants. Charges for air pollutants from mobile sources differentiate between nine different fuel types and charges for waste generation distinguish various categories of toxic and non-toxic waste. However, there has never been any evaluation of the effectiveness of Uzbekistan’s system of pollution charges in terms of its contribution to pollution abatement. Further, the system comprises a large number of pollutants, rendering it administratively complex and onerous for both, companies and the administration (UNECE, 2020[13]). The system’s complexity also renders monitoring more difficult and it is reported that the monitoring process of pollutants and environmental risks of high-risk projects is not always well enforced. Uzbekistan’s investment promotion bodies could play an active role in the simplification process. Further, integrated permitting could render the permitting system more efficient (UNECE, 2020[13]).
Increasing and better enforcing fines for environmental pollution and crimes could reduce private companies’ negative environmental impacts. It is reported that fines for environmental crimes and pollution such as illegally cutting trees or dumping sewage in a river are not always enforced and too low to deter private and state-owned companies from committing environmental offences if they are enforced. In a 2023 presidential decree, however, Uzbekistan significantly increased fines for environmental offences (President of the Republic of Uzbekistan, 2023[38]). This increase in fines could be a first steps to better deter individuals and entities from engaging in environmental offences.
Uzbekistan is in the process of introducing a green certification system. Green certificates – similarly to environmental audits – aim at indicating whether the processes, materials and energy, which companies use in the provision of goods and services, are environmentally friendly (Embassy of the Republic of Uzbekistan in Malaysia, 2022[81]). At present, this system is applied on a voluntary basis, especially by companies who need such certificates for their exports. A draft resolution, which will make green certificates mandatory for companies undertaking category I, II and III activities, is currently under review. Green certification centres will have to go through a certification process and follow international standards. The green certificate system is managed by Uzbekistan’s Ministry of Ecology, Environmental Protection and Climate Change.
Uzbekistan has a water tax to incentivise more rational use of water but numerous exemptions limit its effectiveness. Legal entities, individual entrepreneurs and dekhan farms (partially commercial small farms based on a household plot) pay a water use tax for pumping water from natural resources. Tax rates have increased significantly in recent years in order to create incentives for more efficient water use. However, much of the water, which is extracted and used in Uzbekistan, is not subject to the water tax due to numerous exemptions: except for dekhan farms, water used for irrigation in agriculture, which accounts for over 90% of total water use, is not subject to taxation but to water withdrawal limits. Further, pumping water to produce drinking water by water utilities, for hydraulic turbines by hydropower plants, by thermal power plants and to wash saline agricultural land are exempted from the water use tax. These multiple exemptions significantly weaken the effectiveness of the tax in incentivising the more rational use of water (UNECE, 2020[13]).
Environmental impact assessments
EIA and strategic environmental assessment (SEA) systems are fundamental to ensure that investment contribute to climate and environmental goals. EIAs and SEAs are structured analytical and participatory approaches for developing and evaluating assessments of how the environment will be affected by certain activities and advise on how best to manage their environmental implications. While SEAs assess strategic and policy actions such as new or amended laws, policies, programmes and plans, EIAs are used to examine proposed investment projects such as highways, power stations, water resource projects and large-scale industrial facilities. EIAs support investors in minimising environmental risks associated with their investment projects. SEAs in turn ensure that the policies, regulations and standards that influence the attraction and environmental performance of investment are aligned with national climate and environmental objectives. Strengthening the implementation of EIA and SEA systems is essential for their effectiveness in greening FDI and reducing its carbon impacts (OECD, 2022[48]).
Uzbekistan’s EIA system includes EIAs for new activities and periodic updates and SEAs for urban planning documents. Economic activities in the four environmental risk categories (minor impact to high risk), which are also subject to environmental permits, require EIAs every three years as well as in the event of extensions, reconstructions or modernisation of their facilities or changing technological processes. Projects in higher risk categories must undergo more complex EIA procedures. Project developers have the responsibility of carrying out EIA studies. The Ministry of Ecology, Environmental Protection and Climate Change’s Centre for State Ecological Expertise, in turn, is responsible for reviewing EIAs for category I and II activities and local authorities for reviewing EIAs for category III and IV activities. The EIA review process by public authorities is called State Ecological Expertise (SEE). While according to the 2000 Law on Ecological Expertise, SEAs apply to draft state programmes, concepts and schemes, in practice, SEAs have only been conducted for urban planning documents. In addition to EIAs and SEAs, a voluntary process called public ecological expertise exists in Uzbekistan but has in practice not been conducted since 2010 (UNECE, 2020[13]).
Uzbekistan is currently in the process of further aligning its EIA system with international best practices and of introducing a more systematic SEA process. A draft law to replace the 2000 Law on Ecological Expertise has been developed with the support of the World Bank and the UN Economic Commission for Europe. This new law has been adapted to reflect the requirements of the 1991 Convention on Environmental Impact Assessment in a Transboundary Context and the 2003 Protocol on Strategic Environmental Assessments, in particular, with respect to public participation in EIAs as well as public access to information on EIAs. The draft law also provides additional details on SEAs and Uzbekistan plans to start using SEAs more widely beyond the evaluation of urban planning documents. Uzbekistan is currently conducting pilot SEAs on the Tourism Development Programme of Bostanlik District of Tashkent Region with the support of the Agence Francaise du Développement and of the national Energy Development Programme with the support of the Gesellschaft für Internationale Zusammenarbeit (GIZ).
The implementation of EIAs could be further improved. It is reported that EIAs are frequently treated as a mere formality by investors rather than an obligation. In some cases, to plainly bypass the EIA process, developers construct facilities for activities not subject to EIAs while switching those facilities to activities subject to EIAs once construction is finalised (UNECE, 2020[13]). There are also reports of investment projects being located in protected areas such as several large wind power farms, which are located very close to or within proposed protected areas, or a recently constructed highly polluting cement plant within a nature reserve (CEE Bankwatch, 2024[82]). Another example is the expansion of three existing landfills in the autonomous region of Karakalpakstan planned very close to residential areas with significant social risks even though the project was eventually cancelled as a result of protests from civil society (Kožmínová and Lesikhina, 2022[83]; EBRD, 2024[84]). An exception are projects, which benefit from the support of IFIs, which tend to take the EIA process more seriously as a result of IFIs’ stricter environmental standards and scrutiny. A master plan needs to be approved and adopted.
Timely and well-planned public consultation processes can contribute to the effectiveness and success of EIAs and SEAs. They contribute to the successful design, implementation, operation and management of the proposed actions. Stakeholders, including foreign multinationals, provide a valuable source of information on key impacts, potential mitigation measures and the identification and selection of alternatives. Their consultation further ensures the EIA/SEA process is open, transparent, and robust, and also that individual EIAs/SEAs are founded on justifiable and defensible analyses (OECD, 2022[48]).
Public participation is mandatory in the EIA process in Uzbekistan but could be better enforced. Public participation in the form of public hearings is required at two stages of the EIA process in Uzbekistan for projects falling in categories I and II (UNECE, 2020[13]; World Bank, 2023[72]; Cabinet of Ministers of the Republic of Uzbekistan, 2020[85]). Procedures for participation in the EIA process are not defined in detail and there is no regular review by SEE authorities of developers’ compliance with the existing public participation requirements. While evidence suggests that in some cases, public authorities do pay attention to compliance with the requirements for public hearings by projects developers, it is reported that in many cases, public participation takes place only after the beginning of construction. Further, available evidence suggests that in some cases, developers provide incorrect or incomplete information during public hearings (UNECE, 2020[13]). In other cases, significant parts of local communities are not included in public consultations or public consultations are not conducted at all.
Streamlining activities subject to EIAs and their risk classification, introducing a screening mechanism, and extending time limits for EIA reviews could facilitate enforcement. While it was reduced in the 2018 Resolution on SEE, the list of activities subject to EIAs in Uzbekistan remains very broad compared with international best practices. In total, approximately 46 000 existing facilities require EIAs in Uzbekistan and in 2023, a total of 21 400 EIAs were reviewed by SEE authorities. This large volume of EIAs to review by authorities leaves less time for the review of those projects, which do actually have a significant impact on the environment. Furthermore, some potentially very harmful activities for the environment are classified as medium or low risk such as thermal power plants with a capacity of less than 300 MW. At the same time, the time limits for the review of EIA documentation submitted by project developers to SEE authorities are very tight, ranging from 5 days for activities in category IV to 20 days for activities in category I (or 40 days with an extension). These tight review deadlines together with the large overall volume of EIAs to review can leave little time for thorough expert reviews of EIA documentation by the relevant authorities (UNECE, 2020[13]).
More stringent requirements for EIA providers and sector-specific requirements for high-risk activities as well as better alignment with international law could improve the quality of EIAs. While most project developers hire EIA experts, there are no specific requirements that experts must meet such as licensing or certificates (UNECE, 2020[13]). Further, at present, there are no requirements for the submission of sector specific information and documentation in the EIA process, thereby potentially neglecting fundamental sector-specific risks, especially for projects in high risk categories (World Bank, 2023[72]). Uzbekistan’s legal framework for EIAs is not yet aligned with the Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters in terms of screening, effective public participation and the scope of EIAs (UNECE, 2020[13]).
Green public procurement
The use of environmental criteria in public procurement processes is increasing in Uzbekistan. Public procurement is a useful tool to decarbonise investment, especially in infrastructure. Beyond bringing existing low-carbon solutions to market today, it can create ‘lead’ markets where government demand is significant (e.g. transport, construction), and can spur innovation without engaging new spending. Uzbekistan’s Law No. 684 on public procurement mentions that the preservation of a favourable environmental situation should be taken into account in public procurement processes (article 16). The law also includes a list of green criteria, which can be included in public procurement processes, including energy efficiency, rational use of natural resources, use of environmentally friendly materials and recycled materials and renewable energy sources (article 32) (Republic of Uzbekistan, 2021[86]). In the first quarter of 2023, such environmental criteria were incorporated in 16% of public procurement processes. The Ministry of Economy and Finance’s Department of Procurement is currently working on guidelines for green public procurement and a new public procurement law, which will incorporate more detailed green procurement criteria in order to further promote green public procurement in the country.
Carbon trading
Article 6 of the Paris agreement allows for international carbon trading under certain conditions. This includes transferring mitigation outcomes in the form of carbon credits from one country to another, between private companies and through market-based schemes such as the Carbon Offsetting and Reduction Scheme for International Aviation. However, to participate in the transfer of such carbon credits, countries must meet reporting, tracking and accounting requirements, including an authorisation and approval process and the establishment of a registry, which tracks carbon credits (Fattouh and Maino, 2022[87]; United Nations, 2015[88]).
Uzbekistan is in the process of establishing the infrastructure and regulations required to participate in international carbon trading in line with article 6 of the Paris Agreement. Presidential resolution No. 436 from 2022 calls for the development of the infrastructure required to participate in international carbon trading until 2026. This includes a greenhouse gas inventory, a carbon credit registry, a monitoring, reporting and verification mechanism for all GHG emissions as well as regulations and a mechanism for managing international carbon trading (President of the Republic of Uzbekistan, 2022[26]). Decision 117 from March 2024 asks the Ministry of Economy and Finance to establish a National Carbon Credit Registry to record voluntary carbon credit market projects and GHG emission reductions by 1st of October 2024. The decision also provides detailed regulations for voluntary carbon market projects and other carbon credits, which are internationally traded (Cabinet of Ministers of the Republic of Uzbekistan, 2024[89]). International carbon trading could allow private investors in clean technologies such as renewable energies in Uzbekistan to raise additional financing for their investment projects through carbon credits. Ultimately, this could make the country a more attractive destination for investors in clean technologies.
8.4.6. Clarify the strategic and institutional framework for green investment promotion and introduce expenditure-based tax incentives
Investment promotion bodies can create awareness of existing green investment opportunities, attract green investors, and facilitate their establishment and expansion in the economy. Investment promotion bodies – whether as IPAs or departments in ministries – are key players in bridging information gaps that may otherwise hinder the realisation of foreign investments, and their potential sustainable development impacts. Many prioritise green investments, by selecting green priority sectors such as renewable energies or other low carbon technologies or green priority investment projects, and by allocating resources accordingly (OECD, 2022[48]; OECD, forthcoming[90]). Investment facilitation services can help reduce administrative barriers to low-carbon investments. Investment aftercare services are an important channel for the propagation of FDI low-carbon spillovers through the interactions of foreign MNEs with domestic firms and workers. Investment promotion bodies also tend to have the role to raise policy makers’ awareness of regulatory needs to promote low-carbon investment (OECD, 2022[48]).
Uzbekistan is in the early stages of integrating green considerations into investment promotion and facilitation policies. The MoE is the main institution in charge of promoting investment in renewables. The MIIT’s Investment Generation Department, which targets and deals with investment projects of at least USD 10 million, furthermore hosts a unit targeting and dealing with energy sector projects. Uzbekistan does not have an investment promotion strategy and official priority investment sectors. Investment promotion bodies do not have specific policies targeting and supporting green investment either. This lack of strategic direction for green investment promotion can be attributed to a challenging institutional landscape where multiple agencies with overlapping functions operate without co-ordinated strategic direction. This makes it difficult to attract investment in a structured manner in general, let alone to focus on green investment (see chapter on investment promotion). Looking ahead, close co-ordination between the MIIT, including UzIPA, the MoE and the IPA on investment promotion in the energy sector is crucial and could be further enhanced.
While Uzbekistan’s 2019 Investment Law contains several environmental provisions, such provisions have been scaled back in the new draft Investment Law. The current Law on Investment and Investment Activities prohibits “investment in objects, the creation and use of which do not meet the sanitary and hygienic, radiation, environmental, architectural, town planning and other requirements established by legislation” (article 8). Further, the obligations of investors include complying with legal requirements on environmental protection (articles 11 and 13). The law also stipulates that investors’ obligations on environmental protection and the supply of modern equipment and technologies, which meet energy efficiency and environmental standards, should be included in investment agreements between investors and the government (article 42). The law restricts or bans foreign investment in certain areas of the economy to ensure the protection of flora and fauna and the environment (article 46) and allows for restricting, suspending or terminating activities that violate environmental requirements established by law (article 60) (Republic of Uzbekistan, 2019[91]). Uzbekistan is currently revising the 2019 Investment Law and the new draft includes significantly fewer environmental provisions and obligations for investors.
Investment in Uzbekistan’s special economic zones (SEZs) is subject to the same environmental obligations as those in the Investment Law. Article 15 of Law No. 604 on Special Economic Zones requires projects in SEZs to comply with requirements in the field of ecology and environmental protection and modern energy efficiency standards. Article 19 prohibits activities in SEZ that do not meet environmental standards. Documents to be submitted to apply for the creation of a new SEZ include a business plan with an analysis of environmental conditions of the relevant territory. The need to protect the environment further figures amongst the motives for early closure of a SEZ (Republic of Uzbekistan, 2020[92]). In addition, the authorities responsible for SEZs encourage SEZ investors to deploy renewable energies and to engage in activities such as planting trees or building water treatment facilities on a voluntary basis. According to the reports submitted by the Directorates of industrial zones, a total of 1.3 billion dollars in investments was attracted in 2023, largely in the chemical and petrochemical industry.
Going forward, it would be beneficial to adopt a more systematic approach to promoting and facilitating green investment. This includes adopting a national investment promotion strategy, in which climate and environmental considerations are embedded. This also involves reviewing and identifying specific economic activities where Uzbekistan has the greatest potential to develop low-carbon activities or growth poles. Once such activities have been identified, relevant bodies should design investment promotion packages for these low carbon activities combining tools that range from intelligence gathering (e.g. market studies) and sector-specific events to pro-active investor engagement (one-to-one meetings, email/phone campaigns, enquiry handling). Facilitation services should support investors in low-carbon activities to acquire the necessary permits and clearances for their investment projects. Aftercare services should be designed to help investors overcome information barriers associated with identifying low-carbon business partners, suppliers and distributors, for example, through match-making services, and help them reduce emissions along their supply chains. Finally, Uzbekistan’s investment promotion bodies could further advocate for reforms required to promote low-carbon investments by servicing as primary interface between investors and other government institutions (OECD, 2022[48]).
Tax and other financial incentives for renewables and other clean technologies
Most tax incentives for renewables in Uzbekistan are corporate income tax (CIT) and indirect tax (e.g. property or land tax or customs duty) incentives (Table 8.7). Renewable energy producers with an installed capacity above 100 kW are exempted from property and land taxes for ten years while residential renewable auto-producers are exempted from property and land taxes for three years. Commercial renewable energy producers additionally enjoy a 50% reduced CIT rate for three years. Manufacturers of renewable energy equipment are exempted from all taxes for five years. Other financial incentives for renewables include feed-in-tariffs for a period of ten years for renewable auto-producers with an installed capacity of less than 1 MW and partial reimbursements of the purchasing price of renewable equipment and interests paid on commercial loans for such equipment within certain limits. Information on the number of renewable auto-producers and if feed-in-tariffs are implemented is not publicly available.
Uzbekistan has also developed a set of incentives for energy efficiency improvements and investment in waste management (Table 8.7). Companies purchasing energy efficiency equipment can benefit from a partial reimbursement of interests paid on commercial loans. Whereas companies in certain energy intensive industrial sectors are subject to higher electricity tariffs, this surcharge is waived for those investing in energy efficiency improvements. Tax benefits and preferential credits are available for firms investing in pollution abatement and resource-saving technologies to reduce adverse environmental impacts of their activities. Electric and hybrid vehicles produced in Uzbekistan are exempted from recycling fees and import duties until 2030. Waste management companies benefit from a reduced CIT rate and additional financial benefits are available for companies that develop and produce equipment for waste disposal, reduction and recycling. Tax incentives also exist to encourage water saving in agriculture. Agricultural producers, who introduce water-saving technologies and water-measuring devices in irrigation and fisheries, benefit from reduced water tax rates. Agricultural producers, who do not take such measures, in turn, are subject to higher water tax rates (President of the Republic of Uzbekistan, 2024[93]).
Shifting towards expenditure-based tax incentives while phasing out profit-based and indirect tax incentives will improve the contribution of FDI to decarbonisation in Uzbekistan. Exemptions from indirect taxes for renewable producers such as value added tax and customs duties on machinery and equipment, land tax and property tax reward the installation of capacity rather than electricity production, which does not encourage investors to locate clean electricity generation in the most optimal geographical locations (according to resource availability and grid capacity). Corporate income tax reductions or exemptions for green sectors such as renewables or waste, in turn, are costly in terms of forgone public revenues. Further, they often benefit investments that would have materialised anyway. Expenditure-based incentives that target low-carbon investments are instead linked to specific expenses and lower the cost of related inputs (see Chapter on tax incentives for detailed analysis of income versus expenditure-based incentives). For instance, Mauritius and South Africa offer accelerated depreciation allowances on machinery used to generate renewable energy. By lowering the cost of capital, these incentives are expected to facilitate investment that would otherwise not be made and have the potential to mobilise more investment per dollar of forgone tax revenue. A downside of targeted expenditure-based incentives is that they require greater tax administration capacities and are associated with higher compliance costs in terms of qualifying and reporting requirements (OECD, 2022[48]). Regular monitoring of the effectiveness of these incentives is also crucial.
Tax and other financial incentives for renewables, energy efficiency and other green technologies
Source: (President of the Republic of Uzbekistan, 2019[94]); (President of the Republic of Uzbekistan, 2022[95]); (President of the Republic of Uzbekistan, 2021[96]); (President of the Republic of Uzbekistan, 2022[97]); (President of the Republic of Uzbekistan, 2017[98]); (Republic of Uzbekistan, 2019[99]); (IEA, 2022[2]); (UNECE, 2020[13]); (International Energy Charter, 2022[23]), (President of the Republic of Uzbekistan, 2023[38]), (President of the Republic of Uzbekistan, 2024[93]).
In 2023, Uzbekistan introduced a system of green energy certificates. These certificates are issued to producers of solar, wind and hydropower energy and can be traded and sold to other organisations and companies to meet their decarbonisation initiatives and RBC goals. One certificate is issued per 1 000 kWh of electricity produced from renewable sources. The cost of renewable energy certificates can be deducted from taxable income. The Ministry of Economy and Finance is in charge of managing the green energy certificate system (President of the Republic of Uzbekistan, 2023[100]) and was approved officially as Uzbekistan’s international renewable energy certificate (I-REC) issuer by The International Tracking Standard Foundation in June 2023 (The International Tracking Standard Foundation, 2023[101]). In February 2024, Uzbekistan started issuing the first green energy certificates (UZReport, 2024[102]; UZDaily, 2024[103]). A separate trading platform for green energy certificates has been created and is currently operating (spot.uzex.uz). Hydropower certificates have also already been sold.
An oversupply of certificates in relation to demand and illegitimate renewable electricity claims are potential challenges for Uzbekistan’s green energy certificate system. As demand for green energy certificates depends on companies’ and organisations’ voluntary contributions to the low carbon transition, the supply of certificates risks exceeding demand without sufficient awareness raising and measures to encourage firms to buy certificates such as RBC legislation and initiatives. This can result in low certificate prices and an oversupply of certificates. A further risk are illegitimate certificate claims. To prevent such claims, Uzbekistan could establish a sound verification and auditing system for the issuance or green energy certificates (Kumar Upadhyay, 2023[104]; GreenUp Team, 2024[105]).
Uzbekistan maintains generous tax incentives for geological exploration of oil and gas. While certain incentives for foreign investors, joint ventures and domestic suppliers were abolished in 2022 (President of the Republic of Uzbekistan, 2020[106]), in 2021, Uzbekistan introduced new incentives to attract more investment in oil and gas exploration targeted not only at foreign but also domestic companies. This includes reduced subsoil use tax rates and property, land, customs duty and VAT exemptions (President of the Republic of Uzbekistan, 2021[107]) (Table 8.8). While modern fossil fuels, especially natural gas, will continue to play an important role in the country’s energy mix in the medium-run to balance electricity generation from renewables, these incentives may stimulate additional fossil fuel production and contribute to locking-in fossil fuels in the country’s energy mix in the long-run. To accelerate the clean energy transition and attract more investment in renewables, it would be beneficial to gradually phase incentives for fossil fuels out.
Tax and other financial incentives for fossil fuels in Uzbekistan
8.4.7. Strengthen green skills and the enabling conditions for green innovation
Green skills
The availability of sufficient green skills can facilitate green investment projects and environment- and climate-friendly business practices. This includes skills such as renewables engineering, energy efficiency technologies, emissions measurement expertise, energy and climate modelling capabilities and energy auditing (IEA, 2022[2]; International Energy Charter, 2022[23]). Such skills can be developed in the workforce through specialised training, learning-by-doing, apprenticeships and secondments, in-depth professional certifications or dedicated degree programmes at universities and educational institutes. In addition to providing “green” investors with sufficient workers with the skills required to operate low-carbon technologies, the development of green skills can encourage FDI spillovers by increasing the potential for labour mobility between foreign and domestic firms. Community-level capacity building programmes (e.g. energy literacy) to influence consumption behaviours and reduce the demand for energy- or emissions-intensive products and services, on the other hand, can help create new markets for foreign investors seeking to expand their low-carbon investments (OECD, 2022[48]).
Skilled labour shortages can be a challenge for renewable energy investors in Uzbekistan. To deal with skills shortages, some renewable energy investors such as Voltalia in Urgench enter partnerships with local universities to train technicians with the right skills. Uzbekistan has taken steps to further develop skills in demand by green investors. A 2019 presidential resolution provides for the organisation of training programmes for energy auditors and engineering and technical personnel in the field of regulation and efficient use of energy resources. It also creates new educational programmes and new specialisation options in existing programmes and increases existing programmes’ student quotas in the areas of renewable energies, energy efficiency and energy audits in higher education institutions (President of the Republic of Uzbekistan, 2019[80]). In addition, a 2021 presidential resolution mandates an increase in the student intake in the bachelor’s degree programme in “Alternative Energy Sources” at the Islam Karimov Tashkent State Technical University starting from the academic year 2021-22 and creates a master’s degree programme in “Hydrogen Energy and Technology” starting from the academic year 2024/2025 at this same university. The resolution also mandates the development of measures to attract foreign scientists to Uzbekistan to supervise doctoral students in the area of hydrogen and to develop joint research with foreign research institutions and calls for the development of a doctoral programme in hydrogen (President of the Republic of Uzbekistan, 2021[109]).
In the future, Uzbekistan should continue its efforts to build the professional capabilities and skills in demand by green investors. In this process, it would be beneficial to collaborate and consult with educational and research institutions and with the private sector to fully understand their needs and which skills are most in demand. This process should also be backed with sufficient financial resources (IEA, 2022[2]). Uzbekistan could furthermore consider introducing a system of training and certifications for energy auditors in accordance with international best practices (International Energy Charter, 2022[23]).
Low-carbon innovation and intellectual property rights
Low-carbon and environment-related innovation remains low in Uzbekistan in line with innovation in general. In 2021, there were only 525 researchers in R&D per million people compared to 4 079 in the OECD (in 2020) and R&D expenditure amounted to only 0.13% of GDP compared to 3% in OECD members on average. Likewise, there were only 2.2 patent applications by residents and non-residents per billion USD of PPP GDP in Uzbekistan in 2021 compared to 20.2 in OECD countries on average (World Bank, 2024[4]). Uzbekistan’s weak performance in innovation in general and in low-carbon innovation in particular can be attributed to fragmented policies, unclear and overlapping institutional mandates, a lack of inter-institutional co-ordination and limited skills and capacities by local firms to absorb and integrate external knowledge and technologies. Especially MSMEs frequently lack managerial and organisational skills required to adopt new technologies (UNECE, 2022[110]).
Uzbekistan has taken measures to facilitate low-carbon innovation. Through the Presidential Decree No. 5063, the government created the National Research Institute of Renewable Energy Sources under the MoE in 2021, which comprises a research centre for hydrogen energy and a laboratory for testing and certification of renewable and hydrogen energy technologies. This laboratory was accredited by the MoE in 2022. The same presidential decree also includes a set of measures to accelerate research on renewables and hydrogen, including the development of programmes for collaboration with foreign experts and institutions in these areas (President of the Republic of Uzbekistan, 2021[109]; IEA, 2022[2]).
Going forward, Uzbekistan could foster more green innovation through targeted start-up accelerators, incubators or innovation centres for green technologies, renewable energy and energy efficiency. In 2017, Uzbekistan created the Technopark Yashnabad, which includes the production of alternative and renewable energy sources among its priority areas. Resident firms in the Technopark Yashnabad benefit from a set of tax exemptions (UNECE, 2022[110]). Additional accelerators and incubators, which are more targeted to green technologies could provide further support to the emergence of innovative start-ups, which promote environmental sustainability. Such accelerators could also play an important role in co-ordinating and formulating technology networks with various actors in the field of green growth, including researchers, policymakers and entrepreneurs (UNECE, 2022[110]).
Measures to strengthen MSMEs’ absorptive capacities could facilitate green innovation. Absorptive capacity is defined as the ability of the firm to acquire, assimilate and exploit the available information, knowledge and technology that comes through interaction with other firms. Governments can strengthen MSMEs’ absorptive capacities by implementing targeted measures that support the development of strategic assets and resources at the firm level (e.g. access to skills, finance, innovation and digitalisation, etc.). Such measures involve financial support and technical assistance but also training, managerial and organisational changes that are required to strengthen firm productivity and innovation. Measures that facilitate access to qualified human capital can strengthen firms’ capabilities in areas that require highly specialised expertise and skillsets such as those involving the use of innovative production processes, automation and digitalisation. Managerial skill development programmes in the form of seminars, workshops and individual consultations and improved access to finance can also enhance firms’ absorptive capacities (OECD, 2022[48]). Improved absorptive capacities can facilitate both the adoption of new technologies among firms and the development of new processes and products.
Intellectual property protection, which is crucial for low-carbon innovation and investment, has improved in Uzbekistan but remains relatively weak. Intellectual property rights (IPRs) create strong incentives for innovation as they ensure that investors earn a fair return on their technological innovations. IPRs can be used to generate revenues from licences, encourage synergistic partnerships, or create a market advantage and be the basis for productive activities. They are important for the development of research- and capital-intensive low-carbon technologies (OECD, 2022[48]). Uzbekistan has recently expanded the pool of patent attorneys, implemented adequate intellectual property approval fees, reduced legislative restrictions on intellectual property registration, accelerated examination procedures for intellectual property, taken measures to develop intellectual property related skills and introduced a system of digital label tracing to protect certain products against counterfeit. However, the intellectual property registration process remains slow, and enforcement can be a challenge (UNECE, 2022[110]).
8.4.8. Strengthen responsible business conduct and voluntary compliance tools
Responsible business conduct (RBC) and voluntary compliance promotion instruments can facilitate more environment- and climate friendly business practices (see also Chapter on Responsible Business Conduct). This includes adherence to international RBC agreements such as the OECD’s Guidelines for Multinational Enterprises. These guidelines recommend that businesses take due account of the need to protect the environment, including improving environmental performance and addressing any adverse environmental impacts in their own operations and supply chains, within the framework of laws, regulations and administrative practices in the countries where they operate. Chapter 6 of the Guidelines on “Environment” addresses aspects such as environmental management systems, continual improvement of corporate environmental performance, training of workers on environmental matters, and raising environmental awareness. RBC also comprises voluntary compliance promotion instruments such as voluntary environmental labelling or environmental reporting (OECD, 2022[48]).
Uzbekistan has already made some progress in promoting RBC. For example, state-owned enterprises need to manage environmental, social and governance risks, and since July 2024, are expected to provide annual non-financial reporting, including on environmental issues. Green procurement is growing (see above). A green taxonomy sets incentives for sustainable finance (see below). Significant opportunities for promoting green business practices through RBC exist, including through the planned adoption of a National Action Plan on Business and Human Rights. The government can strengthen RBC-related expectations across different policy areas and support businesses to ensure their application in practice. Insufficient awareness of international RBC standards and stakeholder engagement are important challenges that also need to be addressed.
Environment and climate-related financial disclosure is an RBC instrument which can help mobilise green investment and provide companies with incentives to reduce their carbon footprint and environmental impact. Effective, clear, and consistent environment- and climate-related disclosure can reveal how companies are preparing for a lower-carbon economy and how they are dealing with pollution and other environmental risks and thus supports investors to better assess financial exposure to climate-related risks. Such disclosure can improve the accuracy of ESG investment ratings and ultimately facilitate investments into lower carbon assets. The Task Force on Climate-related Financial Disclosure (TCFD) provides recommendations to companies on TCFD, which include the disclosure of information on the governance, strategy, management and targets around climate-related risks. Environmental regulations on reporting requirements are also increasingly used to address the cross-border environmental footprint of multinationals (OECD, 2022[48]).
In 2019, Uzbekistan introduced environment-related corporate disclosure requirements for mining companies. The country adopted a presidential resolution requesting large mining companies to implement corporate disclosure processes in accordance with the principles and requirements of the International Standards of Accounting and Reporting and to publish reports on economic, social and ecological issues in accordance with the Global Reporting Initiative (UNECE, 2020[13]). This resolution is being implemented in practice by many large mining companies, which publish sustainable development reports on their websites since 2019-20 (NGMK, 2024[111]; AMMC, 2024[112]).
Uzbekistan introduced a system of voluntary eco-labelling in 2019 but this system is not operational yet. The system has undergone changes in legal regulation. Pursuant to Presidential Decree No. 81 of 31 May 2023 on transformation in the environmental protection sector, Resolution of the Cabinet of Ministers No. 20 of 20 January 2025 on measures to improve the system of voluntary environmental labelling of products and services was adopted, which addresses the problems that prevented the system from developing. The renewed eco-labelling has become an associate member of the global eco-labelling network. According to the government, 22 eco-labelling standards are in the process of adoption by the national standardisation authority. Once they are adopted, certification in the system will be possible. The national eco-labelling system still needs donation of experience from eco-labels of other countries in order to create conditions for its work as an effective tool for implementation of the state environmental policy and green public procurement. To date, it can be seen that the instrument of voluntary eco-labelling is in demand, as more than 100 enterprises in Uzbekistan in the last 3 years have received foreign eco-labels for their products in the absence of national ones.
To promote voluntary energy certifications for buildings, in 2019, Uzbekistan established the Green Building Council of Uzbekistan. This institution promotes net-zero energy, carbon-neutral and healthy buildings by applying voluntary certification schemes for the energy performance of buildings such as Leadership in Energy and Environmental Design (LEED) and the Building Research Establishment’s Environmental Assessment Method (BREEAM) (International Energy Charter, 2022[23]). However, to date, seven buildings in Uzbekistan have received a voluntary energy certification. All buildings in New Tashkent must achieve green building certification levels.
Uzbekistan adopted a green taxonomy in 2023. This taxonomy provides a list of sectors (efficiency of use of water and raw materials; improvement of air and soil quality; sustainable agriculture and forestry and eco-tourism; green transport; energy efficiency improvements; renewable energy; green buildings) and activities being considered green as well as specific criteria for these activities being classified as green. “Green” projects, which are financed through “green” bonds and loans, and investment projects by public and private entities receiving government support have to be assessed using the green taxonomy until 1st October 2024. The Ministry of Economy and Finance is the government entity responsible for providing information and raising awareness on the green taxonomy among the business community (Cabinet of Ministers of the Republic of Uzbekistan, 2023[113]).
Going forward, Uzbekistan could introduce mandatory reporting requirements for investment projects. The EU Taxonomy Regulation, which entered into law in 2020, for instance, places a reporting obligation on certain companies to disclose how much of their global investment is aligned with environmentally sustainable activities. Starting from 2022, large investors (with over 500 employees) with operations in the EU must disclose which proportion of their turnover, capital expenditure and operating expenditure is associated with environmentally sustainable economic activities. Non-financial investors can use the EU Taxonomy to plan their climate and environmental transition and raise finance for this transition, while financial companies can use the EU Taxonomy to design credible green financial products (OECD, 2022[48]). Uzbekistan could introduce similar reporting requirements beyond projects financed through green bonds or loans and entities, which receive government support.
It would also be beneficial to further refine Uzbekistan’s green taxonomy and to provide investors with information on how to use it (OECD, 2023[14]). The EU’s taxonomy, for example, provides a more detailed classification of sectors and activities defined as sustainable (European Commission, 2024[114]). It would also be important to provide investors in Uzbekistan with guidance and information on how to use and apply the green taxonomy and to spread awareness on this new instrument and on how to apply it. This could be done, for example, through a dedicated website with information and guidelines.
In addition to RBC, awareness raising on climate change and environmental challenges can encourage more green investment. Insufficient, inaccurate or costly information on the carbon performance of different technologies, products or services leads to sub‐optimal decisions by consumers and investors, and generally results in underinvestment in low-carbon technologies. For instance, lack of awareness on the energy performance of household appliances leads to an inability of consumers to interpret the impact of energy prices on the operational costs of one product relative to another, meaning that price signals do not influence purchasing behaviour as expected and carbon pricing instruments may be ineffective. Concerns about access to information on the carbon footprint of consumption and investment choices have led many governments to introduce measures to raise public awareness and understanding of carbon performance, including platforms for dialogue and information sharing, information campaigns, and product labelling schemes (OECD, 2022[48]).
Improving awareness of the benefits of renewables, energy efficiency and other low-carbon technologies could incentivise RBC engagement and green business practices by private sector. The general public, government officials, and industrial companies’ awareness of environmental protection, environmental issues and climate change and the benefits of renewable energies, energy efficient technologies and waste management remains low in Uzbekistan, in particular in rural areas (International Energy Charter, 2022[23]; IEA, 2022[2]; UNECE, 2020[13]). This can hinder energy efficiency improvement and reduce public support for investment in renewables (MOEF, 2023[6]). Likewise, public awareness of environmental aspects of industrial activities remains low and there is very limited citizen engagement in monitoring of environmental compliance of projects and facilities with a significant environmental footprint. There are few NGOs specialising in environmental enforcement (UNECE, 2020[13]). Going forward, it would be important to enhance awareness on climate change and environmental protection, energy efficiency, renewable energies and other green technologies, both among the general public as well as government officials and industrial companies in particular. More environment- and climate-conscious citizens can encourage firms to take more environment- and climate-related RBC measures.
Uzbekistan’s large, socio-economically significant industrial sector presents both challenges and opportunities for its low-carbon transition. The sector is an important direct and indirect contributor to carbon emissions (see section on energy intensive industries). As consumers and regulators push for greater sustainability in industrial value chains, the climate-related rationale for the adoption of low-carbon technologies and fuels in industry will increasingly be strengthened by competitiveness considerations.
Green hydrogen could be a solution to reduce hard-to-abate emissions in Uzbekistan’s industrial sector. It could complement energy efficiency technologies (Box 8.1), which will not be enough to meet the country’s more ambitious GHG reduction targets. Green hydrogen is defined as hydrogen produced through water electrolysis powered by solar- or wind-generated electricity. There are two important areas where green hydrogen is emerging as an important enabler of decarbonisation in industrial activities. The first is through substitution of grey hydrogen in existing industrial processes. Grey hydrogen (hydrogen produced using fossil fuels) is a critical input in numerous industrial processes, including chemical and fertiliser production, and substituting it with green hydrogen can help to abate emissions from these existing processes. The second is as a substitution for other fossil fuels in industrial activities that require significant heat. In heavy industries such as steel manufacturing, mineral and metal processing, and cement production the scope for decarbonisation through direct electrification is limited due to the need for extremely high temperatures which only fossil fuels have hitherto been able to provide; it is these emissions that render such industries hard-to-abate. Hydrogen is emerging as one possible fuel that can replace fossil fuels in these activities, and if the hydrogen is ‘green’ it can enable such hard-to-abate industries to transition to net zero emissions.
Improved energy efficiency will be an important component of the decarbonisation of Uzbekistan’s industry. Discussions with industrial firms and the MoE in Uzbekistan in the preparation of this section revealed that recent regulatory changes and gradual regulated electricity price increases are beginning to improve firms’ energy performance. During a 2024 fact-finding mission to Tashkent, almost all of the firms consulted confirmed that they had begun to use co-located renewable energy, primarily rooftop solar, for administrative functions. Many also reported introducing new energy saving and optimisation processes, often in collaboration with foreign technology providers. These changes are gradually leading to lower – and less-carbon intensive – electricity consumption in the industrial sector. There are also signs that Uzbekistan’s sizeable population of state-owned enterprises (SOEs) are investing in more technically advanced efficiency and emissions-reductions solutions, including waste heat recycling in sugar manufacturing and the possibility of using scrap and electrification in the metallurgical sector.
Green hydrogen could potentially also render Uzbekistan’s electricity system more flexible in the long-run. Hydrogen can support the integration of variable renewables in the electricity system, being one of the few options for storing energy over days, weeks or months (IEA, 2024[115]). However, as this technology is not mature yet and remains in an early development stage, this section focuses on green hydrogen as a solution to reduce hard-to-abate emissions in heavy industry.
Uzbekistan is home to Central Asia’s most advanced green hydrogen project. The project is a joint venture between the chemical SOE Uzkimyosanoat (UKS) and Saudi Arabia’s ACWA Power. It is the first green hydrogen project in Central Asia to reach a final investment decision (FID), and has financing from a number of IFIs, including the EBRD (EBRD, 2023[116]). The project set-up is currently unique in Central Asia: ACWA Power has signed a power purchasing agreement (PPA) with the national grid to provide renewable energy (RE), and a hydrogen-purchasing agreement (HPA) with Uzkimyosanoat to provide green hydrogen. Uzkimyosanoat will use this green hydrogen to replace grey hydrogen in its ammonia production, producing 3 000 tonnes of green ammonia. The company plans to export this green ammonia to the EU in the context of emerging low-carbon market opportunities following the introduction of the EU’s Carbon Border Adjustment Mechanism.
Substantial investment will be necessary if green hydrogen is to play a significant role in Uzbekistan’s low-carbon transition. Identifying and addressing the barriers to attracting further investment in low-carbon fuels and technologies such as green hydrogen will be key to capitalise on the successes and lessons of the UKS-ACWA project. At the same time, while the majority of investment will have to come from private sources, the government also has a critical role in mobilising finance through advocacy, awareness raising or more interventionist de-risking strategies that can lower the cost of capital for early investors (Lee and Saygin, 2023[117]). Striking the right balance will be crucial for making Uzbekistan attractive for green hydrogen projects and ensuring the long-term sustainability of the government’s strategy.
This section focusses on three areas where policy action can increase the attractiveness of Uzbekistan as a destination for green hydrogen investment projects. The first of these is the setting out of a strategic vision to clarify how green hydrogen will be used in Uzbekistan’s low-carbon transition, which can give clarity to investors on the long-term market opportunities in the country. The second examines how Uzbekistan can enhance its green innovation and investment policy framework to increase the attractiveness of Uzbekistan for green hydrogen projects, and the third analyses investment facilitation measures that the government can take to accelerate green hydrogen project implementation. The section builds upon OECD work undertaken under the Sustainable Infrastructure Programme in Asia to support Central Asia governments with aligning industrial systems and climate objectives (Box 8.2).
The OECD Sustainable Infrastructure Programme in Asia (SIPA) supports governments in Central and Southeast Asia in aligning economic and investment ambitions with low-carbon goals. In Central Asia, SIPA has been working closely with Kazakhstan, Mongolia, and Uzbekistan to balance industrial growth with climate ambitions. Despite varied industrial structures, these countries face common challenges related to decarbonisation, such as large, fossil-fuel intensive power sectors, increasing industrial demand for electricity, socio-economically important hard-to-abate sectors, legacy infrastructure issues, and business and investment climate conditions that limit private sector participation (OECD, 2017[118]) (OECD, 2021[119]). The Programme is financed by the German government through the International Climate Initiative.
For more information on SIPA activities in Central and Southeast Asia: https://www.oecd.org/en/about/programmes/sustainable-infrastructure-programme-in-asia.html.
8.5.1. Define a strategic vision for green hydrogen development and its contribution in Uzbekistan’s low carbon transition
The Government of Uzbekistan has articulated ambitious low-carbon transition targets but does not have an explicit industry emissions reduction commitment. Uzbekistan strengthened its GHG emissions reduction ambitions in its updated NDC in 2021 (see section on the strategic and legal framework for green investment) (Government of Uzbekistan, 2022[120]). However, Uzbekistan’s NDC does not contain an explicit commitment for emissions reductions in its energy-intensive industrial sector (Government of Uzbekistan, 2022[120]). Responding to Article 4.19 of the Paris Agreement, since 2021, the government has been working closely with international partners, including the OECD through SIPA, the EBRD, and the World Bank, to develop a long-term strategy to support the implementation of the government’s ambitions. As in other emerging and developed economies (Table 8.1), a clear vision for hydrogen in Uzbekistan's long-term strategy is critical for signalling the direction and pace of the low-carbon transition to investors, the industrial sector, and policymakers, enabling the development and implementation of sectoral plans.
Uzbekistan has already committed to improving energy efficiency in the industrial sector. Recognising the need to align industry growth with climate goals, a 2022 presidential resolution (No. 436) commits to improving energy efficiency in industry by 2030. Point 27 of the Action Plan to implement the Green Economy Transition Strategy adopted through this resolution contains two relevant technology-neutral clauses for upgrading industrial infrastructure and developing a policy toolkit (fiscal, subsidies) to support the low-carbon transition (Government of Uzbekistan, 2022[120]).
Sources: (Government of Chile, 2021[121]), (Green Hydrogen Organisation, 2023[122]) (Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB), 2016[123]), (Green Hydrogen Organisation, 2023[124]), (Ministry of Environment, Forest and Climate Change Government of India, 2022[125]), (Green Hydrogen Organisation, 2023[126]), (Ministery of Energy and Minerals (Oman), 2022[127]), (Green Hydrogen Organisation, 2023[128]).
Uzbekistan has taken some initial steps to establish a policy framework conducive to green hydrogen development. In 2021, Uzbekistan issued Presidential Decree (PD) no. PP-5063 (PD 5063), which set out for the first time three overarching priorities and rationales for supporting a hydrogen industry in Uzbekistan: (1) Support widespread introduction of innovative technologies to develop hydrogen energy and renewable energy sources; (2) build hydrogen energy infrastructure to promote energy efficiency and security; (3) enable Uzbekistan’s transition to a green economy (Government of Uzbekistan, 2021[129]). Work between the World Bank and the MoE, which leads the government’s hydrogen work programme, has resulted in an initial roadmap for the use of low-carbon hydrogen in industry, which was initially drafted in 2022 but only publicly released in 2024 (World Bank, 2022[130]).
A national strategy for green hydrogen could enhance the long-term sustainability and competitiveness of Uzbekistan’s industrial sector. Directing firm-level investment to low-carbon technologies requires significant co-ordination across policy domains. It also requires strong and consistent signals to the private sector to demonstrate that low-carbon technologies such as green hydrogen and its derivatives are part of the government’s strategic vision for the future competitiveness of the industrial sector in a low-carbon context. Recent OECD SIPA work, including support for Mongolia in developing a national green hydrogen strategy, as well as complementary OECD research on how emerging markets and developing economies such as Uzbekistan can become competitive, highlights the importance of national strategic documents in aligning the public and private sector efforts in advancing this emerging low-carbon technology (ESMAP et al., 2023[131]; Cordonnier and Saygin, 2022[132]).
8.5.2. Create a business case for green hydrogen and support early investors
In the attraction of investment to develop a green hydrogen industry, Uzbekistan will have to compete with other emerging market and developing countries (EMDEs) with similar ambitions. Success in attracting investment will therefore rely on the establishment of a framework that is conducive to the creation of competitive business cases for green hydrogen production in Uzbekistan. This can be done by (1) reducing costs and risks for early investors, (2) clearly articulating and promoting the business case for green hydrogen, and (3) acting as an effective conduit between international and multilateral financing institutions and local industrial and energy stakeholders (Table 8.2).
Government support has been primarily channelled through funding for basic and applied research in hydrogen. Through PD 5063, the government allocated USD 4 million (UKS 50 billion) in off-budget funds to support hydrogen research carried out at the National Scientific Research Institute of Renewable Energy Sources (the Institute) under the MoE (Government of Uzbekistan, 2021[129]). The Institute has established 11 research laboratories, with a number of these working on different parts of the hydrogen production and use value chain and has developed a 35-hectare site for testing, training, and accreditation close to Tashkent. The Institute has ambitions to expand research facilities to Chirchiq, a key site for the petrochemical and fertiliser industry, to test hydrogen use in urban mobility. They are also exploring how to repurpose Uzbekistan’s extensive gas transmission network for hydrogen use. Recent efforts to boost low-carbon technology research also include the establishment of the Central Asian Green University and the development of new MA programmes focused on hydrogen. There has also been a strong international component to Uzbekistan’s low-carbon research and innovation, with the MoE having signed co-operation and development agreements for blue and green hydrogen research with several international partners, including JICA (Japan) through the SATREPS programme (JICA, 2024[133]).
Like other EMDEs developing a green hydrogen industry, Uzbekistan could establish targeted expenditure-based investment incentives specifically for green hydrogen projects. To date, the government’s approach to motivating low-carbon industrial projects mirrors its approach to attracting FDI in renewable energy. Uzbekistan has avoided using a Feed-in-Tariff (FiT) system (except for very small-scale renewable energy auto-producers), opting instead for a mix of fiscal and customs incentives to enhance investment attractiveness. While legally these incentives can apply to capital expenditure for a broad range of sustainable infrastructure investments, it remains unclear if they explicitly extend to green hydrogen projects. In addition to clarifying whether these incentives apply to green hydrogen, it would also be important to shift from indirect tax (e.g. property tax, customs duty or land tax) and CIT incentives towards expenditure-based incentives.
Derisking policies could foster investment in green hydrogen projects without limiting the scope for investment in other low-carbon industrial initiatives. Uzbekistan has introduced certain aspects of a ‘derisking’ approach already, notably through the establishment of a HPA between the state-owned Uzkimyosanoat and ACWA power, mitigating the risk and uncertainty that arises from the lack of maturity in the domestic market for low-carbon solutions. Although this project is not a typical FDI project in low-carbon industry and infrastructure but rather a domestic investment project in collaboration with a foreign technology provider, it highlights the critical role of predictable off-take agreements (purchase obligations) in ensuring project bankability. OECD work on attracting investment for green hydrogen highlights other potential ‘derisking’ policies and their impact on the cost of capital (Table 8.2) (OECD/The World Bank, 2024[134]; Lee and Saygin, 2023[117]).
Effective carbon pricing will be critical to incentivising investments in low-carbon technologies in general and in green hydrogen in particular. The attractiveness of low-carbon investment projects for Uzbekistan’s industrial sector will depend on raising the cost of fossil-fuel intensive alternatives. At present there is no effective carbon price in Uzbekistan (World Bank, 2022[130]). Policy efforts to improve industrial energy efficiency through stricter emissions and performance standards have created some incentives for firms to invest in new technologies and processes. The government is already engaged in efforts to reform fossil fuel subsidies and increase national energy tariffs (IISD, Forthcoming). The introduction of a carbon tax, which is the subject of ongoing discussions within the government, is another measure which could signal to investors that the country’s vast industrial sector is open to low-carbon industrial investments such as green hydrogen.
At the same time, it is imperative that industrial firms have the technological capacities and knowledge to embed low-carbon technologies such as green hydrogen into their operations. In sectors such as petrochemicals where green hydrogen can replace ’grey’ or ‘brown’ hydrogen, these capacities are likely already established. The challenge for policymakers will be to extend awareness and expertise to new sectors such as metallurgy and transport, where the understanding of hydrogen remains limited. Institutions such as the National Scientific Research Institute for Renewable Energy Sources can play a key role in this by facilitating technology transfer and skills development through pilot projects with industry. The introduction of a curricula on green hydrogen into a master’s degree programme at the Tashkent State Technical University, with support of USAID, is a welcome step in this regard.
Strategic government engagement with IFIs and bilateral technical co-operation platforms could help raise the profile of potential green hydrogen projects in Uzbekistan. An important consideration for EMDEs like Uzbekistan is that policymakers have very limited fiscal capacity to offer capital grants for early-stage projects. Policymakers need to use a more creative blend of investment and fiscal incentives to de-risk projects and attract finance from IFIs and multilateral development banks (MDBs) to complement the financing roles of the private and public sector. Uzbekistan is already working in this area, with mature technical co-operation established between the MoE and bilateral programmes of the Japanese and German governments for hydrogen research and development. Additionally, the role of IFIs such as the EBRD in financing the UKS-ACWA project demonstrates that the government already has experience in mobilising IFI financing for high-risk, cutting-edge low-carbon technology projects.
A growing interest in OECD member countries in green hydrogen production is creating new scientific, technological, and investment opportunities in EMDEs such as Uzbekistan. Kazakhstan, for example, is one of a number of countries that has now partnered with Germany’s Hydrogen Diplomacy programme, led by the German Federal Foreign Office, which focuses on establishing bilateral partnerships, providing technical and financial support, and fostering a global hydrogen market (GIZ, 2024[135]).Japan’s Basic Hydrogen Strategy aims to enhance global hydrogen production capacity and industry competitiveness through technology demonstrations and strategic investments in Japanese hydrogen technologies (Agency for Natural Resources and Energy, 2023[136]). There is a role here for the government to map the emerging financing and technical support programmes available for green hydrogen projects in the country and to more strategically promote Uzbekistan’s particular business case.
Investment promotion bodies in Uzbekistan could play a crucial role in enhancing the country's appeal for green hydrogen projects. For example, the IPA actively promotes “green” projects both on its website and during meetings with potential investors. Although the IPA has not previously been involved in low-carbon industrial projects, if the Government of Uzbekistan articulates a strategy and supportive policy mix for such projects like hydrogen, these agencies can act as effective intermediaries between local industry and external investors and technology providers. They could effectively promote Uzbekistan as a prime location for green hydrogen projects, maintain a registry of bankable hydrogen projects, and facilitate access to financing opportunities, including those that could qualify for IFI financing through initiatives such as the World Bank ‘lighthouse’ projects (Box 8.3). A more important role of investment promotion bodies in Uzbekistan in the attraction of green hydrogen projects requires first and foremost clarifying and strategic an institutional framework for green investment promotion.
To integrate into global low-carbon hydrogen markets, it will be important that Uzbekistan aligns its green hydrogen projects with international standards and certification requirements. If Uzbekistan seeks to position itself within international emerging low-carbon production value chains, either as an exporter of green hydrogen or its derivatives such as low-carbon ammonia, both domestic policymakers and private sector actors need to meet the international quality infrastructure standards that underpin regional and global markets. Currently, this is happening at the project level, such as Uzkimyosanoat's collaboration with a German accreditation firm to ensure compliance with EU regulations. However, this awareness must be extended to relevant government bodies to assure investors that similar low-carbon industrial projects will be guided by policies and regulations that support their integration into external value chains. It is important for policymakers to engage in international consultations on the development of these standards and certifications, the landscape of which remains fragmented but which will likely consolidate in the coming years around a common set of rules and standards (Cammeraat et al., 2022; International Energy Agency, 2023b). Participating in multilateral initiatives and international co-operation fora will enable Uzbekistan to remain abreast of these developments.
The World Bank, in a 2023 report developed with the OECD, proposed a global initiative for supporting mid- to large size “lighthouse” projects (100 MW to 1GW) with a total volume of 10 gigawatts (GW) or more. The aim is to demonstrate the viability of green hydrogen projects across emerging economies
The aim of the projects would be to:
Develop a guideline or checklist of factors across the supply chain that need to be considered when developing a clean hydrogen project;
Promote tools for prioritising and assessing projects, drawing initially from the pipeline of existing projects (i.e., project assessment frameworks, risk evaluation matrices, and cost benefit analysis models);
Identify and address obstacles that hinder the development and deployment of clean hydrogen projects, involving the mapping out of potential bottlenecks in the supply chain, technology gaps, regulatory hurdles, financing constraints, and infrastructure limitations;
Improve the quality of clean hydrogen projects to make them more attractive by implementing coherent standards for project planning, risk management and performance monitoring;
Promote joint mechanisms (funds and donors such as MDBs, government agencies and private sector) to allocate financial support to the projects;
Follow the principles of the World Bank Group’s International Finance Corporation (IFC or similar environmental, social, and governance guidelines) to define a set of actions to guarantee sustainable, socioeconomically equitable, and beneficial project development.
Source: (OECD/The World Bank, 2024[134])
8.5.3. Facilitate investment in green hydrogen and remove barriers to investment
Access to land for investment in green hydrogen is a major determinant of a project’s feasibility and attractiveness. Land access is particularly important for renewable energy infrastructure for projects implemented with co-located and dedicated renewable energy sources. It is also essential when electrolysis is powered by grid-delivered renewable power. Regulatory trends in major markets indicate that for hydrogen to be considered ‘green’, the power used for production must be additional and not diverted from direct electrification elsewhere. Therefore, scaling up the hydrogen industry will require significant expansion of renewable power. In assessing a possible roadmap for a low-carbon hydrogen industry in Uzbekistan, with a focus on ‘blue’ hydrogen, the World Bank estimated that an additional 250km2 of land for solar and wind energy would be needed for electrolysis by 2030, and 750km2 by 2050 (World Bank, 2022[130]). Consequently, many of the land-related issues that would have an impact on the feasibility of hydrogen projects are therefore similar to those for renewable energy projects.
Uzbekistan has well documented land-related investment challenges. As discussed in the chapter on Uzbekistan’s legal framework for investment and in previous OECD work on the business and investment climate in Uzbekistan, the 1998 Land Code stipulates that foreign investors may not purchase land or alienate land rights and may only lease it, and are technically required to return land to the state in the condition in which it was originally obtained (Government of Uzbekistan, 1998[137]) (OECD, 2021[119]). Since significant capital investments are necessary for renewable energy projects, land issues have been regularly raised by investors as a barrier to investment in Uzbekistan’s sustainable energy infrastructure. Investors have succeeded in obtaining land rights that are sufficiently secure for them to undertake such investments, as demonstrated by the significant expansion of FDI in renewable energy in recent years, but much of this land has been allocated through project-specific presidential decrees or clauses in PPP agreements between investors and the relevant ministry or SOE to which the land belongs.
Ensuring smooth permitting and licensing processes is essential for lowering the initial transaction costs of green hydrogen projects. The chapters on Uzbekistan’s legal framework for investment and investment promotion of this report provide a detailed overview of the permitting and licensing framework in Uzbekistan. There are a number of specific permitting and licensing issues critical for green hydrogen projects, namely around planning and zoning, transport, water access, storage, handling and safety considerations (OECD, 2023[138]). Uzbekistan already has a fairly well-established institutional and regulatory experience regarding permitting and licensing procedures for various parts of the hydrogen value chain (World Bank, 2022[130]). Nevertheless, if the use of hydrogen is to be extended to other industrial applications and its production scaled up, new licensing and permitting issues are likely to emerge. For example, the MoE is exploring the repurposing of gas pipeline networks for hydrogen use, an area for which there is a significant body of scientific knowledge but limited practical experience to guide risk-based permitting and licensing (OECD, 2023[138]). Policymakers and industrial firms should anticipate these challenges and draw on international experience.
A better use of industrial development and planning policies, such as clusters and SEZs, could help accelerate green hydrogen project implementation. The cost-effective way to deliver hydrogen to the end-user is to cluster production and transmission infrastructure with demand. Uzbekistan has extensive experience with SEZs in the context of industrial development, and the country has a number of significant industrial clusters where the use of hydrogen can be developed or expanded and where there is existing energy production and transmission infrastructure. The potential pilot project of the Ministry of Energy at Chirchiq is also co-located with a ‘Special Industrial Zone’ (a form of SEZ). The development of hydrogen research and pilot projects is therefore already moving in a direction that is seeking to optimise the opportunities presented through SEZs and industrial hubs. A more strategic approach to using SEZs, streamlining industrial permitting, and zoning, and leveraging demand in existing industrial clusters could significantly enhance Uzbekistan's attractiveness for future green hydrogen projects.
Such approach, which follows a logic of “hub”, can help accelerate project development in suitable locations and enhance business rationales through the economic benefits of infrastructure co-location. In the OECD, countries have been developing approaches to help identify locations and designate priority and preferred land for the implementation of clean energy projects. Such approaches include France’s designation of “acceleration zones” for renewable energy projects, which identify priority zones for such project development and enhance social acceptability. Another example is Australia, which has been leveraging geoscience data and mapping to facilitate project development and implementation by establishing a public portal through which project developers can visualise a range of relevant information. Australia's Hydrogen Opportunities Tool provides a wide range of data including renewable energy production potential, water availability, infrastructure availability, and potential for storage. Many countries seeking to develop domestic large-scale hydrogen production, including Australia and Spain, are planning to develop “hydrogen hubs” that have the potential of generating agglomeration economies and enabling the development of local circular economies, for example by co-locating wastewater treatment infrastructure, green hydrogen production and industrial production (OECD, forthcoming[139]). USAID has announced that it would support the development of a green hydrogen hub in Uzbekistan, which provides an opportunity to explore this model.
Source: (President of the Republic of Uzbekistan, 2019[94]); (President of the Republic of Uzbekistan, 2022[95]); (President of the Republic of Uzbekistan, 2021[96]); (President of the Republic of Uzbekistan, 2022[97]); (President of the Republic of Uzbekistan, 2017[98]); (Republic of Uzbekistan, 2019[99]); (IEA, 2022[2]); (UNECE, 2020[13]); (International Energy Charter, 2022[23]), (President of the Republic of Uzbekistan, 2023[38])
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← 1. Primary energy supply is defined as energy production plus energy imports, minus energy exports, minus international bunkers, then plus or minus stock changes (IEA, 2024[142]).
← 2. Variable renewable energy refers to sources of renewable energy (usually electricity) where the maximum output of an installation at a given time depends on the availability of fluctuating environmental inputs. It includes wind energy, solar energy, run-of-river hydro and ocean energy (OECD, 2024[140]).
← 3. The Minister of Economy and Finance, the Minister of Ecology, Environmental Protection and Climate Change, who also serves as the council’s secretary, the Minister of Investment, Industry and Trade, the Minister of Foreign Affairs, the Minister of Energy, the Minister of Agriculture, the Minister of Transport, the Minister of Water Resources, the Minister of Construction, Housing and Communal Services, the Minister of Mining and Geology, the Minister of Health, the Minister of Emergency Situations, the Minister of Poverty Reduction and Employment, the Minister of Digital Technologies, the Minister of Pre-School and School Education, the Minister of Higher Education, Science and Innovation, the Director of the Statistics Agency, the Director of the Youth Affairs Agency, the Chairman of the Oliy Majlis Senate Development and Ecology Committee of the Aral Bay region, the Deputy Speaker of the Legislative Chamber of the Oliy Majlis, the Chairman of the Council of Ministers of the Republic of Karakalpakstan, mayors of regions and Tashkent city, local and foreign environmentalists and scientists, media representatives and local activists.
← 4. Power system flexibility refers to the ability to respond in a timely manner to variations in electricity supply and demand (IEA, 2019[143]).
← 5. Based on interviews with renewable energy investors in Uzbekistan.
← 6. The ISO 50001 standard provides small and large companies and organisations in all sectors with a recognised framework for developing an effective energy management system. To obtain an ISO 50001 certification, organisations have to adhere to a set of requirements, including the development of a policy for more efficient use of energy, the setting of targets and objectives to meet the policy and the continuous monitoring or energy consumption and whether targets are met (ISO, 2018[141]).