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Supported by abundant resources and a stable social environment, Uzbekistan has experienced rapid economic growth in recent years. However, ageing power plants and transmission and distribution infrastructure have significantly hindered further economic development. To address these challenges, the government has introduced a series of reforms aimed at streamlining the domestic energy market.

As part of these efforts, between September 2023 and mid-2024, the Uzbek government issued, among other provisions, the Measures to Carry Out the Next Stage of Reform in the Energy Sector, and a revised Law on the Electric Energy Industry.

A key feature of these reforms is the clear definition of roles, rights and responsibilities for electricity market participants. Notably, the central electricity procurement function of the National Electric Grid of Uzbekistan (NEGU), under the Ministry of Energy, has now been assigned to the newly established Uzenergosotish (UES). The NEGU now solely manages grid operations, while the UES is responsible for centralised electricity procurement from sellers.

This reform directly affects the contractual structure of power station investment in Uzbekistan by splitting the power purchase agreement (PPA). Previously, PPAs encompassed the purchase of electricity along with grid services in a single agreement. Now, electricity sellers will sign individual PPAs with the UES to specify the terms of electricity transactions, and separate transmission connection agreements (TCAs) with the NEGU to manage grid service details.

The recent reforms introduce new contractual features. Based on the authors¡¯ extensive project experience in Uzbekistan, the following aspects warrant particular attention from investors.

Project construction schedule. In Uzbekistan, power plant investment projects typically require investors to construct the power plant and assume responsibility for building, installing, testing, commissioning and handing over the associated electrical facilities. Additionally, the power plant¡¯s commercial operation date (COD) must follow the successful testing and commissioning of these associated facilities.

Before the separation of PPAs and TCAs, construction of both power plants and associated electrical facilities was governed by a unified project schedule with common provisions for delays, such as purchaser risk events and force majeure. Post-separation, power plant construction is managed by the PPA, while associated electrical facilities construction is regulated by the TCA.

Although the initial schedules for both agreements may be aligned, the applicable delay provisions often differ. As the project progresses, this could lead to misalignment between the construction timelines of the power plant and associated electrical facilities, complicating project execution and management. Investors should carefully review the delay provisions in both agreements to ensure consistent progress standards for the power plant and associated electrical facilities construction.

NTC risk events. With the separation of power purchase and grid service functions, grid-related risk events, previously unified under the purchaser risk events in the PPA, are now separately categorised as NTC risk events. In the initial versions of the PPA and TCA provided by the Uzbek authorities, it is typically stipulated that the NEGU is responsible for NTC risk events occurring before the COD, while the UES assumes responsibility for those occurring after the COD.

Although this division of responsibilities appears to cover all NTC risk events, pre-COD NTC risk events could still prevent the seller from delivering electricity to the grid in a timely manner under the PPA. Therefore, it is recommended that investors negotiate provisions in the PPA requiring the UES to also assume payment obligations for deemed net power output payments for pre-COD NTC risk events, with the UES subsequently recovering the related costs from the NEGU by itself.

Additionally, PPAs often include bank guarantees or similar instruments as performance security from the UES. For investors, securing the inclusion of the above-mentioned arrangement would enhance the availability and enforceability of remedies in such scenarios.

Co-ordination of billing and payment methods. In Uzbekistan, large-scale power generation projects often allow electricity tariffs to be calculated in strong currencies such as US dollars or Chinese yuan. However, payments are typically required to be settled in the local currency, Uzbekistani som. Under the TCA, settlements between the seller and the NEGU involve three components: construction of associated electrical facilities (payments from the NEGU to the seller); land compensation for associated electrical facilities (payments from the NEGU to the seller); and grid services (payments from the seller to the NEGU), all of which are also settled in som.

Although Uzbekistani power purchasers often commit to providing exchange rate compensation in agreements, obtaining foreign currency within Uzbekistan has remained challenging since the removal of exchange controls in 2017. It is therefore recommended that investors negotiate for power purchasers to directly settle electricity payments in strong currencies such as US dollars or euros. Simultaneously, the TCA should adopt the same currency for settlements to mitigate foreign exchange risks.

Calculation of transfer consideration. In energy investment projects under the IA/PPP model, it is typically agreed that, in the event of early termination, either the investor or offtaker has the right to sell or acquire the relevant energy project at the consideration calculated based on a predetermined method. Before the separation of the PPA and TCA, the calculation of consideration under the PPA included the construction costs of associated electrical facilities.

However, after the separation, the initial draft of the PPA provided by the Uzbek side removed this provision, and the TCA also did not address it. This omission implies that, in the event of early termination, the investor may not be able to recover the construction costs of the associated electrical facilities. To address this, it is recommended that investors pay close attention to the calculation clauses for transfer consideration in the agreements. It is essential to ensure that all development costs, including associated electrical facilities construction costs, are recoverable.

Uzbekistan is a dynamic and progressive emerging market that investors can actively shape by introducing market-oriented legal tools. Entering this market requires a thorough understanding and respect for local laws and regulations, while also devising transaction structures within the legal framework that align with project realities to safeguard investors¡¯ interests effectively.

Cheng Jun is an equity partner and Zhou Xi is an associate at Zhong Lun Law Firm