TAJIKISTAN'S HYDRO ENERGY PRICING DILEMMA

UNCLAS SECTION 01 OF 04 DUSHANBE 000668 SIPDIS SENSITIVE SIPDIS STATE FOR SCA/CEN, EB, S/P NSC FOR MILLARD, MERKEL E.O. 12958: N/A TAGS: PGOV ECON EENG EINV AF PK TI SUBJECT: TAJIKISTAN'S HYDRO ENERGY PRICING DILEMMA REF: A) DUSHANBE 326 B) DUSHANBE 327 DUSHANBE 00000668 001.2 OF 004 (U) Sensitive but unclassified. Please handle accordingly. Not for public Internet. ¶1. (U) SUMMARY: Tajikistan faces critical choices to increase its hydropower exports and streamline domestic consumption and production. However, as long as the government provides cheap-or free-electricity, reforming the existing system will prove extremely difficult. Some simple steps to reduce transmission and distribution losses would increase exports if high-voltage lines are built - in addition to the planned additional hydropower projects (REFTELS). Promising opportunities exist for U.S. private investment in providing technology and expertise for the domestic and external market. END SUMMARY. HOW MUCH ELECTRICITY TAJIKISTAN REALLY EXPORTS~ ¶2. (SBU) Tajikistan's leading export is electricity, but much of it is folded into exporting energy intensive aluminum. State-owned Tajikistan Aluminum Plant (TadAZ) was built in conjunction with Nurek hydropower station (HPS) during Soviet times and uses between 4000-5000 kWh of electricity yearly, accounting for one-third of domestic electricity consumption. TadAZ is Tajikistan's largest exporter, earning $430 million, 54 percent of total merchandise exports, according to the World Bank. Although the price TadAZ pays for electricity is a "state secret," according to independent local hydro energy expert SIPDIS Rustam Aminjanov, the World Bank estimates that by taking into account the wholesale cost and production taxes, TadAZ pays about 1.1 cents per kWh - well below the break-even cost of 1.7 cents for the company. TadAZ historically runs high electricity payment arrears, although recent accounting scandals compelled the government to make the company's energy payments timelier. TadAZ is the largest industrial employer, with 12,000 on the payroll. ~AND WHY MUCH MORE CAN BE EXPORTED ¶3. (SBU) Building new higher voltage power lines would increase exports, even at current hydro energy generating levels. Tajikistan has few options to export excess electricity during summer and often sheds excess power; last year the equivalent of 1.5 billion kWh was discharged to maintain the Nurek reservoir water level. The power lines leading into Afghanistan are 110 kv, but only operate at 35 kv; this electricity currently is sold at 2 cents per kWh. Poor relations with neighboring Uzbekistan, instigated by Tashkent, have closed export through the old Soviet power grid, although barter trade with the Uzbeks still takes place in northern Tajikistan, which is cut off from southern Tajikistan's grid until a proposed South-North high voltage line is built. An energy consultant working with the World Bank calculates that the export value of this seasonal surplus electricity at $27- 43 million when exported for 2 or 3 cents. ¶4. (SBU) Additional electricity exports also depend on reducing internal theft and transmission loss, which account for 40-60 percent of production. Aminjanov estimates 30 percent of energy hookups in Tajikistan are illegal, but the government is ill-equipped to deter this. Inspectors are easily bribed to report a lower meter reading, non-paying state factories are not disconnected from the power grid, and individual domestic consumers cannot be physically cut off from electricity for nonpayment due to the way the older transformer boxes are DUSHANBE 00000668 002.2 OF 004 configured. An energy consultant working with the World Bank believes the 2002 commercial and technical loss figure of 60 percent translates to a loss of potentially exported electricity worth $36 - 55 million. THE HYDRO ENERGY PRICING CONUNDRUM ¶5. (SBU) Electricity in Tajikistan is considered to be a public good and priced accordingly. Tariffs for electricity use are a paltry half a cent for individual customers per kWh and 0.8 cents per kWh for industrial customers, although a lower rate holds for state-owned factories and a higher rate for privately-owned ones, undercutting the government's lip-service to promoting private-sector growth. The individual customer rate is 24 percent of the "cost recovery price" when factoring in average transmission and distribution costs of 1.8 cent per kWh. Almost 90 percent of the country's electricity is generated at Nurek Hydro Power Station (HPS),which produces electricity very cheaply at 0.3 cents per kWh. This is because the investment cost was "sunk" (carried by Russia) when the dam was built. ¶6. (SBU) The hydro-energy pricing conundrum comes into play when looking at new hydropower projects, which do not carry such a previously "sunk" investment cost. The World Bank estimates that the lowest production cost for the new planned hydropower plant facilities will be 2 cents per kWh at Sangtuda HPS. Electricity for the first-phase Rogun HPS has an estimated production cost of 2.5 cents per kWh and after the second phase 2.8 cents per kWh. The cost recovery price when taking in transmission and distribution costs would then be the cheapest at 3.8 cents per kWh - placing demand for this power primarily into the export market, if the government does not subsidize production. (COMMENT: REFTELS include a comprehensive overview on pending hydropower station investments and the key players. END COMMENT.) The World Bank indicates it is economically feasible for Pakistan to pay between 5 to 6 cents per kWh for Tajik electricity. WHAT NEEDS TO BE DONE TO FIX SUPPLY AND DEMAND~ ¶7. (SBU) A comprehensive financial recovery plan for electricity production, pricing, transmission, and distribution would go a long way to fixing the electricity sector's woes. Seasonality is a huge issue for Tajikistan and causes severe electricity rationing in the winter months, and is exacerbated by the large water release needs for agriculture. The World Bank believes building Rogun HPS could alleviate-but not solve-the seasonality issues by regulating water flow upstream of Nurek HPS. In addition, during an April 6 meeting, visiting World Bank economist Raghuveer Sharma pointed out that export revenue from Rogun HPS could pay for winter electricity imports. Moreover, Sharma indicated Tajikistan has good quality coal that could be used to produce thermal power during the winter. (NOTE: PolOff's meeting was delayed due to a last-minute teleconference Sharma had with RAO UES, which just has asked for an $150 million World Bank credit for Sangtuda I HPS construction. END NOTE.) ¶8. (SBU) At a minimum, pricing needs to be set at the cost-recovery level to include investment in the entire electricity network to reverse asset deterioration. Sharma notes that the switch platform at Nurek HPS is slowly sinking, and transformers throughout the electrical grid are weakening from lack of repair. Most urban areas have a single outdated DUSHANBE 00000668 003.2 OF 004 electrical box to distribute power to several apartment buildings. The majority of the boxes are completely worn out and must be replaced, according to Aminjanov. ¶9. (SBU) Cost recovery pricing includes tariffs optimizing domestic consumption and streamlining industrial use while not penalizing private businesses. Because the majority of the population pays only a nominal charge and collection is not stringently enforced, there is little incentive to conserve electricity. The tariff pricing mechanism is three-tiered: average citizens pay the least, state-owned industries pay a higher rate, and private industries pay the highest fees. This inverted pricing structure encourages wasteful consumption by ordinary consumers - e.g., the Soviet-era habit of turning on the TV when getting up in the morning and leaving it on until one goes to bed - subsidizes inefficient state-owned industries that produce unneeded and unwanted goods, and dampers legitimate private business ventures. ~IS HINDERED BY THE POLITICAL REALITY OF HYDROPOWER ¶10. (SBU) Political considerations color the hydroenergy pricing dilemma. Tajikistan has few natural resources, but cheap electricity is one thing the government can offer its citizens. President Rahmonov is unlikely to make radical changes to the pricing structure this election year because building large new infrastructure projects, such as hydropower stations, represents a cornerstone of his economic policy. During an April 7 PolOff meeting with Barqi Tojik, the state-owned energy monopoly, it was clear tariff pricing does not correlate with production, transmission, or distribution costs - all final pricing decisions are made within the Ministry of Energy and higher up - i.e., within the Presidential circle. ¶11. (SBU) COMMENT: An increase in electricity tariffs also would not likely help upgrade the electricity infrastructure or provide more state incomes to help the poor. The mounting corruption levels in Tajikistan widen income inequalities and push back the nascent middle class. The scale of the new power projects - and the competing interests of potential international investors - opens the door to even greater graft. In the meantime, severe seasonal power outages hinder economic progress because private small and medium-sized private enterprises cannot run without electricity. ¶12. (SBU) COMMENT CONTINUED: Hydropower is a crucial component of Secretary Rice's Infrastructure Integration Initiative for Greater Central Asia. Increased exports of Tajik electricity would benefit first Tajikistan and then Afghanistan, Pakistan, and potentially even India. American investment in the sector would help bring transparency and encourage market principles if, in particular, high-voltage power lines for export are built. There also are opportunities for American investment in the domestic market in technology and expertise to upgrade transformers in residential communities, assuming Russia does not dominate the entire energy sector before U.S. firms can get a toehold. ¶13. (SBU) COMMENT CONTINUED: However, Russian energy monopolies, as a matter of Kremlin foreign policy, are well on their way to so dominating Tajikistan's energy sector that Dushanbe risks becoming a neo-Soviet satellite state. In principle, many intelligent and well-informed Tajiks are aware of this threat to their sovereignty, but do not know how to counter the snout-in-the-trough greed in high levels of the DUSHANBE 00000668 004.2 OF 004 Tajik government. It seems to us that Moscow appears to abet this corruption. More high-level U.S. government engagement with the Tajiks could help Dushanbe better comprehend the nexus of world-standard energy policy and sovereignty. END COMMENT. HOAGLAND