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

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(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

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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

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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

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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