Identifier
Created
Classification
Origin
06SKOPJE1117
2006-11-27 16:11:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Skopje
Cable title:  

MACEDONIA: GOM FACING POTENTIAL POLITICAL FALLOUT

Tags:  ENRG ECON EINV EAID MK 
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RUEHSF/AMEMBASSY SOFIA 5047
RUEHVB/AMEMBASSY ZAGREB 2298
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UNCLAS SKOPJE 001117 

SIPDIS

SENSITIVE
SIPDIS

DEPT PLS PASS TO USAID

E.O. 12958: N/A
TAGS: ENRG ECON EINV EAID MK
SUBJECT: MACEDONIA: GOM FACING POTENTIAL POLITICAL FALLOUT
FROM ELECTRICITY SHORTAGES

Summary
--------
UNCLAS SKOPJE 001117

SIPDIS

SENSITIVE
SIPDIS

DEPT PLS PASS TO USAID

E.O. 12958: N/A
TAGS: ENRG ECON EINV EAID MK
SUBJECT: MACEDONIA: GOM FACING POTENTIAL POLITICAL FALLOUT
FROM ELECTRICITY SHORTAGES

Summary
--------------

1. (SBU) Macedonia,s new government faces several critical
challenges in the electricity market. In the short-term, the
supply of available electricity may not be sufficient to meet
demand this winter. In addition, the newly privatized
electricity distribution company is beginning to enforce
payment by customers -- including individuals, businesses and
government offices -- who have become accustomed to not
paying for electricity. Both developments could create
political fallout for the GOM. In the longer term, Macedonia
will need to boost investment in its electricity
infrastructure to enable the privatized distribution company
to provide a reliable power supply at a reasonable cost to
consumers. End summary.

Electricity Supply And Demand
--------------

2. (U) The state-owned Macedonian power generation company
ELEM produces 75 to 80 percent of the electricity consumed in
the country. The majority of that electricity is produced by
five aging lignite coal power plants. Eight hydroelectric
plants also produce electricity. The state-owned electricity
transmission company, MEPSO, imports the balance of the
electricity needed. Demand is highest in the winter, since a
large share of households and businesses heat their buildings
with electricity.


3. (U) The state also owns a back-up fuel oil power plant
near the town of Negotino that is costly to operate and is
used only when other sources are insufficient to meet demand.
The Negotino plant can produce up to 210 megawatts daily, a
significant amount, but not enough to cover the gap between
other domestic production and demand. In past years, this
mix of imported electricity and domestic generation, with the
extra supply from the Negotino plant, has provided sufficient
electricity for Macedonia in past years.

Enough Electricity This Winter?
--------------

4. (SBU) This winter, however, Macedonia may not have enough
electricity to meet demand, especially after January 1, 2007.
Due to its limited financial resources, MEPSO had secured
only relatively short-term contracts to import electricity

through the early part of 2007. MEPSO opened a tender in
September to purchase additional contracts of imported
electricity for January to April 2007, but so far has been
able to secure only about a third of the electricity it
sought. Local energy experts predict the regional supply of
available electricity will be low this winter due to
increased demand in nearby countries, and that regional power
supplies will be reduced by the impending closure of a
Bulgarian nuclear power plant.


5. (SBU) The GOM recently sent a supplementary budget request
to parliament for 20 million euros to cover fuel oil for the
Negotino back-up plant. In part to save power, and in part
due to a dispute over long overdue electricity bills, MEPSO
also cut the electricity to one of Macedonia,s largest
electricity customers, Silmak, which processes metal alloys.
Silmak owes MEPSO several million dollars in unpaid bills.
Following the power cuts, Silmak furloughed a number of its
employees, who have threatened to strike if they are not
re-instated. Further complicating the political picture for
the government, Silmak is owned by the head of the Macedonian
Socialist Party, a governing coalition junior partner.


6. (SBU) Putting an optimistic face on this grim power supply
picture, the newly appointed Chairman of ELEM, Vlatko
Cingoski, assured us recently that there would be a
sufficient supply of electricity to meet household demand
this winter. He said the Negotino plant could supply enough
electricity to make up any household demand shortfall. If
that is not adequate to meet demand, he said the GOM has
concluded agreements with the country's largest industrial
consumers to reduce their supply of electricity during the
winter.


7. (SBU) Despite his optimistic outlook, Cingoski admitted to
us that ELEM had not been conducting scheduled maintenance on
its coal-fired plants this year due to financial problems.
In order to continue the winter electricity supply
uninterrupted, maintenance will have to be deferred until
next spring, since the plants must be shut down during that
process. In addition, Cingoski said, ELEM has not stored
enough reserve coal for the winter and the company is now
building up its reserves. Despite these potential pitfalls,
Cingoski was optimistic that Macedonia's coal plants would
continue to operate at near full capacity during the coming
months, ensuring a steady supply for ELEM's operations.

Unpaid Bills
--------------

8. (SBU) When the electricity distribution company ESM (which
transmits electricity to the customers from the large
capacity transmission network managed by MEPSO, and collects
payments) was state-owned, there was no political will to
enforce payment collection for past due bills. As a result,
many customers became accustomed to not paying for
electricity. Before ESM was privatized, the company
unsuccessfully filed approximately 500,000 court cases for
non-payment, but it did not disconnect electricity to
customers who failed to comply. The GOM privatized ESM in
March 2006, selling it to the Austrian company EVN for 225
million euros. EVN claims that, when it took over, the
collection rate for electricity was at a low 55 percent.


9. (SBU) After EVN purchased the distribution system, the new
owners immediately began making ESM employees pay their
personal electricity bills. In August, EVN began
disconnecting electricity to government offices and large
companies that were behind on their payments. According to
EVN Macedonia CEO Gunther Ofner, the collection rate for
households and businesses has begun to increase, although
there are still some towns and neighborhoods where almost no
customers pay for electricity. He said the GOM and municipal
governments still owe approximately 25 million euros for
electricity bills.


10. (SBU) Ofner said EVN recognizes the political
sensitivity of disconnecting electricity to households and
businesses, especially if those actions are perceived as
unfairly targeting one or another ethnic group.
Nevertheless, EVN has to enforce payment in order to make the
distribution company financially viable, Ofner said. He
noted that EVN had begun talks with the GOM on how to
increase the collection rate while ensuring that the poorest
households receive a minimal amount of electricity.

"Lost" Electricity
--------------

11. (SBU) In addition to a low collection rate, there is a
high rate of electricity loss due to technical problems and
theft. The President of the Energy Regulatory Commission,
Slave Ivanovski, told us that when the Commission sets the
price of electricity, they calculate an 11 percent
electricity loss rate due to technical reasons. The actual
loss rate is 24 percent. This figure includes electricity
lost due to illegal connections to the electricity network,
as well as customers who "adjust" their meters so that they
appear to consume less electricity.

Unsustainable Cheap Electricity
--------------

12. (U) The other key to the sector's financial woes is that
the price of domestically generated electricity has remained
low. While imported electricity costs about 0.08 cents/kWh,
the regulated price that MEPSO pays ELEM for electricity is
now regulated at about 0.03 cents/kWh. Although low
electricity rates for consumers are politically appealing,
the result is continued underinvestment in the energy sector.
Despite the unsustainably low prices, Ivanovski told us that
ELEM so far has not requested that the Energy Regulatory
Commission increase the price of electricity supplied by ELEM.

Privatization of Electricity Generation?

--------------

13. (SBU) The previous government's privatization plan for
the sector, developed with the assistance of USAID and other
international donors, called for the privatization of all
state-owned generation assets. The previous GOM began a
tender for the sale of the Negotino power plant before the
July election and agreed with the IMF that it would privatize
ELEM in 2007.


14. (SBU) The new government, however, appears reluctant to
proceed with the full privatization of ELEM. The GOM,s
four-year work program envisions "the gradual privatization
of parts of the energy sector while preserving the dominance
of state ownership." Cingoski, a political appointee and an
influential adviser to the new government on energy issues,
told us the GOM is considering merging ELEM and MEPSO under
one holding company, and then privatizing ELEM,s assets
piecemeal over an extended period. However, the GOM would
retain at least a 25 percent stake in the privatized assets.
Cingoski argued that, if ELEM were able to charge more for
the electricity it produces, the GOM could finance new power
plants without privatizing ELEM.


15. (U) On November 1, the GOM canceled the tender for the
privatization of the Negotino power plant. The GOM had
received bids from four international companies in May 2006,
but did not award the tender before the July elections. The
previous government ranked EVN,s bid first because it had
proposed to invest the largest amount, 750 million euros, in
upgrading the existing power plant and building new power
plants on the existing site. The current government claims
EVN,s bid included many unacceptable conditional
requirements, and that its proposed purchase price of four
million euros for the power plant was too low. The GOM plans
to announce a new tender for the Negotino plant by the end of
November.

Comment: Swift Action Needed
--------------

16. (SBU) If electricity supplies are inadequate to meet
household demands this winter, the GOM could face strong
political pressure from the public to intervene to ensure
MEPSO and ESM do not cut household power supplies. If that
happens, and supplies to major industrial consumers are cut
instead, the GOM will face pressures from furloughed workers
and disgruntled industrialists to boost power imports to
cover the shortfalls. That, in turn, could result in
pressure from the IMF, which the GOM likely would resist, not
to exceed fiscal expenditure targets.


17. (SBU) To offset such challenges, the GOM will
immediately have to pay its own electricity arrears. It also
should also work with EVN to ensure that the poorest
households can afford a minimum level of electricity supply.
For electricity generation, ELEM will need to propose to the
regulatory commission an increase in the price of
domestically generated electricity in order to adequately
cover operations and maintenance costs. In addition, the GOM
should privatize ELEM to honor Macedonia's IMF commitment,
and should open up the market for additional private
investment in new generation capacity. Unfortunately, the
GOM at present does not appear prepared to move forward
quickly on these steps.
MILOVANOVIC