UNCLAS TIRANA 000618

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/SCE (MBENEDICT/DSAINZ/WILLIS)
NSC FOR BRAUN
TREASURY FOR ATUKORALA
USDOC FOR 4233/ITA/MAC/OEERIA/CEED (MROGERS)

E.O. 12958: N/A
TAGS: ECON ENRG EINV AL
SUBJECT: ENERGY POLICY CHANGES IN ALBANIA

REF: TIRANA 281


1. (U) Summary: PM Berisha recently described a series of
energy-related measures to improve Albania's business
climate. The GoA will alter its two-tiered electricity price
structure to reduce energy prices for the private business
sector to bring it more in line with regional norms and to
spur economic activity. This price decrease will be offset,
in part, by a planned increase in electricity prices for
households. Poor families will continue to enjoy government
subsidies. Berisha also re-affirmed the GoA's commitment to
build an IFI-financed thermal power plant near Vlore and the
rapid privatization of parts of the state-owned electric
utility. End summary.

Business Gets a Boost


2. (U) PM Berisha told business community representatives
in May that the GoA will significantly reduce the price of
electricity for businesses starting July 1 as part of a
larger set of measures to improve the business climate.
(Note: Albania employs a two-tiered pricing structure for
electricity. To date, household consumers paid low rates and
business customers paid high rates - nearly double that of
households. End Note.) Berisha said the price reduction for
businesses -- 33 percent -- aims to reduce private sector
costs, spur business activity and increase employment. This
measure, he indicated, was even more important in the context
of the soon-to-be signed Stabilization and Association
Agreement with the European Union, and existing free trade
area agreements with regional countries, which will increase
competitive pressures on domestic industries.


3. (U) At the same time, the GoA will increase electricity
prices for households in order to bring the cost to price
ratio in line. However, to soften the social impact, the GoA
will subsidize approximately 190,000 families who cannot
afford the higher price. The amount of the price increase
will vary according to the amount of electricity consumed.
Opposition lawmakers have opposed the plan and expressed
concerns about its social impact. Shortly after Berisha's
announcement, the Energy Regulatory Authority approved the
price changes.

Balanced Electricity Production


4. (SBU) Energy generation in Albania heavily depends on
weather conditions because 95 percent of electricity
production comes from hydropower plants located in the north
of the country. The GoA wants to balance sources and
geographic location of generation facilities and is focused
on constructing new thermal power plants in central and
southern Albania where power consumption is highest. (Note:
the current mismatch between power generation in the north
and heavy consumption in the south results in large
transmission losses. End note.) Berisha confirmed his
government's desire to build a long-planned (and World
Bank/EBRD/EIB financed) thermal power plant in Vlore despite
local opposition. Berisha also said it was the GoA desired
another, bigger plant in Korce, and the rehabilitation of the
existing plant in Fier. (Berisha offered no specifics on
these last two projects). Berisha also mentioned the giant
natural gas power facility planned by ASG in southern Albania
(see reftel).


5. (U) Berisha added that the GoA would establish two
energy parks, one in Porto Romano, north of Durres, and the
other one in PishPoro, north of Vlore. The ultimate goal, he
said, was for Albania to become a net exporter of energy.


6. (U) GoA commitment to building new hydropower plants and
improving transmission facilities with neighboring countries
remained strong, Berisha said. To complement the already
financed Tirana-Podgorice 400 kV line (which runs
north-south), the GoA was seeking for funds for two other 400
kV lines, both running east-west, Vau Dejes-Prishtine and
Elbasan-Skopje.

Privatization


7. (U) Berisha said the GoA was interested in accelerating
privatization of parts of the state-owned electric utility,
KESh, particularly its distribution division. (Note: The
privatization of large state-owned companies was one of the
main requests of IMF representatives during their last visit
to Tirana in May.)

Comment


8. (SBU) Most of the "initiatives" announced by PM Berisha
have been urged upon the GoA in various forms for many years
by donors and international advisors, and the GoA's movement
on them is welcome, especially with regard to the realignment
of energy prices. KESh's previous price structure -- low
prices for families, high prices for industries -- has always
been criticized by experts as the reverse of what a
developing country needed and has been cited by investors as
a deterrent to investment. The GoA will likely come in for
serious grumbling by consumers but appears to be determined
to stick with the new price structure.
ZATE