Afghanistan Energy: Revisiting NEPS

UNCLAS SECTION 01 OF 07 KABUL 002070

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SENSITIVE
SIPDIS

E.O.12958: N/A
TAGS: ENRG ECON EPET ETRD KPWR EAID PGOV AF
SUBJECT: Afghanistan Energy: Revisiting NEPS

Ref: A) Kabul 1583/1206/1033/936/935/692
B) Kabul 317/274/162 C) 06 Kabul 5353 and previous


1. (SBU) Summary: The North East Power System (NEPS) is at the
center of the GOA strategy to provide affordable and reliable
electricity to the Afghan people, a high economic and political
priority for the GOA and the donor community. NEPS transmission
lines were designed to import 300MW of power from each of
Afghanistan's three northern neighbors and to be supplemented by
some domestic generations. During the last few months some of the
assumptions underlying NEPS have changed. There may be less than
expected electricity imports from Tajikistan and Uzbekistan and the
timeline could be delayed beyond the end-2008 target date for
completion of NEPS. Turkmenistan says it has more electricity to
export but wants to transmit it over a line not compatible with
NEPS. This has raised some routing and financing questions and
reopened some decisions, which could delay electricity imports from
Turkmenistan as well as increase the cost of construction of the
transmission line. The backbone transmission line from north
central Afghanistan to Kabul has capacity to carry less power than
originally expected. Completion of the Sheberghan power plant has
been pushed back to 2010 due to delays in gas field development and
because we had to move funds to purchase generators for Kabul. With
the likelihood of delays in some pieces of NEPS, the USG decision
this year to go ahead with 100MW of generation capacity in Kabul
appears to be even more justified and prescient.


2. (SBU) These shifting NEPS assumptions do not endanger the
project. It remains a multi-donor, diversified power source
flagship program designed to provide a major supply of power to
Kabul and to communities along the way. We must, however, respond
to some of these changes quickly and encourage donors to do so as
well. The Inter-Ministerial Committee on Energy (ICE) has become a
highly effective vehicle to identify these changes and respond to
them by coordinating donor and GOA resources. Embassy believes that
the sixth meeting of the Joint Coordination and Monitoring Board in
Kabul in September 2007 presents an excellent opportunity for GOA to
increase awareness among donor representatives about the inherent
uncertainty of NEPS, to alert them to slippage in some of the NEPS
timelines, to mobilize support for a renewed momentum on NEPS, and
to seek donor assistance to fill some of the funding gaps in NEPS.
The third Regional Economic Cooperation Conference in Islamabad
(dates TBD) and the CASA100 conference in Kabul this September offer
other opportunities for NEPS discussions. Embassy Kabul appreciates
the support for NEPS provided by Embassies Dunshanbe, Tashkent,
Ashgabat and Delhi and the SARI/E and REMAP programs. Given the
somewhat opaque operating environment, we are working NEPS with
imperfect information. Your continued reporting and assistance is
very valuable to us. End Summary.

Energy: A High Priority For Afghans
--------------


3. (SBU) Electricity is one of the most politically sensitive
issues in Afghanistan (reftels). Surveys show that Afghans view
electricity as one of their highest priorities. Only about 10
percent of the population has access to public power. Even more
disquieting is that the supply of electricity in the country has not
improved during the last five years, raising serious political
fall-out for the GOA as well as the USG and the international
community. President Karzai and other GOA leaders have singled out
support for the power sector as one of the most pressing needs of
the country. To address these political and economic imperatives,
we are working with the GOA and the donor community to build a
sustainable network that delivers affordable and reliable
electricity to Afghans. Such a network would also advance Afghan
economic growth, prosperity and stability, high priority strategic
USG objectives in Afghanistan.

NEPS: Shifting Assumptions
--------------


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4. (SBU) The multi-donor North East Power System (NEPS) project is
at the core of our power sector strategy for Afghanistan. Together
with the smaller USG-funded South East Power System (SEPS) project,
NEPS would provide access to electricity in areas covering about 60
percent of Afghanistan's population. During the last four months
some of the assumptions underlying NEPS have changed (see paras
9-22). It does not mean that NEPS is endangered. It remains a
multi-donor, diversified power source flagship program designed to
provide a major supply of power to Kabul and to communities along
the way. We must, however, respond to some of the shifting
assumptions and encourage other donors to do so as well. We must
also re-energize our NEPS efforts and continue to urge Afghans to
establish a homogenous overall vision. As a result of the NEPS
changes, there is likely to be slippage in the 2008-2009 target date
for NEPS completion, although if we address selected issues, power
can begin to flow by end-2008. With the likelihood of delays in
some pieces of NEPS, the USG decision this year to go ahead with
100MW of generation capacity in Kabul appears to be even more
justified and prescient.

ICE: Highly Effective
--------------


5. (SBU) The Inter-ministerial Committee on Energy (ICE),
established by Presidential decree in November 2006 (ref B),has
been a highly effective vehicle to respond to these changes. While
still trying to find its organizational legs, ICE has already become
a very productive coordinating body on energy issues both within the
GOA and between the GOA and donors. Under Economy Minister Jalil
Shams, ICE has also become an important player in providing high
level policy direction in the energy sector. It is through the
ICE-convened coordinating meetings that the GOA and donors as a
group have been able to identify the some of the changes in NEPS
assumptions and to deliberate on how best to respond to these
changes. ICE has taken the lead role in mobilizing the Ministry of
Energy and Water (MEW) and donors to systematically prioritize
energy sector development projects, to identify funding and resource
gaps and to seek funding alternatives.

Opportunities to Reenergize NEPS
--------------


6. (SBU) Embassy believes that the sixth meeting of the Joint
Coordination and Monitoring Board (JCMB-VI) to be held in Kabul in
September 2007 offers an excellent opportunity for the GOA to
increase awareness among donor representatives about the inherent
uncertainty of NEPS, to alert them to slippage in some of the NEPS
timelines, to mobilize support for a renewed momentum on NEPS, and
to seek donor assistance to fill some of the funding gaps in NEPS.
Other targets of opportunity to push forward on NEPS with regional
states and donors are the third Regional Economic Cooperation
Conference in Islamabad (dates tbd) and the CASA1000 conference in
Kabul September 5-6.


7. (U) Embassy Kabul appreciates the support for NEPS provided by
Embassies Dunshanbe, Tashkent, Ashgabat and Delhi and the SARI/E and
REMAP programs. Given the complexities of various pieces of NEPS
and the somewhat opaque environment in some Central Asian states, we
are working NEPS with imperfect information. Your continued
reporting and assistance is very valuable to us. We suggest even
more invigorated coordination and exchange between the Embassies and
the SARI/E and ReMAP programs. Such coordination will allow us to
deliver a consistent and synchronized message to the NEPS players
and to influence their actions so that NEPS becomes a reality in a
timely manner. In particular, we would appreciate any information
on the availability of surplus power in Tajikistan, Uzbekistan and
Turkmenistan.

Original NEPS
--------------


8. (U) NEPS was conceived in 2003 as a cross-border project in

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which 220kv transmission lines would be built to import 300 MW of
power each from Tajikistan, Uzbekistan and Turkmenistan. These
cross-border arrangements would be locked in with power purchase
agreements (PPA) drafted according to international best practices.
The three lines would converge at Pul-e-Khumri in north central
Afghanistan, from where another transmission line would be built
over the Hindu Kush mountains and the Salang Pass to Kabul. NEPS
would also be fed by a 100 MW thermal plant to be built by USAID at
the Sheberghan gas field near Mazar-e-Sharif. Of the proposed 1000
MW thus flowing into NEPS by end-2008, 600 MW would be transmitted
to Kabul and the adjoining areas, with 400 MW to be absorbed by
communities along the transmission lines in northern Afghanistan.
If other domestic sources of electricity were to be developed in the
future, they could also be fed into NEPS. In this manner, NEPS was
envisaged as a transmission backbone for a large part of the
country.

Tajikistan Connection: ADB
--------------


9. (SBU) The Asian Development Bank (ADB) is responsible for the
142km $35 million transmission line from the Tajik border to
Pul-e-Khumri. The ADB is also responsible for construction of the
line on the Tajik side of the border. Completion of the
transmission line for Tajik power has been delayed and, when it is
built, it is expected to carry less power than originally
anticipated. A fundamental difficulty about the Tajik connection is
uncertainty about the amount of surplus power available within
Tajikistan.

-- The line has been delayed beyond 2008 because power purchase
agreement negotiations are taking longer than expected and ADB will
not begin construction until a PPA is in place;

-- Instead of the expected 300 MW to be imported year-around, the
Tajiks are willing to only agree to 100 MW and only during 5-6
months in the summer; in their latest offer they are unwilling to
make any commitments on firm supply or to lock in a price;


10. (SBU) Embassy recommends a multi-pronged effort to push the
GOA, the Tajiks and the ADB as well as the World Bank (both of which
are providing consultation advice to the Tajiks and the Afghans on
the PPAs) to:

-- conclude the PPA at the earliest so construction can begin on the
transmission line;

-- encourage the Tajiks to be more forward leaning on providing
guarantees on supply and price;

-- encourage the ADB, the GOA and the Tajiks to agree to begin
construction on the line without a finalized PPA; and

-- reinvigorate our USAID-funded consultation services for the PPA
and technical aspects of the transmission links.

Uzbekistan Connection: ADB
--------------


11. (SBU) The ADB is responsible for the 192km $55 million line
from the Uzbek border to Pul-e-Khmuri. Construction of the line is
on schedule for completion by end-2008. There are serious
questions, however, about transmission capacity on the Uzbek side of
the border which may both delay and severely limit power supply from
Uzbekistan. Instead of the expected 300 MW, there may be no
electricity supply into the NEPS network from Uzbekistan unless
there is some investment soon in transmission capacity on the Uzbek
side of the border.

-- The GOA and the donor community recently learned that there is no
220kv connection line on the Uzbek side of the border to feed power
to the 220kv line being built within Afghanistan by the ADB. The

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existing connection within Uzbekistan is a 110kv line which feeds 25
MW into a 110kv line to Mazar-e-Sharif. The 110kv connections are
not part of the 220kv NEPS transmission system.

-- In order to get any power from Uzbekistan, NEPS needs a 50km
220kv transmission line from the border to Surkhan within
Uzbekistan. This new line would allow 150MW of power we believe is
available at Surkhan to flow into NEPS.

-- In order to get an additional 150MW (for a total of 300MW) at
Surkhan, transmission connections will also have to be built from
Surkhan to northern Uzbekistan; we do not know the detailed systems
configurations for this connection.

-- A recent ADB mission to Uzbekistan recommended that ADB consider
assistance on transmission lines within Uzbekistan to enable import
of electricity by Afghanistan. We understand, however, from ADB
staff that its project approval procedures make it highly unlikely
that either the line from the border to Surkhan or the one from
Surkhan to northern Uzbekistan can be built before 2010.


12. (SBU) Embassy believes that our immediate aim should be to find
a means to fund the 50km 220kv line from the border to Surkhan soQthat it can be completed before end-2008 and 150MW can begin to flow
into NEPS. Without this line, we are unlikely to have any power in
NEPS by end-2008 even though key pieces of NEPS -- Uzbek border to
Pul-e-Khumri to Kabul -- will be completed by then.

-- GOA Funding: The most promising option for the Surkhan-to-border
line appears to be one where the GOA fronts the $20 million needed
for this line to the Uzbeks as prepayment for the power they will
import and the Uzbeks fast track construction of the line. In a May
27 ICE meeting, the GOA told donors that it had reached internal
agreement on this approach. Energy and Water Minister Ismail Khan,
Economy Minister Shams and Deputy Finance Minister Shahrani plan to
visit Tashkent to make this offer to the Uzbeks. Embassy will press
the GOA to make this visit at the earliest.

-- Korea: We understand Korea has expressed some interest in
providing assistance within Uzbekistan to support Afghan-related
projects. If the GOA-funded, Uzbek-built proposal is not finalized
soon, we should encourage the Koreans to assist with the
Surkhan-to-border transmission line. For the Koreans, such a
project would have multiple advantages: assistance to Uzbekistan,
assistance to Afghanistan, and a seat at the high table by becoming
stake-holders in NEPS, the flagship multi-donor energy program in
Afghanistan. In any approach we make to the Koreans, we should
underscore the urgency of this piece of the NEPS puzzle.

-- ADB: We should encourage the ADB to work on a parallel track on
funding the transmission lines beyond Surkhan to northern Uzbekistan
so that up to 300 MW of electricity would be eventually available
for import from Uzbekistan into NEPS.

-- USG: Due to constrained Uzbek relations with the United States,
the USG should remain in the background on the Uzbek-Afghan energy
trade issue. We should, however, continue to provide consultant
support to the GOA on the proposed PPA as well as the technical
aspects of the transmission links.

Turkmenistan Connection: USAID
--------------


13. (SBU) Under the original NEPS structure, USAID is responsible
for the 267km $57 million transmission line from the Turkmenistan
border to Sheberghan. Due to the ADB's decision in 2006 not to fund
the Sheberghan-Mazar connection, this section was also added to
USAID's program. The Turkmenistan connection appears to be the most
bedeviling at this point because recent developments have reopened
some fundamental decisions that had been made. It appears now that
more than 300MW of power may be available from Turkmenistan but the
transmission line from Turkmenistan will cost more and will be

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delayed beyond end-2008 because Afghan-Turkmen discussions on the
technical aspects have not yielded results to date.


14. In a June 2007, Afghan Minister of Energy and Water Ismail Khan
and the Turkmen Minister of Energy and Industry signed a "Protocol
of Intention" under which:

-- Turkmenistan is willing to supply electricity on a 500kv line
(Note: We understand that 500kv is the standard the Turkmen now use
for all new lines on their grid. NEPS standard is 220kv);

-- each country would fund transmission lines within its territories
from its own funds;

-- Turkmenistan agreed to supply 300MW of power (Note: we have heard
that the Turkmen privately told the Afghans that they could supply
more.)

-- the terms of the power trade would be defined by a PPA.


15. (SBU) Donors will receive a complete read-out of the GOA visit
to Turkmenistan at the next ICE meeting scheduled for June 28. The
connection to Turkmenistan presents the largest true construction
problem. Turkmenistan's offer of more power on a 500kv line raises
several questions and reopens some previous decisions:

-- Who will fund the additional $30 million for a substation to step
down the voltage from 500kv to 220kv?

-- Given the opportunity to receive more power from Turkmenistan (to
make up in part or in whole for less power from Tajikistan and
Uzbekistan),is it more appropriate to build a larger capacity 500kv
line within Afghanistan as well?

-- Who will fund the excess cost of a 500kv line within Afghanistan
relative to a 220kv line budgeted for by USAID?

-- What is the optimal border crossing point for the Turkmenistan
connection?

-- If the transmission line from the Turkmenistan border were 500kv,
where should it terminate within Afghanistan? Pul-e-Khumri,
Naibabad, Mazar, Sheberghan or Andkhoy?


16. (SBU) USAID currently has $57 million for the originally
proposed line from Turkmenistan to Mazar. If the decision is to
build a 500kv line along the original alignment within Afghanistan,
then either USAID will need additional funding or the GOA and donors
will have to seek other funding sources. The GOA is also
considering asking the Turkmen to build the line within Afghanistan
because they claim to be able to build transmission capacity cheaper
and quicker than the international community. This option would
raise questions about whether to risk the GOA and Turkmenistan
building this crucial line.


17. (SBU) We understand that Turkmenistan believes that an elaborate
PPA is not necessary for cross-border electricity trade and the
existing MOU will be adequate. We should encourage the Turkmenistan
Government to engage in serious PPA discussions with the GOA because
it is in its self-interest to enter binding agreements that promise
to bring in a significant and steady stream of revenue over a long
period of time. The USG should continue to provide consultant
support to the GOA on the proposed PPA.

The Pul-e-Khumri to Kabul Backbone: India
--------------


18. (SBU) The Indian Government is responsible for the 201km km
220kv line from Pul-e-Khumri to Kabul. Construction is ahead of
schedule, with completion expected in October 2008. This line,
however, will only have the capacity to transmit 250MW instead of
the originally conceived 600MW because mountainous terrain and

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difficult weather conditions pose constraints on the volume.

-- The GOA and donors should begin discussion about a second line in
the medium term from Pul-e-Khumri to Kabul to enable more power to
be transmitted to Kabul and provinces to the south and east of
Kabul.

Sheberghan Power Plant: USAID
--------------


19. (SBU) The proposed 100MW USAID-funded power plant at Sheberghan
is a critical piece of the Afghan electricity strategy because it
represents the only planned domestic source of power in NEPS at this
point. The project has been delayed to 2010 for several reasons.
USAID had to initially wait for ADB's project to rehabilitate gas
wells at Sheberghan before it could move ahead on its project.
After two aborted ADB tenders to find a service contractor for the
gas well rehabilitation, USAID decided in late 2006 to move ahead
itself on a $12 million project to verify reserves and rehabilitate
seven wells so it can begin the design and construction the power
plant. The task order has been issued to USAID contractor Black and
Veatch, which is looking for service provider. We expect the
verification and rehabilitation work will begin in October 2007,
with design work on the power plant to commence in 2008 after proof
of availability of gas for 20-25 years has been established.
Separately, we are discussing with ADB a proposal to combine the ADB
and USAID natural gas projects at Sheberghan to launch a more
comprehensive development of the gas fields in the Sheberghan region
(septel). Another reason for the delay on the Sheberghan power
plant is that USAID had to reprogram money allocated for the power
plant to purchase the generators for Kabul (Ref A: 07 Kabul 936 and
07 Kabul 692).

Funding/Other Gaps in NEPS
--------------


20. (SBU) Working closely with donors, ICE has systematically
identified funding and other gaps in NEPS over the last four months.
Some of those gaps have been plugged:

-- India has agreed to fund substations at Doshi and Charikara;

-- Germany will fund substations at Mazar and Konduz;

-- GOA will reallocate $27 million from the Afghanistan
Reconstruction Trust Fund for a partial upgrade of the Kabul
distribution system.


21. (U) There are, however, several areas that need urgent
attention:

-- $5 million for a reactive power compensation system

-- Additional funding for the distribution system in Kabul to stop
leakages and to enable it to absorb the additional 250MW when NEPS
come on line

-- $27.5 million Load Dispatch and Control Center and a NEPS
Operations and Maintenance contractor

-- $4.5 million for an Emergency Restoration System

-- $6.0 million for Operations and Maintenance

-- Distribution systems in Doshi, Charikar, Mazar, Pul-e-Khumri,
Khulm and Aybak.

Comment on Power Purchase Agreements
--------------


22. (SBU) According to feedback from MEW and international
consultants helping with the power purchase agreements, the

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prospective NEPS suppliers -- Tajikistan, Uzbekistan and
Turkmenistan -- are reluctant to enter into binding power purchase
agreements. The commercial approach of these countries is heavily
influenced by their soviet-era roots in which commercial relations
did not need contractual agreements laying out in detail the rights
and obligations of the contracting parties. Utility officials in
these states also do not appear to have the capacity to fully
understand the PPAs drafted to international best practice standards
by international consultants that are being offered to them. We
should continue to press vigorously on all sides for the countries
to enter into these PPAs at the earliest and continue robust USAID
consultant support for these PPA processes. However, we should be
prepared to accept that it may not be possible to finalize the PPAs
in a timely manner and that the actual cross-border flow of NEPS
power may have to begin under the existing non-binding MOUs that
Afghanistan has in place with Tajikistan, Uzbekistan and
Turkmenistan. We believe that once electricity begins to flow into
NEPS in sufficient volumes, there will be increasing incentive for
the trading partners to formalize the arrangements into binding
agreements. The only line that is contingent on a PPA at this time
is the Tajikistan connection, where the ADB will not begin
construction of the line until a PPA is in place. We should
encourage the ADB to loosen this conditionality.

Wood