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07KABUL274 2007-01-27 06:24:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kabul
Cable title:  

Afghanistan Energy: New Inter-Ministerial Commission Offers

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DE RUEHBUL #0274/01 0270624
O 270624Z JAN 07 ZDK
					  UNCLAS SECTION 01 OF 06 KABUL 000274 




E.O.12958: N/A
SUBJECT: Afghanistan Energy: New Inter-Ministerial Commission Offers
Opportunity: Part II

Ref: A) Kabul 162; B) Kabul 137; C) 06 Kabul 5353; D) 06 Kabul
5194; E) 06 Kabul 4319 and previous

KABUL 00000274 001.2 OF 006

1. (SBU) Introduction and Summary: A principal USG goal in
Afghanistan's energy sector is ensuring an adequate and affordable
supply of electricity to Kabul and other key population centers by
end-2008 through rehabilitation and construction of power plants,
dams and transmission lines. Despite good progress and momentum on
most of these projects, the time frame is tight, and potentially
significant risk points remain that could delay our target date (Ref
A,C). While there has been heavy investment in building the
physical assets for Afghanistan's power sector, adequate attention
and resources have not been focused on ensuring that the GOA has in
place the institutional and policy framework, the regulatory
environment, the managerial talent and the skilled technical
workforce needed to maintain this large investment. In this area,
the international community and the GOA need to focus particular
attention on distribution reform and cost recovery.

2. (SBU) The Inter-Ministerial Commission on Energy, created in
December 2006 with a broad mandate to coordinate and lead policy
within the GOA, presents an opportunity to inject urgency into
efforts to address some of the most important issues facing
Afghanistan's energy sector. Ref A focused on the Northern
Electrical Power System (NEPS) transmission project and the role the
newly created GOA inter-ministerial body can play in seeing it
successfully completed. This cable discusses our approach to other
major energy issues that the GOA and the international donor
community need to address with urgency. Embassy ideas -- a
coordinated approach involving the Afghan Reconstruction Group,
USAID and Embassy Econ -- on the way forward on NEPS and other
issues facing the Afghan energy sector were conveyed in a White
Paper to other donors through UNAMA. (We also passed the White
Paper to SCA/A.) The donor community provided critical impetus
towards a unified donor action plan for addressing these issues with
the Afghans. The plan is to distill our White Paper into an
internationally approved actions paper which lists the specific
steps that the GOA needs to take in the short term and the issues it
needs to address in the medium term. We will use this actions paper
to step up engagement with the GOA and ICE on the way forward. The
Joint Coordination and Monitoring Board (JCMB) mechanism is
essential to effective donor coordination in this and other sectors.
Again, in identifying energy priorities, the UNAMA-convened "Tea
Club" mechanism has worked to close donor ranks and inject critical
impetus behind our efforts. End Introduction and Summary.

3. (SBU) A high priority USG goal in Afghanistan's energy sector is
ensuring an adequate and affordable supply of electricity to Kabul
and other key population centers by end-2008. The USG, along with
the GOA and the international community, aims to achieve this goal
primarily by building Northern Electrical Power Systems (NEPS) and
Southern Electrical Power Systems (SEPS). Despite good progress and
momentum on most segments of these systems, the time frame is tight,
and potentially significant risk points remain that could delay our
target date, resulting in adverse political fallout (Ref A,C).
While there has been heavy investment in building the physical
assets for Afghanistan's power sector, adequate attention and
resources have not been focused on ensuring that the GOA has in
place the institutional and policy framework, the regulatory
environment, the managerial talent and the skilled technical
workforce needed to maintain this large investment. In particular,
the international community and the GOA need to focus attention on
distribution reform and cost recovery. An estimated 40-50 percent
of the power generated in Afghanistan is lost in distribution. And,
these leaky distribution systems are deteriorating. No matter how
efficient, the generation and transmission systems that we create
will not be sustainable without reform, construction of new, and
modernization of existing distribution and collection systems.

Inter-Ministerial Commission on Energy (ICE)


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4. (SBU) In December 2006, the GOA Cabinet established an
Inter-Ministerial Commission on Energy (ICE) with the broad mandate
of "monitoring the implementation of energy sector plans,"
coordination of donor assistance and formulation of development
programs and reform policy. Creation of ICE presents a good
opportunity to fill a large gap in the GOA's understanding, planning
and implementation of energy strategy and policy formulation. Ref A
discussed the lead coordinating role that we hope ICE will play
within the GOA on energy issues. We also noted the importance of
empowering ICE with both the political support and the technical
capacity to become one of the principal energy sector actors in the
GOA. Beside NEPS coordination (Ref A) the key areas that require
the attention of ICE and the GOA include:

-- Kabul Power Supply and Replacement of Generators
-- Power Purchase Agreements with Northern Neighbors
-- Sheberghan Gas Field and Power Plant Development
-- Da Afghanistan Breshna Moassessa (DABM) Commercialization
-- Distribution Sector Reform and Cost Recovery
-- Regulatory Reform
-- Enhancing public awareness of energy sector issues
-- Central Asia South Asia Regional Energy Markets
-- Distributed Small-Medium Scale Solutions
-- Renewable Energy Sources

These areas are each described in greater detail below.

Kabul Power Supply


5. (U) ICE has already taken the lead in the GOA's effort to expand
electricity generation capacity immediately in Kabul, one of the
most urgent energy issues facing the GOA and the donor community.
There is agreement between the USG, the donor community and ICE that
Kabul requires 100 MW of additional power quickly because there is
currently an acute shortage of electricity in the city. Second, the
existing NW Kabul Power Plant generators are unreliable, raising the
possibility that there will be prolonged blackouts, especially
during the next two winters. Third, acquiring additional capacity
is not merely a short term fix to fill a gap until NEPS comes on
line, as we have believed in the past. This added capacity will be
needed even when NEPS is fully operational and supplying 300-500 MW
of power to Kabul in addition to the existing 150 MW of hydro
generation. The failure to improve the power situation in Kabul
until NEPS comes on line by 2008-2009 and the risk of blackouts due
to the breakdown of the existing generators may have serious adverse
political fallout for the GOA and the donor community.

Power Purchase Agreements


6. (SBU) The NEPS concept relies critically on imported power from
Tajikistan, Uzbekistan and Turkmenistan for import of electricity.
USAID has provided technical assistance to the GOA in negotiating
Power Purchase Agreements (PPA) with these countries. Negotiations
are being led by the Ministry of Energy and Water together with the
Ministries of Foreign Affairs and Finance, with the support of a
legal advisor financed under a World Bank project. ICE, working
closely with MEW, should coordinate and closely monitor GOA progress
on these PPAs. While there has been good progress during the last
year, PPAs are notoriously difficult and time consuming to conclude
and will require strong, high-level, close coordination and
monitoring. There has been good progress in the negotiations with
Tajikistan. In October 2006, the two countries signed an
Inter-Governmental Agreement, which will be a stepping stone to
concluding a PPA. The GOA was most sanguine about power imports
from Turkmenistan because past dealings on electricity between the
two countries have been positive. A GOA delegation will be
traveling to Turkmenistan on or about January 27 to finalize some
technical issues. The death of President Niyazov, however, has cast
some measure of uncertainty on the prospects of moving ahead quickly
on the PPA. Uzbekistan poses a greater challenges. Uzbekistan

KABUL 00000274 003.2 OF 006

claims it will not have surplus power to export for several years
unless Afghanistan arranges financing for upgrading or building
additional transmission capacity within Uzbekistan.

Sheberghan Gas Field Development


7. (U) Sheberghan gas field development and the proposed power
plant are key components of NEPS. After a period of delay and GOA
and donor disappointment, there have been positive developments
during the last three months on Sheberghan. The ADB, USAID and
Ministry of Mines have reached a common understanding on the way
forward, based on finding a private sector operator for the
Sheberghan gas fields. There will be several sweeteners for the
prospective private sector operator: a production sharing agreement
(PSA) where the operator would own and sell the gas; $24 million in
ADB funds for rehabilitation and refurbishing of the gas wells and a
gas pipeline; and $12 million in USAID funds that will be used to
verify and rehabilitate 3 wells that will be dedicated to the
Sheberghan Power Plant.

8. USAID is moving forward on hiring a contractor to move a rig to
the Sheberghan field and begin the verification process. Once
verification is complete, the design of the power plant can begin.
ADB and the Ministry of Mines are preparing the tender documents for
the selection of the private sector operator. Working closely with
MEW and the Ministry of Mines (MOM), ICE should play a coordinating
role as there are many inter-ministerial issues involved. The terms
under which the gas will be supplied to the power plant and the
electricity will be supplied by the power plant to the grid are
important and complicated issues. In addition, Sheberghan is an
important piece of NEPS, a core ICE coordinating responsibility. It
is not clear whether the MEW and MOM have the technical capacity by
themselves to address these issues.

9. (U) The USG-funded power plant at Sheberghan will be built on
the "Design and Build" model. The feasibility studies have been
completed. The next task is for USAID to issue a task order to its
IRP contractor, LouisBerger-BlackVietch to develop the documents and
put it out for bid. This plan is contingent on the gas verification
effort on which USAID has already mover forward. The target date
for completion of the Sheberghan power plant is the 2009-2010 time

DABM Commercialization


10. (U) ICE will also need to closely monitor the MEW efforts to
corporatize and restructure the Afghan power utility Da Afghanistan
Breshna Moassessa (DABM), a process that is being supported by the
World Bank through a contractor. The national utility is
over-staffed and lacking in the necessary skills and talent to carry
out routine planning and project implementation, let alone manage
the physical assets the donor community is building and engage with
neighboring countries on electricity trade. As a condition for
release of the $20 million USG money for diesel, the transformation
of DABM from a company operating under the SOE law to one operating
under the company law was speeded up. The target date for
completion of this process is March 20, 2007. This, however, will
not be the end of the issue as the new DABM will need to find its
feet, exert its independence and begin to think like a company.
GOA-ICE-MEW along with the donor community should ensure that they
stand up a modern, effective power utility in Afghanistan. One of
the immediate steps that the utility should take is outsourcing of
its billing and collection system to strengthen cost recovery.
Longer term, they should consider unbundling of the generation,
transmission and distribution functions of DABM so that there can be
arms-length, market-driven transactions between each of these

Distribution Sector Reform


KABUL 00000274 004.2 OF 006

11. (U) GOA-ICE-MEW should raise distribution reform as a top
priority within the GOA and with the donor community and the Afghan
people. It is arguably the single most important unresolved piece
of Afghanistan's energy puzzle. The distribution systems throughout
the country are in dire need of refurbishment to upgrade them to
safe and efficient operating standards. Distribution technical and
non-technical losses are extremely high -- the conventional wisdom
is that 40-50 percent is being squandered due to technical losses,
theft and non-payment. Reducing these losses should be a top
priority for the GOA and the donor community. Technical loss
reduction can only be achieved through the construction of new
distribution lines, the refurbishment of existing ones, and the
replacement or installation of associated electrical equipment.
The reduction of the non-technical losses can be achieved through
installation of metering devices, instituting an efficient consumer
billing and collection system, and elimination of theft.
Unfortunately, donor interest in providing funding assistance to
install/upgrade electric distribution facilities appears to be
lacking and distribution may have to evolve based on internally
generated funding. The World Bank has a $25 million project for
distribution upgrades (an MV backbone for Kabul), but this is only a
fraction of what is required. In the absence of further donor
investment, operational efficiency and commercial tariffs will be
even more important.

Regulatory Reform


12. (U) The regulatory environment in Afghanistan's power sector is
unstable, if not nonexistent. Any rules that exist are made up and
changed on an ad hoc basis by the Ministry of Energy and Water, DABM
and municipalities. The technical standards used are inadequate and
inconsistent. The GOA-ICE-MEW needs to quickly put in place a legal
and regulatory framework designed to attract independent power
producers, which can become an important element in Afghanistan's
energy sector. A healthy and sustainable power sector needs a
stable and fair regulatory environment in which the rules are
transparent and widely understood and the technical standards are
high and consistent. In the medium term, GOA-ICE-MEW should
initiate a process that can create such a regulatory environment.
They should consider establishing a Power Sector Regulatory
Authority (along the lines of the Afghanistan Telecommunications
Regulatory Authority) which acts as an independent rule-making body
that sets technical standards, balances the interests of the
stake-holders (consumers, private sector service providers,
incumbent government utility) and acts as an unbiased arbiter of
disputes. An appropriate regulatory environment and could attract
independent power producers, which could become an important element
in Afghanistan's power supply.

Energy Sector Awareness in Civil Society


13. (U) ICE can also play a lead role in enhancing public awareness
of power sector issues. It should coordinate development of a
countrywide awareness and education program that informs the Afghan
people about energy issues, the need for institutional reform and
capacity building and the vital importance of cost recovery. The
education program needs to extend into all sections of Afghan civil
society, including Parliamentarians, and policy-makers and
opinion-shapers. USAID's existing energy sector public advocacy
program can be used to assist ICE. The contours of the message
should be:

-- A healthy and sustainable power sector is a necessary condition
for Afghanistan's development and prosperity of its people.

-- With help from the donor community, the GOA is building a modern
and efficient power infrastructure.

-- To preserve the large investment, the GOA has to develop the

KABUL 00000274 005.2 OF 006

capacity to manage this investment. It has to develop the
institutional framework, the managerial talent and a skilled
technical workforce to run the dams, power stations, and the
transmission and distribution networks.

-- To maintain this investment, the Government of Afghanistan must
also ensure that the system is based on cost recovery and reform of
distribution systems. If electricity is viewed as a free good, the
generation, transmission and distribution systems will collapse.

Central Asia South Asia Electrical Regional Energy Markets
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

14. (U) A larger and longer term project is the Central Asia South
Asia Regional Energy Markets (CASAREM) initiative, a plan to match
potentially abundant electric power generation in Central Asia with
the severe electricity deficiency in South Asia. CASAREM would
provide for transmission of electric power from generating countries
in Central Asia through Afghanistan via a 500 KV transmission line
with some off-take in Afghanistan but a primary vision of a South
Asian target market. There has been good progress on CASAREM
recently. In October 2006 at a conference in Dushanbe, Afghanistan,
Kyrgyzstan, Pakistan and Tajikistan signed an Intergovernmental
Agreement on the development of a Central Asia-South Asia Regional
Energy Market. While the MOU is a significant first step indicating
the partners desire to go forward with this model project, several
difficult steps must be taken before any electricity would flow
through the system and the circuit ahead remains difficult. The
Asian Development Bank is commissioning consultants to complete
technical and economic evaluations, and the World Bank is hiring
consultants to undertake the environmental and social impact study
and make recommendations on legal, institutional and risk mitigation
issues. The next CASAREM Ministerial meeting is scheduled to be in
Kabul in June 2007 and is intended to make the decision to proceed
or abandon the project based on techno-economic viability.

15. (U) CASAREM is being driven by the ADB and World Bank with a
focus on economic development in the Kyrgyz Republic and Tajikistan.
Afghanistan, to date, has had a limited role although it has staked
out a claim to receive a share of the electricity and has impacted
routing decisions. ICE needs to coordinate Ministry of Energy and
Water participation in the CASAREM process to ensure Afghanistan's
interests are properly protected and its commitments are consistent
with and supportive of NEPS development. Steps should also be taken
to ensure that the benefits to Afghanistan of the CASAREM process
are allocated to reinforce and sustain the domestic Afghan
electricity system.

Distributed Small-Medium Scale Solutions


16. (U) The GOA and ICE should also explore the possibility of
delivering off-line small to medium scale "distributed" solutions.
Consideration could be given to developing "distributed" solutions
that could be delivered through Public Private Partnerships and/or
franchises in partnership with a corporatized DABM. PPP's would
have the benefit of attracting private sector capital and
technologies, and are generally scalable. PPP projects,
nonetheless, would still need to develop solutions for distribution
and cost recovery. For instance, the use of schemes similar to the
phone cards in the telecom sector that have allowed those services
to proliferate, have been proven effective in the energy sector in
other developing economies such as South Africa.

Renewable Energy Sources


17. (U) Finally, GOA-ICE-MEW should also consider renewable energy
sources as a way of meeting some of Afghanistan's energy needs,
given the current conditions of infrequent and unreliable public
power, limited power distribution networks, and the high cost and
logistical challenges of operating and maintaining diesel power

KABUL 00000274 006.2 OF 006

sources. Because Afghanistan's operating environment is so
difficult and expensive, the total life-cycle cost of renewable
energy sources is more closely comparable to conventional sources
than is the case in most of the world. Renewable energy sources,
including solar, wind, biomass, bio-fuels, geothermal, and landfill
gas may offer opportunities in varying degrees in various parts of
the country. For example, the use of solar photovoltaic systems may
provide some quantities of electricity in communities that are not
on the NEPS or SEPS grids. This may also apply to some extent in
Kabul, where the demand-supply gap is likely to persist even after
NEPS is completed. It may also be a viable option for near-term
buyers likely to purchase smaller diesel generators in the period
before a central power grid is in place, or buyers seeking power
solutions where neither diesel nor electrical grid extension
represents a practical solution. Micro hydro power is already
promoted aggressively. Wind power presents another opportunity to
fill gaps in Afghanistan's energy landscape.

18. (U) We will examine with the GOA-ICE-MEW and the donor
community ways to seek funding for an assessment of the contribution
that renewable energy sources can provide, which may include lower
life-cycle costs, greater reliability, independence from complicated
and unreliable logistics networks, or simplicity of operation and
maintenance. Renewable energy should be made a part of the Afghan
National Development Strategy.



19. (U) As noted above, these Embassy ideas were conveyed in a
White Paper through UNAMA to other donors. The ideas were well
received by the donors and we are now working with the lead energy
sector donors to distill the White Paper into an internationally
approved actions paper which lists the specific steps that the GOA
needs to take in the short term and the issues it needs to address
in the medium term. We will use this actions paper to step up
engagement with the GOA and ICE on the way forward. We will
continue to use all levels of influence, bilaterally and through the
donors, to move forward. In the latter regard, the JCMB/Tea Club
informal mechanism has been and is likely to remain an essential
mechanism for keeping the donors together and moving forward.