Afghanistan Energy: New Inter-Ministerial Commission Offers

UNCLAS SECTION 01 OF 06 KABUL 000274 SIPDIS STATE FOR SCA/A, SCA/FO (A/S BOUCHER, GASTRIGHT, DEUTSCH) STATE PASS USTDA FOR DSTEIN/SGREENIP STATE PASS OPIC, USAID MANILA PLEASE PASS ADB/USED NSC FOR AHARRIMAN USAID/AA/ANE FOR JKUNDER TREASURY FOR ABAUKOL CENTCOM FOR CG CJTF-76, POLAD, JICENT SENSITIVE, SIPDIS E.O.12958: N/A TAGS: ENRG ECON EPET ETRD KPWR EAID PGOV AF 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) -------------- KABUL 00000274 002.2 OF 006 ¶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 frame. 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 services. 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. Comment -------------- ¶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. Neumann