KOSOVO: TECHNICAL, FINANCIAL, POLITICAL ISSUES

C O N F I D E N T I A L SECTION 01 OF 02 PRISTINA 000677

SIPDIS

SIPDIS

DEPT FOR DRL, INL, USAID, AND EUR/SCE, NSC FOR BRAUN,

E.O. 12958: DECL: 08/28/2017
TAGS: EAID ECON PGOV UNMIK KV
SUBJECT: KOSOVO: TECHNICAL, FINANCIAL, POLITICAL ISSUES
THREATEN KOSOVO ENERGY SUPPLY


Classified By: COM TINA KAIDANOW FOR REASONS 1.4 (B) AND (D).


1. (C) SUMMARY: Kosovo's energy sector is dominated by Kosovo
Energy Corporation (KEK),a publicly-owned, vertically
integrated monopoly that provides ninety-eight percent of
Kosovo's electricity. With help from contractors provided by
USAID, KEK has made significant improvements in its
operations. However, technical shortcomings, problems with
physical infrastructure, and management issues still limit
its ability to provide reliable power and subject Kosovo to
ongoing threats of destabilizing power shortages and cost
overruns. For example, a routine shutdown of the Kosovo B
power plant for necessary maintenance this September could
become a crisis if KEK's financial woes impair its ability to
import replacement power. More aggressive collection efforts
are raising larger questions about relations with the Kosovo
Serb community, which has largely not paid for its energy
consumption since 1999. END SUMMARY.

TECHNICAL IMPEDIMENTS


2. (SBU) KEK generates electricity in two plants outside of
Pristina located near the lignite (low quality coal) mines
that fuel the plants. The first plant, Kosovo A, was built
in the 1960s with five generating units, but only two, A3 and
A4, are currently operable. The amount of coal that can be
transported on the existing conveyor system limits sustained
power generation from Kosovo A to about 130 MW. Kosovo B,
built in the 1980s, has two units capable of generating 280
MW each. Thus, KEK maximum sustained generating capacity is
about 690 MW, with another 30-40 MW supplied by a
hydroelectric plant in Gazivode. During peak hours,
especially in the winter, KEK must import power to meet
demand.


3. (SBU) A power crunch is looming in September as both
units of Kosovo B need to be shut down, possibly through
October 15, to service common facilities such as the cooling
tower, water treatment, smokestack and ash-handling
facilities. Although some coal is being stockpiled, Kosovo A
will probably not be able to sustainably supply more than 130
MW. Peak load during this season may be around 550 MW, and
power will need to be imported. During this period,
scheduled blackouts will also be more prevalent. Although
KEK is pursuing the rehabilitation of the A5 unit and intends
to increase the capacity of the conveyor system serving
Kosovo A, Kosovo will remain a net importer of power until
the planned Kosovo C plant comes on line, which is not likely
before 2015.

FINANCIAL ISSUES AGGRAVATE POWER CRUNCH


4. (SBU) With help from USAID-funded consultants, KEK has
made significant improvements in metering, billing, and
collection procedures that have boosted its revenue
collections 30 percent above the same period last year.
Nonetheless, financial challenges remain that may impact
power availability in the near and longer term. KEK's budget
for the current year projects imported power costs of 40
million euros. While the projections of the volume of power
needed remain valid, the cost of imported power is averaging
.09 euros per KWh -- more than twice the historical
(projected) price and twice the regulated tariff that KEK is
able to charge its customers. The high cost of imported
power is partly due to the scarcity of power in the region
resulting from the low availability of hydropower and the
closure of a large nuclear plant in Bulgaria. KEK also
believes there has been some abuse of market power among the
limited number of traders the Energy Regulatory Office has
licensed to respond to KEK's tenders for power imports.


5. (C) At current prices, KEK estimates it will need 20
million euros just to pay for imports in September. It
currently does not have enough cash on hand to get the
letters of credit necessary to close contracts for this
volume, and its ability to borrow is constrained. Even if
KEK finds a way to contract for the power it needs during the
upcoming power crunch, it will need an infusion of cash,
probably from the Kosovo budget, to pay for power imports
this winter. KEK's bid for a five percent tariff increase
this spring was quashed by Prime Minister Ceku, costing KEK 7
million euros.

COLLECTION EFFORTS IMPACT MINORITIES


6. (SBU) As KEK's collection processes become more effective,
they are pushing into the sensitive area of relations with

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the Kosovo Serb community. Many Kosovo Serbs living in
enclaves have not paid KEK bills since 1999. Both the recent
Ministry of Internal Affairs requirement for presentation of
a paid electric bill as a condition of vehicle registration,
and the Ministry of Trade and Industry's earlier requirement
linking new business registrations to payment for electricity
has had a disproportionate impact on Kosovo Serbs. A new
process for prioritizing substations for load shedding is
also likely to have a similar impact; it will determine whose
power gets cut off during a shortage using a formula that
considers, for the first time, the amount of power that gets
paid for as a percentage of power distributed. Serb enclaves
that have not been paying for power will likely see their
priority fall and their access to electricity decrease.


7. (SBU) The Kosovo Government plans to take up the issue of
the link between vehicle registration and KEK bills, and USOP
expects that the list of substations whose load shedding
priority will fall under the new procedure will be vetted
with local and international groups before action is taken to
implement it. Ideally, KEK will need to implement a customer
outreach program to bring Serb enclaves into its formal
customer base at an appropriate time once final status is
determined. Once Kosovo Serbs have acclimated themselves to
final status -- and realize their lives and property are not
in jeopardy -- KEK could begin a series of public meetings to
answer locals' questions and explain its amnesty program.
Some Serb municipal leaders have indicated that an
appropriate program at the right time would probably be
accepted by most residents of their enclaves. There is
little tradition of customer outreach in Kosovo and an
outside adviser could provide valuable guidance in this
process.

MANAGEMENT ISSUES


8. (C) In an unusual arrangement, Minister for Energy and
Mining Ethem Ceku is also Chairman of KEK's Board of
Directors. Ceku is closely involved in KEK management,
scheduling board meetings twice each month. He recently
dismissed Managing Director Pranvera Dobruna and the board
has appointed a selection committee to find a new MD. A
total of 32 applications were received for this position, but
after the initial assessment process, none of the candidates
were deemed qualified. The board recently authorized the
selection committee to reach out more actively to recruit
qualified candidates. These management issues have had a
negative impact on KEK performance, yet the Kosovo C project
may finally be making progress with the World Bank's recent
selection of the transaction advisers who will oversee the
multi-billion dollar tender process.


9. (C) COMMENT: Real economic development in Kosovo cannot
take place without access to reliable, affordable electric
power -- and KEK has a long way to go for this to be a
reality. On top of these challenges is what to do with the
problem of non-paying Kosovo Serb enclaves. Our take is that
this should not be a hasty or destabilizing process, but that
the payment regime should gradually come to include these
enclaves at an appropriate time after final status has been
resolved. We may also need to weigh in again with UNMIK
should Serbia make the offer -- as it did last year -- to
provide energy to Serb areas in Kosovo, an idea that
foundered on Belgrade's insistence that all Serbs in Kosovo
benefit from the scheme, while UNMIK insisted it was not
technically or politically feasible to single out Serb
consumers in this manner. In the meantime, we will weigh the
advantages of possibly expanding our technical assistance to
KEK to maximize its earnings potential, understanding all the
while that there will be no permanent cure to Kosovo's energy
woes until Kosovo C comes on line years from now. END
COMMENT.

KAIDANOW