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 PRISTINA 00000677 002 OF 002 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