RRT ERBIL -- THE LIGHTS ARE ON -- KRG BENEFITS FROM PRIVATE

UNCLAS SECTION 01 OF 03 BAGHDAD 003787 SIPDIS E.O. 12958: N/A TAGS: PGOV ENRG ECON EINV IZ SUBJECT: RRT ERBIL -- THE LIGHTS ARE ON -- KRG BENEFITS FROM PRIVATE SECTOR INVESTMENT IN ELECTRICITY This is an Erbil Regional Reconstruction Team (RRT) cable. ¶1. Summary: Electricity supply has jumped in Erbil Province, thanks partly to a privately-owned power plant fueled by gas from the Dana Gas/Crescent Petroleum gas field. Private power generation could produce as much as 1,900 MW by 2010 when plants in Dohuk and Sulaimaniyah are projected to come on line. Kurdistan Regional Government (KRG) efforts are currently focused on meeting the region's growing power demands, but the KRG is also promoting investment in its considerable gas, hydro and wind assets with a view to becoming a net power exporter to the rest of the country. The KRG power sector suffers from lack of access to financing, weak capacity and inexperience in long-range planning. U.S. Advisers are working with the KRG Ministry of Electricity to address these shortcomings, as well as to implement best international practices in pricing, billing and revenue collection. End summary. -------------- Background -------------- ¶2. Since 2003, the Kurdistan Region (KR) has used power from the national grid (200 MW),hydropower (100 MW),suppliers in Turkey (130-200 MW) and Iran (2.5 MW) and city-owned generators (200 MW) to meet its growing power needs. But supplies have been unable to meet more than half of the current estimated demand of 1,500 MW (up from 250 MW in 1991). In 2007, on average, only 21-43 percent of total demand was met in the region (compared to 54% of demand met in the rest of Iraq.) Demand in the KR (as elsewhere in Iraq) has been growing substantially, by one estimate, at 15% per year. ¶3. Further exacerbating the shortfall has been the fact that drought has reduced hydropower output, the national grid produces insufficient electricity to meet national demand, and biannual renegotiation of the Turkish contract with the GoI more often than not leaves Dohuk Province without power in the coldest and hottest months of the year (septel). As elsewhere, access to subsidized diesel fuel is a chronic problem. With the KRG providing between 2-8 hours of electricity a day (depending on the season),most families, as elsewhere in Iraq, were obliged to rely on private generation (either their own small generator or a neighborhood generator) for which they paid from $40 - $150 a month. There are 680 of these alone in the city of Erbil. -------------- ELECTRICITY HOURS JUMP IN ERBIL -------------- ¶4. The recent inauguration of a 500 MW gas-powered privately-owned generation plant in Erbil and seasonal reduction in demand have helped to improve power supply dramatically in the province. Erbil residents are now enjoying 10-12 hours of government-supplied electricity a day. The brainchild of a well-to-do Kurdish investor (based in Amman),the USD 390 million Pir Daud plant is one of three Build-Own-Operate (BOO) power plants that Mass Global Trading is building in the KR. Mass Global's contract with the KRG provides for a fifteen year, 2.9 cents per Kilo Watt Hour (KWH) guarantee and government-supplied fuel. (Pir Daud is expected to break even by 2015.) The Trade Bank of Iraq (TBI) helped finance the project, providing letters of credit for the import of the equipment and by extending direct credit facilities. ¶5. The Pir Daud plant is linked by pipeline to the Dana Gas/Crescent Petroleum Khor Mor gas field. (Note: The $650 million Khor Mor gas field is the largest single private investment in Iraq today and the largest private sector oil and gas project in Iraq in several decades. End note). One of the project's key features is Qseveral decades. End note). One of the project's key features is that Dana/Crescent will supply free natural gas to the Kurdistan Region's power plants. Dana/Crescent plans to recover profits by extracting and selling valuable natural gas liquids from the gas stream. ¶6. Pir Daud is not yet at full capacity. On October 4, natural gas began flowing at 75 million cubic feet per day (mcfd) to Pir Daud. The gas flow will rise in stages to 300 mcfd within the first half of 2009. There are plans to increase Pir Daud capacity by 250 MW by installing two more 125 MW GE Frame 9 turbines, bringing the plant to 750 MW total. -------------- Sulaimaniyah Plant: Financing Problems -------------- ¶7. Mass Global is also building a 750MW plant in Sulaimaniyah that will be fed by the same pipeline. The Chamchamal project was to be completed in 3 stages, with the first of the 250 MW units slated to begin operations in November and the entire project to be completed by the end of 2009. However, work on Chamchamal power plant is behind schedule (reportedly due to contract renegotiation with Siemens and the investor.) An International Finance Corporation (IFC) mission was in Sulaimaniyah in September to hold negotiations with the CEO of Mass Global for an equity stake in the project but subsequently pulled out of the project, reportedly because of the international financial crisis. (Mass Global is also reportedly BAGHDAD 00003787 002 OF 003 negotiating with the GOI Ministry of Electricity on a 500 MW gas turbine power project to be located near the Taq-Taq field in Sulaimaniyah.) ¶8. When completed, the two new power plants will have combined generating capacity of 1,500 MW, sufficient to power about 750,000 homes or several large industrial projects. The third Mass Global project (in collaboration with another investor) is a 400 MW BOO heavy fuel oil-fired power plant based in Dohuk which is not projected to come on line until 2010. Dohuk is not connected to the national grid which feeds Erbil and Sulaimaniyah. As a result, until the plant comes on line, Dohuk will remain critically dependent on the vagaries of biannual GoI renegotiation of Turkish-supplied power. -------------- Managing Demand -------------- ¶9. To complement the supply side improvements, the KRG recognizes that it needs to devote attention to the demand side of the power equation -- a focus of the USAID-drafted Energy Master Plan which is intended to serve as a road-map for the Kurdistan Region Ministry of Electricity. Although monthly bills average only USD 3 per household, bill collection is abysmally low. USAID-funded Electricity Subject Matter Experts (SME) have guided the Ministry's efforts to put in place pilot meter-testing programs in the Erbil region with a view to the eventual privatization of this function. A number of private companies are currently involved: Apator (Poland) is installing eighty state-of-the-art test meters in Erbil; Slovenian and Chinese companies are also providing test meters in Erbil. In addition to these pilot programs, Digital Metering (DM), a Dubai-based metering company, was given a contract by the KRG Ministry of Electricity for installation of 100,000 meters (40,000 in Sulaimaniyah, 35,000 in Erbil and 25,000 in Dohuk). (DM's project is financed by a $50 million Canadian loan.) ¶10. The SME Advisers are also working with the KRG Director General of Electricity on a realistic pricing strategy. Tariffs in the KR are currently 2 cents a Kilowatt Hour (KWH). (By way of comparison, residents of New York City pay 17 cents a KWH.) Although the average tariffs will be increased to 5 cents a kilowatt-hour in 2009, the marginal cost of production has been estimated at close to 7 cents a KWH. (Comment: Given the high prices that residents have become accustomed to paying for private generation, it would appear that there is a price between USD 3 a month and USD 150 a month which consumers should be willing to pay. Nonetheless, an informal survey of Erbil residents revealed a deep-seated opposition both to privatization as well as to any price increases. The KRG announcement that prices would double - before service had actually improved - was a highly unpopular move. End comment.) -------------- Adding Transmission Lines -------------- ¶11. The KRG Ministry of Electricity will need additional transmission capacity for the 4th Pir Daud unit when it comes on line. Additional transmission capacity is currently being contracted and is proceeding to catch up. In September the KRG MoE announced the award of a $33 million 132 kilovolt electrical transmission and distribution project that links Aqra, in Dohuk province, to Khabat in Erbil province to a US Company, Symbion Power. In addition, the MoE announced a tender for a 37-km 33kV two-line transmission system from Dokan Lake to the Sulaimaniyah Water Project. A $20 million distribution improvement project - Japanese funded, UNDP implemented - is also in the works. QJapanese funded, UNDP implemented - is also in the works. -------------- Fuel -------------- ¶12. The chronic shortage of government-subsidized diesel fuel (coming from the Bayji refinery) affects those facilities which are still dependent on fuel. While there is currently no refinery capacity in the KR, refineries are to be built by companies which have signed Production Sharing Contracts which the KRG (these projects constitute part of their infrastructure improvement commitment). Heritage Oil has agreed to build a 20,000 barrel/day refinery in their Miran Block (not yet sited). Topco's 20,000 barrel per day refinery in their Taq-Taq Block has been sited, but not yet constructed. Norwegian oil company DNO is close to completion of a 6,000 barrel/day diesel fuel refinery. -------------- The future is hydropower -------------- ¶13. In August 2007, KRG Minister of Electricity Hoshyar Siwaily stated in a press conference that by 2009 Kurdistan region would be able to supply enough electricity for the Region and to export power to the other provinces of Iraq. The potential certainly exists for this resource-rich, thinly populated and industry-poor region to export to the larger population and industrial centers in the south - but not in the next five years, based on supply and demand trends in the region. BAGHDAD 00003787 003 OF 003 ¶14. The Kurdistan region is endowed with significant hydro resources and some experts believe that the long-term power solution lies with the region's hydropower potential. A 2007 Japanese ODA study prioritized 20 medium-sized sites for a total of 2,000 MW. The massive Bekhma Dam - designed as a multi purpose hydropower project and abandoned in the early 1990s - could deliver 1,600 MW. (Comment: We understand that there are plans to reactivate the USD 5 billion, centrally-financed project. End comment.) The MoE recently has announced tenders for detailed feasibility studies for three hydropower plants in the three governorates of the Kurdistan Region: Halwan Hydropower plant (53MW),Gali Balinda Hydropower plant (111MW),and the Delga Hydropower plant (97MW). ¶15. The MoE also announced tenders for feasibility studies in three provinces to carry out wind power assessment at high wind velocity sites in Chamchamal, Makhmor, Azmer and Haji Omran. These can be quickly assembled and, along with natural gas-based turbine projects, they could potentially be the "least cost generation" options for the region's electricity needs. And finally, the KR is estimated to have some 82 trillion cubic feet of associated gas; capturing flared gas alone could produce 4,000 MW of electricity. -------------- Comment -------------- ¶16. The KRG's encouragement of private sector operators has produced significant improvements in electricity supply, but access to financing (such as that discussed with the IFC) is urgently needed to continue the improvements to power delivery. For its part, the KRG Ministry is short on technical expertise and new to long-range planning. Fortunately, USAID SMEs are filling some of this gap. In addition to work on billing, revenue collection, training and capacity building, they are guiding the Ministry to look at the steps necessary to set up an independent regulatory body. U.S. advice is highly esteemed by the Minister and his Directors General; the work of our USAID-funded experts has been important in steering the direction of this important ministry and should be continued. CROCKER