KYRGYZ RELIANT ON FRAYING WINTER POWER PATCHWORK

C O N F I D E N T I A L SECTION 01 OF 03 BISHKEK 001174

SIPDIS

DEPT FOR SCA (GORKOWSKI/DEUTSCH)

E.O. 12958: DECL: 11/18/2018
TAGS: ENRG ECON PREL SOCI KG
SUBJECT: KYRGYZ RELIANT ON FRAYING WINTER POWER PATCHWORK

REF: A. BISHKEK 593

B. BISHKEK 501

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Classified By: Amb. Tatiana Gfoeller, Reason 1.4 (b) and (d).


1. (C) Summary: The Kyrgyz Republic will be relying on a
patchwork of external support, strained infrastructure, and
good fortune to keep the lights on this winter. A
Russian-brokered plan to ensure winter supplies of
electricity in the Kyrgyz Republic is fraying as proposed
imports of Kazakh and Turkmen electricity become increasingly
elusive. Payment for Uzbek natural gas may be possible with
IMF assistance and revenues from the sale of a majority stake
in Kyrgyzgas to Gazprom, but will leave the Kyrgyz with fewer
future options. The Kyrgyz Minister of Energy envisions a
crisis by February due to shortfalls in the main Toktogul
hydroelectric cascade reservoir and excessive electricity
demand. The U.S. firm AES hopes to secure a long-term
management contract for three Bishkek-based assets the Kyrgyz
government has recently decided to largely privatize.
However, with snow already blanketing the country and
overloads shorting the electricity grid, the patchwork
stitches together a system that risks failure in the midst of
a challenging winter. End Summary.

One for All, and All for One
--------------


2. (SBU) On the margins of the early October Commonwealth of
Independent States summit in Bishkek, Russian officials
apparently convinced Central Asian states to work
collectively to avoid a complete breakdown of electricity
supplies in the Kyrgyz Republic this winter. Components of
the arrangement included reliable natural gas supplies from
Uzbekistan, 250 million kilowatt hours of electricity from
Kazakhstan and possibly some additional electricity from
Turkmenistan. In a related development, Russia's Gazprom
secured natural gas exploration rights in the Kyrgyz Republic
as well as a 75% stake in the monopolistic Kyrgyz natural gas
provider, Kyrgyzgas.

Difficulties with Gas
--------------


3. (C) The Russian deal, however, must overcome some
perennial hurdles. Previous Kyrgyz-Uzbek natural gas
negotiations have been contentious, with debate encompassing
governance of water supplies in the Toktogul hydroelectric
cascade and sale of electricity. Russian control of the
Kyrgyzgas infrastructure may give the Kyrgyz more leverage in
future deals with the Uzbeks, but it relinquishes a greater
portion of the Kyrgyz Republic's (energy) security to Russia.


4. (SBU) If Kyrgyz imports of Uzbek natural gas in 2009
match this year's estimated inflow of 850 million cubic
meters, then Kyrgyz authorities will need to locate about
$255 million to finance the natural gas imports at the new
Uzbek price -- an amount more than double the 2008 bill and
more than six percent of Kyrgyz gross domestic product.
While the Kyrgyzgas sale and the International Monetary Fund
(IMF) may provide funding for most of this bill (see
paragraph nine),those resources will not be available in
future years.

Not Enough Watts
--------------


5. (C) Supply difficulties in southern Kazakhstan also raise
questions about potential Kazakh electricity exports to the
Kyrgyz Republic. Kazakhstan has previously relied on Kyrgyz
electricity to meet shortfalls in southern Kazakhstan, and an
AES official told Emboff November 7 that no new Kazakh

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generating capacity will come on line until 2012 at the
earliest. (Note: AES is a U.S. firm, which has long been
active in the Kazakh electricity sector. End note.) When
asked how Kazakhstan would be able to supply the Kyrgyz with
electricity amidst rising Kazakh demand, the AES official
said that a running joke in Kazakhstan has the Kyrgyz and the
Kazakhs exporting the same 250 million kilowatt hours of
electricity to each other. This way, he surmised, officials
from both countries can claim that they are supporting their
neighbor. However, the AES official conceded that the
Kazakhs should be able supply coal and mazut (heavy fuel oil)
for the Bishkek thermal station.


6. (C) Prospects for Turkmen electricity exports are fading
as political and technical difficulties regarding the transit
of said electricity through Uzbekistan have made this option
increasingly unworkable. Plus, it appears the Turkmen may
have concluded a separate electricity deal with Tajikistan.

Living on the Edge
--------------


7. (SBU) In the wake of Bishkek's second snowfall of the
season, Kyrgyz electricity generation and transmission
capabilities are already being stretched. The main reservoir
in the Toktogul hydroelectric cascade has 9.2 billion cubic
meters of water, less than 70% of last year's level.
Although the Kyrgyz government suspended its blackout
schedule for Bishkek and called for cuts in areas exceeding
their allowed consumption limits, Minister of Eneregy
Saparbek Balkibekov announced November 11 that the Kyrgyz
Republic would face an "energy crisis" by February if
consumption is not sufficiently curtailed. As virtually all
areas of the country are exceeding their electricity
consumption limits, Balkibekov has proposed cutting supplies
of electricity used for heating and cooking. Government
officials are also considering reintroducing blackouts in
Bishkek. Meanwhile, within the past week technical failures
disrupted the main transmission line feeding Bishkek power
from the Toktogul cascade and the line linking Central Asia
with the Russian power grid.

Donors Pledge Assistance
--------------


8. (SBU) In addition to USAID efforts to provide generators
to critical care facilities at Kyrgyz hospitals lacking
back-up power supplies, the World Bank has identified almost
$11 million for mazut, bulldozers, piping and precipitators
for use at the Bishkek thermal plant. (Note: After the
Toktogul hydroelectric cascade, the Bishkek thermal plant is
the most significant facility for generating electricity in
the country. End note.) World Bank Resident Representative
Roger Robinson briefed the Ambassador about this proposed
assistance November 5, and noted that the mazut supplies
would enable more boilers at the Bishkek thermal plant to be
put to use. Currently, he added, only 160-180 megawatts (MW)
of the 600 MW of installed capacity is used. The remainder
either requires maintenance or lacks appropriate fuel.
Robinson explained that the bulldozers would be used to shift
coal around the plant.


9. (SBU) In a November 6 briefing to the Ambassador
regarding the IMF's planned $100 million Exogenous Shocks
Facility for the Kyrgyz Republic, IMF Resident Representative
James McHugh confirmed that the Kyrgyz could conceivably
allocate some of these funds to finance natural gas and
electricity purchases for this winter, if energy supplies are
available.

Can the Private Sector Help?
--------------

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10. (C) The AES official told Emboff that AES is still
interested in a 15-20 year management contract for the three
Bishkek-based energy sector assets: the Bishkek thermal
plant, the Bishkek Teplosets (hot water and heating network),
and Severelectro electricity distribution company. Although
the Kyrgyz government recently announced plans to sell an 80%
stake in these assets to the private sector, the AES official
estimated that the official $470-$520 million valuation for
the assets was too high to attract any real interest. He
told Emboff that Kyrgyz privatization agency officials had
been criticized for an earlier, much lower, estimate, and
subsequently increased the valuation for the initial tender
process. The AES official, who has visited the Bishkek
thermal plant previously, estimated that the facilities
required $300 million in investment, and believed that
Russian firms and Israeli-Kazakh investor Alexander
Mashkevich were no longer interested in these assets. The
AES official hoped to convince Kyrgyz officials that the
required investment would necessitate the long-term
management contract just to recoup expenses. He believed
that the Kyrgyz might reissue the tender with more favorable
terms early next year.

Comment
--------------


11. (C) While many are hopeful that the Kyrgyz, with
significant outside assistance, will pull together enough
energy to power the country through the winter, a strained
and well-worn infrastructure and increasing energy costs make
sustaining this patchwork increasingly difficult. (Note:
Anecdotal evidence also indicates that less power consumption
is being metered, which reduces revenues available for future
maintenance. End note.) With overloads this season already
causing the electricity grid to falter, it will be important
for Kyrgyz authorities to make decisions on long-term
solutions. However, finger-pointing within the government
has accelerated as more bad news arrives each day. Plus,
previous sales of electricity to Kazakhstan and repeated
allegations of off-book sales of electricity continue to fuel
charges of corruption in senior ranks.


12. (C) Kyrgyz authorities, including Prime Minister
Chudinov, have previously expressed support for AES
involvement in the Kyrgyz electricity sector. A senior AES
team plans to visit Kyrgyzstan in late December. We hope to
utilize that visit to highlight the importance of taking
decisive action on electricity sector issues for the
country's long-term benefit.
GFOELLER