TURKMENISTAN-AFGHANISTAN MARCH 11 CONSULTATIONS ON

UNCLAS SECTION 01 OF 03 ASHGABAT 000483 SENSITIVE SIPDIS STATE FOR SCA/CEN, EUR/ACE, EEB AID/W FOR EE/EA E.O. 12958: N/A TAGS: PGOV PREL EAID TX SUBJECT: TURKMENISTAN-AFGHANISTAN MARCH 11 CONSULTATIONS ON ELECTRICITY REF: (A) Ashgabat 1481, (B) Ashgabat 199 (C) Astana 419, (D) Astana 251 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (SBU) SUMMARY: On March 11, USAID met with representatives of the Turkmenistan Ministry of Energy and Industry (MOEI) to continue consultations in support of the supply by Turkmenistan to Afghanistan of 300 MW of electric power through the construction of necessary transmission infrastructure and new power generation facilities. Responding to a request from the previous Minister in November 2008 (Ref A),USAID mobilized consultants under the Economic Reform to Enhance Competitiveness activity to complete an analysis of the financial parameters of the project and its sustainability requirements. The results of this analysis were presented to MOEI on March 11. USAID anticipates that the presentation of these results, and the delivery to the MOEI of a spreadsheet financial model of the project, will assist Turkmenistan in taking the dialogue with Afghanistan on the contractual arrangements for delivery of power to the next step. USAID invited requests from the Turkmenistan MOEI for further technical assistance to support the objective of increasing Turkmenistan's export of power to Afghanistan. USAID likewise reiterated interest in closer collaboration with Turkmenistan under phase two of the Regional Energy Markets Assistance Program (REMAP),for which a contract was awarded on March 4. END SUMMARY. POTENTIAL OF TURKMENISTAN IN POWERING ITS NEIGHBORS ¶3. (SBU) Turkmenistan is endowed with abundant reserves of natural gas whose potential has yet to be fully exploited. Presently, Turkmenistan's gas exports are almost entirely directed at European markets, with delivery via Russian pipelines. Turkmenistan remains interested in expanding and diversifying its export markets. Conversion of natural gas to electricity for export is consistent with this diversification objective and has many advantages. The Central Asian region remains generation-capacity constrained, and the physical infrastructure exists for Turkmenistan to supply large volumes of year-round base-load electric power to its CAR neighbors via the region's 500 kV network (Central Asian Power Grid). However, institutional arrangements and political disagreements often prevent rational utilization of this potential (Refs C and D.) ¶4. (SBU) With construction of the necessary transmission infrastructure, the export potential to Afghanistan and Pakistan could easily rival that of Central Asian markets. The technology of gas-turbine power generation makes it possible to rapidly expand capacity, with plant construction time typically under half that of new coal-fired generation, and considerably less than new hydroelectric facilities. In an era of increasing concern for greenhouse-gas emissions, the construction of high-efficiency (and thus relatively low CO2 emissions per unit of electricity produced) gas-fired plant has an inherent risk-hedging advantage over coal generation in the event that binding GHG-emission caps are adopted. TURKMENISTAN'S EXPORTS TO AFGHANISTAN ¶5. (SBU) Turkmenistan currently provides small volumes (roughly 40 MW) of power to Afghanistan at a price of $0.02 per kWh. In earlier discussions on the prospects for expanding delivery of Turkmenistan electricity to Afghanistan, MOEI made it clear that expanded power deliveries to Afghanistan requiring investment in new infrastructures would have to be priced on a quasi-commercial basis, i.e. at prices that would allow Turkmenistan to recover all costs involved in the production and delivery. In consultations with MOEI, USAID understood this to imply not only the cost of capital associated with the expanded infrastructure, but also a market-reflective price of gas used in the generation of electricity. ¶6. (SBU) In discussions in early February between Afghanistan and Turkmenistan, both parties acknowledged this fundamental principle in a draft "protocol" (essentially a draft a joint declaration of ASHGABAT 00000483 002 OF 003 intent) on the next steps in facilitating expanded power deliveries (Ref B) whose text was produced as an output of these discussions. (NOTE: The Turkmenistan side has not yet signed this protocol. USAID understands that other stipulations of the protocol, and not the cost-reflective/commercial pricing stipulation, are what have caused the Turkmenistan side to delay its signature. Specifically, the protocol provides an indicative schedule of milestones relating to the negotiation of a power-purchase-agreement to which the Turkmenistan side appears to have been unwilling to commit without more careful analysis of the projects' finances that USAID's assistance has now provided. END NOTE.) (Ref B.) ¶7. (SBU) USAID, with support from other donors, is currently completing the construction in Afghanistan of the North East Power System (NEPS) that will link Kabul with Mazar-e-Sharif and other population centers in northern Afghanistan, and to Uzbekistan, Tajikistan, and Turkmenistan for the delivery of power generated under existing and new planned generation facilities. With the imminent completion of NEPS (within the next few months),the basic infrastructure will be in place for Afghanistan to take delivery of and distribute up to 1000 MW of power. It is within this context that discussions of expanded power exports from Turkmenistan to Afghanistan have been conducted. ¶8. (SBU) Under the scenario that USAID's consultants were asked to analyze, Turkmenistan would construct a new 254 MW gas-fired plant and expand the 500 kV network from its substation at Serdar to the border with Afghanistan. Afghanistan would complete the interconnection of this line to NEPS. This infrastructure would enable the delivery of 300 MW of power to Afghanistan (with the new 254 MW plant presumably augmented by existing Turkmenistan generation capacities.) USAID's advisors in Afghanistan estimate that there is at present up to 1000 MW of unsatisfied demand in that country, and that with the completion of investments in the NEPS and in distribution infrastructure in population centers, the physical absorption of the putative 300 MW from Turkmenistan would be easily feasible. IS AFGHANISTAN A CREDIBLE CUSTOMER FOR TURKMENISTAN POWER? ¶9. (SBU) Consistent with the commercial pricing principle agreed between Turkmenistan and Afghanistan in early February (Ref B), USAID's consultant was instructed to base his financial analysis on the assumption that the new plant and associated transmission infrastructure should be constructed on a commercial, project-finance basis, with all costs reflected in the project's revenue requirements. The resulting per-kWh tariff implications price the electricity considerably higher than the roughly $0.02 per kWh that Afghanistan is currently charged for the limited volumes it currently imports from Turkmenistan. ¶10. (SBU) MOEI was quick to voice its concern that the higher tariff requirements might price the power beyond the capacity of Afghanistan to reliably pay. With respect to this concern, MOEI has already indicated that it is likely to require that a credible payment-risk guarantee be provided to cover MOEI against the risk of non-payment under the envisaged new 300 MW arrangement. This requirement is reflected in the draft protocol produced at the early February meeting between the sides. Per the text of that draft protocol, Afghanistan would seek either World Bank or Asian Development Bank backing for a sovereign Government of Afghanistan guarantee (Ref B.) (NOTE: USAID's advisors remain uncertain whether such an IFI guarantee might be negotiated in a sufficiently timely manner, given institutional constraints and the lack of an Afghanistan sovereign debt rating. This may imply that alternative payment-risk guarantee arrangements will have to be identified. END NOTE.) AWAITING FURTHER ACTION FROM MOEI ¶11. (SBU) USAID's consultants are continuing to engage with working-level MOEI personnel on the operation of the spreadsheet-based dynamic financial model for the project, which allows for the adjustment of certain cost and plant performance ASHGABAT 00000483 003 OF 003 assumptions to derive a range of per-kWh tariff requirements (i.e. cost of natural gas, cost of capital, plant capacity factor, etc.) USAID expects that this work will provide the MOEI with sufficient comfort and confidence that it is prepared to proceed in further discussions such that it endorses the referenced draft "protocol" (Ref B) that outlines next steps in the dialogue between Turkmenistan and Afghanistan on the development of this project. ¶12. (SBU) Per the protocol, the sides are committed to agreeing to draft a basic terms sheet for a Power Purchase Agreement (PPA) that would provide the framework for the project and the MOEI's submission to the Government of Turkmenistan of a request to finance the project. (NOTE: Responding to a request received in initial consultations with USAID's consultants in January from the MOEI Department for Investments Head, Dortguly Jalilov, USAID's consultant's analysis presented a menu of options that the Turkmenistan Government might consider if it were to pursue private-sector involvement in this project in lieu of state funding. At the presentation, it was clear that the MOEI representatives present - Jelilov was absent - were not comfortable with pursuing such a discussion, and so this dimension was not pursued. From USAID's perspective, for the sake of rapid implementation of the investment program and earliest possible delivery of power to Afghanistan, development of this project as a purely Government-financed investment is most expedient. USAID also understands that a recent government decision will allow MOEI to retain whatever residual earnings this project might generate, which would appear to be a disincentive for MOEI to advocate for the involvement of the private sector in financing this investment. END NOTE.) ¶13. (SBU) USAID reiterated its hope that the MOEI would act soon to ratify the draft "protocol" between Afghanistan and Turkmenistan on the project, and confirmed its readiness to provide additional assistance to MOEI in preparing for further discussions and actions with Afghanistan as outlined in the protocol. USAID's recently awarded REMAP project has resources available to assist the MOEI in this direction, and to promote further engagement of Turkmenistan with Afghanistan and expanded cooperation with other countries of Central Asia. ¶14. COMMENT: USAID awaits the endorsement by the Turkmenistan Government's Cabinet of Ministers of a Memorandum of Understanding that prescribes the mode of interaction with MOEI under REMAP, and reiterated at this meeting its interest in seeing this MOU signed. USAID was advised on the margins of the March 11 meeting that the MOEI and MFA have already passed their comments on the MOU to the Cabinet of Ministers. END COMMENT. MILES