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