Identifier
Created
Classification
Origin
09ASTANA1373
2009-08-11 06:07:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Astana
Cable title:  

POWERING AFGHANISTAN: CONSIDERING THE CONTRIBUTION OF

Tags:  ENRG PGOV ECON EAID EINV KZ AF ZK 
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UNCLAS SECTION 01 OF 05 ASTANA 001373 

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EUR/CARC, EEB/ESC
STATE PLEASE PASS TO USTDA

E.O. 12958: N/A
TAGS: ENRG PGOV ECON EAID EINV KZ AF ZK
SUBJECT: POWERING AFGHANISTAN: CONSIDERING THE CONTRIBUTION OF
CENTRAL ASIA TO STABILITY AND GROWTH

REF: (A) ASTANA 0251
(B) ASTANA 0419

ASTANA 00001373 001.2 OF 005


UNCLAS SECTION 01 OF 05 ASTANA 001373

SENSITIVE
SIPDIS

STATE FOR SCA/CEN, EUR/CARC, EEB/ESC
STATE PLEASE PASS TO USTDA

E.O. 12958: N/A
TAGS: ENRG PGOV ECON EAID EINV KZ AF ZK
SUBJECT: POWERING AFGHANISTAN: CONSIDERING THE CONTRIBUTION OF
CENTRAL ASIA TO STABILITY AND GROWTH

REF: (A) ASTANA 0251
(B) ASTANA 0419

ASTANA 00001373 001.2 OF 005



1. (U) Sensitive but unclassified. Not for public Internet.


2. (SBU) SUMMARY: Reliable, affordable electricity is vitally
important to Afghanistan's economic growth, prosperity, and
stability. Donors are investing substantial resources in
Afghanistan to build a power transmission and distribution
infrastructure. Using this infrastructure to satisfy demand remains
a challenge and a substantial increase in supply is required.
Options include building new generation in Afghanistan to exploit
viable natural gas, coal, and hydroelectric potential, but
Afghanistan-based generation will likely be insufficient, especially
in the near-term, to satisfy demand. Central Asia appears to
represent a viable near-term option to supply Afghanistan.


3. (SBU) In the long-term, Central Asian power should enjoy a
cost-competitive position for exports to Afghanistan, and possibly
other South Asian markets. There are challenges to realizing this
potential. USAID advisors in Central Asia believe that USG emphasis
on accelerated development of the CASA-1000 project to bring
Tajikistan and Kyrgyzstan generation to Afghanistan and Pakistan
exacerbates these challenges, and is based on inadequate analysis of
the financial viability and political risk of the project. A
thorough analysis is accessible via OpenNet at the following
address:

http://intranetcar.ee.usaid.gov/Home/
Almaty-Offices/Economic-Growth/Resources---Li nks/
Powering-Afghanistan --------------
The-Contribution-of-Centra.aspx.

END SUMMARY.

AFGHANISTAN'S POWER SECTOR INFRASTRUCTURE


4. (SBU) Afghanistan lacks sufficient domestic generation capacity
to meet demand, and relies on limited (and subsidized) imports from
Turkmenistan, Uzbekistan, and Tajikistan, and on costly donor-funded
diesel generation plants. Only about a third of households in Kabul
enjoy electricity service. Service in other urban areas is less

common, while electricity service in rural areas is virtually
unknown. The Afghanistan and U.S. governments, multi-lateral
development banks, and other donors put a high priority on
developing the power sector. Electricity generated or imported has
increased from 500 million kilowatt hours (kWh) in 2004 to 1.57
billion kWh in 2008 and the number of electricity customers has
increased by almost 280% in the last six years.


5. (SBU) A major obstacle to expanding coverage is the poor
financial performance of Afghanistan's nascent power institutions.
To ensure long-term sustainability, the U.S. Government is working
with the Afghanistan Government to improve the sector's commercial
performance and build the capacity of Afghans to govern, manage, and
maintain their electricity systems. The U.S. Government is assisting
in expanding domestic generation. When these projects are
completed, the total grid-connected installed capacity in
Afghanistan should exceed 500 MW, still far short of the estimated
1000 MW potential demand that an expanded and reinforced Afghanistan
North East Power System (NEPS) might serve.

POWER FROM UZBEKISTAN


6. (SBU) Turkmenistan, Uzbekistan, and Tajikistan have stated their
willingness to promote stability in Afghanistan by supplying
electrical power. Uzbekistan has considerable potential to supply
Afghanistan with relatively low-cost power, drawing on its
substantial natural gas reserves. Uzbekistan has agreed to supply
up to 70 MW to cover Mazar-e-Sharif and parts of Kabul. The recent
completion of a single-circuit 220 kV interconnection enables

ASTANA 00001373 002.2 OF 005


Uzbekistan to expand the supply to 150 MW. A second 220 kV
interconnection will double this transmission capacity.

POWER FROM TURKMENISTAN


7. (SBU) Turkmenistan's potential to provide electric power to
Afghanistan relies on its abundant reserves of natural gas. Current
supplies to Afghanistan are limited, via a 110 kV line supplying
approximately 25 MW to Herat. Turkmenistan and Afghanistan, with
U.S. Government help are discussing a new dedicated 500 kV line to
connect Turkmenistan generation to NEPS at Andkhoy, with a potential
initial supply of up to 300 MW from a new gas-fired plant. The
discussions are still at the exploratory stage, however, and have
not yet included a discussion of price.

POWER FROM TAJIKISTAN


8. (SBU) Tajikistan has enormous potential for hydroelectric
generation, with about 4000 MW installed, and moderate new capacity
under development. Tajikistan also has some coal-fired generation
potential. Tajikistan currently endures winter shortages and forced
rationing, however, due to a combination of seasonal fluctuation in
hydroelectric power availability, the significant load represented
by TALCO, the country's Soviet-legacy aluminum smelter, and its
reliance on erratic power supplies from neighboring Central Asian
countries during peak winter demand. Despite its potential, new
capacity development in Tajikistan is constrained by financing
uncertainties and regional water-sharing disputes, with downstream
Uzbekistan strongly opposed to new large hydroelectric development
that doesn't consider its water-security concerns.

POWER FROM KYRGYZSTAN


9. (SBU) Kyrgyzstan's energy endowments are similar to
Tajikistan's. Kyrgyzstan also has viable coal deposits. Like
Tajikistan, Kyrgyzstan suffers from severe winter power deficits.
New hydro-electric development in Kyrgyzstan faces similar
challenges to those in Tajikistan.

POWER FROM KAZAKHSTAN


10. (SBU) Kazakhstan possesses approximately 17,000 GW of installed
capacity, the majority of which is lignite-fired and located in
Kazakhstan's north. Remaining thermal generation capacities in the
south rely on rail deliveries of Kazakhstan lignite. Domestic
generation capacity in Kazakhstan's southern districts is
insufficient to meet the demands of its largest load centers.
Kazakhstan imports power from Kyrgyzstan, and relies on limited
volumes of power that can be delivered from northern Kazakhstan via
the 500 kV line connecting northern Kazakhstan generation capacities
with the Central Asian Power Grid (CAPG) via Almaty.

CASA-1000 - PROS AND CONS


11. (SBU) CASA-1000 is envisaged as the first phase in a
prospective "Central Asia - South Asia Regional Electricity Market",
or CASAREM, in which Central Asia would supply power to South Asian
markets, including Afghanistan. CASA-1000 would link Tajikistan
with northern Pakistan via a 500 kV DC transmission line, with the
capacity to transmit up to 1000 MW of power from Central Asia to
Peshawar via Afghanistan. The Afghanistan power system would draw
up to 300 MW at an intermediate point along the line via a DC to AC
converter station. Power would be supplied during periods of
generation surpluses in Tajikistan and Kyrgyzstan.

THE CASE FOR CASA


12. (SBU) Proponents of CASA-1000 argue it would provide Tajikistan
and Kyrgyzstan with higher revenues from hydroelectric generation
than they currently earn under existing arrangements for power sales
within Central Asia. CASA-1000 thus would stimulate investment in

ASTANA 00001373 003.2 OF 005


Central Asian generation.

UNDERMINED BY UNREALISTIC ASSUMPTIONS


13. (SBU) However, USAID's Central Asia advisors believe the
CASA-1000 project makes a number of unrealistic assumptions,
including the following: (1) that Pakistan is a credible market for
Central Asian power that the CASA-1000 line would deliver; (2) that
the CASA-1000 line's security can be reliably assured; and (3) that
Kyrgyzstan and Tajikistan will be able to supply at least 2 TWh and
3 TWh per year, respectively.

MARKET AND PAYMENT RISK


14. (SBU) The ability of Afghanistan's power companies, and their
customers, to pay the full cost of consumed power is currently very
limited. Based on discussions USAID advisors have held with
power-sector representatives in Central Asia, concern for the
prospect of non-payment by Afghanistan is significant, is likely to
constrain investment in new plants and would jeopardize the dispatch
of power to Afghanistan if large arrearages accumulated. Pakistan
has a total installed capacity of about 16,000 MW, of which about
6,000 MW is operated by Independent Power Producers (IPPs). In
March, local trade press reported Pakistan's single-buyer wholesale
customer for IPP-produced power had arrearages to Pakistan's IPPs of
over $2 billion, despite the IPPs' low contract price of about
$0.05/kWh, according to Pakistan's Water and Power Development
Authority. Pakistan's IPPs have begun taking generation off-line in
response.


15. (SBU) Since the market in Central Asia, especially Kazakhstan,
is supply constrained, it is likely that Kyrgyzstan and Tajikistan
would seek a price beyond the ability of CASA-1000 and the Pakistan
market to pay. Kyrgyzstan sells summer electricity to Kazakhstan at
$0.046/kWh as part of their annual water release agreement. We can
expect that Tajikistan will seek to export its power on similar
terms. Given the financial crisis in the Pakistan power sector and
the cost of exporting Kyrgyzstan or Tajikistan power via CASA-1000,
investment in infrastructure that relied on a paying Pakistan buyer
would seem imprudent, if based solely on commercial considerations.

PHYSICAL SECURITY RISK


16. (SBU) The risk of sabotage against power infrastructure in
Afghanistan appears likely to remain for the foreseeable future. As
against market or payment risks, financial guarantees will be
required to satisfy would-be investors in any commercially
structured supply arrangement. The proposed CASA-1000 line would
traverse very inhospitable territory, with its Pakistan terminus in
the Federally Administered Tribal Areas near Peshawar. The physical
security of a high-voltage transmission line stretching several
hundred kilometers would be very difficult to ensure. This risk
would deter investment based on commercial considerations, or result
in high costs and the need for complicated and costly insurance.


17. (SBU) CASA-1000's initial financial models assumed that
Kyrgyzstan and Tajikistan would have sufficient surplus capacity to
provide power to energize the CASA-1000 line and supply up to a
combined 5 TWh per year, during peak summer months. USAID and World
Bank advisors have independently concluded that such supply
estimates are based on optimistic assumptions. If Kyrgyzstan and
Tajikistan together are unable to provide a combined 5 TWh per year
for export via CASA-1000, the economic viability of the project
becomes very questionable, as fixed transmission costs would raise
the unit-cost of power delivered.

INTERCONNECTION WITH CENTRAL ASIAN TRANSMISSION


18. (SBU) The expansion of power supplies from Central Asia to
Afghanistan will entail the interconnection of NEPS with
high-voltage transmission infrastructures in Turkmenistan,

ASTANA 00001373 004.2 OF 005


Uzbekistan, and Tajikistan. The practical difficulties of
interconnection will increase as the volume of power exported from
Central Asia to Afghanistan increases.


19. (SBU) Currently, Turkmenistan, Uzbekistan, and Tajikistan
provide power to Afghanistan on what is known as an "island" basis.
With current limited volumes, the potential impact of an Afghanistan
network fault on the stability of the exporting countries' systems
is negligible. However, as load increases with the completion of
high-voltage 220 kV interconnections, Afghanistan system reliability
becomes increasingly important.

POLITICAL RISK


20. (SBU) Power exports to Afghanistan from Turkmenistan and
Uzbekistan appear to entail no substantial domestic political risk,
as the two exporting countries do not currently endure domestic
supply shortages. Moreover, both appear prepared and able to
increase generation capacity to expand exports to Afghanistan.
Unfortunately, the same cannot be said for Kyrgyzstan and
Tajikistan. Neither country currently satisfies its own domestic
load requirements year-round, and the prospects for significant
capacity expansion in both countries remains remote for the
foreseeable future. The political risks to the delivery of
Kyrgyzstan and Tajikistan power to Afghanistan would be amplified
under a CASA-1000 scenario. Assuming the project's economic
assumptions are correct, Pakistan and Afghanistan would most likely
capture all of Kyrgyzstan's and Tajikistan's surplus hydroelectric
power. In addition to the likely increasing of rationing in these
countries, it might precipitate a decision by Kazakhstan to
disconnect from the CAPG, with repercussions for regional
cooperation. Meanwhile, CASA-1000 would create conditions to expand
hydroelectric capacities in Kyrgyzstan and Tajikistan. Uzbekistan
has vehemently opposed such investment, and government officials
have told USAID that they have strong reservations about the
CASA-1000 proposal for this reason, among others.

THE RISKS OF CASA-1000 OUTWEIGH THE REWARDS


21. (SBU) Enthusiasm for CASA-1000 appears to be waning among many
involved in the project. The Asian Development Bank withdrew its
financial backing for the project earlier this year, ostensibly due
to financing constraints and competing ADB priorities. In internal
ADB correspondence seen by USAID, however, ADB staff echoed many of
the concerns outlined above. USAID understands the World Bank is
conducting its own due diligence of the CASA-1000 project. In
April, Pakistan's cabinet vetoed the Inter Governmental Agreement on
CASA-1000 pending a comprehensive presentation of the project's
viability by its sponsors.

CONCLUSIONS AND RECOMMENDATIONS


22. (SBU) We recommend pursuing diversified options to expand power
exports from Central Asia to Afghanistan. Simultaneously, the
United States government should emphasize domestic industry
development in Afghanistan (including commercialization),and
support sector reform and development in Central Asia to facilitate
expanded trade in Central Asia and with Afghanistan and beyond.
Expanded trade between Central Asia and South Asia, including
Pakistan, could at that point be developed with a significantly
lower risk profile and a more certain and sustainable future.

THE COSTS OF CASA-1000


23. (SBU) We recommend that the United States reconsider support
for the CASA-1000 project, pending a clear demonstration of its
financial viability. Further, we recommend that the U.S. government
consider the opportunity cost of pursuing CASA-1000, in terms of
alternative investments in options to supply power to Afghanistan,
the relative timeliness of delivery of such supply, and the
potential regional political and geostrategic repercussions that

ASTANA 00001373 005.2 OF 005


CASA-1000 would have. Where mitigation of power-supply constraints
in Pakistan is of concern, we recommend that alternative options for
supply be compared with and evaluated against CASA-1000. Continued
pursuit of CASA-1000 would appear to jeopardize constructive
engagement with Uzbekistan to resolve Afghanistan's power supply
deficit. Uzbekistan's immediate support and commitment are more
important to Afghanistan's energy security than the potential future
benefits of the CASA-1000 project.

THE VIABILITY OF AFGHANISTAN'S POWER SECTOR


24. (SBU) Regardless of the source of power, the key issue is the
financial sustainability of the Afghanistan power sector. U.S.
efforts should continue to emphasize putting the Afghanistan power
sector on a solid footing, ensuring that the sector's revenues are
sufficient to cover its costs, and creating the institutional
arrangements necessary for the sector's sustainability as donor
assistance declines. Assistance should include support for new
capital investments, institutionalization of commercially-oriented
management practices operating companies, and appropriate tariff
policies combined with effective subsidy mechanisms for the
vulnerable. Until domestically-generated revenues are sufficient,
donor-funded fiscal support to the sector will remain necessary to
cover commercially-procured power.

SUPPORTING REGIONAL TRADE IN ELECTRICAL POWER


25. (SBU) The power systems of Uzbekistan, Tajikistan, Kyrgyzstan,
and Kazakhstan are inter-connected via the CAPG. However, this
physical interconnection is not supported by a robust institutional
framework governing the trade in electric power. The USG should
support existing initiatives to establish a regional power market
with enhanced system dispatch efficiency and the transparent and
non-discriminatory allocation of transmission capacities in the
CAPG. This should be matched by efforts to resolve regional water
disputes. The emerging framework will make more power generated
within the region available to Afghanistan and enhance the
investment environment for new generation.


26. (SBU) Embassies Ashgabat, Astana, Dushanbe, Kabul, and Tashkent
have cleared this cable. Embassy Bishkek did not clear, but does
not object to this cable's transmission.

HOAGLAND