RRT ERBIL: KRG SUCCESS IN ELECTRICITY SECTOR

UNCLAS SECTION 01 OF 03 BAGHDAD 003347 SIPDIS E.O. 12958: N/A TAGS: ENRG EPET ECON PGOV IZ SUBJECT: RRT ERBIL: KRG SUCCESS IN ELECTRICITY SECTOR BAGHDAD 00003347 001.2 OF 003 ¶1. This is an Erbil Regional Reconstruction Team (RRT) cable. ¶2. (SBU) Summary. The Kurdistan Regional Government (KRG) is succeeding with its electricity sector strategy, expanding generation capacity in the near future to meet most demand, at least in towns and cities. Out of an estimated unsuppressed demand of 1800 MW, there is now 1,000 MW of generation capacity, with more coming. The KRG has achieved this through foreign and private investment in power plants and guaranteeing investors attractive pricing. The KRG contracted a UK consulting firm for a 20-year Master Plan to guide its electrical power generation, transmission, and distribution development. The firm concluded the KRG has made appropriate decisions in its ongoing expansion plan and the KR has comparative advantages enabling power exports to the rest of Iraq and its neighbors in the near future. Though the KRG is doing well in providing electricity to its people, expansion in capacity will only be sustainable if it raises prices for end-users who have until now enjoyed substantial subsidies. With rate recoveries, streamlining management and staffing and strengthening accountability and transparency will also be required. End summary. A Power Roadmap ¶3. (SBU) The KRG has expanded electrical generating capacity ) and the number of hours of delivery of electricity in major cities ) significantly in the past two years. At a conference in Erbil November 16, a UK-based consulting firm hired by the KRG confirmed what local observers already suspected: that the KRG has been relatively successful in its electricity sector strategy. Parsons Brinckerhoff (PB),a British consulting firm specializing in electricity planning, signed a contract with the KRG in January 2009 to develop a comprehensive 20-year Master Plan integrating all areas of electrical power generation, transmission, and distribution in the KR. It presented the final draft of its plan at the above-mentioned conference, attended by representatives from the KRG Ministry of Electricity (MOE) and Ministry of Planning. The Master Plan included PB,s evaluation of the current power situation in the KR, a comparison of planned development projects against requirements, and an estimate of the KR,s ability to move beyond simply satisfying its internal requirements to begin export of power to the rest of Iraq and to adjacent countries. ¶4. (U) In general, PB concluded that the KRG is pursuing a prudent course in its short- and long-term plans for developing the electrical energy sector in the KR. PB,s Master Plan, however, recommended one significant policy modification - to shift ongoing and planned projects from gas turbine (GT) to Combined Cycle (CC) generation. Otherwise, its long-term recommendations (for 2020 and beyond) were in synch with and complementary to the KRG's plans. Power to the People ) Expanding Generating Capacity ¶5. (SBU) PB reported that the KR currently has approximately 1,000 MW of internal generating capacity, compared to an estimated region-wide demand of 1,800 MW. It has agreements to purchase 134 MW from Turkey and 50-200 MW from Iraqi sources outside the KR , but contracting issues and fuel oil shortages have reduced the reliability and quantity of power received from both external and national sources. The recent drought and a policy of prioritizing water use for agriculture purposes have lowered lake levels and generation at two key hydroelectric plants at Dokan and Darbandikhan. Heavy fuel oil (HFO) and diesel engine driven generation is habitually reduced in the KRG due to a lack of spare parts and reliable supplies of fuel, which is trucked, not piped, Qand reliable supplies of fuel, which is trucked, not piped, to the plants. Transferring electricity from the Iraq interconnected system is problematic, given the shortages on the grid and the lack of cooperation between the KRG and GOI. (Note: Former KRG Prime Minister Nechirvan Barzani told RRT Team Leader that the GOI had tried to convince the KRG not to build new power plants, but the KRG went ahead when the GOI could not guarantee an equivalent amount of power delivery. End Note.) The shortfall between supply and demand has meant that the KR suffers daily outages and brownouts. Because the KR maintains two independent distribution networks, one serving Dohuk and the other serving Erbil and Suleimaniyah, shortages are not equally shared among the three governorates. In the cities of Erbil and Suleimaniyah, power is available about 15 to 18 hours per day, on average. Dohuk gets power about 12 hours per day. Residents supplement the irregular public power supply by running their own generators or by buying power from private entrepreneurs who operate small diesel units, typically charging about 16.5 cents per kilowatt-hour. ¶6. (U) The KRG has several new power generation facilities, either under construction or committed: BAGHDAD 00003347 002.2 OF 003 - In Chamchamal, in Suleimaniyah province, a 750 MW gas turbine plant is partially completed and currently delivering 331 MW. Four turbines should be operational by early next year, with two more possibly available in 2011. - In Ba,adrah, a 150 MW Heavy Fuel Oil-fired plant with planned opening in 2011. - Two hydroelectric plants at Bekhal and Deralok. Bekhal, a 1 MW micro-facility, should open next year. Deralok, producing 30 MW, is planned to start production in ¶2015. - The KRG MOE has recently signed an agreement for construction of a 300 MW heavy oil fired plant with the Korean National Oil Company. The plant would have an initial operating capacity of 150 MW. The balance capacity will be installed by 2014. - Three 29 MW medium speed diesel engine plants in Erbil, Suleimaniyah and Dohuk will be overhauled by 2012. - In Dohuk, a 500 MW combustion turbine plant. ¶7. (U) PB estimates that current construction plans, if completed on schedule, will result in sufficient power on line to satisfy, or even exceed, demand in the KR until about ¶2020. For the period 2020 to 2030, PB recommends additional generation capability be considered: Three 375 MW plants (one in each of the three governorates),a second 375 MW plant in Erbil, and a 250 MW plant in Dohuk. These recommendations assume a high rate of growth in the region; lower growth rates would allow delay of this construction. The consultants strongly recommend that the KRG consider building combined cycle plants (these use heat exhausted by gas turbines or diesel engines to power steam turbines) rather than simple-cycle plants, because of the significant fuel economies they offer. ¶8. (U) The Master Plan concludes that ongoing and projected development of the KR's gas fields will result in production of enough gas to meet electricity generation requirements beyond 2030. The two producing oil fields, Tawke and Taq Taq, and additional fields being developed, will bring enough fuel to the market to both run projected power plants and allow for significant exports. ¶9. (U) PB discounted development of wind-powered generation, both because of its high startup cost and because the region does not generally have adequate wind velocities. Solar generation may be profitable in the future, but, except in very isolated areas, its high costs make it non-competitive with fossil fuel or hydro facilities. Untangling the Wires ) Upgrading the Transmission and Distribution Net ¶10. The PB Master Plan advocates three priorities for the KR electrical transmission and distribution system: - 1st priority - A US$60 million electrical meter installation program. - 2d priority - Rehabilitation of the distribution network, US$250 million. - 3d priority )Connection of 75,000 additional customers per year to the electrical grid, US$80 million per year. ¶11. (U) Only about 600,000 of an estimated 730,000 electrical connections in the KR have conventional meters. The Master Plan suggests that installation of meters be made a priority, both as an incentive to consumers to exercise some discipline over their power use, and as a means to generate funds to cover some of the costs of production and distribution (Note: RRT Erbil has been working with the KRG MOE to improve electrical metering. End Note) ¶12. (U) To meet forecast demand between 2020 and 2030, PB,s Master Plan recommends significant upgrades and additions to existing transmission facilities in the region, to include new bulk supply points, upgrade of transmission lines, and addition of many substations. Upgrades to local feeder lines will help clean up the rat,s nests of wires prevalent in Qwill help clean up the rat,s nests of wires prevalent in urban areas. The consultants believe that prudent reworking of the distribution system and an overall increase in availability of power will dramatically reduce the public,s reliance on private sources of electricity. ¶13. (U) Many isolated villages and farms in the KR have no access to the power grid and either generate their own power or do without it completely. The Master Plan envisions an aggressive program to build distribution networks to these areas, reaching about 75,000 new customers per year, at an approximate cost of US$80 million per year. Expanding the Market ¶14. (U) PB notes the abundance of fossil fuel reserves in the KR and concludes that building electrical generation plants near oil and gas fields, or by locating them near pipelines that serve these fields, could sharply reduce BAGHDAD 00003347 003.3 OF 003 production costs, giving KR-produced electricity a comparative advantage over power produced in the rest of Iraq and in neighboring countries. Turkey is a prime market for future KR power, a reversal of the current situation in which Turkey is a supplier of power to the KR. Comment ¶15. (SBU) The PB Master Plan follows an earlier Master Plan developed in 2008 by the RRT. The conclusions of both plans were similar, but The PB plan employed more sophisticated techniques, including computer simulations, than were available to the RRT. Both plans served as confirmation that the KRG,s power generation and distribution plans are headed in the right direction. The Plan suggested only minor tweaks to ongoing plans and its recommendations for longer term programs complemented KRG MOE thinking. Interestingly, the conference was chaired by the KRG Minister of Planning. The new KRG Minister of Electricity, Yasin Abu Baker Mohammad, was named on December 4, after the conference (As part of the elaborate political dance to establish a balance of power among the political parties in the coalition government, this ministry was earmarked for the Kurdistan Social Democratic Party). ¶16. (SBU) While its plan for improving generation, transmission, and distribution capabilities is on a good course, the KRG MOE will need to redouble its efforts in three key areas: First, the MOE is grossly overstaffed. According to the RRT,s Electricity Adviser, it should pare its staff down to at most two-thirds of its current size. Improving management of MOE is also necessary, especially to strengthen accountability and transparency, to create the ability to control and recover costs, and to improve overall operations and responsiveness to consumers. Second, the MOE needs to work on creation of an omnibus Electricity Law, which would regulate power purchase agreements, establish a code of technical and safety standards, and create a regulatory agency. The PB Master Plan deals with a 20-year window, but the MOE will need to get its staffing and regulatory houses in order in a much shorter timeframe to be able to effectively manage its responsibilities. Last but not least, the KRG must confront the politically-charged issue of raising electricity rates charged to consumers to a sustainable level. PB estimated that the full recovery cost of bringing power to consumers region-wide is about 13.6 cents per kilowatt-hour. PB estimated that the KRG recovers only about ten percent of that cost from electricity revenues. The balance is absorbed by the regional government at a cost of about $2.5 million per day. As the volume of generation increases, the dollar cost of this subsidy will expand accordingly, severely stressing KRG public finances. The KRG seems to be waiting until after the election to begin instituting pricing reform. End comment. FORD