KYRGYZSTAN DRAMATICALLY INCREASES ENERGY PRICES

C O N F I D E N T I A L SECTION 01 OF 03 BISHKEK 000007

SIPDIS

DEPT FOR SCA/CEN

E.O. 12958: DECL: 09/09/2018
TAGS: ECON ENRG SOCI PGOV KG
SUBJECT: KYRGYZSTAN DRAMATICALLY INCREASES ENERGY PRICES

Classified By: CDA Larry L. Memmott, Reason 1.4 (b) and (d).


1. (C) Starting January 1, the Kyrgyz Government more than
doubled the prices for electricity, central heating and hot
water, and the prices are scheduled to rise again in July.
Kyrgyzstan's state-owned electricity and central heating
systems have been starved for revenue for several years due
to artificially low prices, poor bill collection, and
corruption. While the collection rate has increased
dramatically due to better enforcement, revenue has still
been insufficient to maintain and modernize the system. Low
water levels at the largest hydropower plant have also
necessitated blackouts again this winter. The government's
decision to raise prices is broadly unpopular, but it remains
to be seen over the coming months, and especially next winter
when the steepest price increases will be felt, whether they
have political implications.

Dramatic, And Unpopular, Price Increases
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2. (U) Prime Minister Daniyar Usenov announced in November
that the Government would significantly raise the prices for
electricity, central heating and hot water starting January
1, 2010 in order to help cover the systems' costs.
Electricity rates for individual consumers more than doubled,
increasing from 1.6 cents/kilowatt hour (kWh) to 3.4
cents/kWh. Electricity prices will be raised again in July
2010 to 4.3 cents/kWh. Heating prices for consumers using
the central heating system doubled on January 1 and will
increase to five times the 2009 rate next winter. The cost
of centrally supplied hot water increased more than four-fold
on January 1, and will increase to ten times the 2009 rate in
July 2010.


3. (C) The political opposition has strongly criticized the
price hikes, arguing that many people will not be able to
afford the new prices. Roza Otunbayeva told Charge recently
that the energy price increase will be "our major issue" for
2010, and that she expected it would benefit the opposition
substantially. When it announced the new rates, the
government tried to blunt criticism by also announcing that
it will provide cash payments to the poorest households to
offset some of the price increases. Another criticism has
been that the sharp price increases will lead to increased
corruption as more consumers bribe meter readers to avoid
paying higher bills. Experts have also criticized the
government's decision since in the current system individuals
cannot regulate their personal consumption of heat, so the
price increase may not lead to greater conservation of
heating, and the steep increases in the central heating costs
may drive some consumers to switch to electric heating, which
will further increase electricity demand in the winter.


4. (C) The decision to dramatically increase the energy
prices reportedly came from the top of the government. One
independent local energy expert, Ularbek Mateev, told Emboff
that the Ministry of Energy had proposed phasing in the price
increases over a period of a few years, but that Prime
Minister Usenov ordered that the increases be implemented
over the next few months. There were also assertions in the
media that the price increases came after pressure from the
World Bank, which the World Bank later publicly denied.
World Bank Country Manager Roger Robinson told Emboff that he
had been surprised by the government's decision, and that he
believes the government leadership decided that they were
politically secure enough to weather any criticism in the
short-run, and were betting that any discontent would subside
as the government's economic policies pay off with higher
economic growth and standards of living.

Cash Starved Electricity And Heating Systems
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5. (SBU) The Government has limited resources available to
repair or replace the existing energy infrastructure because

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the system has not generated enough revenue to cover even the
on-going operational costs. In the past the government kept
electricity and heating prices artificially low for political
reasons. Even with the low prices, a significant number of
customers reportedly bribe electricity company employees
rather than paying their bills. The Government has been
successful in reducing the non-payment of the bills that are
on the books (though due to corruption and theft, a portion
of energy consumption is not recorded),with a collection
rate of 96 percent, up from 83 percent in 2007. This has
been reflected in a significant decrease in losses due to
all sources (i.e., technical losses, theft, corruption and
non-payment),which have fallen from roughly 75 percent in
2003 to approximately 28 percent in 2009.


6. (U) Much of Kyrgyzstan's existing electricity and heating
infrastructure was built during the time of the Soviet Union,
and inadequate funding for maintenance has led to high energy
losses and frequent equipment breakdowns. The latest sign of
problems with Kyrgyzstan's aging energy infrastructure was
the failure on December 7 of two of the four turbines at the
Toktogul hydropower plant, the largest power plant in the
country with a capacity of 1,200 megawatts that started
operation in 1974. The turbines were repaired and back in
operation by December 12. Another example of the old and
poorly maintained energy infrastructure is Bishkek's combined
heat and power plant, which provides most of Bishkek's heat
during the winter and a portion of the city's electricity,
which began operation in 1961. According to the World Bank,
the power plant began the winter season this year with only
one third of its boilers operational.

Blackouts This Winter Fewer Than Last Year
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7. (C) While the price of electricity is increasing, the
supply remains unreliable. During the winter months
Kyrgyzstan has not been able to meet domestic electricity
demand because imported electricity is expensive and the
water level at the reservoir for the Toktogul hydropower
plant is not high enough to allow the plant to run at full
capacity. The Government has been rationing electricity this
winter by instituting rolling blackouts for much of the
country from midnight to 5:00 am. In the south of the
country, electricity is often out several hours during the
day as well. Electricity consumption in the cities of
Bishkek and Osh in November and December exceeded their
targets, meaning that the distribution companies have had to
increase blackouts in rural areas to meet their overall
consumption targets.


8. (U) Electricity rationing this winter has been less severe
than last winter as the water level of the Toktogul reservoir
is currently higher than last winter. Thus far the winter
has been milder than average, perhaps relieving pressure on
the system, though the decreased precipitation may result in
future difficulties. The reservoir's low water level in 2008
prompted widespread speculation that there had been
unregistered export of electricity, since the weather had not
been significantly dryer than in previous years. Overall
electricity consumption in the autumn/winter period in
2008-2009 decreased by 28 percent compared to the same period
in 2007-2008, with most of that decrease due to intentional
blackouts.


COMMENT: Biting The Bullet - Risky But Necessary?
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9. (C) The Kyrgyz Government is taking a calculated risk by
increasing energy prices so quickly. If the proceeds are
invested in upgrading energy infrastructure (and we will
report on plans for doing so septel),the increase is
economically justified. However, the impact on poverty will
be significant, as many poor households will have a difficult
time managing the steep price increases, especially as higher

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energy prices will also fuel a higher overall inflation rate
as businesses pass on their higher costs to consumers. We do
not believe that the opposition will make much progress in
efforts to turn discontent about price increases into
political channels. If the government did feel some heat
from the public on this issue, President Bakiyev always has
the option of canceling or scaling back some of the future
increase.
MEMMOTT