Kyrgyzstan s Energy Sector: A Poverty and Social Impact Assessment

Transcription

1 Kyrgyzstan s Energy Sector: A Poverty and Social Impact Assessment Commissioned by UNDP s Regional Bureau for Europe and CIS Draft for comments, not citation. April 2011 Authors: Rafkat Hasanov, Kemal Izmailov Editor: Ben Slay

2 TABLE OF CONTENTS List of acronyms... 3 List of figures and tables... 5 Executive summary... 7 I Economy and poverty... 9 Recent economic trends... 9 Poverty trends II Kyrgyzstan s energy sector Electricity Thermal power Gas Coal Decentralized renewables Energy tariffs and costs Legal and regulatory framework Policy reform to date Energy sector development: future scenarios Conclusions III. Poverty and household access to energy Data issues Household energy expenditures Conclusions IV. Social protection and the energy sector Overview Social policy instruments Effectiveness of social protection Social protection and the energy sector Conclusions Bibliography

3 List of Acronyms ADB GDP SC OJSC QFD CAIPS UE IDA CAUPS FEC CHPP HPP AIMSCEM JEA JICA RES FES NEP EITI FESTI ACGRKS WB HVTL NGO USAID IDB KR MW GMCL GMI LSGs MSBs PFMB UMB AMFI GPW CAPP PESAC SPD MLSD USB MSEC HIV AIDS SSEA DSP&HA RSPDs TSPDs Asian Development Bank Gross Domestic Product State Company Open Joint Stock Company Quasi Fiscal Deficit Integrated Power System of Central Asia Utility Enterprise International Development Association Central Asian United Power System Fuel and Energy Complex Heating and Power Plants Hydropower Plants Automated Information and Measurement System for Commercial Electricity Metering Joint Economic Assessment Japanese Agency of International Cooperation Renewable Energy Sources Fuel and Energy Sector National Energy Program Extractive Industries Transparency Initiative Transparency Initiative in the Fuel and Energy Sector of the Kyrgyz Republic Automatic Commercial Gas Record Keeping System World Bank High-voltage Transmission Line Non-Governmental Organization United States Agency for International Development Islamic Development Bank Kyrgyz Republic Minimum Wage Guaranteed Minimum Consumption Level Guaranteed Minimum Income Local Self-Governments Monthly Social Benefits Monthly Benefit to Poor Families with Children Unified Monthly Benefit Average Monthly Per Capita Family Income Great Patriotic War Chernobyl Atomic Power Plant Public Enterprise Structural Adjustment Credit Social Protection Bodies Ministry of Level and Social Development Unified Social Benefit Medical-Social Experts Commission Human Immunodeficiency Virus Acquired Immunodeficiency Syndrome The State Agency for Social Support under the KRG The Department of Social Protection and Humanitarian Aid Rayon Social Protection Departments Town Social Protection Departments 3

4 LSGs A/O SBs HUS&E Local Self-Governments The Aiyl Okmotu State Benefits Housing and Utility Services and Energy 4

5 List of Figures and Tables Chapter I Economy and Poverty Figures: Figure 1. Annual GDP Growth Rates ( ) Figure 2. Poverty Trends in Kyrgyzstan ( ) Figure 3. Poverty Rates: Actual and Predicted Figure 4. Changes in Key Indicators Affecting Household Incomes (2005=1) Figure 5. Kyrgyzstan: Increases in External Migration, Remittance Inflows, in 2010 Tables: Table 1. Macroeconomic Indicators, Kyrgyzstan ( ) Table 2. Fiscal, Social Policy Trends in Kyrgyzstan ( ) Chapter II Kyrgyzstan s energy sector Figures: Figure 6. Trends in Energy Consumption (oil equivalent) Figure 7. Consumption of Energy Goods (2005=100) Figure 8. Effective Household Electricity Tariffs in the Former Soviet Republics (2007) Figure 9. Trends in Energy Production, Consumption ( ) Figure 10. Household Energy Price Inflation Trends ( ) Figure 11. Electricity Production, Consumption, Losses, and Exports (in million kwh, ) Figure 12. Financial Results for Power Generation, Distribution Companies (in million som, ) Figure 13. Collection Rates in the Electricity Sector ( ) Figure 14. Electricity Sector Quasi-Fiscal Deficit ( Figure 15. Trends in Electricity Generation, and in Water Volumes at the Toktogul Hydropower Reservoir ( ) Figure 16. Thermal Power Production, Consumption, Losses, and Exports (in thousand gigacalories, ) Figure 17. Financial Results for Thermal Power Companies (in million som, ) Figure 18. Gas Supply, Consumption, and Losses (in thousand meters 3, ) Figure 19. Gas Sector Financials ( , in million som) Figure 20. Gas, Consumer Price Trends ( ) Figure 21. Fixed Assets (by book value) in the Gas Sector ( , in million soms) Figure 22. Trends in Fixed Asset Depreciation, Cash Collections ( ) Figure 23. Coal Production, Consumption, Imports and Exports (in thousand tons, ) Figure 24. Financial Results for Coal Companies (in million som, ) Figure 25. Actual Versus Planned Household Electricity tariffs (per kwh, ) Figure 26. Cost Share Trends in the Electric Power Sector ( ) Figure 27. Actual Versus Planned Household Thermal Power Tariffs (per gigacal., ) Figure 28. Cost Share Trends in the Thermal Power Sector ( ) Figure 29. Shares of Material Costs in the Thermal Power Sector ( ) Tables: Table 3. Main Energy Indicators of the Central Asian Countries in 2008 Table 4. Energy Sector Privatization Chronology Table 5. End use of Electricity Generated in Kyrgyzstan ( ) Table 6. Addition tariff for renewables to the maximum tariff Table 7. Full cost of electricity generation in renewable small power plants Table 8. Prices for 1 kwh electricity for 4 groups of selected plants 5

6 Table 9. Differences between Planned and Actual Costs of Larger Power Enterprises ( ) Maps: Map 1. Existing and Planned Hydropower Plants and High-Voltage Transmission Lines Chapter III. Poverty and household access to energy Figures: Figure 30. Trends in Household Expenditures, Energy Consumption ( ) Figure 31. Share of Household Spending Absorbed by Energy Expenditures ( ) Figure 32. Household Energy Expenditures by Various Energy Sources ( ) Figure 33. Household Expenditures on Energy, by Deciles ( ) Figure 34. Shares of Household Energy Expenditures Devoted to Various Energy Sources (by Household Deciles, 2009) Figure 35. Shares of Household Energy Expenditures Devoted to Various Energy Sources (by household location, 2009) Figure 36. Share of Households Reporting Interruptions in Electricity Service ( ) Figure 37. Share of Households (by Income Decile) Experiencing Weekly (or More Frequent) Interruptions in Electricity Service ( ) Figure 38. Share of Households (by Location) Experiencing Weekly (or More Frequent) Interruptions in Electricity Service ( ) Tables: Table 10. Monthly Per-Capita Household Expenditures (in som, ) Table 11. Average Per-Capita Monthly Energy Expenditures, by decile group (in som) Chapter IV. Social Protection and the Energy Sector Figures: Figure 39. Ratio of Monthly Pension, Social Assistance Benefits to the National Monthly Subsistence Minimum ( ) Figure 40. Trends in the Distribution of Social Benefits BY Household Deciles ( ) Figure 41. Trends in the Distribution of Pension Benefits by Household Deciles ( ) Figure 42. Trends in the Distribution of Categorical Benefits by Household Deciles ( ) Figure 43. Trends in the Distribution of PFMB benefits by Household Deciles ( ) Figure 44. Trends in the Distribution of MSB benefits by Household Deciles ( ) Tables: Table 12. Kyrgyzstan s Social Protection Instruments: Efficiency and Effectiveness (2005 data) 6

7 Executive summary While the uprising that drove President Kurmanbek Bakiyev from power in April 2010 had many causes, energy issues were among the most important. Dramatic increases in power and heat tariffs introduced in January of that year, combined with two winters of electricity rationing, years of rapid growth in household energy costs, and growing concerns about corruption and mismanagement in the energy sector, were key drivers of tensions in Kyrgyzstan. This study explores the socioeconomic background to these events, and their aftermath, by assessing the poverty and social implications of tariff increases and other policy reforms now being introduced (or considered) in Kyrgyzstan s energy sector. These trends are playing out at a difficult time. While Kyrgyzstan was one of many countries that experienced slowing economic growth in 2009 (with the impact of the global financial crisis), it is one of the few to have reported a recession in The 1.4 percent decline in GDP officially reported for last year was a direct result of the political upheavals Kyrgyzstan experienced during April-June last year. While economic growth helped cut Kyrgyzstan s income poverty rate in half (from 62.6 to 31.7 percent) during , the poverty rate stabilized in 2009, even though 3 percent GDP growth was reported. Although the 2010 poverty data have not yet been released, the recession could have raised the national poverty rate for the first time in a decade. Even before the developments of 2010, however, winter energy insecurities were afflicting significant numbers of households in Kyrgyzstan, particularly in urban areas. This reflects the impact of the severe winter of and the subsequent drought of 2008 that reduced water levels in hydropower reservoirs along the Naryn cascade, the depreciation of the country s electric and thermal power infrastructure, and the absence of decisive market reforms in the energy sector. This study analyzes recent trends in the electricity, thermal, gas, and coal sectors, as well as prospects for decentralized renewables in Kyrgyzstan. It focuses in particular on the commercial and regulatory characteristics limiting the attainment of full cost recovery tariffs, as well as on prospects for significant short- and medium-term improvements in management within these sectors. It notes that tariffs for electric and thermal power are being pulled in opposite directions by social acceptability and economic feasibility. Whereas natural gas tariffs depend on the price of imported natural gas, the state sets power and heat tariffs. In so doing, the state is guided primarily by social concerns leaving many energy companies unprofitable. These problems are exacerbated by the monopolistic structures found throughout the energy sector (with the partial exception of coal). The absence of competition and market stimuli creates preconditions for inefficiency and corruption. These problems are aggravated by high levels of fixed asset depreciation, particularly in the power and gas sectors. Modernizing energy production, transmission, and distribution in Kyrgyzstan will require billions of dollars in new investments which may not be forthcoming at current tariff levels, and with the current regulatory environment. Despite having large coal reserves and reporting large increases in coal production during , imports continue to cover between half and two thirds of Kyrgyzstan s coal needs. Likewise, virtually all of Kyrgyzstan s natural gas is imported, from a single supplier (UzbekTransGaz). The government that came to power following the April 2010 events has responded to these problems by introducing the Fuel and Energy Sector Transparency Initiative. FESTI represents an attempt to improve management and governance within the sector, by introducing greater measures of public participation and transparency but without raising tariffs, or further privatizing energy sector assets, or significantly increasing the role of market forces. Compared to past policies, FESTI is an important step forward, especially in terms of reducing corruption. But at the same time, by focusing on reducing corruption in and improving the management of state-owned monopolies rather than transforming them into market actors capable of modernizing the energy sector FESTI is also a modest step forward. 7

8 Official household survey data (stretching into 2010) indicate that the energy crisis that began in the winter of 2008 has decreased poor households access to electricity and other energy products and services. These households have also been affected more by interruptions in electricity supplies. Prior to 2010, significant efforts had been invested in reforming Kyrgyzstan s social protection system, in part to increase its ability to mitigate the impact of higher energy prices and tariffs or poor and vulnerable households. Unfortunately, there is little evidence to indicate that the social protection system provides these households with effective protection against higher energy costs. Instead, household survey data suggest that Kyrgyzstan s social protection system became more regressive during , with growing shares of social benefits paid out to upper-income households. On the other hand, these data indicate that households low-income and otherwise devote relatively small shares of their budgets to energy productions and services. In light of the above, this study makes the following recommendations: The relatively small shares of household budgets devoted to energy expenditures, the small likelihood that household electricity tariffs will be increased in the short (and possibly medium) term, and the difficulties in targeting social benefits to poor households these factors weaken the case for more closely linking social and energy policies. The issue would instead seem to be one of adopting policies to improve the functioning of the energy sector and the social protection system. In this respect, important changes would include: More closely linking the poor family monthly benefit to the guaranteed minimum income, which should itself be more closely linked to the minimum subsistence level; Means-testing the monthly social benefit and categorical benefits, to reduce their regressive character; and Considering the reintroduction of lifeline electricity tariffs. Reductions in tariffs for small volumes of household electricity consumption could be offset by higher tariffs for consumption above this level, thereby leaving average tariff levels unchanged. A number of important research questions have been identified in this report. These pertain to: Improvements in the quality of household survey and production/sales data regarding the energy sector, in order to remove inconsistencies within and between these data sets; Developing possible scenarios for the future of Kyrgyzstan s energy sector; Improving corporate governance in the energy sector; Identifying appropriate energy saving technologies, and policies and programmes to accelerate their introduction; Strengthening the role of affordability analyses in regulating energy tariff increases; Analysis of obstacles to the accelerated development of small hydropower plants and other decentralized renewable energy technologies, with proposed solutions; Analysis of the costs of electric and thermal power production and tariff setting; and Analysis of the results of the Fuel and Energy Sector Transparency Initiative. 8

9 I Economy and poverty Recent economic trends In the years between the Russian financial crisis of and onset of the global economic crisis in 2009, Kyrgyzstan reported average age annual GDP growth of around 5 percent. However, as the data in Figure 1 indicate, this growth was rather unstable, with strong economic expansions ( , 2001, , ) 2008) being followed by slowdowns or recessions (2002, 2005). This growth pattern tern reflects the impact of a number of internal and external shocks, of both an economic and political nature (e.g., popular uprisings in 2005 and 2010). As a small open economy, Kyrgyzstan is very dependent on other countries not not only for exports and imports, but also, and increasingly, remittances from migrant workers. Whereas remittances were reported at 8 percent of GDP in 2002, preliminary data indicate that they had risen to 27 percent of GDP in Figure 1 Annual GDP Growth Rates ( ) 7.0% 7.0% 8.5% 7.6% 5.4% 5.3% 3.1% 2.9% 0.0% -0.2% -1.4% Source: State Statistical Committee. Difficulties in the business and investment climate, and other market distortions, are key reasons for this slow growth. 1 As 2010 International Financial Corporation report found that, while recent reforms had improved the investment climate, these improvements, and their effects, were rather moderate. 2 These difficulties limit inflows of foreign capital, technology, and know-how, especially outside of the non-ferrous metallurgical sector, thereby inhibiting the broader industrial and agricultural modernization that Kyrgyzstan needs. High rates of unemployment and underemployment (particularly in subsistence agriculture, which is the economy s largest sector in terms of employment) and the inability of growing sectors s to absorb redundant labor from agriculture and elsewhere, has resulted into growing internal and external migration. The global crisis had a significant negative impact on Kyrgyzstan. While the low degree of integration with the international economy protected its financial system, GDP growth in 2009 dropped to under 3 percent, on the back of a 15 percent reported decline in remittances (see Table 1). 1 While Kyrgyzstan moved up in the World Bank Doing business ranking during this time, little progress was registered in the global competiveness index, or in Transparency International's Corruption Perceptions Index. 2 Investment Climate in the Kyrgyz Republic as Seen by Small and Medium Enterprises, IFC, 2010, p.10 9

10 Soaring food prices, which rose by a third in 2008, also contributed to the hardships experienced by vulnerable families. GDP end use data point to a 14 percent decline in personal consumption in Table 1 Macroeconomic Indicators, Kyrgyzstan ( ) GDP growth rates 8.5% 8.4% 2.9% -1.4% Inflation rates (annual averages): - Consumer prices 10% 25% 7% 8% - Foodstuffs 15% 33% 2% 7% - Electricity, gas, heat, other fuels 8% 30% 22% 14% Remittances (millions) $688 $1,138 $967 $1,245 Remittances (% to GDP) 18% 22% 21% 27% Change in remittances 60% 65% -15% 29% Source: National Statistical Committee data, UNDP calculations. As in many other countries, the government of Kyrgyzstan responded to the crisis by loosening its fiscal and social policy purse strings. As the IMF data in Table 2 below show, the share of GDP devoted to public expenditures rose from 26.2 percent in 2008 to a projected 40.5 percent in Rising social expenditures particularly pensions accounted for almost half of this increase. While budget support and other grants from donors soared during this time (from 2 to 11 percent of GDP), so did Kyrgyzstan s fiscal deficit and public debt. The increases in social protection spending that cushioned the blows from the crisis and then the events of 2010 may not, therefore, be sustainable. Table 2 Fiscal, social policy trends in Kyrgyzstan ( ) Share of GDP devoted to: Budget revenues 25.9% 28.5% 29.6% 30.0% - Grants 1.9% 5.3% 11.0% 1.9% Budget expenditures 26.2% 36.6% 40.5% 34.2% - Social fund expenditures 5.0% 6.8% 9.4% 9.0% - Pensions 4.4% 6.1% 9.0% 8.6% Budget deficit -0.3% -8.1% -10.9% -8.2% Public debt 48.5% 59.4% 70.0% 68.2% Source: IMF country report, Kyrgyzstan (October 2010). While GDP end use data are not yet available for 2010, the large increase in the budget deficit, social expenditures, and remittances suggest that final consumption may have increased last year. For 2011, the government has projected 6.3 percent GDP growth. Poverty trends As the data in Figure 2 below indicate, Kyrgyzstan s official income poverty rate dropped from 62.6 percent in 2000 to 31.7 percent in 2008, before bottoming out in Kyrgyzstan s national Millennium Development Goals Progress Report argues that GDP growth and final 3 The Kyrgyz Republic, the Second Progress Report on the Millennium Development Goals, Second Edition, (Revised and Amended), Bishkek

11 consumption growth have been main factors of the poverty reduction. Survey on impact of the global financial crisis on labor migration from Kyrgyzstan to Russia 4 says that increase in private consumption (gross consumption of households) which is the most important component of GDP, is positively correlated with the flow of migrant remittances (see Box 1). Likewise, the 15 percent decline in remittances registered in 2009 corresponds to a 15 percent decline in individual consumption reported in that year. Figure 2 Poverty Trends in Kyrgyzstan ( ) 68% National 63% 62% 60% Rural 56% 57% 53% 55% 56% 50% 51% Urban 45% 46% 48% 45% 43% 42% 40% 36% 37% 37% 35% 28% 30% 32% 32% 27% 23% 23% 22% Source: State Statistical Committee. An econometric analysis of the relationship between the national poverty rate, GDP growth, and trends in social spending and remittances is presented in Box 1 and in Figures 3 and 4 below. Box 1 Forecasting the Poverty Rate: Results of Econometric Exercise Changes of poverty rates can be forecast depending on changes in GDP, remittances, and social transfers, using the below equation: Pov=-1.77*GDP *Soc *Rem (-2.59) (-3.46) (-2.82) t-statistics Where Pov = change in the poverty rate GDP = real GDP per capita growth rate Soc = real growth in social protection expenditures Rem = Lagged remittance growth rate The data used for this analysis s come from Kyrgyzstan s balance of payments, and from the official national accounts data. 4 Irina Lukashova, Irina Makenbaeva, Impact of the global financial crisis on labour migration from Kyrgyzstan to Russia. Qualitative overview and quantitative survey, CASE Kyrgyzstan, OSCE. Centre in Bishkek, ACTED, European Commission. Bishkek, 2009, p

12 While there are some drawbacks to this model, its specification is reasonable. It avoids non-stationarity issues and the adjusted R-squared = The following figure 3 illustrates the predictive power of the model. Figure 3 Poverty rates: actual and predicted actual data results of modeling This model indicates that the national poverty rate in 2010 may have fallen, as the effects of the moderate decline in GDP may have been offset by increases in social spending and the rebound in remittances. Figure 4 Changes in key indicators affecting household incomes (2005 = 1) 2,5 2 1,5 1 0, ,5 4 3,5 3 2,5 2 1,5 1 0,5 0 GDP level (2005=1) Social protection level (2005=1) Remittances level (2005=1) Notwithstanding the progress reported during , Kyrgyzstan continues to face significant poverty reduction challenges. Recent years have seen poverty rates rising in Issyk-Kul and Chui oblasts, and in Bishkek. The average share of remittances in household incomes in the southern Osh, Jalalabad, and Batken oblasts exceeds 20 percent, while in northern regions this indicator does not exceed 1 percent of household. This makes living standards in the southern regions which were 12

13 the flashpoints for the ethnic tensions in May-June 2010 particularly vulnerable to declines in remittance inflows. Seen in this context, the stunning increases in external migration outflows from Kyrgyzstan s southern regions officially reported for 2010 (see Figure 5), combined with the record high remittance inflows reported for the country as a whole, may be important factors for social stability. Figure 5 Kyrgyzstan: Increases in external migration, remittance inflows, in 2010 Relative to State Statistical Committee data, UNDP calculations. Other important characteristics of poverty in Kyrgyzstan include the following: Significant differences in regional poverty rates. In Bishkek, the extreme poverty rate in 2008 was 2.1 percent, while in Naryn and Issyk-Kul oblasts, this rate was 11.6 and 16.9 percent, respectively. Whereas the overall poverty rate in Bishkek in 2008 was 15.2 percent, in most other regions it exceeded 40 percent. Much of the pre-2009 progress in poverty reduction was due to developments in Bishkek and Chui oblast. Feminization ion of poverty. In 2008 women accounted for the vast majority of pensioners (67 percent of those over retirement age), and of employees in the education and health sectors (76 and 79 percent, respectively). The average salary in these female sectors, and the average retirement pension for women, are below the subsistence minimum. Women working in these sectors receive lower salaries than do men working in these sectors: in 2008 a woman s average salary in the education and health sectors is only 78 and 62 percent, respective, of a man s average salary in these sectors. 5 Poverty is concentrated in rural areas. Almost three-quarters of Kyrgyzstan s poor live in rural areas; in percent of the rural population lives below the national poverty line (compared to 21.9 percent of the urban population). Children, people living in large households with many children, in households headed by women, in rural areas, and living by themselves face the 5 Women and men of the Kyrgyz Republic: A collection of gender-disaggregated disaggregated statistics, Bishkek, 2009, pp. 46, 87,

14 greatest poverty risks. This is mainly due to limited opportunities for well paid employment. 6 Access to water and communal services is also much lower in rural areas, due in part to the difficulties of delivering these services in mountainous regions. In urban areas, by contrast, households are much more likely to have access to central heating, gas, and hot water, improved water and sanitation, fixed-line telecommunications, and the internet. However, at least a third of the urban non-poor do not have access to at least one of these services. Limited access to these services is a particular burden for women in poor households, many of whom can not afford to purchase labor-saving household appliances. Child poverty rates are high. According to the findings of the integrated household sample survey conducted in 2006, 48.5 percent of children under 18 lived in poverty and 12 percent of these are extremely poor. The number of underweight children is still high and in 2009 was 4.6 percent. 7 Limited opportunities for the poor to create their own capital. Poor households in Kyrgyzstan generally do not have access to the banking system or financial services. In rural areas the poor generally have smaller plots of land than those who are better-off and due to the fact that the land market is not developed they are not able to use their lands as collateral. 6 The need to make a thorough analysis of the position of rural women was one of the key recommendations of the UN Committee on the Elimination of Discrimination Against Women in the third periodic report of the Kyrgyz Republic on compliance with the UN Convention on the Elimination of all Forms of Discrimination Against Women, articles Source: NSC, 14

15 II Kyrgyzstan s energy sector Prior to the energy crisis that began in early 2008, Kyrgyzstan s energy sector suffered from benign neglect. Market reforms had largely ended in the early years of the decade; state-owned monopolies continued to dominate the sector; attempts to attract private capital and foreign investment had met with limited success; and effective electricity tariffs were among the lowest in the region (see Figure 6). The focus was instead on the state mobilization for the construction of new large hydro-power stations (such as Kambarata-1 and -2 on the Naryn cascade), and adding to electricity transmission capacity (e.g., via the construction of the Datka-Kemin high voltage power line). Figure 6 Effective Household Electricity Tariffs in the Former Soviet Republics (2007) $0.09 $0.07 $0.06 $0.05 $0.04 $0.04 $0.04 Nominal tariff (per kwh) times collection rate $0.02 $0.01 $0.01 Source: EBRD data, UNDP calculations. The energy crisis that began in 2008 was something of a wakeup call. As a result of cold temperatures and low water levels in the hydropower stations along the Naryn cascade, electricity blackouts increased abruptly, while sharply higher import prices made gas unaffordable for many households and businesses. These trends are apparent in Figure 7, which show that electricity generation and consumption (generation less net exports and losses) dropped by some 25 and 13 percent, respectively, during Gas consumption dropped by almost two thirds, as prices of gas imported from Uzbekistan rose from $100 to $240 per 1000 cubic meters during Faced with growing shortages of centrally supplied electricity and unaffordable gas, many households, businesses, and public institutions switched to coal-fired boilers. Domestic coal production rose some 41 percent during ; 2010; apparent consumption (production less net exports) rose 57 percent. In addition ion to encouraging the dash to coal, the government responded to these developments by permitting energy prices and tariffs to rise at rates well above consumer price inflation (see Figure 8). It introduced a programme of anti-crisis measures (including rotating blackouts and brownouts), raised electricity collection rates, reduced electricity losses, 8 and 8 Commercial and technical losses (in kwh), as well as accounts payable (in som) in the electricity sector declined during , 2009, while the ratio of accounts receivable to gross income in the electricity sector also fell. 15

16 accelerated the development of small hydropower plants. The government also tried to reinvigorate privatization processes in the energy sector by putting stakes in six state-owned energy companies up for sale. Last but not least, in January 2010 it doubled household electricity tariffs (from $0.017 to $0.034 per kwh), and quadrupled household thermal power tariffs (from $5.9 to $23.7 per gcal). These tariff hikes fed into the growing popular dissatisfaction with President Kurmanbek Bakiyev, who was driven from power by unrest and demonstrations in April Figure 7 Trends in energy production, consumption ( ) Electricity generation Electricity consumption* Thermal generation Thermal consumption** Coal production Coal consumption*** Gas supply^ Gas consumption~ Source: State Statistical Committee data, UNDP calculations * Generation less exports and losses. ** Generation less losses. *** Production less net exports. ^ Imports plus domestic production. ~ Gas supply less losses. Following Bakiyev s departure, these large tariff hikes were scaled back or rescinded, lessening the impact on vulnerable households. Allegations of mismanagement and corruption led to the cancellation of the energy sector privatizations (see Box 2), as well as to the introduction of the Fuel and Energy Sector Transparency Initiative. Nonetheless, despite this more social orientation of energy policy, household energy prices in 2010 continued to rise at rates well above consumer price inflation. Electricity Production, consumption, and losses. The vertically integrated Kyrgyzenergo was dissolved in 2001 into a single generation company, a single transmission company, and four distribution companies. All these companies are state-owned; 9 competitive pressures are weak. Virtually all of Kyrgyzstan s power generation assets belong to the Power Plants company, including 15 large hydropower plants, two combined power and thermal plants, and dozens of small-scale power 9 As of 2010, the Ministry of State Property held 80.5 percent equity stakes in Power Plants (generation), Power Grid (transmission), and in the electricity distribution companies. The Social Fund held another 13.2 percent of the shares in these companies. 16

17 producers. 10 Total power generation capacity is 3,740 megawatts; the large hydropower plants account for 2,950 megawatts, while the combined power and thermal plants have a total capacity of 730 megawatts. The state-owned National Power Grid company manages the electricity transmission infrastructure, while four regional distribution companies ( Severelektro, Vostokelektro, Jalalabatelektro, and Oshelektro ) monopolize the supply of power in the areas for which they are responsible. Company Severelektro Power Distribution Company Vostokelektro Power Distribution Company Oshelektro Power Distribution Company Jalalabadelektro Power Distribution Company Bishkek Combined Heat and Power Plant, and the Bishkek District Heating Distribution Company Box 2 Energy sector privatization chronology 11 Privatization process * A single tender for the privatization of the state-owned stakes in Severelectro, the Bishkek Combined Heat and Power Plant, and the Bishkek District Heating Distribution Company was initiated in late 2008, with a starting price of $137 million. The tender was voided due to a lack of bids by the January 2009 deadline. * A second attempt to sell Severelectro separately was voided in July 2009, for the same reason. * A third attempt, without establishing a starting price, succeeded in December 2009, with the Chakan GES generating company announced the winner. Terms of sale included up-front payment of $3 million and capital investments of some $70 million over 10 years. Reportedly, no performance conditions were included in the tendering documents. * Following allegations of corruption and mismanagement and the events of April 2010, the government nationalized Chakan GES. * Two privatization attempts were declared void for lack of bids. The starting price was set at $41 million. * The third attempt, without establishing a starting price, succeeded in February 2010 with the same Chakan GES announced the winner. The terms of sale included payment of about $1.2 million and investments of $30 million over 10 years. * Following allegations of corruption and mismanagement and the events of April 2010, the government nationalized Chakan GES. * Two attempts of privatization were voided due to lack of bids. The initial starting price was set at $42 million. Two attempts of privatization were voided due to lack of bids. The initial starting price was set at $27 million. * A single tender for the privatization of the state-owned stakes in Severelectro, the Bishkek Combined Heat and Power Plant, and the Bishkek District Heating Distribution Company was initiated in late 2008, with a starting price of $137 million. * The tender was voided due to a lack of bids by the January 2009 deadline. * No further attempts have been made. The Power Plants generation company produces 99 percent of Kyrgyzstan s electricity. Since more than 90 percent of this is generated by hydropower plants on the Naryn cascade with uniform hydrological conditions, market competition in power generation is difficult to imagine for the foreseeable future. Longer term, however, the construction of large coal-fired power plants (such as Kara-Keche), expansion of decentralized renewables, increased industrial co-generation, the 10 Other power generating companies include Chakan HPP, Koshoi, Kalinin HPP Ltd., and Ark Ltd. 11 Adapted from Joint Economic Assessment: Reconciliation, Recovery, and Reconstruction, World Bank, July 2010, p

18 introduction of more flexible management of the hydropower plants on the Naryn cascade, and the possible creation of a regional electricity market, could offer prospects for competition in electricity generation. Figure 8 Household energy price inflation trends ( ) 2010) % 68% 25% 38% 33% 28% 32% 10% 7% 8% 0% 13% 0% 12% 17% 1% Consumer prices Electricity tariffs Gas tariffs Heat tariffs Annual average increases. Source: State Statistical Committee data, UNDP calculations. Prospects for market competition in electricity transmission are even more constrained, owing to significant associated economies of scale. The state-owned National Power Grid company, which now performs this function, seems likely to remain a natural monopoly indefinitely. Figure 9 Electricity production, consumption, losses, and exports (in million kwh, ) Generation Losses Consumption Exports Source: State Statistical Committee In addition, there is no market competition among electricity distribution companies, each of which operates in its own territory and their territories do not overlap. While some 27 private 18

19 wholesalers/small distributors were licensed in 2009 to purchase electricity from Power Plants and resell it, these wholesalers typically operate lower-voltage lines, and do not provide most users with an effective alternative to the regional distribution companies. It is possible to imagine competition among distribution companies particularly in urban areas that are located close to the borders of one of the existing distribution zones, and particularly if the wholesalers are able to expand their activities. However, policy since April 2010 has emphasized strengthening state control over distribution (and other electricity) companies, in order to improve management and reduce corruption. On the one hand, it is not surprising that all the companies produced by Kyrgyzelektro s 2001 unbundling have been included into the state Monopoly Register. 12 Their tariffs are therefore subject to close scrutiny by the Antimonopoly Agency. On the other hand, the structural conditions now prevailing in the power sector under which a single state-owned monopoly has been replaced by eight such companies, whose prospects for attracting the private capital needed for modernization are quite uncertain now seem particularly unfortunate. Table 3 End uses of electricity generated in Kyrgyzstan ( ) Consumption 49% 51% 53% 64% 66% 62% - Households n.a. n.a. 32% 37% 37% n.a. - Others n.a. n.a. 21% 28% 29% n.a. Losses 33% 32% 31% 31% 25% 24% Exports 18% 17% 16% 5% 9% 14% Source: State Statistical Committee, UNDP calculations. The power sector is characterized by close technological links between production and consumption; a problem in one link can immediately produce downstream ripple effects. Trends in electricity generation and use, and in the distribution of electricity generated, across consumption (and for households and other users), exports, and losses, are shown in Figure 9, and in Table 3. These data indicate that electricity losses have declined since 2005 which, along with reductions in the share of electricity going to exports, has helped to cushion households from the worst of the decline in electricity generation. 13 Losses in Kyrgyzstan nonetheless remain quite high by international standards; losses in the 7-10 percent range are considered a standard benchmark. 14 Most (70 percent in 2010) of these losses occur at the distribution stage, due primarily to obsolete equipment, the absence or malfunctioning of meters, inaccurate metering of consumed electricity, as well as outright theft. In Kyrgyzstan, neither the generation, transmission, nor distribution companies are responsible for cash management: payments from end-users are collected and accumulated in escrow accounts and divided among the companies on the basis of percentages set monthly by the Ministry of Energy s Regulatory Department. Barter and offsets are also used in settlements between sector 12 According to Order No. 524 of the State Agency for Anti-Monopoly Regulation, dated 30 December Losses exist in all power systems. Technical losses occur in electricity generation and transmission from the point of generation to the point of final consumption; their size is determined by the distance over which the electricity is transmitted and the quality of transmission equipment. Commercial losses represent the difference between the price (tariff) of electricity supplied to the end user and the payment collected for its consumption. 14 Source: Electricity Loss Reduction Strategy for the Kyrgyz Power Sector, USAID, Bishkek, 25 March 2010 (revised 30 April 2010), pp. 11,

20 entities, as well as between sector entities and end-users. In addition, trading figures covering the same electricity flows reported by different utilities differ from each other. 15 Figure 10 Financial results for power generation, distribution companies (in million som, ) Revenues Costs Profit (loss) Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; UNDP calculations. The data include small-scale enterprises. In light of these complications, power company finances are likewise rather complicated. In general, these companies show rapid increases in both revenues and costs (in cash-flow terms), with cumulative growth in the latter (60 percent) outpacing the former (41 percent) during (By contrast, cumulative growth in the GDP deflator and producer price index during this time was 46 and 58 percent, respectively.) As a result, the financial results reported by power sector companies deteriorated sharply after 2006 (see Figure 10). Available data indicate that power sector companies responded to these trends by trying to tighten their finances. For example, accounts payable in this sector declined in absolute terms during , 2009, despite large increases in costs and revenues. While accounts receivable (more than half of which are doubtful or unrecoverable debts) in the power sector grew during , relative to sectoral revenues they declined. Households account for about 70 percent of power sector receivables. Collection rates increased during this time (see Figure 11), while the power sector s quasi-fiscal deficit continued to fall, dropping from nearly 13 percent of GDP to under 4 percent during (see Figure 12). 16 These trends are occurring against a backdrop of electricity tariffs that are still quite low by regional standards (see Figure 6). However, the data analyzed above suggest that the financial problems facing the power sector are not due solely, or perhaps even largely, to slow revenue growth 15 Reductions in electricity losses can be exaggerated, for example, when companies over-estimate estimate billing and then accounts receivable. 16 The quasi-fiscal deficit is determined by the sum of: (1) above-standard electricity losses; (2) deviations from a 100 percent cash collection rate; and (3) the difference between tariffs and long-run marginal costs (including investment costs), measured on a cash-flow basis. The quasi-fiscal deficit therefore reflects the difference between the income needed to fully cover operating and capital costs in the sector versus actual revenues received. According to Kyrgyzstan s medium-term budget framework, this deficit is to drop below 2 percent of GDP by

21 because of low tariffs, 17 or the power companies unwillingness/inability to collect tariffs or reduce electricity losses. They instead suggest that the key financial problem facing the power sector has been rapid growth in costs. While some of this growth results from large capital outlays for infrastructure investments, it may also reflect the inability of weak market forces or regulatory oversight to contain costs. Figure 11 Collection rates in the electric power sector ( ) 2009) % 86% 90% 90% 82% 104% 89% 99% 88% 90% 65% 70% Overall Households Industry Agriculture Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, The data include small-scale enterprises. Hydropower challenges. Electricity generation in Kyrgyzstan is dominated by hydropower, which provides more than 90 percent of total electricity output. Hydropower plants along the Naryn cascade, with installed capacity of 2870 megawatts, account for about 78 percent of Kyrgyzstan s total generation capacity. The Toktogul power station, with 1200 megawatts of installed capacity, is Central Asia s largest hydropower station, and only multi-year hydropower water storage facility. This reliance on hydropower leaves Kyrgyzstan vulnerable to changes in water levels along the Naryn cascade. This was particularly apparent in 2008, when drought conditions helped push water volumes at Toktogul to extremely low levels (see Figure 13). The volume of electricity generated fell 21 percent in that year, and another 6 percent in 2009 as releases were limited by the need to restore water levels. However, because Toktogul is a multi-year storage facility, good management of the water in its reservoir should provide some protection against droughts in the future. 18 Investment projects and prospects. According to various estimates, Kyrgyzstan is not using more than 10 percent of its total hydropower capacity, which is assessed at 140 billion kwh by the National Power Grid company. 19 The combination of abundant water resources and reliance on hydro power poses a dilemma for policy makers in Kyrgyzstan. The construction of new hydro power plants both along the Naryn cascade and on smaller rivers is is an obvious way to increase capacity for winter power generation, as well as boost exports and promote economic development. This is the vision of the Central Asia and South Asia Regional Energy Market (CASAREM) project, which is 17 The reported 41 percent revenue growth combined with a 23 percent reported reduction in kwh sold during suggests that effective electricity tariffs rose by 85 percent during these years. 18 According to data on the CA WaterInfo website ( info.net/analysis/index_e.htm), water inflows into Toktogul in 2007 were also well below historical averages. However, national statistical committee data indicate that electricity generation rose 2 percent that year, while exports and losses absorbed almost half of the electricity produced (see Table 3). This has given rise to claims that mismanagement,, rather than drought, caused the sharp drops in water levels at Toktogul in , 2008, and then electricity shortages during subsequent winters. 19 Source: Small and Medium Sized Hydropower Development Programme,, approved by presidential decree N 365, 14 October

22 supported by the donor community working in Central Asia, and to which the government of Kyrgyzstan subscribes. The Ministry of Energy has conducted feasibility studies for constructing some 47 hydropower plants across the country. Figure 12 Electricity sector quasi-fiscal deficit ( ) 2009) 12.8% As a share of GDP 7.6% 5.9% 4.9% 3.7% 3.9% Source: Ministry of Energy. Moreover, prospects for virtually all investment projects in the energy sector are constrained by Kyrgyzstan s relatively low electricity tariffs. In addition to reducing the cash flow power companies need to finance investments within the sector directly, low electricity tariffs reduce the commercial feasibility of energy projects in other sectors. This applies both to coal (the demand for which is determined in part by the financial situation in the power sector) and to decentralized renewables, the payback period for which shortens as electricity tariffs increase. Figure 13 Trends in electricity generation, and in water volumes at the Toktogul hydropower reservoir ( ) 50% Toktogul water volume (deviation from multi-year average*) 40% Year-on-year-change in electricity generated (kwh) 30% 20% 10% 0% % -20% -30% -40% -50% * Calculated relative to the average volume for that month in previous years, going back to A zero value means water volume in that month was at its multi-year average (no deviation from normal). Sources: State Statistical Committee, CA WaterInfo website; UNDP calculations. 22

23 The Kambarata-1 and -2 hydropower projects are at present receiving the greatest attention and assistance from the government. Kambarata-2, the costs of which were estimated at some $100 million in 2007, is under active construction the first unit was installed in 2010, with construction to be completed by Key parameters include: installed capacity 360 megawatts (three units of 120 megawatts each); power generation 1,148 million kwh; water reservoir capacity 70 million m 3. The construction is being financed by the government budget and an earmarked credit from the Russian Federation. 20 Kambarata HPP-1 would be significantly larger and more expensive: installed capacity of 1,900 megawatts (4 units of 475 megawatts each); power generation of 5,088 million kwh, and a water reservoir capacity of 4,650 million m 3 ; and construction costs of some $1.7 billion. The construction of the Kara-Keche coal-fired power station, with a capacity of at least 1200 megawatts, is also under discussion. This plant would generate electricity from coal that would be mined from the Kavaksky lignite basin, where it would be located. In addition to helping to develop the coal industry, Kara-Keche would diversify Kyrgyzstan s generation capacity away from its neartotal reliance on hydropower. However, the sources of financing for the construction of this $1.3 billion project have not yet been identified. Map 1 Existing and planned hydropower plants and high-voltage transmission lines Kemin-Almaty High-voltage transmission line Datka-Kemin highvoltage transmission line ($343 million) Kara-Keche Datka transmission line ($229 million) Aigultash-Samat high-voltage transmission line ($12.9 million) Source: Ministry of Energy. Kyrgyzstan s topography essentially divides the power transmission network into northern and southern parts, which are linked by a high-voltage transmission line running from Toktogul in the south to Frunzenskaya in the north. Because the Naryn cascade is in the south, Kyrgyzstan s southern regions have a power surplus, while the north is in deficit. However, some parts of the south such as Leilek in the western part of the Batken region face power shortages (especially in the winter time) because they are under-served by the existing transmission infrastructure. This problem is being addressed by the construction of the 131 kilometer Aigultash-Samat transmission line, which is to be completed in November of This project is financed by a $12 million credit from the Islamic Development Bank, as well as $900K from the National Power Grid transmission company. 20 The Agreement between the Government of the Kyrgyz Republic and the Government of the Russian Federation as of February 3, 2009 "On Construction of Kambarata HPP-1". 23