Analytical materials / Kyrgyzstan

Marat Musuraliev: Problems in the Electro-energy Sector of Kyrgyzstan: Is There a Way Out?

22.04.2016

“If the electro-sector of Kyrgyzstan is not able to resolve the problems occurred, it will lead to repeating electricity shortages in the country by 2017-2018, growth of social tensions, and up to another unconstitutional change of government, whereas the energy sector management personnel will be fully replaced”, – possible risks and challenges in the energy sector of Kyrgyzstan, are discussed by economist, deputy director of the “Smart Business Solutions Central Asia” Marat Musuraliev, exclusively for CABAR.asia.       

Image 3Socio-economic and political effects on electro-energy sector of Kyrgyzstan.

The energy sector is a socially significant theme in Kyrgyzstan, which periodically becomes subject of consideration for Government, Parliament and the Council of Defense. It may be noted that, electricity shortages were among the main causes of social protests in the society, leading to the overthrow of the Bakiev regime in April 2010. In general, energy issues are outlined by the Kyrgyz government, increasing deficit in power generation is becoming more explicit and conditionally the industry problems can be divided into tariff and production. In this article, I would like to focus more on production issues, which are not so often discussed by experts.

Difficulties in building new generating capacity in the Kyrgyz Republic.

Concerning the changes in the energy production sphere of Kyrgyzstan – the situation is much more complicated. Activities in this area require substantial financial resources, which Kyrgyzstan does not possess, coordination of actions in the energy-related industries, such as logistics, and reaching agreements with neighboring states.

Currently, there are only two progressing projects in Kyrgyzstan. These are the construction of power transmission line (PTL) “Datka-Kemin” and reconstruction of thermal power station (TPS) in Bishkek. Both of the projects are financed by external loans from China and implemented by Chinese companies. Generally, it is objective, since neither the Kyrgyz energy sector nor Kyrgyzstan as a whole, have financial resources and production facilities for constructing large infrastructure projects. In addition, there will be no reliable data on the payback of loans and profitability of these projects posted and the statements of the politically exposed persons on PTL and TPS, as a rule, have flashy nature, with declarations on energy independency of the country.

At the same time, it should be noted that according to the Ministry of Finance data, as for 2016 the external debt of Kyrgyzstan reached 3.6 billion dollars, makes about 60% of GDP – maximum allowable level, fixed at the legislative level. [1] Herewith, it is possible to note a key aspect that the greatest amount of foreign loans – 28% were directed to the transportation sector, mainly road repairing and 22% – to the energy sector. Considering the absence of connectivity between the directions of the majority external loans of Kyrgyzstan and their repayment sources, it can be supposed that the effectiveness degree of these loans – is a subject for discussion.

In the Council of Defense decision, from 2015, concerning the energy sector the following is noted: “poor management of the coal industry is very disappointing. Existing potential of 70 major coal deposits amounts to 2.2 billion tons, but the fuel and energy complex has been unable to upgrade extraction technology, provide logistics, clear planning and other issues in the coal industry. Absence of state policy has led to uncontrolled extracting process of coal and distribution of coal by various companies, operating not in the public interest, which is particularly evident during the autumn-winter period …”

That is, logistics problems for the coal industry have been noted. However, one could add that, these problems are well known even before. In Kyrgyzstan, nor under the Soviet Union, neither in 25 years after its collapse, no internal railway network was created. Railway lines in the country are only in Chui valley, which has defined concentration of majority industrial enterprises in the region until 1991, and subsequent mass of internal migration to the valley from all other regions. Whichever type of goods would be made outside the Chui Valley, its transportation to other parts of the country will make the majority of products more expensive and less competitive.

For implementation of construction projects in energy sector is crucially important to resolve logistic issues. For instance, construction of, Kambar-Ata – 1 Hydro-Electric Power Plant (HEPP) is likely to have negotiations with neighboring countries, including the transportation issues as well.

Under USSR, all the non-standard heavy equipment alike transformers, turbine wheel and others, weighing several hundred tons each, for Toktogul and other HEPPs of the country were imported by railway through Uzbekistan. It is well known that Tashkent opposes the construction of hydropower plants on trans-border rivers. Therefore, it is doubtful that this time it will be able to bring such equipment, for example, the replacement for Toktogul HEPP through Uzbekistan. Along the road by Chui valley through the passes, the polybasic trawls managed to bring one aggregate for Kambar-Ata HEPP-2, weighing about 100 tons. However, the aggregates for Toktogul and Kambar-Ata HEPP-1 – are more powerful and therefore 3-4 times heavier. In Kyrgyzstan, there are no automobile bridges, which could withstand such weight loads.

Probably the Kyrgyz Government hopes to transport the equipment through so-called “alternative road”, which is intended to build on the expense of external loan from China, which is 1 billion US dollars? However, as mentioned above, Kyrgyzstan is already close maximum allowable level of the external loans amount – 60% of GDP. That is, receiving more loans will make the situation problematic. Nevertheless, if receiving the loan will be possible, then the following question appears- how to ensure repayment of the loan by the alternative road? Will the Kyrgyz government make it a toll highway? Officially, this information has not been published yet.

As a possible option, the HEPP equipment transportation can be done by internal railways until the “alternative road”, but these railways have unsatisfactory technical conditions, as it was noted on the government resolution released on September 30, 2014 № 558:

“… The low service speed of the Kyrgyz railways is due to the high degree of deterioration of the most critical sections of the railway infrastructure. Thus, the threshold degree of deterioration is 50-55%, deterioration of fixed assets, including buildings and structures, machinery and equipment and track facilities, is making up 71%, in electricity system- 50%, in the signaling system and communication – 63%.

Over 30% of the rails, being in operation, have overweigh in tonnage and more than 50% of the wood crossties are worn. “[2]

It is doubtful that these kind of railways would be able to carry overloaded weights of energy equipment for HEPP.

In addition, it is necessary to point out that by spring 2016 the construction of not only the Upper-Naryn cascade, but also the larger Kambar – Ata HEPP-1 is actually suspended. Moreover, this scenario became evident in early 2014, when, due to the Ukraine crisis, the Western countries closed their capital markets to Russian entities. In 2014-2015, in Russia, the process of double national currency devaluation occurred, GDP decline and a decline in state budget revenue due to unfavorable price conjecture on the main export commodities: energy and metals. As a result, the Russian government and its companies with state shares in their capital went to review their expenditures and started to postpone some projects to subsequent years. Therefore, it has become apparent that Kyrgyzstan should not rely on construction continuation of these projects by Russian Federation. In January 2016, the authorities of the Kyrgyz Republic have denounced the agreement between Kyrgyzstan and Russia on the construction and operation of Kambar-Ata HEPP-1 and Upper-Naryn cascade. [3]

At the same time, not only production figures of Kambar-Ata -1 remain controversial but also the logistics of building materials and equipment, political risk associated with the position of Uzbekistan, as well as the financial indicators: profitability of the project is low and the payback period is extensive.

In order to solve these problems, Kyrgyzstan should start negotiating with its neighboring countries and start building an internal railway network. However, promotion in these areas has not been observed yet. What is also generally objective: the construction of one-kilometer railways is worth around $ 2 million, the support-span construction – from $ 10 million per km and tunnel construction – from $ 15 million per km., Kyrgyzstan does not possess such funds and production potential for implementing such construction projects. In addition, there is no progress on HEPP negotiation processes with neighboring countries. Accordingly, the solution of industrial problems on new generating capacities in Naryn cascade is not yet to be implemented.

At the same time, it should be noted that after the collapse of USSR, other Central Asian countries have built new railways for thousands of kilometers, connecting their regions into a single transport space and eliminated their dependence in this area on neighboring countries. Thus, Kazakhstan has built more than 2,500 km of railways, Turkmenistan – more than 1000 km Uzbekistan – more than 300 km, including 19 km tunnel under the Kamchik pass, Tajikistan – 150 km, Afghanistan – 75 km and Kyrgyzstan – 0 (zero) km. Commenting this situation can be done differently, but the numbers – are evident.

Kyrgyzstan – from electricity exporter – to importer

In 2014, the Kyrgyz Republic was transformed from an electricity export country to – importer. That is, the annual increase in electricity consumption – exceeded the generation (14 billion KWh), and the country is forced to import energy for the third year. Moreover, these imports are financed through the allocation of loans, the tariffs on imported electricity is 3-5 times higher than the average rates in the energy sector of the Kyrgyz Republic and the volumes of supplies from abroad are increasing.

In 2014, electricity imports amounted to some 1.4 billion KW/h and in 2015 – it was expected at the level of 1.18 billion kWh. According to the Kyrgyz Defense Council prediction, “for the autumn-winter period of 2015-2016 the amount of electricity deficit would be around         2, 15 billion. KW/h.” [4][5]

In 2014-2016 period, Kyrgyzstan managed to cover the electricity deficit through imports from Kazakhstan and Tajikistan.

According to official statistics from the National Statistics Committee website, the energy power of the republic for 2009-2015 was characterized by the following data of production and consumption: [6]

Table 1. Energy of Kyrgyzstan in 2009-2015.

Image 2

  • – The total number of electricity consumption in the Kyrgyz Republic for 2015 – is calculated as an increase to the 2014 data at the level of average annual growth over the past 5 years.

Positive dynamics in the table – can be called the reduction of total losses volume, which decreases from 2012. To some extent, this was also contributed by Defense Council decision, where a working group that established more than 20 corruption schemes, and developed measures for their removal. However, the fight against corruption can be effective only if it is continuous and systematic. For example, China is fighting corruption for more than 4000 years, and though could not win; however, managed to limit its scopes.

 When transferring the figures given in the table into graphics and add production trend lines of electricity consumption in the Kyrgyz Republic for the 2009-2015, the following diagram is obtained (unit of measurement – million KW / h.):

Diagram 1. Production and consumption of electricity in 2009 -2015.

Графика

As can be seen, in 2014 the consumption of electricity in Kyrgyzstan – has surpassed the volume of generation, and the Republic has passed into the list of energy-deficient category countries.

Moreover, in reality, the trend line of production dynamics in Kyrgyzstan in the coming years will go down, due to deterioration of existing power stations, which has already exhausted their resources. The nominal growth of the generation trend line in the diagram is due to low figures in 2008-2010, when due to water flow from the reservoir, there was a drastic reduction electricity production, bringing to shortages and massive restrictions in energy supply and consumption.

Concerning the technical conditions of the equipment, the following facts can me noted: in Toktogul HEPP for 2014-2015, there were four major accidents, which made a direct consequence of hundreds and thousands of dollars. The main causes of the accidents were due to excessive operation of the equipment. Taking into account the construction suspension of Kambar-Ata HEPP-1 and Naryn cascade, the electricity deficit in Kyrgyzstan, with a steady 5-8% annual growth in consumption – will keep increasing.

A similar situation also occurs in the electro system distribution of Kyrgyzstan. Thus, “there are 928 kilometers of underground cable lines in Bishkek. Due to extreme deterioration, around 40% of the cables should be replaced. Over the past four years, 150 kilometers of the cables were reconstructed.” [7] As a matter of fact, the technical conditions of the cable networks and equipment in the regions is worse than in the capital. The regional dispatching services of the OJCS “Severelectro” are receiving hundreds of calls from their consumers. During the bad weather conditions (heavy snow, strong wind), the number of calls are increasing. The cause of emergency power cuts are – aging, deterioration and electrical equipment overload. “[8]

One cannot say that, measures are not taken, since the planning and emergency replacement of the obsolete equipment is in process. Formally, Kyrgyzstan signed an agreement with creditors to finance the replacement of equipment in Toktogul and other hydroelectric power station; the complexities of their implementation were mentioned earlier. Since 2015, the electricity consumers in Kyrgyzstan begun to set up a so-called “smart electricity meters” that are able to independently transmit the meter readings to control centers. In addition, this device has a higher level of protection from authorized access. These measures helped to reduce the amount of technical losses, theft and reduce the operating costs of distribution networks in the Kyrgyz Republic.

Nevertheless, the volume of electricity shortage in the country is growing, and the continuation of the annual consumption growth will only aggravate this problem.

What will be prioritized: the solution of internal or external problems?

It is obvious that due to these circumstances, the priority should be given to solving internal problems of power industry in Kyrgyzstan, especially in terms of raising funds and creation of new generating capacity.

In this regard, the attempt of Kyrgyzstan to participate in the CASA project, which is declared to export electricity form Kyrgyzstan and Tajikistan to South Asia seems surprising. How will Kyrgyzstan export electricity to Afghanistan and Pakistan, if the country has electricity deficit and the construction of Kambar-Ara HEPP-1 and Upper Naryn cascade are suspended?

When the participation of Kyrgyzstan in CASA energy project is announced by politically exposed persons, it is understandable that – politics and reality do not necessarily coincide. However, when the project CASA-1000 is shown on websites of state energy companies of the Kyrgyz Republic – it raises more questions and doubts about the adequacy of their management. [9]

Will Kyrgyzstan be able to solve the energy sector issues? It will, but only if Kyrgyzstan implements and solves the following measures in the industrial sector and energy projects: issues of logistics, reaching agreements with Uzbekistan, as well as refusal to participate and exit obviously flawed projects, including the CASA-1000.

At the same time, it is obvious that the state-owned railway “Kyrgyz Temir Zholy” is not able to maintain a satisfactory condition of their current path and will not be able to realize the construction of new railway. This will require the transformation of the railway from closed state-ownership, which financial statements are not published to – JSC (Joint Stock Company), a similar are acting in Russia and Kazakhstan – “Kazakhstan Temir Zholy” and the Russian Railways. These companies are fundamentally different: they have open financial accountability, which is posted on their websites in multiple languages, annually audited by international companies and annually confirm their credit ratings form rating agencies. Surely, such transparency provides clarity of their business processes, tariffs, policies and trust towards them. Trust and obtained ratings will allow these companies independently raise their funds in international capital markets and implement construction of new railways estimated by billion dollar budgets.

The same can be noted with regard to energy companies of neighboring Kazakhstan (KEGOC, KazMunayGas and others). They also confirm their financial statements at the international audit companies and support their ratings. In comparison with Kyrgyzstan, which only in 2015 received a sovereign credit rating, as a result, none of the companies with state participation has passed these procedures and has not received a credit rating.

If the electro-sector of Kyrgyzstan is not able to resolve the problems occurred, it will lead to repeating electricity shortages in the country by 2017-2018, growth of social tensions, and up to another unconstitutional change of government, whereas the energy sector management personnel will be fully replaced.

 References:

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[1]http://www.minfin.kg/ru/novosti/mamlekettik-karyz/tyshky-karyz.html

[2]http://online.adviser.kg/Document/?doc_id=31613734

[3]http://www.president.kg/ru/news/zakony/7261_prezident_almazbek_atambaev_podpisal_zakonyi_o_denonsatsii_soglasheniy_s_rossiyskoy_federatsiey_o_stroitelstve_i_ekspluatatsii_kambaratinskoy_ges-1_i_verhne-naryinskogo_kaskada_ges/

[4]http://ru.sputnik.kg/Kyrgyzstan/20141201/1013533411.html

[5] http://ru.sputnik.kg/economy/20150507/1015407377.html

[6]http://stat.kg/images/stories/Kyrgyzstan%20v%20syfrax.pdf , со http://stat.kg/images/stories/docs/tematika/svod/Yearbook%202008-2012.pdf  , http://stat.kg/media/publicationarchive/b8b6dbf9-0d15-4d57-8fbb-938e98a2e78d.pdf и http://stat.kg/media/publicationarchive/34570709-3c3f-42b2-b05d-e77935342767.pdf

[7]http://www.severelectro.kg/ru/2009-05-26-10-08-44/3818-vechernij-bishkek-41-11058-transhei-po-vsemu-gorodu

[8]http://www.severelectro.kg/ru/2009-05-26-10-08-44/3591-oao-lseverjelektror-soobschaet

[9]http://www.energo.kg/aktsioneram-i-investoram/proekty/casa-1000 и http://energo-es.kg/?page=news&read=812

Author: Marat Musuraliev, economist, deputy director of the “Smart Business Solutions Central Asia” (Kyrgyzstan, Bishkek)

The opinions of the author may not coincide with the position of CABAR.asia

 

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