Psia energy kyrgyzstan_undp_apr2011

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Psia energy kyrgyzstan_undp_apr2011

  1. 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 2011Authors: Rafkat Hasanov, Kemal IzmailovEditor: Ben Slay
  2. 2. TABLE OF CONTENTSList of acronyms ............................................................................................................................... 3List of figures and tables ................................................................................................................... 5Executive summary........................................................................................................................... 7I Economy and poverty ..................................................................................................................... 9 Recent economic trends ................................................................................................................ 9 Poverty trends ............................................................................................................................. 10II Kyrgyzstan’s energy sector.......................................................................................................... 15 Electricity ................................................................................................................................... 16 Thermal power ............................................................................................................................ 24 Gas ............................................................................................................................................. 27 Coal ............................................................................................................................................ 29 Decentralized renewables ............................................................................................................ 32 Energy tariffs and costs ............................................................................................................... 34 Legal and regulatory framework.................................................................................................. 39 Policy reform to date ................................................................................................................... 40 Energy sector development: future scenarios ............................................................................... 42 Conclusions ................................................................................................................................ 46III. Poverty and household access to energy .................................................................................... 48 Data issues .................................................................................................................................. 48 Household energy expenditures ................................................................................................... 49 Conclusions ................................................................................................................................ 55IV. Social protection and the energy sector ..................................................................................... 56 Overview .................................................................................................................................... 56 Social policy instruments ............................................................................................................ 57 Effectiveness of social protection ................................................................................................ 60 Social protection and the energy sector ....................................................................................... 62Conclusions .................................................................................................................................... 64Bibliography ................................................................................................................................... 71 2
  3. 3. List of AcronymsADB Asian Development BankGDP Gross Domestic ProductSC State CompanyOJSC Open Joint Stock CompanyQFD Quasi Fiscal DeficitCAIPS Integrated Power System of Central AsiaUE Utility EnterpriseIDA International Development AssociationCAUPS Central Asian United Power SystemFEC Fuel and Energy ComplexCHPP Heating and Power PlantsHPP Hydropower PlantsAIMSCEM Automated Information and Measurement System for Commercial Electricity MeteringJEA Joint Economic AssessmentJICA Japanese Agency of International CooperationRES Renewable Energy SourcesFES Fuel and Energy SectorNEP National Energy ProgramEITI Extractive Industries Transparency InitiativeFESTI Transparency Initiative in the Fuel and Energy Sector of the Kyrgyz RepublicACGRKS Automatic Commercial Gas Record Keeping SystemWB World BankHVTL High-voltage Transmission LineNGO Non-Governmental OrganizationUSAID United States Agency for International DevelopmentIDB Islamic Development BankKR Kyrgyz RepublicMW Minimum WageGMCL Guaranteed Minimum Consumption LevelGMI Guaranteed Minimum IncomeLSGs Local Self-GovernmentsMSBs Monthly Social BenefitsPFMB Monthly Benefit to Poor Families with ChildrenUMB Unified Monthly BenefitAMFI Average Monthly Per Capita Family IncomeGPW Great Patriotic WarCAPP Chernobyl Atomic Power PlantPESAC Public Enterprise Structural Adjustment CreditSPD Social Protection BodiesMLSD Ministry of Level and Social DevelopmentUSB Unified Social BenefitMSEC Medical-Social Experts CommissionHIV Human Immunodeficiency VirusAIDS Acquired Immunodeficiency SyndromeSSEA The State Agency for Social Support under the KRGDSP&HA The Department of Social Protection and Humanitarian AidRSPDs Rayon Social Protection DepartmentsTSPDs Town Social Protection Departments 3
  4. 4. LSGs Local Self-GovernmentsA/O The Aiyl OkmotuSBs State BenefitsHUS&E Housing and Utility Services and Energy 4
  5. 5. List of Figures and TablesChapter I Economy and PovertyFigures:Figure 1. Annual GDP Growth Rates (2002-2010)Figure 2. Poverty Trends in Kyrgyzstan (2000-2009)Figure 3. Poverty Rates: Actual and PredictedFigure 4. Changes in Key Indicators Affecting Household Incomes (2005=1)Figure 5. Kyrgyzstan: Increases in External Migration, Remittance Inflows, in 2010Tables:Table 1. Macroeconomic Indicators, Kyrgyzstan (2007-2010)Table 2. Fiscal, Social Policy Trends in Kyrgyzstan (2008-2011)Chapter II Kyrgyzstan’s energy sectorFigures: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 (2007-2010)Figure 10. Household Energy Price Inflation Trends (2007-2010)Figure 11. Electricity Production, Consumption, Losses, and Exports (in million kWh, 2005-2010)Figure 12. Financial Results for Power Generation, Distribution Companies (in million som, 2006-2009)Figure 13. Collection Rates in the Electricity Sector (2007-2009)Figure 14. Electricity Sector Quasi-Fiscal Deficit (2002-2009Figure 15. Trends in Electricity Generation, and in Water Volumes at the Toktogul Hydropower Reservoir(2008-2010)Figure 16. Thermal Power Production, Consumption, Losses, and Exports (in thousand gigacalories, 2006-2010)Figure 17. Financial Results for Thermal Power Companies (in million som, 2006-2009)Figure 18. Gas Supply, Consumption, and Losses (in thousand meters3, 2006-2010)Figure 19. Gas Sector Financials (2007-2009, in million som)Figure 20. Gas, Consumer Price Trends (2007-2010)Figure 21. Fixed Assets (by book value) in the Gas Sector (2006-2009, in million soms)Figure 22. Trends in Fixed Asset Depreciation, Cash Collections (2006-2009)Figure 23. Coal Production, Consumption, Imports and Exports (in thousand tons, 2006-2010)Figure 24. Financial Results for Coal Companies (in million som, 2006-2009)Figure 25. Actual Versus Planned Household Electricity tariffs (per kWh, 2006-2012)Figure 26. Cost Share Trends in the Electric Power Sector (2006-2009)Figure 27. Actual Versus Planned Household Thermal Power Tariffs (per gigacal., 2007-2012)Figure 28. Cost Share Trends in the Thermal Power Sector (2006-2009)Figure 29. Shares of Material Costs in the Thermal Power Sector (2006-2009)Tables:Table 3. Main Energy Indicators of the Central Asian Countries in 2008Table 4. Energy Sector Privatization ChronologyTable 5. End use of Electricity Generated in Kyrgyzstan (2005-2010)Table 6. Addition tariff for renewables to the maximum tariffTable 7. Full cost of electricity generation in renewable small power plantsTable 8. Prices for 1 kWh electricity for 4 groups of selected plants 5
  6. 6. Table 9. Differences between Planned and Actual Costs of Larger Power Enterprises (2009-2010)Maps:Map 1. Existing and Planned Hydropower Plants and High-Voltage Transmission LinesChapter III. Poverty and household access to energyFigures:Figure 30. Trends in Household Expenditures, Energy Consumption (2007-2009)Figure 31. Share of Household Spending Absorbed by Energy Expenditures (2006-2010)Figure 32. Household Energy Expenditures by Various Energy Sources (2006-2010)Figure 33. Household Expenditures on Energy, by Deciles (2006-2010)Figure 34. Shares of Household Energy Expenditures Devoted to Various Energy Sources (by HouseholdDeciles, 2009)Figure 35. Shares of Household Energy Expenditures Devoted to Various Energy Sources (by householdlocation, 2009)Figure 36. Share of Households Reporting Interruptions in Electricity Service (2006-2009)Figure 37. Share of Households (by Income Decile) Experiencing Weekly (or More Frequent) Interruptions inElectricity Service (2008-2009)Figure 38. Share of Households (by Location) Experiencing Weekly (or More Frequent) Interruptions inElectricity Service (2008-2009)Tables:Table 10. Monthly Per-Capita Household Expenditures (in som, 2006-2010)Table 11. Average Per-Capita Monthly Energy Expenditures, by decile group (in som)Chapter IV. Social Protection and the Energy SectorFigures:Figure 39. Ratio of Monthly Pension, Social Assistance Benefits to the National Monthly SubsistenceMinimum (2007-2009)Figure 40. Trends in the Distribution of Social Benefits BY Household Deciles (2006-2010)Figure 41. Trends in the Distribution of Pension Benefits by Household Deciles (2008-2010)Figure 42. Trends in the Distribution of Categorical Benefits by Household Deciles (2008-2010)Figure 43. Trends in the Distribution of PFMB benefits by Household Deciles (2008-2010)Figure 44. Trends in the Distribution of MSB benefits by Household Deciles (2008-2010)Tables:Table 12. Kyrgyzstan’s Social Protection Instruments: Efficiency and Effectiveness (2005 data) 6
  7. 7. Executive summary While the uprising that drove President Kurmanbek Bakiyev from power in April 2010 hadmany causes, energy issues were among the most important. Dramatic increases in power and heattariffs introduced in January of that year, combined with two winters of electricity rationing, years ofrapid growth in household energy costs, and growing concerns about corruption and mismanagementin the energy sector, were key drivers of tensions in Kyrgyzstan. This study explores the socio-economic background to these events, and their aftermath, by assessing the poverty and socialimplications of tariff increases and other policy reforms now being introduced (or considered) inKyrgyzstan’s energy sector. These trends are playing out at a difficult time. While Kyrgyzstan was one of many countriesthat experienced slowing economic growth in 2009 (with the impact of the global financial crisis), itis one of the few to have reported a recession in 2010. The 1.4 percent decline in GDP officiallyreported for last year was a direct result of the political upheavals Kyrgyzstan experienced duringApril-June last year. While economic growth helped cut Kyrgyzstan’s income poverty rate in half(from 62.6 to 31.7 percent) during 2000-2008, the poverty rate stabilized in 2009, even though 3percent GDP growth was reported. Although the 2010 poverty data have not yet been released, therecession could have raised the national poverty rate for the first time in a decade. Even before thedevelopments of 2010, however, winter energy insecurities were afflicting significant numbers ofhouseholds in Kyrgyzstan, particularly in urban areas. This reflects the impact of the severe winter of2007-2008 and the subsequent drought of 2008 that reduced water levels in hydropower reservoirsalong 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 asprospects for decentralized renewables in Kyrgyzstan. It focuses in particular on the commercial andregulatory characteristics limiting the attainment of full cost recovery tariffs, as well as on prospectsfor significant short- and medium-term improvements in management within these sectors. It notesthat tariffs for electric and thermal power are being pulled in opposite directions by socialacceptability and economic feasibility. Whereas natural gas tariffs depend on the price of importednatural gas, the state sets power and heat tariffs. In so doing, the state is guided primarily by socialconcerns—leaving many energy companies unprofitable. These problems are exacerbated by the monopolistic structures found throughout the energysector (with the partial exception of coal). The absence of competition and market stimuli createspreconditions for inefficiency and corruption. These problems are aggravated by high levels of fixedasset 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 2006-2009,imports continue to cover between half and two thirds of Kyrgyzstan’s coal needs. Likewise, virtuallyall 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 theseproblems by introducing the Fuel and Energy Sector Transparency Initiative. FESTI represents anattempt to improve management and governance within the sector, by introducing greater measures ofpublic participation and transparency—but without raising tariffs, or further privatizing energy sectorassets, or significantly increasing the role of market forces. Compared to past policies, FESTI is animportant step forward, especially in terms of reducing corruption. But at the same time, by focusingon reducing corruption in and improving the management of state-owned monopolies—rather thantransforming them into market actors capable of modernizing the energy sector—FESTI is also amodest step forward. 7
  8. 8. Official household survey data (stretching into 2010) indicate that the energy crisis that beganin the winter of 2008 has decreased poor households’ access to electricity and other energy productsand 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 protectionsystem, in part to increase its ability to mitigate the impact of higher energy prices and tariffs or poorand vulnerable households. Unfortunately, there is little evidence to indicate that the social protectionsystem provides these households with effective protection against higher energy costs. Instead,household survey data suggest that Kyrgyzstan’s social protection system became more regressiveduring 2008-2009, with growing shares of social benefits paid out to upper-income households. Onthe other hand, these data indicate that households—low-income and otherwise—devote relativelysmall 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 smalllikelihood 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 formore closely linking social and energy policies. The issue would instead seem to be one of adoptingpolicies to improve the functioning of the energy sector and the social protection system. In thisrespect, 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. 9. I Economy and poverty Recent economic trends In the years between the Russian financial crisis of 1998-1999 and onset of the global 1998 1999economic crisis in 2009, Kyrgyzstan reported average annual GDP growth of around 5 percent. averageHowever, as the data in Figure 1 indicate, this growth was rather unstable, with strong economicexpansions (2000-2001, 2003-2004, 2007-2008) being followed by slowdowns or recessions (2002, 2001, 2003 2008)2005). This growth pattern reflects the impact of a number of internal and external shocks, of both an terneconomic and political nature (e.g., popular uprisings in 2005 and 2010). As a small open economy,Kyrgyzstan is very dependent on other countries—not only for exports and imp countries not imports, but also, andincreasingly, remittances from migrant workers. Whereas remittances were reported at 8 percent ofGDP in 2002, preliminary data indicate that they had risen to 27 percent of GDP in 2010. Figure 1—Annual GDP Growth Rates (2002-2010) 1 8.5% 7.6% 7.0% 7.0% 5.4% 5.3% 3.1% 2.9% 0.0% -0.2% -1.4% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: State Statistical Committee. Difficulties in the business and investment climate, and other market distortions, are keyreasons for this slow growth.1 As 2010 International Financial Corporation report found that, whilerecent reforms had improved the investment climate, these improvements, and their effects, were vedrather moderate.2 These difficulties limit inflows of foreign capital, technology, and know-how, knowespecially outside of the non-ferrous metallurgical sector, thereby inhibiting the broa ferrous broader industrial andagricultural modernization that Kyrgyzstan needs. High rates of unemployment and under under-employment (particularly in subsistence agriculture, which is the economy’s largest sector in terms ofemployment) and the inability of growing sectors to absorb “redundant” labor from agriculture and sectorselsewhere, has resulted into growing internal and external migration. The global crisis had a significant negative impact on Kyrgyzstan. While the low degree ofintegration with the international economy protected its financial system, GDP growth in 2009dropped 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 registeredin the global competiveness index, or in Transparency Internationals Corruption Perceptions Index.2 “Investment Climate in the Kyrgyz Republic as Seen by Small and Medium Enterprises”, IFC, 2010, p.10 Republic 9
  10. 10. Soaring food prices, which rose by a third in 2008, also contributed to the hardships experienced byvulnerable families. GDP end use data point to a 14 percent decline in personal consumption in 2009. Table 1—Macroeconomic Indicators, Kyrgyzstan (2007-2010) 2007 2008 2009 2010 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 byloosening its fiscal and social policy purse strings. As the IMF data in Table 2 below show, the shareof GDP devoted to public expenditures rose from 26.2 percent in 2008 to a projected 40.5 percent in2010. 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 ofGDP), so did Kyrgyzstan’s fiscal deficit and public debt. The increases in social protection spendingthat cushioned the blows from the crisis and then the events of 2010 may not, therefore, besustainable. Table 2—Fiscal, social policy trends in Kyrgyzstan (2008-2011) Share of GDP devoted to: 2008 2009 2010 2011 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. For2011, 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 droppedfrom 62.6 percent in 2000 to 31.7 percent in 2008, before bottoming out in 2009. Kyrgyzstan’snational Millennium Development Goals Progress Report 20103 argues that GDP growth and final3 The Kyrgyz Republic, the Second Progress Report on the Millennium Development Goals, Second Edition, (Revisedand Amended), Bishkek 2010 10
  11. 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 Russia4 says that increase in private consumption (gross consumption of households) which is the most important component of G 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 (2000-2009) 68% National 63% 62% 60% Rural 56% 57% 56% 53% 55% 51% Urban 50% 45% 46% 48% 45% 43% 42% 40% 36% 37% 37% 35% 30% 32% 32% 28% 27% 23% 23% 22% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 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 ForecastingChanges of poverty rates can be forecast depending on changes in GDP, remittances, and social transfers,using the below equation: Pov=-1.77*GDP - 0.35*Soc - 0.14*Rem + 10.69 (-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 rateThe data used for this analysis come from Kyrgyzstan’s balance of payments, and from the official snational 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. 55. 11
  12. 12. While there are some drawbacks to this model, its specification is reasonable. It avoids non-stationarityissues and the adjusted R-squared = 0.59.The following figure 3 illustrates the predictive power of the model.Figure 3—Poverty rates: actual and predicted 30 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 -5 -10 -15 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 4,5 4 2 3,5 GDP level (2005=1) 3 1,5 2,5 Social protection 2 level (2005=1) 1 1,5 Remittances level (2005=1) 0,5 1 0,5 0 0 2005 2006 2007 2008 2009 2010 Notwithstanding the progress reported during 2001-2010, 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. 13. the flashpoints for the ethnic tensions in May-June 2010—particularly vulnerable to decline in May particularly declinesremittance inflows. Seen in this context, the stunning increases in external migration outflows fromKyrgyzstan’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 asstability. Figure 5—Kyrgyzstan: Increases in external migration, remittance inflows in 2010 Kyrgyzstan: nflows,Relative to 2009. 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 in2008 was 2.1 percent, while in Naryn and Issyk Kul oblasts, this rate was 11.6 and 16.9 percent, Issyk-Kul 1respectively. Whereas the overall poverty rate in Bishkek in 2008 was 15.2 percent, in most otherregions it exceeded 40 percent. Much of the pre-2009 progress in poverty reduction was due to pre 2009developments in Bishkek and Chui oblast. Feminization of poverty. In 2008 women accounted for the vast majority of pensioners (67 ion omenpercent of those over retirement age), and of employees in the education and health sectors (76 and 79percent, respectively). The average salary in these “female” sectors, and the average retirementpension for women, are below the subsistence minimum. Women working in these sectors receivelower salaries than do men working in these sectors: in 2008 a woman’s average salary in theeducation and health sectors is only 78 and 62 percent, respective, of a man’s average salary in thesesectors.5 Poverty is concentrated in rural areas. Almost three-quarters of Kyrgyzstan poor live in quarters Kyrgyzstan’srural areas; in 2009 37.1 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 withmany children, in households headed by women, in rural areas, and living by themselves face the women,5 “Women and men of the Kyrgyz Republic: A collection of gender-disaggregated statistics,” Bishkek, 2009, pp. 46, 87, disaggregated115. 13
  14. 14. greatest poverty risks. This is mainly due to limited opportunities for well paid employment.6 Accessto water and communal services is also much lower in rural areas, due in part to the difficulties ofdelivering these services in mountainous regions. In urban areas, by contrast, households are muchmore 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 donot have access to at least one of these services. Limited access to these services is a particular burdenfor women in poor households, many of whom can not afford to purchase labor-saving householdappliances. Child poverty rates are high. According to the findings of the integrated household samplesurvey conducted in 2006, 48.5 percent of children under 18 lived in poverty and 12 percent of theseare 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 inKyrgyzstan generally do not have access to the banking system or financial services. In rural areas thepoor generally have smaller plots of land than those who are better-off and due to the fact that theland 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 UNCommittee on the Elimination of Discrimination Against Women in the third periodic report of the Kyrgyz Republic oncompliance with the UN Convention on the Elimination of all Forms of Discrimination Against Women, articles 41-42.7 Source: NSC, http://212.42.101.124:1041/stat1.kg/index.php?option=com_content&task=view&id=45&Itemid=100 14
  15. 15. II Kyrgyzstan’s energy sector Prior to the energy crisis that began in early 2008, Kyrgyzstan’s energy sector suffered frombenign neglect. Market reforms had largely ended in the early years of the decade; state-owned statemonopolies continued to dominate the sector; attempts to attract private capital and foreign privateinvestment had met with limited success; and effective electricity tariffs were among the lowest in theregion (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 Kambarata 2electricity transmission capacity (e.g., via the construction of the Datka-Kemin high voltage power Datka Keminline). Figure 6—Effective Household Electricity Tariffs in the Former Soviet Republics (2007) $0.09 $0.07 Nominal tariff (per kWh) $0.06 times collection rate $0.05 $0.04 $0.04 $0.04 $0.02 $0.01 $0.01Source: EBRD data, UNDP calculations. The energy crisis that began in 2008 was something of a wakeup call. As a result of coldtemperatures and low water levels in the hydropower stations along the Naryn cascade, electricityblackouts increased abruptly, while sharply higher import prices made gas unaffordable for manyhouseholds 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 2 and 13 25percent, respectively, during 2007-2010. Gas consumption dropped by almost two thirds, as prices of 2007 2010.gas imported from Uzbekistan rose from $100 to $240 per 1000 cubic meters during 2007 2007-2009.Faced with growing shortages of centrally supplied electricity and unaffordable gas, many electricityhouseholds, businesses, and public institutions switched to coal-fired boilers. Domestic coal coal firedproduction rose some 41 percent during 2007-2010; apparent consumption (production less net 2007 2010;exports) rose 57 percent. In addition to encouraging the “dash to coal”, the government responded to these iondevelopments by permitting energy prices and tariffs to rise at rates well above consumer priceinflation (see Figure 8). It introduced a programme of anti-crisis measures (including rotating ). anti crisisblackouts and brownouts), raised electricity collection rates, reduced electricity losses,8 and8 Commercial and technical losses (in kWh), as well as accounts payable (in som) in the electricity sector declined during2006-2009, while the ratio of accounts receivable to gross income in the electricity sector also fell. 2009, 15
  16. 16. accelerated the development of small hydropower plants. The government also tried to reinvigorateprivatization processes in the energy sector by putting stakes in six state-owned energy companies upfor 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 2010. Figure 7—Trends in energy production, consumption (2007-2010) 160 Electricity generation 140 Electricity consumption* 120 Thermal generation 100 Thermal consumption** 80 60 Coal production 40 Coal consumption*** 20 Gas supply^ 0 Gas consumption~ 2007 2008 2009 2010Source: 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 tothe cancellation of the energy sector privatizations (see Box 2), as well as to the introduction of theFuel and Energy Sector Transparency Initiative. Nonetheless, despite this more “social” orientation ofenergy policy, household energy prices in 2010 continued to rise at rates well above consumer priceinflation. Electricity Production, consumption, and losses. The vertically integrated Kyrgyzenergo was dissolved in2001 into a single generation company, a single transmission company, and four distributioncompanies. All these companies are state-owned;9 competitive pressures are weak. Virtually all ofKyrgyzstan’s power generation assets belong to the “Power Plants” company, including 15 largehydropower plants, two combined power and thermal plants, and dozens of small-scale power9 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 inthese companies. 16
  17. 17. producers.10 Total power generation capacity is 3,740 megawatts; the large hydropower plantsaccount for 2,950 megawatts, while the combined power and thermal plants have a total capacity of730 megawatts. The state-owned “National Power Grid” company manages the electricitytransmission infrastructure, while four regional distribution companies (“Severelektro”,“Vostokelektro”, “Jalalabatelektro”, and “Oshelektro”) monopolize the supply of power in the areasfor which they are responsible. Box 2—Energy sector privatization chronology11Company Privatization processSeverelektro * A single tender for the privatization of the state-owned stakes in Severelectro, thePower Bishkek Combined Heat and Power Plant, and the Bishkek District HeatingDistribution Distribution Company was initiated in late 2008, with a starting price of $137Company 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.Vostokelektro * Two privatization attempts were declared void for lack of bids. The starting pricePower was set at $41 million.Distribution * The third attempt, without establishing a starting price, succeeded in FebruaryCompany 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.Oshelektro Power * Two attempts of privatization were voided due to lack of bids. The initial startingDistribution price was set at $42 million.CompanyJalalabadelektro Two attempts of privatization were voided due to lack of bids. The initial startingPower price was set at $27 million.DistributionCompanyBishkek Combined * A single tender for the privatization of the state-owned stakes in Severelectro, theHeat and Power Bishkek Combined Heat and Power Plant, and the Bishkek District HeatingPlant, and the Distribution Company was initiated in late 2008, with a starting price of $137Bishkek District million.Heating * The tender was voided due to a lack of bids by the January 2009 deadline.Distribution * No further attempts have been made.Company The “Power Plants” generation company produces 99 percent of Kyrgyzstan’s electricity. Sincemore than 90 percent of this is generated by hydropower plants on the Naryn cascade with uniformhydrological conditions, market competition in power generation is difficult to imagine for theforeseeable future. Longer term, however, the construction of large coal-fired power plants (such asKara-Keche), expansion of decentralized renewables, increased industrial co-generation, the10 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.87. 17
  18. 18. introduction of more flexible management of the hydropower plants on the Naryn cascade, and thepossible creation of a regional electricity market, could offer prospects for competition in electricitygeneration. Figure 8—Household energy price inflation trends (2007-2010) Household 2010) 2007 68% 2008 2009 53% 2010 38% 33% 32% 28% 25% 17% 13% 12% 10% 7% 8% 0% 0% 1% Consumer prices Electricity tariffs Gas tariffs Heat tariffsAnnual average increases. Source: State Statistical Committee data, UNDP calculations. Prospects for market competition in electricity transmission are even more constrained, owingto significant associated economies of scale. The state-owned “National Power Grid” company, state ownedwhich now performs this function, seems likely to remain a natural monopoly indefinitely. Figure 9—Electricity production, consumption, losses, and exports (in million kWh, 2005 Electricity 2005-2010) Generation Consumption 14523 14830 14891 Losses Exports 11789 11083 11070 7869 7551 7396 7299 7257 6862 4667 4582 4973 3693 2750 2662 2629 2460 2379 552 1579 1034 2005 2006 2007 2008 2009 2010Source: State Statistical Committee. : Committee In addition, there is no market competition among electricity distribution companies, each ofwhich operates in its own territory and their territories do not overlap. While some 27 private 18
  19. 19. wholesalers/small distributors were licensed in 2009 to purchase electricity from “Power Plants” andresell it, these wholesalers typically operate lower-voltage lines, and do not provide most users withan effective alternative to the regional distribution companies. It is possible to imagine competitionamong distribution companies—particularly in urban areas that are located close to the borders of oneof the existing distribution zones, and particularly if the wholesalers are able to expand theiractivities. However, policy since April 2010 has emphasized strengthening state control overdistribution (and other electricity) companies, in order to improve management and reducecorruption. On the one hand, it is not surprising that all the companies produced by Kyrgyzelektro’s 2001unbundling have been included into the state Monopoly Register.12 Their tariffs are therefore subjectto close scrutiny by the Antimonopoly Agency. On the other hand, the structural conditions nowprevailing in the power sector—under which a single state-owned monopoly has been replaced byeight such companies, whose prospects for attracting the private capital needed for modernization arequite uncertain—now seem particularly unfortunate. Table 3—End uses of electricity generated in Kyrgyzstan (2005-2010) 2005 2006 2007 2008 2009 2010 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 andconsumption; a problem in one link can immediately produce downstream ripple effects. Trends inelectricity 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 inthe share of electricity going to exports, has helped to cushion households from the worst of thedecline in electricity generation.13 Losses in Kyrgyzstan nonetheless remain quite high byinternational standards; losses in the 7-10 percent range are considered a “standard benchmark”.14Most (70 percent in 2010) of these losses occur at the distribution stage, due primarily to obsoleteequipment, the absence or malfunctioning of meters, inaccurate metering of consumed electricity, aswell as outright theft. In Kyrgyzstan, neither the generation, transmission, nor distribution companies are responsiblefor cash management: payments from end-users are collected and accumulated in escrow accountsand divided among the companies on the basis of percentages set monthly by the Ministry ofEnergy’s Regulatory Department. Barter and offsets are also used in settlements between sector12 According to Order No. 524 of the State Agency for Anti-Monopoly Regulation, dated 30 December 2009.13 Losses exist in all power systems. Technical losses occur in electricity generation and transmission from the point ofgeneration to the point of final consumption; their size is determined by the distance over which the electricity istransmitted 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 30April 2010), pp. 11, 13. 19
  20. 20. entities, as well as between sector entities and end-users. In addition, trading figures covering the end users.same electricity flows reported by different utilities differ from each other.15 Figure 10—Financial results for power generation, distribution companies (in million som, 2006- esults mpanies 2009) Revenues Costs Profit (loss) 13406 11725 12067 11192 9395 9603 8538 8359 179 -208 2006 2007 2008 -533 2009 -1339Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; UNDPcalculations. The data include small-scale enterprises. small In light of these complications, power company finances are likewise rather complicated. Ingeneral, these companies show rapid increases in both revenues and costs (in cash-flow terms), with cashcumulative growth in the latter (60 percent) outpacing the former (41 percent) during 2006 2006-2009. (Bycontrast, cumulative growth in the GDP deflator and producer price index during this time was 46 and58 percent, respectively.) As a result, the financial results reported by power sector companiesdeteriorated sharply after 2006 (see Figure 10 harply 10). Available data indicate that power sector companies responded to these trends by trying to companiestighten their finances. For example, accounts payable in this sector declined in absolute terms during2006-2009, despite large increases in costs and revenues. While accounts receivable (more than half 2009,of which are doubtful or unrecoverable debts) in the power sector grew during 2006 2006-2009, relative tosectoral 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 1 quasi-fiscaldeficit continued to fall, dropping from nearly 13 percent of GDP to under 4 percent during 2008-2008 162009 (see Figure 12). These trends are occurring against a backdrop of electricity tariffs that are still quite low byregional standards (see Figure 6). However, the data analyzed above suggest that the financialproblems facing the power sector are not due solely, or perhaps even largely, to slow revenue growth15 Reductions in electricity losses can be exaggerated, for example, when companies over-estimate billing and then over estimateaccounts receivable.16 The quasi-fiscal deficit is determined by the sum of: (1) “above-standard” electricity losses; (2) deviations from a 100 fiscal “above standard”percent cash collection rate; and (3) the difference between tariffs and long-run marginal costs (includin investment long run (includingcosts), measured on a cash-flow basis. The quasi fiscal deficit therefore reflects the difference between the income needed flow quasi-fiscalto fully cover operating and capital costs in the sector versus actual revenues received. According to Kyrgyzstan’s receivedmedium-term budget framework, this deficit is to drop below 2 percent of GDP by 2012. term 2012 20
  21. 21. because of “low tariffs”,17 or the power companies’ unwillingness/inability to collect tariffs or reduce unwillingness/inabilityelectricity losses. They instead suggest that the key financial problem facing the power sector hasbeen rapid growth in costs. While some of this growth results from large capital outlays forinfrastructure investments, it may also reflect the inability of weak market forces or regulatory estments,oversight to contain costs. Figure 11—Collection rates in the electric power sector (2007-2009) Collection 2009) 2007 2008 2009 104% 99% 95% 90% 90% 89% 88% 90% 86% 82% 70% 65% Overall Households Industry AgricultureSource: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The datainclude 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 Naryncascade, with installed capacity of 2870 megawatts, account for about 78 percent of Kyrgyzstan’stotal generation capacity. The Toktogul power station, with 1200 megawatts of installed capacity, isCentral Asia’s largest hydropower station, and only multi-year hydropower water storage facility. multi yearThis reliance on hydropower leaves Kyrgyzstan vulnerable to changes in water levels alon the Naryn alongcascade. This was particularly apparent in 2008, when drought conditions helped push water volumesat Toktogul to extremely low levels (see Figure 13). The volume of electricity generated fell 21percent in that year, and another 6 percent in 2009 as releases were limited by the need to restore 2009water levels. However, because Toktogul is a multi-year storage facility, good management of the multi yearwater in its reservoir should provide some protection against droughts in the future.18 Investment projects and prospects. According to various estimates, Kyrgyzstan is not usingmore 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 relia reliance onhydro power poses a dilemma for policy makers in Kyrgyzstan. The construction of new hydro powerplants—both along the Naryn cascade and on smaller rivers—is an obvious way to increase capacity both rivers isfor winter power generation, as well as boost exports and promote economic development. This is the andvision of the Central Asia and South Asia Regional Energy Market (CASAREM) project, which is17 The reported 41 percent revenue growth combined with a 23 percent reported reduction in kWh sold during 2006 2006-2009suggests that effective electricity tariffs rose by 85 percent during these years. pe18 According to data on the CA WaterInfo website (http://www.cawater-info.net/analysis/index_e.htm water inflows into ( info.net/analysis/index_e.htm),Toktogul in 2007 were also well below historical averages. However, national statistical committee data indicate thatelectricity 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 mismanagement,levels at Toktogul in 2007-2008, and then electricity shortages during subsequent winters. 2008,19 Source: Small and Medium Sized Hydropower Development Programme, approved by presidential decree N 365, 14October 2008. 21
  22. 22. supported by the donor community working in Central Asia, and to which the government ofKyrgyzstan subscribes. The Ministry of Energy has conducted feasibility studies for constructing Ministrysome 47 hydropower plants across the country. Figure 12 2—Electricity sector quasi-fiscal deficit (2002-2009) 2009) 12.8% As a share of GDP 7.6% 5.9% 4.9% 3.7% 3.9% 2002 2005 2006 2007 2008 2009Source: Ministry of Energy. Moreover, prospects for virtually all investment projects in the energy sector are constrainedby Kyrgyzstan’s relatively low electricity tariffs. In addition to reducing the cash flow powercompanies need to finance investments within the sector directly, low electricity tariffs reduce thecommercial feasibility of energy projects in other sectors. This applies both to coal (the demandfor which is determined in part by the financial situation in the power sector) and to decentralizedrenewables, the payback period for which shortens as electricity tariffs increase. ck Figure 13—Trends in electricity generation, and in water volumes at the Toktogul hydropower lectricity reservoir (2008-2010) 50% Toktogul water volume (deviation from multi-year average*) multi 40% Year-on-year-change in electricity generated (kWh) change 30% 20% 10% 2008 2009 2010 0% -10% -20% -30% -40% -50%* Calculated relative to the average volume for that month in previous years, going back to 1991-1992. A zero 1991value means water volume in that month was at its multi year average (no deviation from normal). multi-yearSources: State Statistical Committee, CA WaterInfo website; UNDP calculations. 22
  23. 23. The Kambarata-1 and -2 hydropower projects are at present receiving the greatest attention andassistance from the government. Kambarata-2, the costs of which were estimated at some $100million in 2007, is under active construction—the first unit was installed in 2010, with construction tobe completed by 2015. Key parameters include: installed capacity—360 megawatts (three units of120 megawatts each); power generation—1,148 million kWh; water reservoir capacity—70 millionm3. The construction is being financed by the government budget and an earmarked credit from theRussian Federation.20 Kambarata HPP-1 would be significantly larger and more expensive: installedcapacity of 1,900 megawatts (4 units of 475 megawatts each); power generation of 5,088 millionkWh, and a water reservoir capacity of 4,650 million m3; and construction costs of some $1.7 billion. The construction of the Kara-Keche coal-fired power station, with a capacity of at least 1200megawatts, is also under discussion. This plant would generate electricity from coal that would bemined from the Kavaksky lignite basin, where it would be located. In addition to helping to developthe coal industry, Kara-Keche would diversify Kyrgyzstan’s generation capacity away from its near-total reliance on hydropower. However, the sources of financing for the construction of this $1.3billion project have not yet been identified. Map 1—Existing and planned hydropower plants and high-voltage transmission lines “Kemin-Almaty” High-voltage transmission line Kara-Keche “Datka-Kemin” high- voltage transmission line ($343 million) “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 andsouthern parts, which are linked by a high-voltage transmission line running from Toktogul in thesouth to Frunzenskaya in the north. Because the Naryn cascade is in the south, Kyrgyzstan’s southernregions have a power surplus, while the north is in deficit. However, some parts of the south—such asLeilek 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 beingaddressed by the construction of the 131 kilometer Aigultash-Samat transmission line, which is to becompleted in November of 2011. This project is financed by a $12 million credit from the IslamicDevelopment 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 ofFebruary 3, 2009 "On Construction of Kambarata HPP-1". 23
  24. 24. Although Kyrgyzstan imports virtually no electricity, the Toktogul-Frunzenskaya transmissionline runs through Uzbekistan and Kazakhstan (see Map 1). Uzbekistan’s and Kazakhstan’s November2009 decision to withdrawal from—and therefore the de facto dissolution of—the integrated CentralAsian electricity transmission grid adds new potential uncertainty to power supplies in Kyrgyzstan’snorthern regions. This uncertainty is to be addressed by the construction of the $570 million Datka-Kemin transmission line, the construction of which is expected to be co-financed by China’s Export-Import Bank, the Asian Development Bank, and others. However, this financing was put on holdfollowing the April 2010 developments; it has not yet been secured. A 1998 government resolution requires the distribution companies to install reliable and safemeters at each service point, and to take regular meter readings. Virtually all electricity meters havebeen transferred to the balance-sheet of the distribution companies, who must also finance theinstallation of new meters for the population of the republic and their replacement are to be financedby these enterprises. Thus, all responsibility for electricity metering is placed on distributionenterprises. Offering reliable electricity services to growing numbers of migrant households—manyof which have an informal character—located in peri-urban areas are posing significant problems fordistribution companies. This is particularly the case for Severelektro, which serves Bishkek city. As a result, since 2006 a number of projects (financed by the World Bank, KFW, and the SwissEconomic Cooperation Organization), have helped the distribution companies to improve metering,reduce losses, and extend services to new households. Procurement of meters and computer hardwareand software (for billing systems) has played a large role in these projects, which have helped reducelosses and boost cash collection rates. Total financing for electricity sector projects, frominternational organizations and from the state budget, amounts to about $98 million. This is far short of what is necessary: the Joint Economic Assessment published by the WorldBank in mid-2010 assessed the immediate needs of the energy sector (i.e., for the winter of 2010-2011) at $180 million. Out of this amount $124 million was to be allocated to essential and criticalrepairs for heating plants, district heating systems and to ensure security in electricity generation.21The funding needed for the generation and transmission projects mentioned above (e.g., Kambarata-1and -2, Kemin-Datka, Kara-Keche) is estimated in the $5-6 billion range. It is not clear when,whether, or from whom these funds could be obtained. Thermal power Two combined thermal and electric power plants are in operation in Bishkek and Osh cities,covering 85 and 35-40 percent of the households in these two locations, respectively. In addition tothese cities, central heating systems are in place in the towns of Kyzyl-Kiya (covering 60 percent) andKarakol (covering 26 percent).22 Small-scale thermal generation enterprises operate in many smallertowns; and residents of stand-alone houses often have their own thermal generating equipment(stoves, boilers, heaters, etc.). Thermal power in Bishkek (most of which is generated by the Bishkek Combined Heat andPower Plant) is delivered by the Bishkekteploset and Bishkekteploenergo enterprises; in Osh it issupplied by the Osh combined heating and power plant. Thermal power to 95 percent of consumers incities and rayon centers is also produced by the state-owned Kyrgyzzhilkommunsoyuz enterprise. All21 For more see, “The Kyrgyz Republic Joint Economic Assessment: Reconciliation, Recovery, and Reconstruction”,ADB, IMF, the World Bank, 2010.22 Source: Country Development Strategy for 2008-2011. 24
  25. 25. of these distribution companies are state-owned: Bishkekteploset’ takes the form of a joint state owned: joint-stockcompany in which 84 percent of the shares are state-owned; Bishkekteploenergo is a municipal s owned;enterprises under the Bishkek mayor’s office; while Kyrgyzzhilkommunsoyuz belongs to the Ministryof Energy. Nor is there competition in distribution: each enterprise has its own non non-overlappingterritory of operations. As a result, Bishkekteploset, Bishkekteploenergo, and the territorial divisions erations.of Kyrgyzzhilkommunsoyuz have been included into the State Monopoly Register;23 their tariffs aresubject to close inspection by the Antimonopoly Agency. But while important economies of scale are associated with the creation and maintenance of mportantthermal infrastructure, significant inter modal competitive forces are present, particularly at the retail inter-modallevel. Consumers unhappy with district heating tariffs or service quality can rely more extensively on qualityelectric heaters, install gas- or coal fired boilers, or burn more firewood. There can be little doubt, for coal-firedexample, that the ability to install coal fired boilers (and, in rural areas, burn firewood) has limited the coal-firedstrains on vulnerable households presented by the large increases in electricity, gas, and thermal nspower tariffs since 2007. Exclusive treatment of thermal power as a natural monopoly whose tariffsneed to be kept low could distort competition among fuel sources—competition that can help limit source competitioncosts and price increases while also promoting the development of Kyrgyzstan’s energy sector. Figure 14—Thermal power production consumption, losses, and exports (in thousand gigacalories, roduction, 2006-2010) Generation Consumption Losses 2933 2926 3015 2887 2815 2185 2165 2270 2209 2184 748 761 745 678 631 2006 2007 2008 2009 2010Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010. The datainclude small-scale enterprises. Production, consumption, and losses. Kyrgyzstan’s thermal power facilities generate about 3million gigacalories of thermal power annually (see Figure 14), two thirds of which come from the 1 ,Bishkek Combined Heat and Power Plant. Kyrgyzzhilkommunsoyuz and the Osh Combined Heat andPower Plant generate about 540,000 and 120,000 gigacalories annually, respectively As in the respectively.electricity sector, losses are endemic in thermal power, generally exceeding 20 percent of thermaloutput. However, thanks to reductions in losses from 25 to 22 percent during 2008 2008-2010, the 4percent cumulative decline in consumption reported for these years was less than the 7 percent thesedecline in production.23 According to Order No. 524 of the State Agency for Anti-Monopoly Regulation, 30 December 2009. Anti Monopoly 25
  26. 26. The high thermal power losses are due primarily to wear-and-tear of pipes and insulation of the wear tearnetwork, as well as frequent service interruptions, which lead to high levels of condensation. Th Thedepreciation of fixed assets in Kyrgyzstan’s thermal power sector is estimated at 60 percent.24 Thus,according to the Ministry of Energy, the number of accidents in the OJSC Bishkekteploset’ in the firstmonth of the heating season of 2009-2010 increased by 60 percent as compared to the season of 20092007-2008. The insulation of the main and especially in-house heating networks practically does not 2008. in housefunction and requires capital repairs. This is particularly an issue for Bishkektelposet’, where lossesincreased to 48 percent in 2009. d Thermal sector finances. The financials of the enterprises supplying steam and hot water inrecent years have been even less favorable then in the power sector (see Figure 1 In 2008 some 588 15).million som ($16.1 million) in losses were reported—40 percent of sectoral revenues reported 40 revenues—beforedropping back to 343 million som ($8 million) in 2009. As is the case in the electricity sector, thermalpower companies reported very rapid growth in costs during 2006-2009— percent, while the 2006 —88sector’s accounts payable also rose by 66 percent. (By way of comparison the industrial producerprice index reported a 58 percent cumulative increase during this time; the consumer price indexreported a 47 percent cumulative increase; while the GDP deflator rose 46 percent). While much much-needed investments to refurbish Kyrgyzstan’s decaying thermal infrastructure can no doubt explainmuch of this increase, they may not be able to explain all of it. The rapid growth in accounts payablealso contrasts with the electric power companies’ success in sharply reducing their payables (in real soterms) during 2006-2009. On the other hand, thermal power companies’ accounts receivable only 2009.grew by 13 percent during 2006-2009 (a decline in real terms). While doubtful or unrecoverable 2006household debts grew rapidly during this time, they comprised less than 10 percent of totalreceivables in 2009.25 Figure 15—Financial results for thermal power companies (in million som, 2006-2009) esults mpanies 2006 Revenues 2408 Costs 2042 2065 Profit (loss) 1530 1454 1280 1119 949 2006 -331 2007 2008 2009 -343 -411 -588Source: Finances of Enterprises of the Kyrgyz Republic, State Statistical Committee, Bishkek, 2010; andUNDP calculations. The data include small-scale enterprises. small24 Source: Finances of Enterprises of the Kyrgyz Republic, National Statistical Committee, Bishkek, 2010. Data on small , small-scale enterprises are not included.25 By contrast, doubtful or unrecoverable household debts were 57 percent of power company receivables in 2009. 26
  27. 27. Revenues reported by thermal power companies increased even faster— 118 percent—during faster—by2006-2009. However, because thermal power tariffs only cover about 45 percent of service costs, the 2009.bulk of these revenues come not from users, but from state and local budgets. In 2009, state budgetsubsidies for communal service providers reached 1 billion soms ($23 million). For example, despitereporting an improvement in 2010, Kyrgyzzhilkommunsoyuz only covered about 37 percent of itscosts from sales last year; the difference was financed by state budget, growth in accounts payable, differencefiscal debts, and the like. The 2011 state budget earmarks 740 million soms ($15 million) forKyrgyzzhilkommunsoyuz alone.26 The situation is similar with Bishkekteploenergo, which issubsidized by the Bishkek city budget.27 Investment projects and prospects. Some $110 million in projects to reconstruct and modernizeKyrgyzstan’s central heating system, co-funded by the Asian Development Bank, the World Bank, co fundedand other international organizations (as well as the state budget) are currently being implemented.These projects focus on modernizing the Bishkek and Osh combined heat and power plants replacing plants,inefficient heating boilers, and installing thermal meters (in apartment buildings). Higher prices forheat and hot water (see Figure 8 have led many households to install meters on their own initiative. 8) Gas Natural gas—virtually all of which is imported from Uzbekistan—accounts for 30 percent of virtually accountstotal energy consumption in Kyrgyzstan. Gas import, transportation, distribution, and sales are import,handled by the Kyrgyzgaz state-owned monopoly,28 whose assets include some 800 kilometers of statetrunk pipelines and some 2300 kilometers retail pipeline infrastructure. Figure 16—Gas supply consumption, and losses (in thousand meters3, 2006-2010) upply, 2006 Imports + production 769 783 762 Consumption 671 648 644 Losses 340 294 247 214 106 97 97 80 77 2006 2007 2008 2009 2010** 2010 data for consumption, losses are UNDP estimates.Source: State Statistical Committee. : Committee26 Resolution N 33 of the Government of the Kyrgyz Republic dated December 17 2010 “On Draft Law of the Kyrgyz overnmentRepublic on Republican Budget for 2011 and Forecast for 2012-2013”. 201227 By contrast, Bishkekteploset does not receive budget subsidies. Instead, it is cross-subsidized from r cross subsidized revenues earned viaelectricity exports by the “Power Plants” transmission company.28 As of 2010, the Ministry of State Property held an 87.9 percent equity stakes in Kyrgyzgaz; the Social Fund heldanother 5.4 percent. 27
  28. 28. There are 279,358 gas consumers, most of which (277,344) are households (approximately 1 (277,344)million individuals); the remainder are utilities, industrial, and commercial entities (2,145 users); andbudget-financed organizations (129). About 97 percent of household gas users have meters financed meters. As it is the only major company involved in the purchase, transport, and distribution of gas inKyrgyzstan,29 it is not surprising that Kyrgyzgaz has been included in the monopoly register, and itstariffs subjected to scrutiny by the Antimonopoly Agency. However, as with thermal, competitiveforces are present on the retail gas market: households can substitute electricity or coal households coal-fired boilers(and, in urban areas, district heating) for gas heat; gas-fired appliances can likewise be replaced by gas firedelectric ones. Strengthening competition among these fuel sources can help hold costs and tariff tariffsprices down. Figure 17—Gas sector financials ector Figure 18—Gas, consumer price inflation trends onsumer (2007-2009, in million som) 2009, (2007-2010) 2010) Gross income 250 Gas import prices Costs 4404 4532 Household gas tariffs Profit (loss) 3789 Consumer price index 3320 3070 3045 200 150 25 2007 = 100 128 -128 100 2007 2008 2009 -469 2007 2008 2009 2010Sources: State Statistical Committee, especially Finances of Enterprises of the Kyrgyz Republic, Bishkek,2010; and UNDP calculations. Imports, consumption, and losses. As the data in Figure 16 show, gas consumption inKyrgyzstan dropped precipitously during 2007-2009, as the price of gas imported from Uzbekistan 2007 ,rose from $100 to $240 per thousand cubic meters. Preliminary data indicate that, while the importprice dropped slightly in 2010, imports and consumption continued to decline. The cumulativedecline in gas consumption during 2007-2010 seems to have been on the order of 68 percent, with nsumption 2007 2010particularly large drops reported in the industrial sector. Although household gas prices “only” roseby 12 percent last year, 2010 was the seventh consecutive year in which hou household gas prices rose atrates in excess of consumer price inflation. Losses in the gas sector are significant: in 2009 they comprised 23 percent of total gas supply(imports plus domestic production), up from 12-14 percent in previous years. These losse reflect the 12 14 lossesdebilitated condition of Kyrgyzstan’s gas pipelines, inaccurate metering, theft, and other factors. Thehighest losses are recorded in the country’s southern regions. Gas sector financials. Kyrgyzgaz’s financial performance is determined primarily by trends inwholesale (imported) and retail gas prices, the procurement of which represents some three quarters29 The KyrKazGaz joint venture company also performs gas transit functions in the territory of Kyrgyzstan. 28

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