Central Asian Water & Energy Connection

1. Central Asian Water & Energy Connection Joellyn Murphy November 9, 2010

2. What I’ve learned about the Water-Energy Nexus • Almost everything is a “State Secret” • There are lots of numbers, but very little firm data (and less context), and no trust in anyone else’s numbers • Even the data is political • Variable hydrology affects not only water but energy supply and costs both upstream & downstream • There are no compensating mechanisms to address the adverse effects of very dry or very wet years on upstream or downstream countries • The public does not understand even the basics of the water-energy connection (“KR was short power because it sold it to Uzbekistan”) – nor do most members of Govt. • The root source of the problem is lack of serious energy or water sector reforms and corruption at all levels

3. Toktogul is the only multi-year water reservoir in the region with total storage volume of 19.5 bcm. Five power stations of the Naryn cascade (2,870 MW) produce 12-14 billion kWh a year 1,200 MW (1975) Kambarata HPP-2 (360 MW) Kambarata HPP-1 (1,900 MW) 800 MW (1982) 450 MW (1987) 240 MW (1995) 180 MW (1962) Toktogul Water Reservoir Toktogul Kurpsai Tash-Kumyr Shamaldy-Sai Uch-Kurgan

4. Regional tensions over Water & Energy peak over use of Toktogul Reservoir and construction of Rogun Reservoir • Toktogul was built as a multi-year reservoir for dual purpose (secure irrigation and power production) • KR must release water in summer for irrigation in Kazakhstan & in Uzbekistan • In Soviet times, KR released water to UZ and KZ in summer and received electricity & fuel for winter from UZ and KZ in exchange • KR now exports (sells) the power associated with water releases to UZ & KZ so it can buy UZ gas and KZ coal to fire Bishkek 1 & Osh CHP • However, because of lack of sector reform and persistent corruption, KR reduced fuel purchases and power output at CHP and began using Toktogul to produce cheap winter power. THIS is the nut to crack.

5. The Key Source of Conflict over the “Energy Water Connection” is greater use of Toktogul and less use of CHP to meet Kyrgyz winter demand Toktogul was built to provide summer irrigation for UZ and KZ & KR received electricity & fuel for its thermal plants from UZ and KZ in exchange The pattern of Toktogul’s winter/summer releases changed primarily because of breakdown of the water/fuel barter system after 1991.

6. After independence… • Consumption patterns changed and losses skyrocketed • Tariffs were kept low ($.0025/kWh) & discount “privileges” were maintained • Electric heating was promoted to keep total production up • Tolerance for theft and fraud grew (even discussing “theft” was taboo) and (“our people are too poor to pay”) • Byzantine offsets, opaque export transactions & complex fuel bartering developed into highly profitable sources of corruption • Technical & financial performance was allowed to deteriorate, which decapitalized the sector and adversely affected service • Reforms were adopted on paper as donor conditions: new laws, independent regulation & incorporating & restructuring Kyrgyzenergo in order to increase transparency

7. Industry & Ag load fell from 60% in 1991 to 15% in 2001;Residential load grew from 15% to 28%; Losses quadrupled -- from 11% to an astonishing 42%. Demand by customer group as % of production for domestic use, 1991 and 2001

8. The Kyrgyz Curtailments of 2008-2009

9. Toktogul HPP Cross Section and “Dead Zone” (at 5.5 bcm): Operating below dead level can damage or “crash” the plant (altitude in meters above sea level) Dead zone Level 5 500 mcm

10. Kyrgyzstan’s “Electrocardiogram”: Inflow at Toktogul has wet and dry “periods” with high variability (wet and dry years) within those periods (winter, summer & total since 1912) MCM Annual Long Term Average Summer Winter

11. Without winter 2008-09 curtailments, Toktogul could have hit Dead Zone by the end of January 09 mcm October 1, 2009 12579 January 1, 2010 (with curtailments) 10622 Actual October 1, 2008 9617 Actual January 1, 2009 April 1, 2010 8337 April 1, 2009 7807 Projected End of January (w/o curtailments) 6416 Dead Zone

12. Generation for exports in 2007 left Toktogul unable to cope with 2008’s “1 in 4” dry year

13. Exports Historical Long Term Domestic Use Toktogul inflow exceeded historical average for 9 years until 2008, but outflow was well above inflow in ’06 & ’07,mostly for excessive exports. GWh MCM Outflow Inflow Highest Volume on Oct 1

14. Cracking the Nut: The Sector’s Strategic Challenges 1- Cutting Losses2- Transparency and Sector Structure 3- Justified Tariffs and Social Protection4- Strengthen Regulator and Corporate Governance5- Transmission Security6- New Generation

15. To Ensure Reliable Supply, System Security and Sector Development • 3. “Best Practice” Development: • Least Cost System Expansion Analysis and • Investment Planning; • Use Independent Owner’s Engineer to control costs & insure quality; • Use Model Project Agreements & Contracts; • Establish a Project Escrow Account for each project with agreed “cash waterfall”. Reliable Supply System Security Development for Exports • -CHP Rebuild • ($ 500 M.) • Kara-Keche • ($ 900 M.) • -Datka+South • ($ 250 M.) • Datka-Kemin • ($ 350 M.) -Kemin-Almaty ($ 140 M.) -CASA ($ 240 M.) -Kambarata 1 ($ 3 B.) = $ 1.4 B = $600 M = $3.4 B Enabling Conditions: 1. Reverse Loss-making Financial Performance of the Sector Reduce losses by installing modern metering, information, billing & collection systems Introduce transparency mechanisms to retain cash in sector and ensure its proper use 2. Establish Economic & Institutional Basis for Growth & Investment • Strengthen Regulator • - Use & enforce Per- • formance Agreements; • - Establish & enforce • license conditions; • Establish accountable • Corporate Governance • for state owned • companies; • Justified tariffs that • cover costs, • encourage energy • saving and • attract investments • Properly targeted and • funded Social Protection

16. Total Generation Own Use (1,2%) Domestic Market Exports (16,4%) Domestic Market System Losses (8,9%) Sales to LIC Sales to DisCos Billed by GenCo Billed by DisCos Tech. Losses & Theft (36,2%) Paid to GenCo Paid to DisCos Uncollected (17,3%) In 2007 about 1 in 2 kWh generated was lost,stolen or uncollected (as reported by MIE).

17. Of $300 M potential revenue at 2007 consumption level 2¢ per kWh, $100 M is lost, stolen or uncollected. ($ million) Total Production 14.645 billion kWh Exports System Losses Losses/ Theft Domestic Market Not collected Sales to DisCos Billed by DisCos Paid to DisCos Sales to LIC Paid to GenCo Billed by GenCo

18. Within CIS, the Kyrgyz tariffs are lowest for industrial and next to lowest for residential use (residential tariffs in US cents/kWh as of July 1, 2009) 4,3 (pre January 2010 and post April 7, 2010) January and July 2010 increases, since rescinded

19. 22% of the Kyrgyz population receives state electricity subsidies (discount privileges). Of these, more than 60% are non-poor and less than 10% are extremely poor. Poverty Status of Households Receiving Electricity Subsidies Percent of Kyrgyz Households Receiving State Electricity Subsidies

20. Comparison of Employee Productivity Generation

21. Comparison of Employee Productivity Transmission

22. Reducing Losses: Tick List of Recommendations • Install Transmission Metering and Automatic Data Acquisition System (MADA) • Establish Independent MADA Operator as Data Center for Settlements • Install Distribution “Master Metering” to identify areas of high loss • Install a modern, secure billing system for entire distribution sector • Establish Loss Reduction program based on realistic loss reduction targets by RES rather than arbitrary Soviet-style one-size-fits-all targets • Issue a Management Contract for the distribution sector based on the Georgian model which was a true partnership with the Government, donors, and experienced energy company managers. (See video on UEDC in Georgia)

23. Progress to Data • ADB transmission metering program • KfW distribution metering project will include “witness” or mastering metering • Interest in knowing more about the proposed Settlement Center, and ADB is funding a study to define it

24. Transparency Mechanisms: Recommended Tick List (to Keep Money in Sector and Ensure it is Used Properly) • Establish Data Center for Settlements to operate new Metering and Automatic Data Acquisition System (MADA) that will be installed in 2011 • Hold truly competitive tenders for exports, purchase of fuels for CHP and publish results along with regional benchmark prices • Establish Escrow Account for export revenues and expenditures for CHP fuels and electricity imports • Establish easily accessible channels that provide frequent and reliable information to customers and the public throughout the country (FESTI’s Steering Committee reports) • Establish Customer Advisory Boards and Customer Service Departments in each RES • Require truly competitive tenders for all procurement of goods and services above a specified threshold and public results on websites along with regional benchmark prices • Audit procurement and accounting procedures in each company and publish results • Audit relationships with all contractors and subcontractors performing repairs, construction, or provide supplies, personnel or equipment to energy companies and publish results • Publish Financial Reports of each state-owned energy company and post on website

25. The President’s Energy Sector Transparency Initiative Presidential Decree created “FESTI” signed July 20 • 18 member Monitoring Committee composed of 6 from GOKR, 6 from energy companies, 6 from NGO’s to be selected by transparent tender • Will monitor implementation of a comprehensive program for transparency including: • Installation of modern information systems, to provide reliable and accurate information • Use of Performance Agreements, • Increased public access to information, • New regulatory procedures for tariffs and public outreach & access to information, • Competitive tenders & escrow account for exports & fuel purchases (escrow account established & now in use)

26. Tariffs and Social Protection: Recommended Tick List • Social Safety Net • - Improve both “Targeting” and “Coverage” • - Assure Funding • Cost of Service Study • - Data Collection and Analysis • - Investment Plan • - Management and Operational Audit • - Financial Audit (to determine the currentfinancial position and define “road map” to IFRS accounting system) • Develop set of Tariff Methodologies • Develop procedures for public input, comment and consultations • Through transparency and public outreach program, build confidence that tariffs are fully justified and that money will stay in sector and be used properly • Public Information Program about why tariff increases will be needed in the future; how the additional revenues will be used; how management will be held accountable

27. A Real Breakthrough in Kyrgyzstan ! • Minister of Energy has requested KEAS to work on tariff process & methodology and to help regulator start Cost of Service Study • Minister’s letter requesting us (REMAP) to undertake management audit of the energy companies as first step to determining just & reasonable • ADB has $1 m for technical assistance for NESK for financial management & Cost of Service

28. Strengthen Corporate Governance: Tick List of Recommendations • Review Corporate Charters and Regulations on Board of Directors, General Directorate and amend to strengthen accountability • Keep the Sector unbundled (Generation, Transmission & Distribution), but consider “re-bundling” the four Distribution Companies (economies of scale & eliminate cross-subsidies that undermine the incentive to improve performance) • Appoint new Boards of Directors for GenCo, TransCo, (re-bundled?) DisCo and hold them accountable for Corporate Governance, compliance with license conditions and results under the Performance Agreement. • Consider putting Distribution under 2-3 year Management Contract (using the Georgian model).

29. Strengthen the Regulator: Recommended Tick List • Adopt, monitor and enforce Performance Agreements for each state-owned company • Revise Licensing Regulations • Issue and enforce new licenses that include pre- and post-license conditions • Adopt Internal Guidelines on confidential information for Ministry and Regulator to allow publication of more information • Amend laws to reestablish a strong and more independent Regulator • Adopt a complete set of regulatory procedures to increase transparency, public input to decision making, and investor confidence (debt or equity) • Invest in significant capacity building to enhance analysis and credibility and therefore independence of the Regulator.

30. Another Breakthrough • Performance Agreements are being negotiated this week between the Ministry/Regulator and the Distribution Companies and the President wants them signed by Nov 30.

31. “Best Practice”for Least Cost Sector Development: Tick List of Recommendations • Conduct a Least-Cost Analysis for Sector Development and prepare prioritized investment plan (and feasibility studies for Kam 1, Kara Keche, and Bishkek CHP) • Use truly open, competitive tenders for all new investment projects • Use model (international standard) Project Agreements and Contracts to protect public interest • Hire independent Owner’s Engineer to oversee project design and construction, to control costs and to insure quality of construction and equipment • Establish a Special Escrow Account for each new project with an agreed “cash waterfall” • Establish Electricity Sector Revenue Account in Treasury to accumulate and track all sector related revenues(taxes, dividends, lease fee and etc.) due to GoKR

32. Getting a handle on the region’s Big Picture requires getting a good picture of each country’s energy sector and its energy-water “nexus” from both its perspective as well as ours • Country briefings to be completed & compiled • Review & summary of previous studies of relevance (as we did for KEAS’s “REMAP Bible”) • Focused news monitoring • Meetings, meetings, meetings • Regular reporting on content of The Black Books

33. Kyrgyzstan’s High-Voltage Transmission Grid