Challenges of Electric-Power Challenges of Electric-Power Industry ReformingIndustry Reforming

Kyrgyzstan, Bishkek Kyrgyzstan, Bishkek

June 15June 15thth, 2007 , 2007

Current conditions of power industryCurrent conditions of power industry

Power industry is not financially sustainable, does not provide required Power industry is not financially sustainable, does not provide required power supply.power supply. Growth of emergency outages: Growth of emergency outages: 1999 - 8000, 2000 - 10000 , 2001 - 13000. 1999 - 8000, 2000 - 10000 , 2001 - 13000. 20062006 – electric power losses in REC- – electric power losses in REC-38% (3,8 38% (3,8 bln. kWt/hbln. kWt/h). ). Whilst energy output -Whilst energy output - 3,9 3,9 bln. Som, received 3 bln. som (79%). bln. Som, received 3 bln. som (79%). Accounts receivable as of Accounts receivable as of 2006 2006 has been increased on has been increased on 474 474 million Som million Som (17%). (17%). Losses during 4 months of 2007 are equal to Losses during 4 months of 2007 are equal to 41,5%, 41,5%, including commercial including commercial losses -losses - 19% (900 19% (900 millionmillion. . kWt/hkWt/h, 560 , 560 million Sommillion Som). ). Losses of RECs JSC Losses of RECs JSC “Severelectro” – 46%, JSC “Vostokelectro” – 40%, JSC “Oshelectro – 36%, “Severelectro” – 46%, JSC “Vostokelectro” – 40%, JSC “Oshelectro – 36%, JSC “Zhalalabatelectro” – 38%. RECs have collected 64% of funds. JSC “Zhalalabatelectro” – 38%. RECs have collected 64% of funds. Indebtedness has been increased on 377 million Som (12%) over 4 months. Indebtedness has been increased on 377 million Som (12%) over 4 months. In 1996, indebtedness for RECs were equal to 482 million Som. In 2006, In 1996, indebtedness for RECs were equal to 482 million Som. In 2006, indebtedness was equal to 3 176 million Som. Over 1996indebtedness was equal to 3 176 million Som. Over 1996--2006,2006, indebtedness indebtedness has been increased on 2,7 bln Som. RECs run up a bill to electric power has been increased on 2,7 bln Som. RECs run up a bill to electric power suppliers and for transit suppliers and for transit - 5,9 bln. Som. From 2001, indebtedness was - 5,9 bln. Som. From 2001, indebtedness was increased on 5 billion Som per year. In 2002increased on 5 billion Som per year. In 2002--2005, the companies sustained 2005, the companies sustained more than 3 bln Som of losses.more than 3 bln Som of losses.Reconstruction works are implemented on 20-40%, depreciation is 70% and Reconstruction works are implemented on 20-40%, depreciation is 70% and more. more.

Problems in the sector Problems in the sector

Stagnation in conduction of reforms in energy sector;Stagnation in conduction of reforms in energy sector; Imperfect tariff policy on electric, thermal energy and natural gas; Imperfect tariff policy on electric, thermal energy and natural gas; Inefficient state social protection of consumers; Inefficient state social protection of consumers; Non-transparency of informational and financial activity of energy companies; Non-transparency of informational and financial activity of energy companies; Absence of influence mechanisms on energy monopolists (from side of consumers, Absence of influence mechanisms on energy monopolists (from side of consumers,

court system and Government); court system and Government); Energy companies got significantly behind of generally agreed standards on Energy companies got significantly behind of generally agreed standards on

technological indicators technological indicators ((specific fuel consumption, effective average of specific fuel consumption, effective average of equipment, work capacity of stations, etc.); equipment, work capacity of stations, etc.);

Absence of incentives for rational planning of energy production and consumption Absence of incentives for rational planning of energy production and consumption regimes as well as energy saving and energy efficiency;regimes as well as energy saving and energy efficiency;

Outages of power supply take place in some districts, electric power insufficiency Outages of power supply take place in some districts, electric power insufficiency leads to so-called “rotating blackout”, all signs of energetic crisis were observed;leads to so-called “rotating blackout”, all signs of energetic crisis were observed;

There was a growth of emergency outages, there is a high possibility of major There was a growth of emergency outages, there is a high possibility of major accidents; accidents;

Payment discipline is absent, payment defaults are spread; Payment discipline is absent, payment defaults are spread; Access to energy sector is closed for new independent companies.Access to energy sector is closed for new independent companies.

First steps towards the reform First steps towards the reform

To possess of political will of conduction of the reforms; To possess of political will of conduction of the reforms; Consumers, including community, have to know and Consumers, including community, have to know and

support goals of the reforms;support goals of the reforms; To create required legislative and normative base;To create required legislative and normative base; To created required institutional environment; To created required institutional environment; To introduce market methodology of formation of tariffs; To introduce market methodology of formation of tariffs; Gradual decrease of state participation and increase of Gradual decrease of state participation and increase of

private sector in development of energy system; private sector in development of energy system; Implementation of tariff policy, creating conditions for Implementation of tariff policy, creating conditions for

widened reproduction of power energy; widened reproduction of power energy;

Change of ownership form and management of energy Change of ownership form and management of energy distributing companies;distributing companies;

Taking technical and administrative measures on rapid Taking technical and administrative measures on rapid decrease of energy loss;decrease of energy loss;

Development (under active attraction of private investors) Development (under active attraction of private investors) domestic infrastructure for transportation of electric domestic infrastructure for transportation of electric power and energy carriers, which will allow increase of power and energy carriers, which will allow increase of own energy resources and to decrease their import;own energy resources and to decrease their import;

Adjustment of water use issues with neighboring Adjustment of water use issues with neighboring countries and increase of electric power export, as well as countries and increase of electric power export, as well as transfer to market principles on reciprocal payment;transfer to market principles on reciprocal payment;

Thorough analysis and use of possibilities of domestic Thorough analysis and use of possibilities of domestic production of oil products, coal and non-traditional production of oil products, coal and non-traditional energy resources. energy resources.

Goals of energy industry reformsGoals of energy industry reforms It is essential to make decisions on the following issues:It is essential to make decisions on the following issues: Gradual decrease of state participation and increase of private sector in Gradual decrease of state participation and increase of private sector in

development of energy system;development of energy system; Implementation of tariff policy, creating conditions for widened Implementation of tariff policy, creating conditions for widened

reproduction of power energy; reproduction of power energy; Privatization of energy distributing companies; Privatization of energy distributing companies; Making technical and administrative measure on rapid decrease of Making technical and administrative measure on rapid decrease of

electric power loss;electric power loss; Development (under active attraction of private investors) domestic Development (under active attraction of private investors) domestic

infrastructure for transportation of electric power and energy carriers, infrastructure for transportation of electric power and energy carriers, which will allow increase of own energy resources and to decrease their which will allow increase of own energy resources and to decrease their import;import;

Adjustment of water use issues with neighboring countries and increase Adjustment of water use issues with neighboring countries and increase of electric power export, as well as transfer to market principles on of electric power export, as well as transfer to market principles on reciprocal payment;reciprocal payment;

Thorough analysis and use of possibilities of domestic production of oil Thorough analysis and use of possibilities of domestic production of oil products, coal and non-traditional energy resources. products, coal and non-traditional energy resources.

Restructuring of energy industryRestructuring of energy industry

Figure 1. Restructuring of the sector in 2001

JSC “Kyrgyzenergo” -Vertical integrated company In electric energy industry

-

Generative capacity

National magistral electric networks and dispatcher

Operation control

Distributing networks and sale

Pre-reform conditions

Post-reform conditions

Providing company

JSC “National electric networks of Kyrgyzstan

Production company

JSC “Electric Stations”

Distributing companies

JSC “Severelectro”

JSC “Vostokelectro”

JSC “Zhalalabatelectro” -

JSC “Oshelectro”

JSC “Bishkekteploset”

Stages of energy industry reforming Stages of energy industry reforming

I.I. Asset assessment of energy sector Asset assessment of energy sector

II.II. Separation of subsidiary production and social Separation of subsidiary production and social objectsobjects

III.III. Restructuring and creation and new stock Restructuring and creation and new stock companiescompanies

IV.IV. Changing of ownership form and managementChanging of ownership form and management

Management models of energy industryManagement models of energy industry

Vertical integrated companyVertical integrated company Single buyer – competition between producersSingle buyer – competition between producers Competition of whole sale market (between Competition of whole sale market (between

producers and distributors)producers and distributors) Competition on retail market –between all market Competition on retail market –between all market

players there is an influence of consumer on all players there is an influence of consumer on all companies of energy sectorcompanies of energy sector

Background of energy industry reforms Background of energy industry reforms

Collapse of the USSR Collapse of the USSR Choice – democratic community and transition to Choice – democratic community and transition to

market economymarket economy HyperinflationHyperinflation Price increase on energy resourcesPrice increase on energy resources Transition to electric power for domestic useTransition to electric power for domestic use Lack of financial resourcesLack of financial resources Need in financial borrowings Need in financial borrowings Negotiations with international financial institutionsNegotiations with international financial institutions Incurrence of liability for international institutions. Incurrence of liability for international institutions.

Legislative and institutional baseLegislative and institutional base

Laws “On energy”, “On electric energy”, “On licensing”, “On Laws “On energy”, “On electric energy”, “On licensing”, “On antimonopoly regulation” antimonopoly regulation”

Bodies involved in energy management Bodies involved in energy management Parliament, Government, President Parliament, Government, President Foundation of the State property managementFoundation of the State property management Antimonopoly regulation body Antimonopoly regulation body Corruption control agency Corruption control agency State regulator State regulator Ministry of Labor and Social Protection Ministry of Labor and Social Protection Ministry of economic development and trade Ministry of economic development and trade Ministry of Justice Ministry of Justice Ministry of Finance Ministry of Finance State organ on technical supervision in energy sector State organ on technical supervision in energy sector Water Department Water Department

Regional cooperation Regional cooperation Decrease of loss Decrease of loss - - RKRK 9% 5843 9% 5843HWt/hHWt/h, , KRKR 11% -1392 11% -1392HWt/hHWt/h, , RTRT 15% - 15% -

19881988 HWt/h HWt/h, , RURU 10%-4064 10%-4064HWt/h, in addition, annually - HWt/h, in addition, annually - 13 287 13 287 HWt/hHWt/h Investments to decrease of loss during transfer and distributions in all four Investments to decrease of loss during transfer and distributions in all four

countries – 3 00 million US dollars.countries – 3 00 million US dollars. Rehabilitation of producing assets of Syr-Darya, Angren Hydro-Electro Rehabilitation of producing assets of Syr-Darya, Angren Hydro-Electro

Stations, Tashkent Thermal Electric Station would need Stations, Tashkent Thermal Electric Station would need 1,15 1,15 bln US dollarsbln US dollars, , generation generation - 32000- 32000 Hwt/h Hwt/h. . Ekibastuz HES Ekibastuz HES I I and and II, II, Aksu and Karaganda Aksu and Karaganda HES would need HES would need 1,070 1,070 million US dollars, will be equal to million US dollars, will be equal to 17 11817 118 Hwt/h Hwt/h. .

New projects on generation – Ekibastuz HES New projects on generation – Ekibastuz HES IIII, , Bishkek TESBishkek TESIIII, , KambarataKambarata, , KambarataKambarata IIII, , Rogunskaya HESRogunskaya HES, , Sangutdinsky HES, Talimardzhanskaya Sangutdinsky HES, Talimardzhanskaya

In four countries it is possible to increase fromIn four countries it is possible to increase from 139 139 TWt/h up toTWt/h up to 228 228 TWt/hTWt/h. . 54% 54% of additional electric energy in new stations, of additional electric energy in new stations, 16% 16% of additional electric of additional electric energy due to decrease of lossesenergy due to decrease of losses, , as well as remaining as well as remaining 30% - 30% - due to due to rehabilitation of the old generating aggregates. rehabilitation of the old generating aggregates.

Contribution of additional generation of RK Contribution of additional generation of RK -45%, -45%, RURU,, RT RT- 22% - 22% each and each and KRKR-9%. -9%.

Investments will lead to average additional costs on Investments will lead to average additional costs on 11kWt/h onkWt/h on 2,1 2,1 cent in cent in RTRT; 2,3 –; 2,3 –KRKR; 2,8- ; 2,8- RKRK; 3,5 –; 3,5 –RURU. . TotalTotal- 13 - 13 bln. US dollars for 20 years. bln. US dollars for 20 years.

Tariff policy in energy Tariff policy in energy electric power industryelectric power industry

Goal of tariff policyGoal of tariff policy

Goal of tariff policy is remaining on generation, Goal of tariff policy is remaining on generation, Целью Целью тарифной политики остается разработка, тарифной политики остается разработка, setting up setting up and implementation of economically reasonable price and implementation of economically reasonable price and tariff formation, introduction of more efficient and tariff formation, introduction of more efficient structure of tariffs and bringing them in line with real structure of tariffs and bringing them in line with real costs, as well as annual decrease of quasi-fiscal deficit costs, as well as annual decrease of quasi-fiscal deficit in electric power industry to the level recommended by in electric power industry to the level recommended by the International Monetary Fund the International Monetary Fund ((goal of the Mid-term goal of the Mid-term tariff policy on electric and thermal energy for tariff policy on electric and thermal energy for 2003-2003-2006 2006 and and 2007-2010).2007-2010).

Principles of tariff policyPrinciples of tariff policy

Fundamental principle of tariff policy is Fundamental principle of tariff policy is introduction of self-sufficiency principles of introduction of self-sufficiency principles of energy sector and lies in taking measures on energy sector and lies in taking measures on creation of investment attractive creation of investment attractive environment in energetic sector of economy.environment in energetic sector of economy.

Main principles of tariff policy:Main principles of tariff policy:

Tariffs have to reflect full cost of production, transmission and Tariffs have to reflect full cost of production, transmission and distribution of electric and thermal energy, including costs for distribution of electric and thermal energy, including costs for exploitation and technical services, as well as compensation of invested exploitation and technical services, as well as compensation of invested capital;capital;Tariffs for each group of consumers have to reflect all costs for electric Tariffs for each group of consumers have to reflect all costs for electric and thermal supply on that category of consumers; and thermal supply on that category of consumers; Existing cross-subsidizing from one group of consumers into the other Existing cross-subsidizing from one group of consumers into the other group should be gradually excluded; group should be gradually excluded; Subsidies should be devoted to the consumers (community) with low Subsidies should be devoted to the consumers (community) with low level of income through programs of social protection;level of income through programs of social protection;Minimal volume of energy consumption for provision with vital needs Minimal volume of energy consumption for provision with vital needs with taking into consideration of electric food making has to stay in with taking into consideration of electric food making has to stay in limits up to limits up to 150 150 kWt/h per month and all other benefits should be kWt/h per month and all other benefits should be reconsidered or called off reconsidered or called off ((principle of Basing tariff policy on electric principle of Basing tariff policy on electric and thermal power energy for and thermal power energy for 1998-2000)1998-2000)..

   Prognosis Prognosis FactFact

Generation, kW/hGeneration, kW/h 100 100

100 100

100 100

Loss level,Loss level, % % 22%22% 42%42% 42%42%

SaleSale, , kW/hkW/h 78 78

58 58

58 58

TariffTariff, , SomSom//kWhkWh 0,62 0,62

0,83 0,83

0,62 0,62

IncomeIncome, , SomSom 48,36 48,36

48,36 48,36

35,96 35,96

CostsCosts, , SomSom 48,36 48,36

48,36 48,36

35,96 35,96

includingincluding         

repairsrepairs 14,51 14,51

14,51 14,51

5,51 5,51

New construction New construction 9,67 9,67

9,67 9,67

1,93 1,93

Credit repaymentCredit repayment 5,80 5,80

5,80 5,80

5,80 5,80

Income taxIncome tax 0,97 0,97

0,97 0,97

0,70 0,70

Dividends of paperDividends of paper       6,71 6,71

Existing Methods of tariff calculation for final consumersExisting Methods of tariff calculation for final consumers

At the moment, there has been implementation only of principles of At the moment, there has been implementation only of principles of exclusion of consumptions sills for community due to analysis data:exclusion of consumptions sills for community due to analysis data:

Separation of consumption on sills and setting up of different prices Separation of consumption on sills and setting up of different prices have led to distortion (manipulation) of companies’ reports and have led to distortion (manipulation) of companies’ reports and decrease of income of the company (plundering); decrease of income of the company (plundering); Деление Деление потребления на пороги и установление различных цен привело к потребления на пороги и установление различных цен привело к искажению (манипуляции) кампаниями отчетности и снижению искажению (манипуляции) кампаниями отчетности и снижению дохода кампании (хищение);дохода кампании (хищение);

Thus, plundering have led to decrease of required funds for repairs and Thus, plundering have led to decrease of required funds for repairs and replacement of energy equipment, decreasing efficiency of the replacement of energy equipment, decreasing efficiency of the industry; industry;

Social groups of community with higher level of income use sufficient Social groups of community with higher level of income use sufficient benefits. At the moment, that particular group is continuing to use low benefits. At the moment, that particular group is continuing to use low tariffs due to weakness and insufficiency of social protection. tariffs due to weakness and insufficiency of social protection.

TARIFFS

MYTH OF ENERGY INDEPENDENCY

SOCIAL PROTECTION

POLYTICAL WILL

FALSE REPRESENTATION

INCREASE OF LOSSES

DECREASE OF COLLECTION

Allegations effecting on price formation Allegations effecting on price formation in the Kyrgyz Republicin the Kyrgyz Republic

Mineral fuel deposits

Unit of measure

Kazakhstan

Kyrgyzstan

Tajikistan

Turkmenistan

Uzbekistan Total

Crude oilmillion tones 1 100 5,5 1,7 75 82 1 264,2

Gasmillion tones 1 500 5,0 5,0 2 252 1 476 5 238

Coalmillion tones 24 300 580 500

Insignific

ant 2 851 28 231

Totalmillion tones 26 900 591 507 2 327 4 409 34 733

% of Total 77,4% 1,7% 1,5% 6,7% 12,7% 100%

             

Hydro-potential HW\h/year 27 000 163 000 317 000 2 000 15 000 524 000

 Million tones/year 2,3 14,0 27,3 0,2 1,3 45,1

% of Total % 5,2 31,1 60,5 0,4 2,9 100

Kyrgyzstan can become energy independentKyrgyzstan can become energy independent

1.1. Republic possesses insignificant deposits of hydrocarbon fuel;Republic possesses insignificant deposits of hydrocarbon fuel;2.2. Demand on energy carriers can be covered by only one energy Demand on energy carriers can be covered by only one energy

resource, hydro electric energy, in particular;resource, hydro electric energy, in particular; 3.3. Republic possesses significant hydro potential, but it is only Republic possesses significant hydro potential, but it is only

used on 10%; used on 10%; 4.4. It is important to take into consideration that water resources are It is important to take into consideration that water resources are

dependant on climate conditions. There is significant time dependant on climate conditions. There is significant time repugnance between demand on electric energy and water repugnance between demand on electric energy and water regimes. regimes.

5.5. Existing energy capacity in 5-7 years would hardly cover Existing energy capacity in 5-7 years would hardly cover growing demand in domestic market;growing demand in domestic market;

6.6. Further development of hydro potential requires large Further development of hydro potential requires large investments which can not be provided by domestic resources of investments which can not be provided by domestic resources of the country. the country.

Losses dynamics of distributing companies during 2001-2005

22 22 22 21 20

37,47 35,9 35,938 38,9

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005

%

Normative Fact losses

Commercial losses include:Commercial losses include:

Unaccounted consumption of electric energy; Unaccounted consumption of electric energy; Consumers, having wrong bills or not paying fully actually Consumers, having wrong bills or not paying fully actually

consumed electric energy; consumed electric energy; Consumers, having right bills, but being careless towards their Consumers, having right bills, but being careless towards their

payments. payments.

Unaccounted consumption of electric energy includes Unaccounted consumption of electric energy includes the following: the following:

Plundering of electric energy by consumers through Plundering of electric energy by consumers through interruption of counter functions of through shift of it;interruption of counter functions of through shift of it;

Malfunctioning counters which do not register consumed Malfunctioning counters which do not register consumed electric energy by proper order;electric energy by proper order;

Plundering of electric energy through illegal connection of Plundering of electric energy through illegal connection of unregistered consumers; and unregistered consumers; and

Raising of bills and collection of payments on consumed Raising of bills and collection of payments on consumed electric energy not based on figures of the counter, but on electric energy not based on figures of the counter, but on “rate of consumption” (i.e. estimated usage depending on “rate of consumption” (i.e. estimated usage depending on accommodation area and quantity of residents.)accommodation area and quantity of residents.)

Collection of fundsCollection of funds

100%85%

33%

15%

52%

67%

0%

20%

40%

60%

80%

100%

120%bills issued

unpaid bills

paid bills

paid by mutual payment and

barter

money payment

дефицит денежных

средств

Technical conditions of electric networks 0,4-10 kW, carried on the balance of distributing companies as of 01.01.2000

Measure unit Total Good Fair Requires restoration

%

ВЛ 6-10 кВ km 26959 12163 9779 5017 19%

ВЛ 0,4 кВ km 27940 9556 10164 8220 29%

КЛ 6-10 кВ km 1387 352 577 458 33%

КЛ 0,4 кВ km 997 193 505 299 30%

Total length km 57283 22264 21025 13994 24%

Specific weight 39% 37% 24%

TP 6-10/0,4kW Units 19047 7928 7835 3284 17%

Specific weight 42% 41% 17%

Underrun comparison of fact tariff level from required level in CIS countries

3,8

2,1

43,5

2,3

1,2

0,4

3,1

1

2,3

4,1

5

3,74,1

5

3,7

0

1

2

3

4

5

6

Armen

ia

Azerb

aijan

Georg

ia

Kyrgy

zsta

n

Mol

dova

Tajik

istan

Ukrain

e

Uzbek

istan

cen

t/k

Wh

required tariff fact tariff

Executive Summary Executive Summary

Need in generation of electric energy will be increasing due to Need in generation of electric energy will be increasing due to stabilization and growth of industrial sectors and agriculture, stabilization and growth of industrial sectors and agriculture, whilst tariff control for community and agricultural consumers whilst tariff control for community and agricultural consumers on a low level and retaining of growth trend of energy losses in on a low level and retaining of growth trend of energy losses in networks and consumption by the community. networks and consumption by the community. Problem of electric energy lack can not be resolved due to Problem of electric energy lack can not be resolved due to resources of existing HES. In that case, if there is no decrease of resources of existing HES. In that case, if there is no decrease of electric energy loss that it will be required to build new hydro electric energy loss that it will be required to build new hydro electro-stations of to increase generation on TES. All listed electro-stations of to increase generation on TES. All listed measures require financial investments. Energy companies will measures require financial investments. Energy companies will have to define what is more profitable, quicker pay back period, have to define what is more profitable, quicker pay back period, ability or willingness of consumer to pay expenses. ability or willingness of consumer to pay expenses. Lack of capacity of generation can not be considered as an Lack of capacity of generation can not be considered as an argument for building of new electro stations or increase of argument for building of new electro stations or increase of generation in TES. It hardly be economically reasoned under generation in TES. It hardly be economically reasoned under existing problems in networks and current tariffs for electric existing problems in networks and current tariffs for electric energy. energy.

It is important to outline that transfer of It is important to outline that transfer of tariff reform to later terms will be less tariff reform to later terms will be less painful for the whole community, due to the painful for the whole community, due to the fact that it will require higher level for fact that it will require higher level for increase of tariffs and creation of expensive increase of tariffs and creation of expensive systems of address social protection. systems of address social protection.