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Viewing cable 09ASTANA1373, POWERING AFGHANISTAN: CONSIDERING THE CONTRIBUTION OF

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Reference ID Created Released Classification Origin
09ASTANA1373 2009-08-11 06:07 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Astana
VZCZCXRO9325
OO RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
RUEHKW RUEHLA RUEHLH RUEHLN RUEHLZ RUEHNEH RUEHNP RUEHPOD RUEHPW
RUEHROV RUEHSK RUEHSL RUEHSR RUEHVK RUEHYG
DE RUEHTA #1373/01 2230607
ZNR UUUUU ZZH
O 110607Z AUG 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6001
INFO RUCNCIS/CIS COLLECTIVE 1830
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1198
RUEHKO/AMEMBASSY TOKYO 1900
RUEHUL/AMEMBASSY SEOUL 0859
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1385
RUEKJCS/SECDEF WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEHAST/USOFFICE ALMATY 1780
UNCLAS SECTION 01 OF 05 ASTANA 001373 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/CARC, EEB/ESC 
STATE PLEASE PASS TO USTDA 
 
E.O. 12958: N/A 
TAGS: ENRG PGOV ECON EAID EINV KZ AF ZK
SUBJECT:  POWERING AFGHANISTAN:  CONSIDERING THE CONTRIBUTION OF 
CENTRAL ASIA TO STABILITY AND GROWTH 
 
REF:  (A) ASTANA 0251 
      (B) ASTANA 0419 
 
ASTANA 00001373  001.2 OF 005 
 
 
1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
2.  (SBU) SUMMARY:  Reliable, affordable electricity is vitally 
important to Afghanistan's economic growth, prosperity, and 
stability.  Donors are investing substantial resources in 
Afghanistan to build a power transmission and distribution 
infrastructure.  Using this infrastructure to satisfy demand remains 
a challenge and a substantial increase in supply is required. 
Options include building new generation in Afghanistan to exploit 
viable natural gas, coal, and hydroelectric potential, but 
Afghanistan-based generation will likely be insufficient, especially 
in the near-term, to satisfy demand.  Central Asia appears to 
represent a viable near-term option to supply Afghanistan. 
 
3.  (SBU) In the long-term, Central Asian power should enjoy a 
cost-competitive position for exports to Afghanistan, and possibly 
other South Asian markets.  There are challenges to realizing this 
potential.  USAID advisors in Central Asia believe that USG emphasis 
on accelerated development of the CASA-1000 project to bring 
Tajikistan and Kyrgyzstan generation to Afghanistan and Pakistan 
exacerbates these challenges, and is based on inadequate analysis of 
the financial viability and political risk of the project.  A 
thorough analysis is accessible via OpenNet at the following 
address: 
 
http://intranetcar.ee.usaid.gov/Home/ 
Almaty-Offices/Economic-Growth/Resources---Li nks/ 
Powering-Afghanistan---- 
The-Contribution-of-Centra.aspx. 
 
END SUMMARY. 
 
AFGHANISTAN'S POWER SECTOR INFRASTRUCTURE 
 
4.  (SBU) Afghanistan lacks sufficient domestic generation capacity 
to meet demand, and relies on limited (and subsidized) imports from 
Turkmenistan, Uzbekistan, and Tajikistan, and on costly donor-funded 
diesel generation plants.  Only about a third of households in Kabul 
enjoy electricity service.  Service in other urban areas is less 
common, while electricity service in rural areas is virtually 
unknown. The Afghanistan and U.S. governments, multi-lateral 
development banks, and other donors put a high priority on 
developing the power sector.  Electricity generated or imported has 
increased from 500 million kilowatt hours (kWh) in 2004 to 1.57 
billion kWh in 2008 and the number of electricity customers has 
increased by almost 280% in the last six years. 
 
5.  (SBU) A major obstacle to expanding coverage is the poor 
financial performance of Afghanistan's nascent power institutions. 
To ensure long-term sustainability, the U.S. Government is working 
with the Afghanistan Government to improve the sector's commercial 
performance and build the capacity of Afghans to govern, manage, and 
maintain their electricity systems. The U.S. Government is assisting 
in expanding domestic generation.  When these projects are 
completed, the total grid-connected installed capacity in 
Afghanistan should exceed 500 MW, still far short of the estimated 
1000 MW potential demand that an expanded and reinforced Afghanistan 
North East Power System (NEPS) might serve. 
 
POWER FROM UZBEKISTAN 
 
6.  (SBU) Turkmenistan, Uzbekistan, and Tajikistan have stated their 
willingness to promote stability in Afghanistan by supplying 
electrical power.  Uzbekistan has considerable potential to supply 
Afghanistan with relatively low-cost power, drawing on its 
substantial natural gas reserves.  Uzbekistan has agreed to supply 
up to 70 MW to cover Mazar-e-Sharif and parts of Kabul.  The recent 
completion of a single-circuit 220 kV interconnection enables 
 
ASTANA 00001373  002.2 OF 005 
 
 
Uzbekistan to expand the supply to 150 MW.  A second 220 kV 
interconnection will double this transmission capacity. 
 
POWER FROM TURKMENISTAN 
 
7.  (SBU) Turkmenistan's potential to provide electric power to 
Afghanistan relies on its abundant reserves of natural gas.  Current 
supplies to Afghanistan are limited, via a 110 kV line supplying 
approximately 25 MW to Herat.  Turkmenistan and Afghanistan, with 
U.S. Government help are discussing a new dedicated 500 kV line to 
connect Turkmenistan generation to NEPS at Andkhoy, with a potential 
initial supply of up to 300 MW from a new gas-fired plant.  The 
discussions are still at the exploratory stage, however, and have 
not yet included a discussion of price. 
 
POWER FROM TAJIKISTAN 
 
8.  (SBU) Tajikistan has enormous potential for hydroelectric 
generation, with about 4000 MW installed, and moderate new capacity 
under development.  Tajikistan also has some coal-fired generation 
potential.  Tajikistan currently endures winter shortages and forced 
rationing, however, due to a combination of seasonal fluctuation in 
hydroelectric power availability, the significant load represented 
by TALCO, the country's Soviet-legacy aluminum smelter, and its 
reliance on erratic power supplies from neighboring Central Asian 
countries during peak winter demand.  Despite its potential, new 
capacity development in Tajikistan is constrained by financing 
uncertainties and regional water-sharing disputes, with downstream 
Uzbekistan strongly opposed to new large hydroelectric development 
that doesn't consider its water-security concerns. 
 
POWER FROM KYRGYZSTAN 
 
9.  (SBU) Kyrgyzstan's energy endowments are similar to 
Tajikistan's.  Kyrgyzstan also has viable coal deposits.  Like 
Tajikistan, Kyrgyzstan suffers from severe winter power deficits. 
New hydro-electric development in Kyrgyzstan faces similar 
challenges to those in Tajikistan. 
 
POWER FROM KAZAKHSTAN 
 
10.  (SBU) Kazakhstan possesses approximately 17,000 GW of installed 
capacity, the majority of which is lignite-fired and located in 
Kazakhstan's north.  Remaining thermal generation capacities in the 
south rely on rail deliveries of Kazakhstan lignite.  Domestic 
generation capacity in Kazakhstan's southern districts is 
insufficient to meet the demands of its largest load centers. 
Kazakhstan imports power from Kyrgyzstan, and relies on limited 
volumes of power that can be delivered from northern Kazakhstan via 
the 500 kV line connecting northern Kazakhstan generation capacities 
with the Central Asian Power Grid (CAPG) via Almaty. 
 
CASA-1000 - PROS AND CONS 
 
11.  (SBU) CASA-1000 is envisaged as the first phase in a 
prospective "Central Asia - South Asia Regional Electricity Market", 
or CASAREM, in which Central Asia would supply power to South Asian 
markets, including Afghanistan.  CASA-1000 would link Tajikistan 
with northern Pakistan via a 500 kV DC transmission line, with the 
capacity to transmit up to 1000 MW of power from Central Asia to 
Peshawar via Afghanistan.  The Afghanistan power system would draw 
up to 300 MW at an intermediate point along the line via a DC to AC 
converter station.  Power would be supplied during periods of 
generation surpluses in Tajikistan and Kyrgyzstan. 
 
THE CASE FOR CASA 
 
12.  (SBU) Proponents of CASA-1000 argue it would provide Tajikistan 
and Kyrgyzstan with higher revenues from hydroelectric generation 
than they currently earn under existing arrangements for power sales 
within Central Asia.  CASA-1000 thus would stimulate investment in 
 
ASTANA 00001373  003.2 OF 005 
 
 
Central Asian generation. 
 
UNDERMINED BY UNREALISTIC ASSUMPTIONS 
 
13.  (SBU) However, USAID's Central Asia advisors believe the 
CASA-1000 project makes a number of unrealistic assumptions, 
including the following:  (1) that Pakistan is a credible market for 
Central Asian power that the CASA-1000 line would deliver; (2) that 
the CASA-1000 line's security can be reliably assured; and (3) that 
Kyrgyzstan and Tajikistan will be able to supply at least 2 TWh and 
3 TWh per year, respectively. 
 
MARKET AND PAYMENT RISK 
 
14.  (SBU) The ability of Afghanistan's power companies, and their 
customers, to pay the full cost of consumed power is currently very 
limited.  Based on discussions USAID advisors have held with 
power-sector representatives in Central Asia, concern for the 
prospect of non-payment by Afghanistan is significant, is likely to 
constrain investment in new plants and would jeopardize the dispatch 
of power to Afghanistan if large arrearages accumulated.  Pakistan 
has a total installed capacity of about 16,000 MW, of which about 
6,000 MW is operated by Independent Power Producers (IPPs).  In 
March, local trade press reported Pakistan's single-buyer wholesale 
customer for IPP-produced power had arrearages to Pakistan's IPPs of 
over $2 billion, despite the IPPs' low contract price of about 
$0.05/kWh, according to Pakistan's Water and Power Development 
Authority.  Pakistan's IPPs have begun taking generation off-line in 
response. 
 
15. (SBU) Since the market in Central Asia, especially Kazakhstan, 
is supply constrained, it is likely that Kyrgyzstan and Tajikistan 
would seek a price beyond the ability of CASA-1000 and the Pakistan 
market to pay.  Kyrgyzstan sells summer electricity to Kazakhstan at 
$0.046/kWh as part of their annual water release agreement.  We can 
expect that Tajikistan will seek to export its power on similar 
terms.  Given the financial crisis in the Pakistan power sector and 
the cost of exporting Kyrgyzstan or Tajikistan power via CASA-1000, 
investment in infrastructure that relied on a paying Pakistan buyer 
would seem imprudent, if based solely on commercial considerations. 
 
PHYSICAL SECURITY RISK 
 
16.  (SBU) The risk of sabotage against power infrastructure in 
Afghanistan appears likely to remain for the foreseeable future.  As 
against market or payment risks, financial guarantees will be 
required to satisfy would-be investors in any commercially 
structured supply arrangement. The proposed CASA-1000 line would 
traverse very inhospitable territory, with its Pakistan terminus in 
the Federally Administered Tribal Areas near Peshawar.  The physical 
security of a high-voltage transmission line stretching several 
hundred kilometers would be very difficult to ensure.  This risk 
would deter investment based on commercial considerations, or result 
in high costs and the need for complicated and costly insurance. 
 
17. (SBU) CASA-1000's initial financial models assumed that 
Kyrgyzstan and Tajikistan would have sufficient surplus capacity to 
provide power to energize the CASA-1000 line and supply up to a 
combined 5 TWh per year, during peak summer months.  USAID and World 
Bank advisors have independently concluded that such supply 
estimates are based on optimistic assumptions.  If Kyrgyzstan and 
Tajikistan together are unable to provide a combined 5 TWh per year 
for export via CASA-1000, the economic viability of the project 
becomes very questionable, as fixed transmission costs would raise 
the unit-cost of power delivered. 
 
INTERCONNECTION WITH CENTRAL ASIAN TRANSMISSION 
 
18.  (SBU) The expansion of power supplies from Central Asia to 
Afghanistan will entail the interconnection of NEPS with 
high-voltage transmission infrastructures in Turkmenistan, 
 
ASTANA 00001373  004.2 OF 005 
 
 
Uzbekistan, and Tajikistan.  The practical difficulties of 
interconnection will increase as the volume of power exported from 
Central Asia to Afghanistan increases. 
 
19.  (SBU) Currently, Turkmenistan, Uzbekistan, and Tajikistan 
provide power to Afghanistan on what is known as an "island" basis. 
With current limited volumes, the potential impact of an Afghanistan 
network fault on the stability of the exporting countries' systems 
is negligible.  However, as load increases with the completion of 
high-voltage 220 kV interconnections, Afghanistan system reliability 
becomes increasingly important. 
 
POLITICAL RISK 
 
20.  (SBU) Power exports to Afghanistan from Turkmenistan and 
Uzbekistan appear to entail no substantial domestic political risk, 
as the two exporting countries do not currently endure domestic 
supply shortages.  Moreover, both appear prepared and able to 
increase generation capacity to expand exports to Afghanistan. 
Unfortunately, the same cannot be said for Kyrgyzstan and 
Tajikistan.  Neither country currently satisfies its own domestic 
load requirements year-round, and the prospects for significant 
capacity expansion in both countries remains remote for the 
foreseeable future.  The political risks to the delivery of 
Kyrgyzstan and Tajikistan power to Afghanistan would be amplified 
under a CASA-1000 scenario.  Assuming the project's economic 
assumptions are correct, Pakistan and Afghanistan would most likely 
capture all of Kyrgyzstan's and Tajikistan's surplus hydroelectric 
power.  In addition to the likely increasing of rationing in these 
countries, it might precipitate a decision by Kazakhstan to 
disconnect from the CAPG, with repercussions for regional 
cooperation. Meanwhile, CASA-1000 would create conditions to expand 
hydroelectric capacities in Kyrgyzstan and Tajikistan.  Uzbekistan 
has vehemently opposed such investment, and government officials 
have told USAID that they have strong reservations about the 
CASA-1000 proposal for this reason, among others. 
 
THE RISKS OF CASA-1000 OUTWEIGH THE REWARDS 
 
21. (SBU) Enthusiasm for CASA-1000 appears to be waning among many 
involved in the project.  The Asian Development Bank withdrew its 
financial backing for the project earlier this year, ostensibly due 
to financing constraints and competing ADB priorities.  In internal 
ADB correspondence seen by USAID, however, ADB staff echoed many of 
the concerns outlined above.  USAID understands the World Bank is 
conducting its own due diligence of the CASA-1000 project.  In 
April, Pakistan's cabinet vetoed the Inter Governmental Agreement on 
CASA-1000 pending a comprehensive presentation of the project's 
viability by its sponsors. 
 
CONCLUSIONS AND RECOMMENDATIONS 
 
22.  (SBU) We recommend pursuing diversified options to expand power 
exports from Central Asia to Afghanistan.  Simultaneously, the 
United States government should emphasize domestic industry 
development in Afghanistan (including commercialization), and 
support sector reform and development in Central Asia to facilitate 
expanded trade in Central Asia and with Afghanistan and beyond. 
Expanded trade between Central Asia and South Asia, including 
Pakistan, could at that point be developed with a significantly 
lower risk profile and a more certain and sustainable future. 
 
THE COSTS OF CASA-1000 
 
23.  (SBU) We recommend that the United States reconsider support 
for the CASA-1000 project, pending a clear demonstration of its 
financial viability.  Further, we recommend that the U.S. government 
consider the opportunity cost of pursuing CASA-1000, in terms of 
alternative investments in options to supply power to Afghanistan, 
the relative timeliness of delivery of such supply, and the 
potential regional political and geostrategic repercussions that 
 
ASTANA 00001373  005.2 OF 005 
 
 
CASA-1000 would have.  Where mitigation of power-supply constraints 
in Pakistan is of concern, we recommend that alternative options for 
supply be compared with and evaluated against CASA-1000. Continued 
pursuit of CASA-1000 would appear to jeopardize constructive 
engagement with Uzbekistan to resolve Afghanistan's power supply 
deficit.  Uzbekistan's immediate support and commitment are more 
important to Afghanistan's energy security than the potential future 
benefits of the CASA-1000 project. 
 
THE VIABILITY OF AFGHANISTAN'S POWER SECTOR 
 
24.  (SBU) Regardless of the source of power, the key issue is the 
financial sustainability of the Afghanistan power sector. U.S. 
efforts should continue to emphasize putting the Afghanistan power 
sector on a solid footing, ensuring that the sector's revenues are 
sufficient to cover its costs, and creating the institutional 
arrangements necessary for the sector's sustainability as donor 
assistance declines.  Assistance should include support for new 
capital investments, institutionalization of commercially-oriented 
management practices operating companies, and appropriate tariff 
policies combined with effective subsidy mechanisms for the 
vulnerable.  Until domestically-generated revenues are sufficient, 
donor-funded fiscal support to the sector will remain necessary to 
cover commercially-procured power. 
 
SUPPORTING REGIONAL TRADE IN ELECTRICAL POWER 
 
25.  (SBU) The power systems of Uzbekistan, Tajikistan, Kyrgyzstan, 
and Kazakhstan are inter-connected via the CAPG.  However, this 
physical interconnection is not supported by a robust institutional 
framework governing the trade in electric power.  The USG should 
support existing initiatives to establish a regional power market 
with enhanced system dispatch efficiency and the transparent and 
non-discriminatory allocation of transmission capacities in the 
CAPG. This should be matched by efforts to resolve regional water 
disputes.  The emerging framework will make more power generated 
within the region available to Afghanistan and enhance the 
investment environment for new generation. 
 
26.  (SBU) Embassies Ashgabat, Astana, Dushanbe, Kabul, and Tashkent 
have cleared this cable.  Embassy Bishkek did not clear, but does 
not object to this cable's transmission. 
 
HOAGLAND