Uch-Kurgan Hydropower Plant Modernization Project (RRP KGZ 49240-002) SECTOR ASSESSMENT (SUMMARY): ENERGY Sector Road Map 1. Sector Background, Performance, Problems, and Opportunities 1. The Kyrgyz Republic is rich in renewable energy resources, and almost 100% of the population is connected to the electricity grid. In 2015, 85% of the country s total electricity generation came from hydropower (Norway 96%, Canada 57%, world 16%) with a share of 3,068.5 megawatts (MW) out of 3,920 MW in total installed capacity. 1 The remaining electricity production comes from the two combined heat and power plants (CHPs): Bishkek and Osh. Hydropower is concentrated in the Naryn River cascade 5 large power plants with a total installed capacity of 2,870 MW. However, the untapped technically feasible hydropower potential is estimated to be about 18,000 MW. The total primary energy supply, a substantial part of which is used by the transport sector, is dominated by fossil fuels: oil (40.7%), coal (28.3%), natural gas (5.8%), and hydropower (24%). The country depends on gas from the Russian Federation s Gazprom; oil and oil products from Kazakhstan and the Russian Federation; and coal partially from Kazakhstan, mainly in the winter months to operate the Bishkek and Osh CHPs for heating. 2. The country has not benefited from low-priced solar and wind power or battery-based power storage solutions because locally it lacks access to these technologies. Although the capital city, Bishkek, suffers from power loss and lack of heating in winter, rooftop solar power or solar thermal technologies that could easily supplement winter heating are not in use. So while the country has excess electricity and maintains its status as cheap exporter of electricity, it imports close to a $1 billion of oil products for the transport sector. A large-scale adoption of electric vehicles would allow to use excess electricity (in summer) in lieu of the imported oil for the cars, buses, and trucks in the country. A growing number of Kyrgyz citizens is switching to electricity for space heating because electric heaters are a cheaper solution thanks to low electricity tariffs, that sometime causes short-term (in winter) power shortages. The capital of Bishkek has been piloting solar thermal technology for water and space heating, which could be scaled up to reduce summer energy demand from residential customers. 3. Overall, the Kyrgyz energy sector is characterized by (i) old assets operating beyond their economic life; (ii) poor supply reliability and service quality; (iii) a recent substantial increase in household consumption because of fuel switching; (iv) power shortages, especially in winter; (v) inadequate capital and operation and maintenance spending; (vi) low cost recovery; and (vii) inefficient energy use by consumers. 4. Renewables. The national share of renewable energy, excluding large hydropower, is negligible. The Kyrgyz Republic has good potential for solar power, with 2,100 2,900 annual sunshine hours and direct normal irradiation of 1,600 2,000 kilowatt-hours per square meter per annum (kwh/m 2 a) in the Naryn and Issyk-Kul regions, and 1,600 kwh/m 2 a around Bishkek. 2 The technical capacity for small hydropower plants from more than 200 mountain rivers and several larger irrigation channels is about 1,800 MW. 3 The wind power generation potential is in the lowpopulated mountainous areas, where transport infrastructure and transmission lines are limited. 1 International Energy Agency. World Energy Balances 2017. Paris; and 2017 data from and open joint-stock company Electric Power Plants (EPP). 2 World Bank Group, Energy Sector Management Assistance Program, and Solargis: http:\\globalsolaratlas.info 3 United Nations Development Programme. Renewable Energy Snapshot Kyrgyzstan. http://www.eurasia.undp.org/content/rbec/en/home/library/environment_energy/renewable-energy-snapshots.html
2 5. Fossil fuels. The Kyrgyz Republic imports oil from the Russian Federation and Kazakhstan because the modest petroleum and natural gas reserves are insufficient to meet local demand, while its vast coal reserves require production and transportation facilities. Coal reserves are estimated to be about 27 billion tons, with a proven reserve of 1.3 billion tons. In 2015, coal production was about 1,928,000 tons and coal imports totaled 1,380,000 tons. Thermal plants are the largest consumers of coal, but technological constraints force the Bishkek CHP to partially use imported coal, which operate mainly during the winter months (November March). Significant amounts of coal are burned by households not connected to the district heating network. 6. Ongoing energy sector restructuring and reform. Driven by the global trend of the late 1990s to unbundle the power sector, Kyrgyzenergo, the vertically integrated state-owned utility, was unbundled in 2001 into power generation, transmission, and distribution entities. Considering the overall small power system of the country, and given that one generation plant the Toktogul hydropower units contributes close to 40% of power generation, competition was not introduced into the generation segment. As is the case in other Central Asian countries, the Kyrgyz electricity subsector receives substantial direct and indirect subsidies, accounting for up to 3% of gross domestic product, and remains 93% state-owned. Between 2013 and 2014, with the support of development partners, a government-led initiative amended the electricity law; approved the Medium-Term Tariff Plan, 2014 2017; and appointed a regulator (State Agency for Regulation of Fuel and Energy) for tariff setting and licensing. 4 In 2015, the Ministry of Energy and Industry was abolished and the State Committee for Industry, Energy and Subsoil Use took over the function of policy making. 5 In January 2016, the National Energy Holding Company was established to manage and coordinate all the electricity companies. 7. Old assets. Most of the generation assets and the network were commissioned in the 1970s and 1980s, and 45% of the installed generation capacity is reaching its end of useful economic operation. The Toktogul hydropower plant (HPP) experienced breakdowns three winters in a row (2015, 2016, and 2017) because of dilapidated cables, transformers, and generating units. The poor condition of the transmission and distribution assets worsens this situation. The district heating assets are also in poor condition and need urgent refurbishment since 70% of steam and hot water networks are more than 25 years old. 8. Huge immediate investment needs. A regional power sector study financed by the Asian Development Bank (ADB) found that generation and transmission investments required in 2012 2022 totaled $1.9 billion for domestic needs, 40% higher if distribution is considered; or about $7.3 billion if power export projects, e.g., $3 billion for Kambarata 1 (1,900 MW), are included. 6 9. Poor supply reliability and service quality. Supply reliability (measured by frequency and duration of outages) and service quality (fluctuations in voltage, frequency, or harmonics that can damage equipment) are likely to worsen as a result of old equipment. Distribution companies reported 15 16 outages per day on average in the 2015/2016 and 2016/2017 winter months. 7 Emergency shutdowns of transmission and distribution facilities also occur regularly to avoid overloading key equipment. 4 Government of the Kyrgyz Republic. Order no. 299. 2013. Action Plan for Reforming the Energy Sector 2013 2014. Bishkek. 5 Government of the Kyrgyz Republic. 2015. About Organization Measures in Connection with New Structure of the Government of the Kyrgyz Republic. Bishkek (Resolution no. 768); and Government of Kyrgyz Republic. 2016. On the State Committee for Industry, Energy and Subsoil Use of the Kyrgyz Republic. Bishkek (Resolution no. 373). 6 ADB. 2010. Central Asia Regional Economic Cooperation: Power Sector Regional Master Plan. Manila (TA 7558- REG). 7 Data provided by the National Energy Holding Company.
10. Substantial increase in residential consumption. The largest energy consumer (about 37%) is the residential sector: most of the buildings were constructed in the Soviet era, with low energy efficiency. Newly constructed buildings and houses are mostly using electricity for heating, causing a 67% rise in overall residential consumption. 11. Water energy nexus dictates power trade. Intergovernmental agreements for water releases are negotiated yearly between the neighboring countries. The Toktogul reservoir provides a multiyear storage facility for irrigation in downstream countries. The excess energy in summer is exported to Kazakhstan, Tajikistan, and Uzbekistan. In winter, with limited water and three times the summer demand, oil, coal, and gas are imported to fuel the CHPs. Trade in electricity is therefore interconnected with water release agreements and varies year-to-year. 12. Dependency on regional transmission lines and Central Asian Power System. Under the former Soviet Union, the five Central Asian republics were part of the Central Asian Power System (CAPS), which was designed to facilitate seasonal power and water exchange. The Kyrgyz Republic is an important member of CAPS, being the largest net exporter (on average 1,600 gigawatts-hours since 2007) and provider of frequency regulation services from Toktogul HPP. In 2015, the Kyrgyz Republic commissioned the Datka Kemin transmission line, which has significantly reduced the country s reliance on CAPS. 13. Inadequate capital expenditure on operation and maintenance. New capital expenditure and preventive maintenance lacks funding because of low cost recovery. In 2014, only about 68% of the cost of generating, transmitting, and distributing power was recovered from customers, although this rate improved to 93% in 2017 thanks to tariff increases and more exports. Power sector deficits also fell from Som9.3 billion (2015) to Som1.5 billion (2017). 8 14. Tariff reform. The government planned to gradually increase the weighted average tariff to Som1.67/kWh by 2017 in accordance with the Medium-Term Tariff Plan, 2014 2017. 9 Effective 1 August 2015, the residential tariff was raised by 10% to Som0.77 per kwh, and from 22 June 2017 to Som2.16 per kwh for consumption above 700 kwh, while the commercial consumer tariff is set at Som2.24 per kwh. The government is preparing the tariff plan for 2018. 15. Central Asia Regional Economic Cooperation program. The Kyrgyz Republic is an active participant in the ADB-supported Central Asia Regional Cooperation (CAREC) program. 10 The Central Asia South Asia Regional Electricity Markets, or CASAREM, is an initiative within the CAREC framework for regional cooperation between countries in Central Asia and South Asia. Within the CAREC framework, both ADB and the World Bank, as the key development partners, have invested in CASAREM projects TUTAP, 11 TAP, TAPI and CASA 12 to meet the growing energy demand in Afghanistan and Pakistan by using power imports from Central Asia. Some of these projects are being planned, others are under implementation and, based on the current 8 World Bank. 2018. The State of the Kyrgyz Energy Sector. Washington DC. 9 Government of Kyrgyz Republic. Decision number 650. 2014. On the Issues of State Agency on Regulation of the Fuel and Energy Sector of the Kyrgyz Republic. Bishkek. Government of Kyrgyz Republic. Resolution number 660. 2014. Medium-Term Tariff Plan for 2014 2017. Bishkek. 10 The CAREC program is a partnership of 11 countries and 6 multilateral institutions working to promote development through cooperation that leads to accelerated economic growth and poverty reduction. 11 Financed by ADB, TUTAP stands for Turkmenistan, Uzbekistan, Tajikistan, Afghanistan, Pakistan power interconnection, i.e., Afghanistan and its contiguous countries. 13 Financed by the World Bank, CASA stands for Central Asia South Asia power interconnection.
4 schedule, will be completed by 2025. Cross-border cooperation is an essential element of ADB s energy strategy for this region. Regional interdependency is dictated by geographical allocation of resources and strategies used by the central planners of the former Soviet Union to design and develop those resources. 2. Government s Sector Strategy 16. The government s 40 Steps to Prosperity program, approved by the Kyrgyz Parliament on 26 August 2017, aims to implement 40 top-priority steps within a 5-year period to improve people s lives and is considered the first stage of the future development strategy of the country until 2040. It states that the energy sector should fully meet the growing demand of the residential and business population, and highlights (i) initial development of energy infrastructure with a focus on increasing energy efficiency and developing noncarbon energy; (ii) financial recovery of energy sector and capital investments in the construction and rehabilitation of energy assets; (iii) development of information technologies such as smart meters, remote control systems, and single billing center; (iv) power transmission infrastructure to export electricity and attract private investments for the construction of new generation assets, and renewable energy resources; and (v) preparation and implementation of a tariff policy. At present, the government is developing the Concept of Development of Fuel and the Energy Sector of the Kyrgyz Republic for 2017 2030. 3. ADB Sector Experience and Assistance Program 17. ADB s experience in the Kyrgyz energy sector comprises the Power and District Heating Rehabilitation Project (approved in 1996), Power Sector Improvement Project (2010), Power Sector Rehabilitation Project (2012), Toktogul Rehabilitation Phase 2 Project (2014), and Toktogul Rehabilitation Phase 3 Project (2016). 18. ADB supports the government s strategy to improve the performance of the energy sector, given the strong link between efficient and reliable energy supply and economic and social development. ADB s strategy is to build on the current portfolio and focus on the electricity subsector, where the greatest impact on poor households can be realized. ADB s assistance program during the country partnership strategy period (2018 2022) will be designed to meet the following objectives: (i) Improve energy supply and system performance for domestic customers. Rehabilitate existing and/or build new assets in generation, transmission, and distribution. (ii) Expand renewable energy portfolio. Explore solar and wind power (on and off the grid), including projects involving rooftop solar and floating solar in reservoirs. (iii) Explore energy efficiency and new technology options for energy security. Pilot battery-based storage, seasonal storage, and electric vehicles for scale-up. (iv) Improve sector financial performance. Introduce business systems and management reforms to improve financial results and supply quality, and reduce commercial losses. (v) Implement tariff reform. Assist the government and/or regulator in implementing a medium-term tariff plan that reflects the cost recovery level while protecting poor and vulnerable customers. (vi) Maintain effective donor coordination. Through the donors working group (cochaired by ADB) and the CAREC Energy Sector Coordinating Committee, ensure effective donor coordination on sector investment and provision of sector policy advice.
5 Problem Tree for Energy Sector Effects Fewer economic opportunities energy security Missed opportunities for energy trade and regional cooperation Core Problem Resource deficient energy future Causes Technical Constraints Slowly deteriorating Naryn River cascade power generation capacity Financial Constraints Inadequate income, lack of financing for new capital expenditures and O&M Institutional Constraints Inefficient financial and operational performance, human resources, systems and processes, governance and Subcauses management. Old equipment operating beyond economic life Poor supply reliability and service quality multiyear water storage capacity of Naryn cascade Dredging at operational gates Reliance on hydropower, which is seasonal High commercial losses Low tariff causing customers to switch from other energy uses Weak human resource capacity Weak sector planning and forecasting Uch-Kurgan plant operating beyond economic life O&M = operation and maintenance. output based on water release agreements Recent substantial increase in household consumption because of fuel switching Inefficient billing and metering systems Low cost recovery because of low tariff Lack of commercial equity and debt financing Unsustainable (direct & indirect) subsidies Inefficient organizational structure energy trade Weak regulatory capacity Legend: Addressed by the project Addressed by ongoing ADB projects and other development partners