VZCZCXRO0285
RR RUEHLN RUEHVK RUEHYG
DE RUEHDBU #0668/01 1020707
ZNR UUUUU ZZH
R 120707Z APR 06
FM AMEMBASSY DUSHANBE
TO RUEHC/SECSTATE WASHDC 7184
INFO RUEHDBU/AMEMBASSY DUSHANBE 8380
RUEHAK/AMEMBASSY ANKARA 1521
RUEHBJ/AMEMBASSY BEIJING 1536
RUEHRL/AMEMBASSY BERLIN 1521
RUEHBS/USEU BRUSSELS 0869
RUEAIIA/CIA WASHDC
RUCNCIS/CIS COLLECTIVE
RHEFDIA/DIA WASHINGTON DC
RHMFISS/HQ USCENTCOM MACDILL AFB FL
RHMFISS/HQ USEUCOM VAIHINGEN GE
RUEHIL/AMEMBASSY ISLAMABAD 1499
RUEKJCS/JOINT STAFF WASHDC
RUEHBUL/AMEMBASSY KABUL 1449
RUEHLO/AMEMBASSY LONDON 1476
RUEHML/AMEMBASSY MANILA 0034
RUEHNE/AMEMBASSY NEW DELHI 1449
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHFR/AMEMBASSY PARIS 1361
RUEKJCS/SECDEF WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 1292
RUEHNO/USMISSION USNATO 1509
RUEHVEN/USMISSION USOSCE 1559
RUCNDT/USMISSION USUN NEW YORK 1076
RHMFIUU/DEPT OF ENERGY WASHINGTON DC

UNCLAS SECTION 01 OF 04 DUSHANBE 000668 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EB, S/P 
NSC FOR MILLARD, MERKEL 
 
E.O. 12958: N/A 
TAGS: PGOV ECON EENG EINV AF PK TI
SUBJECT: TAJIKISTAN'S HYDRO ENERGY PRICING DILEMMA 
 
REF: A) DUSHANBE 326 B) DUSHANBE 327 
 
DUSHANBE 00000668  001.2 OF 004 
 
 
(U) Sensitive but unclassified.  Please handle accordingly.  Not 
for public Internet. 
 
¶1. (U) SUMMARY:  Tajikistan faces critical choices to increase 
its hydropower exports and streamline domestic consumption and 
production.  However, as long as the government provides 
cheap-or free-electricity, reforming the existing system will 
prove extremely difficult.  Some simple steps to reduce 
transmission and distribution losses would increase exports if 
high-voltage lines are built - in addition to the planned 
additional hydropower projects (REFTELS).  Promising 
opportunities exist for U.S. private investment in providing 
technology and expertise for the domestic and external market. 
END SUMMARY. 
 
HOW MUCH ELECTRICITY TAJIKISTAN REALLY EXPORTS~ 
 
¶2. (SBU) Tajikistan's leading export is electricity, but much of 
it is folded into exporting energy intensive aluminum. 
State-owned Tajikistan Aluminum Plant (TadAZ) was built in 
conjunction with Nurek hydropower station (HPS) during Soviet 
times and uses between 4000-5000 kWh of electricity yearly, 
accounting for one-third of domestic electricity consumption. 
TadAZ is Tajikistan's largest exporter, earning $430 million, 54 
percent of total merchandise exports, according to the World 
Bank.  Although the price TadAZ pays for electricity is a "state 
secret," according to independent local hydro energy expert 
 
SIPDIS 
Rustam Aminjanov, the World Bank estimates that by taking into 
account the wholesale cost and production taxes, TadAZ pays 
about 1.1 cents per kWh - well below the break-even cost of 1.7 
cents for the company.  TadAZ historically runs high electricity 
payment arrears, although recent accounting scandals compelled 
the government to make the company's energy payments timelier. 
TadAZ is the largest industrial employer, with 12,000 on the 
payroll. 
 
~AND WHY MUCH MORE CAN BE EXPORTED 
 
¶3. (SBU)  Building new higher voltage power lines would increase 
exports, even at current hydro energy generating levels. 
Tajikistan has few options to export excess electricity during 
summer and often sheds excess power; last year the equivalent of 
1.5 billion kWh was discharged to maintain the Nurek reservoir 
water level. The power lines leading into Afghanistan are 110 
kv, but only operate at 35 kv; this electricity currently is 
sold at 2 cents per kWh.  Poor relations with neighboring 
Uzbekistan, instigated by Tashkent, have closed export through 
the old Soviet power grid, although barter trade with the Uzbeks 
still takes place in northern Tajikistan, which is cut off from 
southern Tajikistan's grid until a proposed South-North high 
voltage line is built.  An energy consultant working with the 
World Bank calculates that the export value of this seasonal 
surplus electricity at $27- 43 million when exported for 2 or 3 
cents. 
 
¶4. (SBU) Additional electricity exports also depend on reducing 
internal theft and transmission loss, which account for 40-60 
percent of production.  Aminjanov estimates 30 percent of energy 
hookups in Tajikistan are illegal, but the government is 
ill-equipped to deter this.  Inspectors are easily bribed to 
report a lower meter reading, non-paying state factories are not 
disconnected from the power grid, and individual domestic 
consumers cannot be physically cut off from electricity for 
nonpayment due to the way the older transformer boxes are 
 
DUSHANBE 00000668  002.2 OF 004 
 
 
configured.  An energy consultant working with the World Bank 
believes the 2002 commercial and technical loss figure of 60 
percent translates to a loss of potentially exported electricity 
worth $36 - 55 million. 
 
THE HYDRO ENERGY PRICING CONUNDRUM 
 
¶5. (SBU)  Electricity in Tajikistan is considered to be a public 
good and priced accordingly.  Tariffs for electricity use are a 
paltry half a cent for individual customers per kWh and 0.8 
cents per kWh for industrial customers, although a lower rate 
holds for state-owned factories and a higher rate for 
privately-owned ones, undercutting the government's lip-service 
to promoting private-sector growth.  The individual customer 
rate is 24 percent of the "cost recovery price" when factoring 
in average transmission and distribution costs of 1.8 cent per 
kWh.  Almost 90 percent of the country's electricity is 
generated at Nurek Hydro Power Station (HPS), which produces 
electricity very cheaply at 0.3 cents per kWh.  This is because 
the investment cost was "sunk" (carried by Russia) when the dam 
was built. 
 
¶6. (SBU)  The hydro-energy pricing conundrum comes into play 
when looking at new hydropower projects, which do not carry such 
a previously "sunk" investment cost.  The World Bank estimates 
that the lowest production cost for the new planned hydropower 
plant facilities will be 2 cents per kWh at Sangtuda HPS. 
Electricity for the first-phase Rogun HPS has an estimated 
production cost of 2.5 cents per kWh and after the second phase 
2.8 cents per kWh.  The cost recovery price when taking in 
transmission and distribution costs would then be the cheapest 
at 3.8 cents per kWh - placing demand for this power primarily 
into the export market, if the government does not subsidize 
production.  (COMMENT:  REFTELS include a comprehensive overview 
on pending hydropower station investments and the key players. 
END COMMENT.)  The World Bank indicates it is economically 
feasible for Pakistan to pay between 5 to 6 cents per kWh for 
Tajik electricity. 
 
WHAT NEEDS TO BE DONE TO FIX SUPPLY AND DEMAND~ 
 
¶7. (SBU)  A comprehensive financial recovery plan for 
electricity production, pricing, transmission, and distribution 
would go a long way to fixing the electricity sector's woes. 
Seasonality is a huge issue for Tajikistan and causes severe 
electricity rationing in the winter months, and is exacerbated 
by the large water release needs for agriculture.  The World 
Bank believes building Rogun HPS could alleviate-but not 
solve-the seasonality issues by regulating water flow upstream 
of Nurek HPS.  In addition, during an April 6 meeting, visiting 
World Bank economist Raghuveer Sharma pointed out that export 
revenue from Rogun HPS could pay for winter electricity imports. 
 Moreover, Sharma indicated Tajikistan has good quality coal 
that could be used to produce thermal power during the winter. 
(NOTE:  PolOff's meeting was delayed due to a last-minute 
teleconference Sharma had with RAO UES, which just has asked for 
an $150 million World Bank credit for Sangtuda I HPS 
construction.  END NOTE.) 
 
¶8. (SBU) At a minimum, pricing needs to be set at the 
cost-recovery level to include investment in the entire 
electricity network to reverse asset deterioration.  Sharma 
notes that the switch platform at Nurek HPS is slowly sinking, 
and transformers throughout the electrical grid are weakening 
from lack of repair.  Most urban areas have a single outdated 
 
DUSHANBE 00000668  003.2 OF 004 
 
 
electrical box to distribute power to several apartment 
buildings.  The majority of the boxes are completely worn out 
and must be replaced, according to Aminjanov. 
 
¶9. (SBU) Cost recovery pricing includes tariffs optimizing 
domestic consumption and streamlining industrial use while not 
penalizing private businesses.  Because the majority of the 
population pays only a nominal charge and collection is not 
stringently enforced, there is little incentive to conserve 
electricity.  The tariff pricing mechanism is three-tiered: 
average citizens pay the least, state-owned industries pay a 
higher rate, and private industries pay the highest fees.  This 
inverted pricing structure encourages wasteful consumption by 
ordinary consumers - e.g., the Soviet-era habit of turning on 
the TV when getting up in the morning and leaving it on until 
one goes to bed - subsidizes inefficient state-owned industries 
that produce unneeded and unwanted goods, and dampers legitimate 
private business ventures. 
 
~IS HINDERED BY THE POLITICAL REALITY OF HYDROPOWER 
 
¶10. (SBU) Political considerations color the hydroenergy pricing 
dilemma.  Tajikistan has few natural resources, but cheap 
electricity is one thing the government can offer its citizens. 
President Rahmonov is unlikely to make radical changes to the 
pricing structure this election year because building large new 
infrastructure projects, such as hydropower stations, represents 
a cornerstone of his economic policy.  During an April 7 PolOff 
meeting with Barqi Tojik, the state-owned energy monopoly, it 
was clear tariff pricing does not correlate with production, 
transmission, or distribution costs - all final pricing 
decisions are made within the Ministry of Energy and higher up - 
i.e., within the Presidential circle. 
 
¶11. (SBU) COMMENT:  An increase in electricity tariffs also 
would not likely help upgrade the electricity infrastructure or 
provide more state incomes to help the poor.  The mounting 
corruption levels in Tajikistan widen income inequalities and 
push back the nascent middle class.  The scale of the new power 
projects - and the competing interests of potential 
international investors - opens the door to even greater graft. 
In the meantime, severe seasonal power outages hinder economic 
progress because private small and medium-sized private 
enterprises cannot run without electricity. 
 
¶12. (SBU) COMMENT CONTINUED:  Hydropower is a crucial component 
of Secretary Rice's Infrastructure Integration Initiative for 
Greater Central Asia.  Increased exports of Tajik electricity 
would benefit first Tajikistan and then Afghanistan, Pakistan, 
and potentially even India.  American investment in the sector 
would help bring transparency and encourage market principles 
if, in particular, high-voltage power lines for export are 
built.  There also are opportunities for American investment in 
the domestic market in technology and expertise to upgrade 
transformers in residential communities, assuming Russia does 
not dominate the entire energy sector before U.S. firms can get 
a toehold. 
 
¶13. (SBU) COMMENT CONTINUED:  However, Russian energy 
monopolies, as a matter of Kremlin foreign policy, are well on 
their way to so dominating Tajikistan's energy sector that 
Dushanbe risks becoming a neo-Soviet satellite state.  In 
principle, many intelligent and well-informed Tajiks are aware 
of this threat to their sovereignty, but do not know how to 
counter the snout-in-the-trough greed in high levels of the 
 
DUSHANBE 00000668  004.2 OF 004 
 
 
Tajik government.  It seems to us that Moscow appears to abet 
this corruption.  More high-level U.S. government engagement 
with the Tajiks could help Dushanbe better comprehend the nexus 
of world-standard energy policy and sovereignty.  END COMMENT. 
HOAGLAND