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INFO RUEHTH/AMEMBASSY ATHENS 1703
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UNCLAS SKOPJE 001117 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT PLS PASS TO USAID 
 
E.O. 12958: N/A 
TAGS: ENRG ECON EINV EAID MK
SUBJECT: MACEDONIA: GOM FACING POTENTIAL POLITICAL FALLOUT 
FROM ELECTRICITY SHORTAGES 
 
Summary 
-------- 
¶1. (SBU)  Macedonia,s new government faces several critical 
challenges in the electricity market.  In the short-term, the 
supply of available electricity may not be sufficient to meet 
demand this winter.  In addition, the newly privatized 
electricity distribution company is beginning to enforce 
payment by customers -- including individuals, businesses and 
government offices -- who have become accustomed to not 
paying for electricity.  Both developments could create 
political fallout for the GOM.  In the longer term, Macedonia 
will need to boost investment in its electricity 
infrastructure to enable the privatized distribution company 
to provide a reliable power supply at a reasonable cost to 
consumers.  End summary. 
 
Electricity Supply And Demand 
----------------------------- 
¶2. (U)  The state-owned Macedonian power generation company 
ELEM produces 75 to 80 percent of the electricity consumed in 
the country.  The majority of that electricity is produced by 
five aging lignite coal power plants.  Eight hydroelectric 
plants also produce electricity.  The state-owned electricity 
transmission company, MEPSO, imports the balance of the 
electricity needed.  Demand is highest in the winter, since a 
large share of households and businesses heat their buildings 
with electricity. 
 
¶3. (U)  The state also owns a back-up fuel oil power plant 
near the town of Negotino that is costly to operate and is 
used only when other sources are insufficient to meet demand. 
 The Negotino plant can produce up to 210 megawatts daily, a 
significant amount, but not enough to cover the gap between 
other domestic production and demand.  In past years, this 
mix of imported electricity and domestic generation, with the 
extra supply from the Negotino plant, has provided sufficient 
electricity for Macedonia in past years. 
 
Enough Electricity This Winter? 
------------------------------- 
¶4. (SBU) This winter, however, Macedonia may not have enough 
electricity to meet demand, especially after January 1, 2007. 
 Due to its limited financial resources, MEPSO had secured 
only relatively short-term contracts to import electricity 
through the early part of 2007.  MEPSO opened a tender in 
September to purchase additional contracts of imported 
electricity for January to April 2007, but so far has been 
able to secure only about a third of the electricity it 
sought.  Local energy experts predict the regional supply of 
available electricity will be low this winter due to 
increased demand in nearby countries, and that regional power 
supplies will be reduced by the impending closure of a 
Bulgarian nuclear power plant. 
 
¶5. (SBU) The GOM recently sent a supplementary budget request 
to parliament for 20 million euros to cover fuel oil for the 
Negotino back-up plant.  In part to save power, and in part 
due to a dispute over long overdue electricity bills, MEPSO 
also cut the electricity to one of Macedonia,s largest 
electricity customers, Silmak, which processes metal alloys. 
Silmak owes MEPSO several million dollars in unpaid bills. 
Following the power cuts, Silmak furloughed a number of its 
employees, who have threatened to strike if they are not 
re-instated.  Further complicating the political picture for 
the government, Silmak is owned by the head of the Macedonian 
Socialist Party, a governing coalition junior partner. 
 
¶6. (SBU) Putting an optimistic face on this grim power supply 
picture, the newly appointed Chairman of ELEM, Vlatko 
Cingoski, assured us recently that there would be a 
sufficient supply of electricity to meet household demand 
this winter.  He said the Negotino plant could supply enough 
electricity to make up any household demand shortfall.  If 
that is not adequate to meet demand, he said the GOM has 
concluded agreements with the country's largest industrial 
consumers to reduce their supply of electricity during the 
winter. 
 
¶7. (SBU) Despite his optimistic outlook, Cingoski admitted to 
us that ELEM had not been conducting scheduled maintenance on 
its coal-fired plants this year due to financial problems. 
In order to continue the winter electricity supply 
uninterrupted, maintenance will have to be deferred until 
next spring, since the plants must be shut down during that 
process.  In addition, Cingoski said, ELEM has not stored 
enough reserve coal for the winter and the company is now 
building up its reserves.  Despite these potential pitfalls, 
Cingoski was optimistic that Macedonia's coal plants would 
continue to operate at near full capacity during the coming 
months, ensuring a steady supply for ELEM's operations. 
 
Unpaid Bills 
------------ 
¶8. (SBU) When the electricity distribution company ESM (which 
transmits electricity to the customers from the large 
capacity transmission network managed by MEPSO, and collects 
payments) was state-owned, there was no political will to 
enforce payment collection for past due bills.  As a result, 
many customers became accustomed to not paying for 
electricity.  Before ESM was privatized, the company 
unsuccessfully filed approximately 500,000 court cases for 
non-payment, but it did not disconnect electricity to 
customers who failed to comply.  The GOM privatized ESM in 
March 2006, selling it to the Austrian company EVN for 225 
million euros.  EVN claims that, when it took over, the 
collection rate for electricity was at a low 55 percent. 
 
¶9. (SBU) After EVN purchased the distribution system, the new 
owners immediately began making ESM employees pay their 
personal electricity bills.  In August, EVN began 
disconnecting electricity to government offices and large 
companies that were behind on their payments.  According to 
EVN Macedonia CEO Gunther Ofner, the collection rate for 
households and businesses has begun to increase, although 
there are still some towns and neighborhoods where almost no 
customers pay for electricity.  He said the GOM and municipal 
governments still owe approximately 25 million euros for 
electricity bills. 
 
¶10. (SBU)  Ofner said EVN recognizes the political 
sensitivity of disconnecting electricity to households and 
businesses, especially if those actions are perceived as 
unfairly targeting one or another ethnic group. 
Nevertheless, EVN has to enforce payment in order to make the 
distribution company financially viable, Ofner said.  He 
noted that EVN had begun talks with the GOM on how to 
increase the collection rate while ensuring that the poorest 
households receive a minimal amount of electricity. 
 
"Lost" Electricity 
------------------ 
¶11. (SBU)  In addition to a low collection rate, there is a 
high rate of electricity loss due to technical problems and 
theft.  The President of the Energy Regulatory Commission, 
Slave Ivanovski, told us that when the Commission sets the 
price of electricity, they calculate an 11 percent 
electricity loss rate due to technical reasons.  The actual 
loss rate is 24 percent.  This figure includes electricity 
lost due to illegal connections to the electricity network, 
as well as customers who "adjust" their meters so that they 
appear to consume less electricity. 
 
Unsustainable Cheap Electricity 
------------------------------- 
¶12. (U) The other key to the sector's financial woes is that 
the price of domestically generated electricity has remained 
low.  While imported electricity costs about 0.08 cents/kWh, 
the regulated price that MEPSO pays ELEM for electricity is 
now regulated at about 0.03 cents/kWh.  Although low 
electricity rates for consumers are politically appealing, 
the result is continued underinvestment in the energy sector. 
 Despite the unsustainably low prices, Ivanovski told us that 
ELEM so far has not requested that the Energy Regulatory 
Commission increase the price of electricity supplied by ELEM. 
 
Privatization of Electricity Generation? 
 
---------------------------------------- 
¶13. (SBU)  The previous government's privatization plan for 
the sector, developed with the assistance of USAID and other 
international donors, called for the privatization of all 
state-owned generation assets.  The previous GOM began a 
tender for the sale of the Negotino power plant before the 
July election and agreed with the IMF that it would privatize 
ELEM in 2007. 
 
¶14. (SBU)  The new government, however, appears reluctant to 
proceed with the full privatization of ELEM.  The GOM,s 
four-year work program envisions "the gradual privatization 
of parts of the energy sector while preserving the dominance 
of state ownership."  Cingoski, a political appointee and an 
influential adviser to the new government on energy issues, 
told us the GOM is considering merging ELEM and MEPSO under 
one holding company, and then privatizing ELEM,s assets 
piecemeal over an extended period.  However, the GOM would 
retain at least a 25 percent stake in the privatized assets. 
Cingoski argued that, if ELEM were able to charge more for 
the electricity it produces, the GOM could finance new power 
plants without privatizing ELEM. 
 
¶15. (U)  On November 1, the GOM canceled the tender for the 
privatization of the Negotino power plant.  The GOM had 
received bids from four international companies in May 2006, 
but did not award the tender before the July elections.  The 
previous government ranked EVN,s bid first because it had 
proposed to invest the largest amount, 750 million euros, in 
upgrading the existing power plant and building new power 
plants on the existing site.  The current government claims 
EVN,s bid included many unacceptable conditional 
requirements, and that its proposed purchase price of four 
million euros for the power plant was too low.  The GOM plans 
to announce a new tender for the Negotino plant by the end of 
November. 
 
Comment: Swift Action Needed 
---------------------------- 
¶16. (SBU)  If electricity supplies are inadequate to meet 
household demands this winter, the GOM could face strong 
political pressure from the public to intervene to ensure 
MEPSO and ESM do not cut household power supplies.  If that 
happens, and supplies to major industrial consumers are cut 
instead, the GOM will face pressures from furloughed workers 
and disgruntled industrialists to boost power imports to 
cover the shortfalls.  That, in turn, could result in 
pressure from the IMF, which the GOM likely would resist, not 
to exceed fiscal expenditure targets. 
 
¶17. (SBU)  To offset such challenges, the GOM will 
immediately have to pay its own electricity arrears.  It also 
should also work with EVN to ensure that the poorest 
households can afford a minimum level of electricity supply. 
For electricity generation, ELEM will need to propose to the 
regulatory commission an increase in the price of 
domestically generated electricity in order to adequately 
cover operations and maintenance costs.  In addition, the GOM 
should privatize ELEM to honor Macedonia's IMF commitment, 
and should open up the market for additional private 
investment in new generation capacity.  Unfortunately, the 
GOM at present does not appear prepared to move forward 
quickly on these steps. 
MILOVANOVIC