VZCZCXRO8673
OO RUEHDBU RUEHIK RUEHLN RUEHVK RUEHYG
DE RUEHBUL #0274/01 0270624
ZNR UUUUU ZZH
O 270624Z JAN 07 ZDK
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5721
INFO RUCNAFG/AFGHANISTAN COLLECTIVE
RUCNCIS/CIS COLLECTIVE
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC 0304
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEHNO/USMISSION USNATO 3415
RUEHBS/USEU BRUSSELS
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RUEHML/AMEMBASSY MANILA 1543

UNCLAS SECTION 01 OF 06 KABUL 000274 
 
SIPDIS 
 
STATE FOR SCA/A, SCA/FO (A/S BOUCHER, GASTRIGHT, DEUTSCH) 
STATE PASS USTDA FOR DSTEIN/SGREENIP 
STATE PASS OPIC, USAID 
MANILA PLEASE PASS ADB/USED 
NSC FOR AHARRIMAN 
USAID/AA/ANE FOR JKUNDER 
TREASURY FOR ABAUKOL 
CENTCOM FOR CG CJTF-76, POLAD, JICENT 
 
SENSITIVE, SIPDIS 
 
E.O.12958: N/A 
TAGS: ENRG ECON EPET ETRD KPWR EAID PGOV AF
SUBJECT: Afghanistan Energy: New Inter-Ministerial Commission Offers 
Opportunity: Part II 
 
Ref:  A) Kabul 162;  B) Kabul 137; C) 06 Kabul 5353; D) 06 Kabul 
5194; E) 06 Kabul 4319 and previous 
 
KABUL 00000274  001.2 OF 006 
 
 
¶1.  (SBU) Introduction and Summary: A principal USG goal in 
Afghanistan's energy sector is ensuring an adequate and affordable 
supply of electricity to Kabul and other key population centers by 
end-2008 through rehabilitation and construction of power plants, 
dams and transmission lines.  Despite good progress and momentum on 
most of these projects, the time frame is tight, and potentially 
significant risk points remain that could delay our target date (Ref 
A,C).  While there has been heavy investment in building the 
physical assets for Afghanistan's power sector, adequate attention 
and resources have not been focused on ensuring that the GOA has in 
place the institutional and policy framework, the regulatory 
environment, the managerial talent and the skilled technical 
workforce needed to maintain this large investment.  In this area, 
the international community and the GOA need to focus particular 
attention on distribution reform and cost recovery. 
 
¶2.  (SBU) The Inter-Ministerial Commission on Energy, created in 
December 2006 with a broad mandate to coordinate and lead policy 
within the GOA, presents an opportunity to inject urgency into 
efforts to address some of the most important issues facing 
Afghanistan's energy sector.  Ref A focused on the Northern 
Electrical Power System (NEPS) transmission project and the role the 
newly created GOA inter-ministerial body can play in seeing it 
successfully completed.  This cable discusses our approach to other 
major energy issues that the GOA and the international donor 
community need to address with urgency.  Embassy ideas -- a 
coordinated approach involving the Afghan Reconstruction Group, 
USAID and Embassy Econ -- on the way forward on NEPS and other 
issues facing the Afghan energy sector were conveyed in a White 
Paper to other donors through UNAMA.  (We also passed the White 
Paper to SCA/A.)  The donor community provided critical impetus 
towards a unified donor action plan for addressing these issues with 
the Afghans.  The plan is to distill our White Paper into an 
internationally approved actions paper which lists the specific 
steps that the GOA needs to take in the short term and the issues it 
needs to address in the medium term.  We will use this actions paper 
to step up engagement with the GOA and ICE on the way forward.  The 
Joint Coordination and Monitoring Board (JCMB) mechanism is 
essential to effective donor coordination in this and other sectors. 
 Again, in identifying energy priorities, the UNAMA-convened "Tea 
Club" mechanism has worked to close donor ranks and inject critical 
impetus behind our efforts.  End Introduction and Summary. 
 
¶3.  (SBU) A high priority USG goal in Afghanistan's energy sector is 
ensuring an adequate and affordable supply of electricity to Kabul 
and other key population centers by end-2008.  The USG, along with 
the GOA and the international community, aims to achieve this goal 
primarily by building Northern Electrical Power Systems (NEPS) and 
Southern Electrical Power Systems (SEPS). Despite good progress and 
momentum on most segments of these systems, the time frame is tight, 
and potentially significant risk points remain that could delay our 
target date, resulting in adverse political fallout (Ref A,C). 
While there has been heavy investment in building the physical 
assets for Afghanistan's power sector, adequate attention and 
resources have not been focused on ensuring that the GOA has in 
place the institutional and policy framework, the regulatory 
environment, the managerial talent and the skilled technical 
workforce needed to maintain this large investment.  In particular, 
the international community and the GOA need to focus attention on 
distribution reform and cost recovery.  An estimated 40-50 percent 
of the power generated in Afghanistan is lost in distribution.  And, 
these leaky distribution systems are deteriorating.  No matter how 
efficient, the generation and transmission systems that we create 
will not be sustainable without reform, construction of new, and 
modernization of existing distribution and collection systems. 
 
Inter-Ministerial Commission on Energy (ICE) 
-------------------------------------------- 
 
 
KABUL 00000274  002.2 OF 006 
 
 
¶4.  (SBU) In December 2006, the GOA Cabinet established an 
Inter-Ministerial Commission on Energy (ICE) with the broad mandate 
of "monitoring the implementation of energy sector plans," 
coordination of donor assistance and formulation of development 
programs and reform policy.  Creation of ICE presents a good 
opportunity to fill a large gap in the GOA's understanding, planning 
and implementation of energy strategy and policy formulation.  Ref A 
discussed the lead coordinating role that we hope ICE will play 
within the GOA on energy issues.  We also noted the importance of 
empowering ICE with both the political support and the technical 
capacity to become one of the principal energy sector actors in the 
GOA.  Beside NEPS coordination (Ref A) the key areas that require 
the attention of ICE and the GOA include: 
 
-- Kabul Power Supply and Replacement of Generators 
-- Power Purchase Agreements with Northern Neighbors 
-- Sheberghan Gas Field and Power Plant Development 
-- Da Afghanistan Breshna Moassessa (DABM) Commercialization 
-- Distribution Sector Reform and Cost Recovery 
-- Regulatory Reform 
-- Enhancing public awareness of energy sector issues 
-- Central Asia South Asia Regional Energy Markets 
-- Distributed Small-Medium Scale Solutions 
-- Renewable Energy Sources 
 
These areas are each described in greater detail below. 
 
Kabul Power Supply 
------------------ 
 
¶5.  (U) ICE has already taken the lead in the GOA's effort to expand 
electricity generation capacity immediately in Kabul, one of the 
most urgent energy issues facing the GOA and the donor community. 
There is agreement between the USG, the donor community and ICE that 
Kabul requires 100 MW of additional power quickly because there is 
currently an acute shortage of electricity in the city.  Second, the 
existing NW Kabul Power Plant generators are unreliable, raising the 
possibility that there will be prolonged blackouts, especially 
during the next two winters.  Third, acquiring additional capacity 
is not merely a short term fix to fill a gap until NEPS comes on 
line, as we have believed in the past.  This added capacity will be 
needed even when NEPS is fully operational and supplying 300-500 MW 
of power to Kabul in addition to the existing 150 MW of hydro 
generation.  The failure to improve the power situation in Kabul 
until NEPS comes on line by 2008-2009 and the risk of blackouts due 
to the breakdown of the existing generators may have serious adverse 
political fallout for the GOA and the donor community. 
 
Power Purchase Agreements 
------------------------- 
 
¶6.  (SBU) The NEPS concept relies critically on imported power from 
Tajikistan, Uzbekistan and Turkmenistan for import of electricity. 
USAID has provided technical assistance to the GOA in negotiating 
Power Purchase Agreements (PPA) with these countries.  Negotiations 
are being led by the Ministry of Energy and Water together with the 
Ministries of Foreign Affairs and Finance, with the support of a 
legal advisor financed under a World Bank project.  ICE, working 
closely with MEW, should coordinate and closely monitor GOA progress 
on these PPAs.  While there has been good progress during the last 
year, PPAs are notoriously difficult and time consuming to conclude 
and will require strong, high-level, close coordination and 
monitoring.  There has been good progress in the negotiations with 
Tajikistan.  In October 2006, the two countries signed an 
Inter-Governmental Agreement, which will be a stepping stone to 
concluding a PPA.  The GOA was most sanguine about power imports 
from Turkmenistan because past dealings on electricity between the 
two countries have been positive.  A GOA delegation will be 
traveling to Turkmenistan on or about January 27 to finalize some 
technical issues.  The death of President Niyazov, however, has cast 
some measure of uncertainty on the prospects of moving ahead quickly 
on the PPA.  Uzbekistan poses a greater challenges.  Uzbekistan 
 
KABUL 00000274  003.2 OF 006 
 
 
claims it will not have surplus power to export for several years 
unless Afghanistan arranges financing for upgrading or building 
additional transmission capacity within Uzbekistan. 
 
Sheberghan Gas Field Development 
-------------------------------- 
 
¶7.  (U) Sheberghan gas field development and the proposed power 
plant are key components of NEPS.  After a period of delay and GOA 
and donor disappointment, there have been positive developments 
during the last three months on Sheberghan.   The ADB, USAID and 
Ministry of Mines have reached a common understanding on the way 
forward, based on finding a private sector operator for the 
Sheberghan gas fields.  There will be several sweeteners for the 
prospective private sector operator:  a production sharing agreement 
(PSA) where the operator would own and sell the gas; $24 million in 
ADB funds for rehabilitation and refurbishing of the gas wells and a 
gas pipeline; and $12 million in USAID funds that will be used to 
verify and rehabilitate 3 wells that will be dedicated to the 
Sheberghan Power Plant. 
 
¶8.  USAID is moving forward on hiring a contractor to move a rig to 
the Sheberghan field and begin the verification process.  Once 
verification is complete, the design of the power plant can begin. 
ADB and the Ministry of Mines are preparing the tender documents for 
the selection of the private sector operator.  Working closely with 
MEW and the Ministry of Mines (MOM), ICE should play a coordinating 
role as there are many inter-ministerial issues involved.  The terms 
under which the gas will be supplied to the power plant and the 
electricity will be supplied by the power plant to the grid are 
important and complicated issues.  In addition, Sheberghan is an 
important piece of NEPS, a core ICE coordinating responsibility.  It 
is not clear whether the MEW and MOM have the technical capacity by 
themselves to address these issues. 
 
¶9.  (U) The USG-funded power plant at Sheberghan will be built on 
the "Design and Build" model.  The feasibility studies have been 
completed.  The next task is for USAID to issue a task order to its 
IRP contractor, LouisBerger-BlackVietch to develop the documents and 
put it out for bid.  This plan is contingent on the gas verification 
effort on which USAID has already mover forward.  The target date 
for completion of the Sheberghan power plant is the 2009-2010 time 
frame. 
 
DABM Commercialization 
---------------------- 
 
¶10.  (U) ICE will also need to closely monitor the MEW efforts to 
corporatize and restructure the Afghan power utility Da Afghanistan 
Breshna Moassessa (DABM), a process that is being supported by the 
World Bank through a contractor.  The national utility is 
over-staffed and lacking in the necessary skills and talent to carry 
out routine planning and project implementation, let alone manage 
the physical assets the donor community is building and engage with 
neighboring countries on electricity trade.  As a condition for 
release of the $20 million USG money for diesel, the transformation 
of DABM from a company operating under the SOE law to one operating 
under the company law was speeded up.  The target date for 
completion of this process is March 20, 2007.  This, however, will 
not be the end of the issue as the new DABM will need to find its 
feet, exert its independence and begin to think like a company. 
GOA-ICE-MEW along with the donor community should ensure that they 
stand up a modern, effective power utility in Afghanistan.  One of 
the immediate steps that the utility should take is outsourcing of 
its billing and collection system to strengthen cost recovery. 
Longer term, they should consider unbundling of the generation, 
transmission and distribution functions of DABM so that there can be 
arms-length, market-driven transactions between each of these 
services. 
 
Distribution Sector Reform 
-------------------------- 
 
KABUL 00000274  004.2 OF 006 
 
 
 
¶11.  (U) GOA-ICE-MEW should raise distribution reform as a top 
priority within the GOA and with the donor community and the Afghan 
people.  It is arguably the single most important unresolved piece 
of Afghanistan's energy puzzle.  The distribution systems throughout 
the country are in dire need of refurbishment to upgrade them to 
safe and efficient operating standards.  Distribution technical and 
non-technical losses are extremely high -- the conventional wisdom 
is that 40-50 percent is being squandered due to technical losses, 
theft and non-payment.   Reducing these losses should be a top 
priority for the GOA and the donor community.  Technical loss 
reduction can only be achieved through the construction of new 
distribution lines, the refurbishment of existing ones, and the 
replacement or installation of associated electrical equipment. 
The reduction of the non-technical losses can be achieved through 
installation of metering devices, instituting an efficient consumer 
billing and collection system, and elimination of theft. 
Unfortunately, donor interest in providing funding assistance to 
install/upgrade electric distribution facilities appears to be 
lacking and distribution may have to evolve based on internally 
generated funding.  The World Bank has a $25 million project for 
distribution upgrades (an MV backbone for Kabul), but this is only a 
fraction of what is required.  In the absence of further donor 
investment, operational efficiency and commercial tariffs will be 
even more important. 
 
Regulatory Reform 
----------------- 
 
¶12.  (U) The regulatory environment in Afghanistan's power sector is 
unstable, if not nonexistent.   Any rules that exist are made up and 
changed on an ad hoc basis by the Ministry of Energy and Water, DABM 
and municipalities.  The technical standards used are inadequate and 
inconsistent.  The GOA-ICE-MEW needs to quickly put in place a legal 
and regulatory framework designed to attract independent power 
producers, which can become an important element in Afghanistan's 
energy sector.  A healthy and sustainable power sector needs a 
stable and fair regulatory environment in which the rules are 
transparent and widely understood and the technical standards are 
high and consistent.  In the medium term, GOA-ICE-MEW should 
initiate a process that can create such a regulatory environment. 
They should consider establishing a Power Sector Regulatory 
Authority (along the lines of the Afghanistan Telecommunications 
Regulatory Authority) which acts as an independent rule-making body 
that sets technical standards, balances the interests of the 
stake-holders (consumers, private sector service providers, 
incumbent government utility) and acts as an unbiased arbiter of 
disputes.   An appropriate regulatory environment and could attract 
independent power producers, which could become an important element 
in Afghanistan's power supply. 
 
Energy Sector Awareness in Civil Society 
---------------------------------------- 
 
¶13.  (U) ICE can also play a lead role in enhancing public awareness 
of power sector issues.  It should coordinate development of a 
countrywide awareness and education program that informs the Afghan 
people about energy issues, the need for institutional reform and 
capacity building and the vital importance of cost recovery.  The 
education program needs to extend into all sections of Afghan civil 
society, including Parliamentarians, and policy-makers and 
opinion-shapers.  USAID's existing energy sector public advocacy 
program can be used to assist ICE.  The contours of the message 
should be: 
 
-- A healthy and sustainable power sector is a necessary condition 
for Afghanistan's development and prosperity of its people. 
 
-- With help from the donor community, the GOA is building a modern 
and efficient power infrastructure. 
 
-- To preserve the large investment, the GOA has to develop the 
 
KABUL 00000274  005.2 OF 006 
 
 
capacity to manage this investment.  It has to develop the 
institutional framework, the managerial talent and a skilled 
technical workforce to run the dams, power stations, and the 
transmission and distribution networks. 
 
-- To maintain this investment, the Government of Afghanistan must 
also ensure that the system is based on cost recovery and reform of 
distribution systems.  If electricity is viewed as a free good, the 
generation, transmission and distribution systems will collapse. 
 
Central Asia South Asia Electrical Regional Energy Markets 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶14.  (U) A larger and longer term project is the Central Asia South 
Asia Regional Energy Markets (CASAREM) initiative, a plan to match 
potentially abundant electric power generation in Central Asia with 
the severe electricity deficiency in South Asia.  CASAREM would 
provide for transmission of electric power from generating countries 
in Central Asia through Afghanistan via a 500 KV transmission line 
with some off-take in Afghanistan but a primary vision of a South 
Asian target market.  There has been good progress on CASAREM 
recently.  In October 2006 at a conference in Dushanbe, Afghanistan, 
Kyrgyzstan, Pakistan and Tajikistan signed an Intergovernmental 
Agreement on the development of a Central Asia-South Asia Regional 
Energy Market.  While the MOU is a significant first step indicating 
the partners desire to go forward with this model project, several 
difficult steps must be taken before any electricity would flow 
through the system and the circuit ahead remains difficult.  The 
Asian Development Bank is commissioning consultants to complete 
technical and economic evaluations, and the World Bank is hiring 
consultants to undertake the environmental and social impact study 
and make recommendations on legal, institutional and risk mitigation 
issues.  The next CASAREM Ministerial meeting is scheduled to be in 
Kabul in June 2007 and is intended to make the decision to proceed 
or abandon the project based on techno-economic viability. 
 
¶15.  (U) CASAREM is being driven by the ADB and World Bank with a 
focus on economic development in the Kyrgyz Republic and Tajikistan. 
 Afghanistan, to date, has had a limited role although it has staked 
out a claim to receive a share of the electricity and has impacted 
routing decisions.  ICE needs to coordinate Ministry of Energy and 
Water participation in the CASAREM process to ensure Afghanistan's 
interests are properly protected and its commitments are consistent 
with and supportive of NEPS development.  Steps should also be taken 
to ensure that the benefits to Afghanistan of the CASAREM process 
are allocated to reinforce and sustain the domestic Afghan 
electricity system. 
 
Distributed Small-Medium Scale Solutions 
------------------------------------------ 
 
¶16.  (U) The GOA and ICE should also explore the possibility of 
delivering off-line small to medium scale "distributed" solutions. 
Consideration could be given to developing "distributed" solutions 
that could be delivered through Public Private Partnerships and/or 
franchises in partnership with a corporatized DABM.   PPP's would 
have the benefit of attracting private sector capital and 
technologies, and are generally scalable.  PPP projects, 
nonetheless, would still need to develop solutions for distribution 
and cost recovery.  For instance, the use of schemes similar to the 
phone cards in the telecom sector that have allowed those services 
to proliferate, have been proven effective in the energy sector in 
other developing economies such as South Africa. 
 
Renewable Energy Sources 
------------------------ 
 
¶17.  (U) Finally, GOA-ICE-MEW should also consider renewable energy 
sources as a way of meeting some of Afghanistan's energy needs, 
given the current conditions of infrequent and unreliable public 
power, limited power distribution networks, and the high cost and 
logistical challenges of operating and maintaining diesel power 
 
KABUL 00000274  006.2 OF 006 
 
 
sources.  Because Afghanistan's operating environment is so 
difficult and expensive, the total life-cycle cost of renewable 
energy sources is more closely comparable to conventional sources 
than is the case in most of the world.  Renewable energy sources, 
including solar, wind, biomass, bio-fuels, geothermal, and landfill 
gas may offer opportunities in varying degrees in various parts of 
the country.  For example, the use of solar photovoltaic systems may 
provide some quantities of electricity in communities that are not 
on the NEPS or SEPS grids.  This may also apply to some extent in 
Kabul, where the demand-supply gap is likely to persist even after 
NEPS is completed.  It may also be a viable option for near-term 
buyers likely to purchase smaller diesel generators in the period 
before a central power grid is in place, or buyers seeking power 
solutions where neither diesel nor electrical grid extension 
represents a practical solution.  Micro hydro power is already 
promoted aggressively.  Wind power presents another opportunity to 
fill gaps in Afghanistan's energy landscape. 
 
¶18.  (U) We will examine with the GOA-ICE-MEW and the donor 
community ways to seek funding for an assessment of the contribution 
that renewable energy sources can provide, which may include lower 
life-cycle costs, greater reliability, independence from complicated 
and unreliable logistics networks, or simplicity of operation and 
maintenance.  Renewable energy should be made a part of the Afghan 
National Development Strategy. 
 
Comment 
------- 
 
¶19.  (U) As noted above, these Embassy ideas were conveyed in a 
White Paper through UNAMA to other donors.  The ideas were well 
received by the donors and we are now working with the lead energy 
sector donors to distill the White Paper into an internationally 
approved actions paper which lists the specific steps that the GOA 
needs to take in the short term and the issues it needs to address 
in the medium term.  We will use this actions paper to step up 
engagement with the GOA and ICE on the way forward.  We will 
continue to use all levels of influence, bilaterally and through the 
donors, to move forward.  In the latter regard, the JCMB/Tea Club 
informal mechanism has been and is likely to remain an essential 
mechanism for keeping the donors together and moving forward. 
 
Neumann