VZCZCXRO2800
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHPS #0677/01 2531345
ZNY CCCCC ZZH
P 101345Z SEP 07
FM USOFFICE PRISTINA
TO RUEHC/SECSTATE WASHDC PRIORITY 7685
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RHEHNSC/NSC WASHDC
RUEAWJA/DEPT OF JUSTICE WASHDC
RUFOANA/USNIC PRISTINA SR

C O N F I D E N T I A L SECTION 01 OF 02 PRISTINA 000677 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR DRL, INL, USAID, AND EUR/SCE, NSC FOR BRAUN, 
 
E.O. 12958: DECL: 08/28/2017 
TAGS: EAID ECON PGOV UNMIK KV
SUBJECT: KOSOVO: TECHNICAL, FINANCIAL, POLITICAL ISSUES 
THREATEN KOSOVO ENERGY SUPPLY 
 
 
Classified By: COM TINA KAIDANOW FOR REASONS 1.4 (B) AND (D). 
 
¶1. (C) SUMMARY: Kosovo's energy sector is dominated by Kosovo 
Energy Corporation (KEK), a publicly-owned, vertically 
integrated monopoly that provides ninety-eight percent of 
Kosovo's electricity.  With help from contractors provided by 
USAID, KEK has made significant improvements in its 
operations.  However, technical shortcomings, problems with 
physical infrastructure, and management issues still limit 
its ability to provide reliable power and subject Kosovo to 
ongoing threats of destabilizing power shortages and cost 
overruns.  For example, a routine shutdown of the Kosovo B 
power plant for necessary maintenance this September could 
become a crisis if KEK's financial woes impair its ability to 
import replacement power.  More aggressive collection efforts 
are raising larger questions about relations with the Kosovo 
Serb community, which has largely not paid for its energy 
consumption since 1999.   END SUMMARY. 
 
TECHNICAL IMPEDIMENTS 
 
¶2. (SBU) KEK generates electricity in two plants outside of 
Pristina located near the lignite (low quality coal) mines 
that fuel the plants.  The first plant, Kosovo A, was built 
in the 1960s with five generating units, but only two, A3 and 
A4, are currently operable.  The amount of coal that can be 
transported on the existing conveyor system limits sustained 
power generation from Kosovo A to about 130 MW.  Kosovo B, 
built in the 1980s, has two units capable of generating 280 
MW each.  Thus, KEK maximum sustained generating capacity is 
about 690 MW, with another 30-40 MW supplied by a 
hydroelectric plant in Gazivode.  During peak hours, 
especially in the winter, KEK must import power to meet 
demand. 
 
¶3. (SBU)  A power crunch is looming in September as both 
units of Kosovo B need to be shut down, possibly through 
October 15, to service common facilities such as the cooling 
tower, water treatment, smokestack and ash-handling 
facilities.  Although some coal is being stockpiled, Kosovo A 
will probably not be able to sustainably supply more than 130 
MW.  Peak load during this season may be around 550 MW, and 
power will need to be imported.  During this period, 
scheduled blackouts will also be more prevalent.  Although 
KEK is pursuing the rehabilitation of the A5 unit and intends 
to increase the capacity of the conveyor system serving 
Kosovo A, Kosovo will remain a net importer of power until 
the planned Kosovo C plant comes on line, which is not likely 
before 2015. 
 
FINANCIAL ISSUES AGGRAVATE POWER CRUNCH 
 
¶4. (SBU) With help from USAID-funded consultants, KEK has 
made significant improvements in metering, billing, and 
collection procedures that have boosted its revenue 
collections 30 percent above the same period last year. 
Nonetheless, financial challenges remain that may impact 
power availability in the near and longer term.  KEK's budget 
for the current year projects imported power costs of 40 
million euros.  While the projections of the volume of power 
needed remain valid, the cost of imported power is averaging 
.09 euros per KWh -- more than twice the historical 
(projected) price and twice the regulated tariff that KEK is 
able to charge its customers.  The high cost of imported 
power is partly due to the scarcity of power in the region 
resulting from the low availability of hydropower and the 
closure of a large nuclear plant in Bulgaria.  KEK also 
believes there has been some abuse of market power among the 
limited number of traders the Energy Regulatory Office has 
licensed to respond to KEK's tenders for power imports. 
 
¶5.  (C) At current prices, KEK estimates it will need 20 
million euros just to pay for imports in September.  It 
currently does not have enough cash on hand to get the 
letters of credit necessary to close contracts for this 
volume, and its ability to borrow is constrained.  Even if 
KEK finds a way to contract for the power it needs during the 
upcoming power crunch, it will need an infusion of cash, 
probably from the Kosovo budget, to pay for power imports 
this winter.  KEK's bid for a five percent tariff increase 
this spring was quashed by Prime Minister Ceku, costing KEK 7 
million euros. 
 
COLLECTION EFFORTS IMPACT MINORITIES 
 
¶6. (SBU) As KEK's collection processes become more effective, 
they are pushing into the sensitive area of relations with 
 
PRISTINA 00000677  002 OF 002 
 
 
the Kosovo Serb community.  Many Kosovo Serbs living in 
enclaves have not paid KEK bills since 1999.  Both the recent 
Ministry of Internal Affairs requirement for presentation of 
a paid electric bill as a condition of vehicle registration, 
and the Ministry of Trade and Industry's earlier requirement 
linking new business registrations to payment for electricity 
has had a disproportionate impact on Kosovo Serbs.  A new 
process for prioritizing substations for load shedding is 
also likely to have a similar impact; it will determine whose 
power gets cut off during a shortage using a formula that 
considers, for the first time, the amount of power that gets 
paid for as a percentage of power distributed.  Serb enclaves 
that have not been paying for power will likely see their 
priority fall and their access to electricity decrease. 
 
¶7. (SBU)  The Kosovo Government plans to take up the issue of 
the link between vehicle registration and KEK bills, and USOP 
expects that the list of substations whose load shedding 
priority will fall under the new procedure will be vetted 
with local and international groups before action is taken to 
implement it.  Ideally, KEK will need to implement a customer 
outreach program to bring Serb enclaves into its formal 
customer base at an appropriate time once final status is 
determined.  Once Kosovo Serbs have acclimated themselves to 
final status -- and realize their lives and property are not 
in jeopardy -- KEK could begin a series of public meetings to 
answer locals' questions and explain its amnesty program. 
Some Serb municipal leaders have indicated that an 
appropriate program at the right time would probably be 
accepted by most residents of their enclaves.  There is 
little tradition of customer outreach in Kosovo and an 
outside adviser could provide valuable guidance in this 
process. 
 
MANAGEMENT ISSUES 
 
¶8. (C) In an unusual arrangement, Minister for Energy and 
Mining Ethem Ceku is also Chairman of KEK's Board of 
Directors.  Ceku is closely involved in KEK management, 
scheduling board meetings twice each month.  He recently 
dismissed Managing Director Pranvera Dobruna and the board 
has appointed a selection committee to find a new MD.  A 
total of 32 applications were received for this position, but 
after the initial assessment process, none of the candidates 
were deemed qualified.  The board recently authorized the 
selection committee to reach out more actively to recruit 
qualified candidates.  These management issues have had a 
negative impact on KEK performance, yet the Kosovo C project 
may finally be making progress with the World Bank's recent 
selection of the transaction advisers who will oversee the 
multi-billion dollar tender process. 
 
¶9. (C) COMMENT: Real economic development in Kosovo cannot 
take place without access to reliable, affordable electric 
power -- and KEK has a long way to go for this to be a 
reality.  On top of these challenges is what to do with the 
problem of non-paying Kosovo Serb enclaves.  Our take is that 
this should not be a hasty or destabilizing process, but that 
the payment regime should gradually come to include these 
enclaves at an appropriate time after final status has been 
resolved.  We may also need to weigh in again with UNMIK 
should Serbia make the offer -- as it did last year -- to 
provide energy to Serb areas in Kosovo, an idea that 
foundered on Belgrade's insistence that all Serbs in Kosovo 
benefit from the scheme, while UNMIK insisted it was not 
technically or politically feasible to single out Serb 
consumers in this manner.  In the meantime, we will weigh the 
advantages of possibly expanding our technical assistance to 
KEK to maximize its earnings potential, understanding all the 
while that there will be no permanent cure to Kosovo's energy 
woes until Kosovo C comes on line years from now.  END 
COMMENT. 
 
KAIDANOW