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UNCLAS SECTION 01 OF 03 ASHGABAT 000483 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR SCA/CEN, EUR/ACE, EEB 
AID/W FOR EE/EA 
 
E.O. 12958: N/A 
TAGS: PGOV PREL EAID TX
SUBJECT: TURKMENISTAN-AFGHANISTAN MARCH 11 CONSULTATIONS ON 
ELECTRICITY 
 
REF:  (A) Ashgabat 1481,  (B) Ashgabat 199 
      (C) Astana 419,     (D) Astana 251 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On March 11, USAID met with representatives of 
the Turkmenistan Ministry of Energy and Industry (MOEI) to continue 
consultations in support of the supply by Turkmenistan to 
Afghanistan of 300 MW of electric power through the construction of 
necessary transmission infrastructure and new power generation 
facilities.   Responding to a request from the previous Minister in 
November 2008 (Ref A), USAID mobilized consultants under the 
Economic Reform to Enhance Competitiveness activity to complete an 
analysis of the financial parameters of the project and its 
sustainability requirements.  The results of this analysis were 
presented to MOEI on March 11.  USAID anticipates that the 
presentation of these results, and the delivery to the MOEI of a 
spreadsheet financial model of the project, will assist Turkmenistan 
in taking the dialogue with Afghanistan on the contractual 
arrangements for delivery of power to the next step.  USAID invited 
requests from the Turkmenistan MOEI for further technical assistance 
to support the objective of increasing Turkmenistan's export of 
power to Afghanistan.  USAID likewise reiterated interest in closer 
collaboration with Turkmenistan under phase two of the Regional 
Energy Markets Assistance Program (REMAP), for which a contract was 
awarded on March 4.  END SUMMARY. 
 
POTENTIAL OF TURKMENISTAN IN POWERING ITS NEIGHBORS 
 
¶3.  (SBU) Turkmenistan is endowed with abundant reserves of natural 
gas whose potential has yet to be fully exploited. Presently, 
Turkmenistan's gas exports are almost entirely directed at European 
markets, with delivery via Russian pipelines.  Turkmenistan remains 
interested in expanding and diversifying its export markets. 
Conversion of natural gas to electricity for export is consistent 
with this diversification objective and has many advantages.  The 
Central Asian region remains generation-capacity constrained, and 
the physical infrastructure exists for Turkmenistan to supply large 
volumes of year-round base-load electric power to its CAR neighbors 
via the region's 500 kV network (Central Asian Power Grid). 
However, institutional arrangements and political disagreements 
often prevent rational utilization of this potential (Refs C and D.) 
 
 
¶4. (SBU) With construction of the necessary transmission 
infrastructure, the export potential to Afghanistan and Pakistan 
could easily rival that of Central Asian markets.  The technology of 
gas-turbine power generation makes it possible to rapidly expand 
capacity, with plant construction time typically under half that of 
new coal-fired generation, and considerably less than new 
hydroelectric facilities.  In an era of increasing concern for 
greenhouse-gas emissions, the construction of high-efficiency (and 
thus relatively low CO2 emissions per unit of electricity produced) 
gas-fired plant has an inherent risk-hedging advantage over coal 
generation in the event that binding GHG-emission caps are adopted. 
 
TURKMENISTAN'S EXPORTS TO AFGHANISTAN 
 
¶5.  (SBU) Turkmenistan currently provides small volumes (roughly 40 
MW) of power to Afghanistan at a price of $0.02 per kWh.  In earlier 
discussions on the prospects for expanding delivery of Turkmenistan 
electricity to Afghanistan, MOEI made it clear that expanded power 
deliveries to Afghanistan requiring investment in new 
infrastructures would have to be priced on a quasi-commercial basis, 
i.e. at prices that would allow Turkmenistan to recover all costs 
involved in the production and delivery.  In consultations with 
MOEI, USAID understood this to imply not only the cost of capital 
associated with the expanded infrastructure, but also a 
market-reflective price of gas used in the generation of 
electricity. 
 
¶6. (SBU) In discussions in early February between Afghanistan and 
Turkmenistan, both parties acknowledged this fundamental principle 
in a draft "protocol" (essentially a draft a joint declaration of 
 
ASHGABAT 00000483  002 OF 003 
 
 
intent) on the next steps in facilitating expanded power deliveries 
(Ref B) whose text was produced as an output of these discussions. 
(NOTE: The Turkmenistan side has not yet signed this protocol. 
USAID understands that other stipulations of the protocol, and not 
the cost-reflective/commercial pricing stipulation, are what have 
caused the Turkmenistan side to delay its signature.  Specifically, 
the protocol provides an indicative schedule of milestones relating 
to the negotiation of a power-purchase-agreement to which the 
Turkmenistan side appears to have been unwilling to commit without 
more careful analysis of the projects' finances that USAID's 
assistance has now provided.  END NOTE.) (Ref B.) 
 
¶7.  (SBU) USAID, with support from other donors, is currently 
completing the construction in Afghanistan of the North East Power 
System (NEPS) that will link Kabul with Mazar-e-Sharif and other 
population centers in northern Afghanistan, and to Uzbekistan, 
Tajikistan, and Turkmenistan for the delivery of power generated 
under existing and new planned generation facilities.  With the 
imminent completion of NEPS (within the next few months), the basic 
infrastructure will be in place for Afghanistan to take delivery of 
and distribute up to 1000 MW of power.  It is within this context 
that discussions of expanded power exports from Turkmenistan to 
Afghanistan have been conducted. 
 
¶8.  (SBU) Under the scenario that USAID's consultants were asked to 
analyze, Turkmenistan would construct a new 254 MW gas-fired plant 
and expand the 500 kV network from its substation at Serdar to the 
border with Afghanistan.  Afghanistan would complete the 
interconnection of this line to NEPS.  This infrastructure would 
enable the delivery of 300 MW of power to Afghanistan (with the new 
254 MW plant presumably augmented by existing Turkmenistan 
generation capacities.)  USAID's advisors in Afghanistan estimate 
that there is at present up to 1000 MW of unsatisfied demand in that 
country, and that with the completion of investments in the NEPS and 
in distribution infrastructure in population centers, the physical 
absorption of the putative 300 MW from Turkmenistan would be easily 
feasible. 
 
IS AFGHANISTAN A CREDIBLE CUSTOMER FOR TURKMENISTAN POWER? 
 
¶9.  (SBU) Consistent with the commercial pricing principle agreed 
between Turkmenistan and Afghanistan in early February (Ref B), 
USAID's consultant was instructed to base his financial analysis on 
the assumption that the new plant and associated transmission 
infrastructure should be constructed on a commercial, 
project-finance basis, with all costs reflected in the project's 
revenue requirements.  The resulting per-kWh tariff implications 
price the electricity considerably higher than the roughly $0.02 per 
kWh that Afghanistan is currently charged for the limited volumes it 
currently imports from Turkmenistan. 
 
¶10.  (SBU) MOEI was quick to voice its concern that the higher 
tariff requirements might price the power beyond the capacity of 
Afghanistan to reliably pay.  With respect to this concern, MOEI has 
already indicated that it is likely to require that a credible 
payment-risk guarantee be provided to cover MOEI against the risk of 
non-payment under the envisaged new 300 MW arrangement.  This 
requirement is reflected in the draft protocol produced at the early 
February meeting between the sides.  Per the text of that draft 
protocol, Afghanistan would seek either World Bank or Asian 
Development Bank backing for a sovereign Government of Afghanistan 
guarantee (Ref B.)  (NOTE: USAID's advisors remain uncertain whether 
such an IFI guarantee might be negotiated in a sufficiently timely 
manner, given institutional constraints and the lack of an 
Afghanistan sovereign debt rating.  This may imply that alternative 
payment-risk guarantee arrangements will have to be identified.  END 
NOTE.) 
 
AWAITING FURTHER ACTION FROM MOEI 
 
¶11.  (SBU) USAID's consultants are continuing to engage with 
working-level MOEI personnel on the operation of the 
spreadsheet-based dynamic financial model for the project, which 
allows for the adjustment of certain cost and plant performance 
 
ASHGABAT 00000483  003 OF 003 
 
 
assumptions to derive a range of per-kWh tariff requirements (i.e. 
cost of natural gas, cost of capital, plant capacity factor, etc.) 
USAID expects that this work will provide the MOEI with sufficient 
comfort and confidence that it is prepared to proceed in further 
discussions such that it endorses the referenced draft "protocol" 
(Ref B) that outlines next steps in the dialogue between 
Turkmenistan and Afghanistan on the development of this project. 
 
¶12. (SBU) Per the protocol, the sides are committed to agreeing to 
draft a basic terms sheet for a Power Purchase Agreement (PPA) that 
would provide the framework for the project and the MOEI's 
submission to the Government of Turkmenistan of a request to finance 
the project.  (NOTE:  Responding to a request received in initial 
consultations with USAID's consultants in January from the MOEI 
Department for Investments Head, Dortguly Jalilov, USAID's 
consultant's analysis presented a menu of options that the 
Turkmenistan Government might consider if it were to pursue 
private-sector involvement in this project in lieu of state funding. 
 At the presentation, it was clear that the MOEI representatives 
present - Jelilov was absent - were not comfortable with pursuing 
such a discussion, and so this dimension was not pursued.  From 
USAID's perspective, for the sake of rapid implementation of the 
investment program and earliest possible delivery of power to 
Afghanistan, development of this project as a purely 
Government-financed investment is most expedient.  USAID also 
understands that a recent government decision will allow MOEI to 
retain whatever residual earnings this project might generate, which 
would appear to be a disincentive for MOEI to advocate for the 
involvement of the private sector in financing this investment.  END 
NOTE.) 
 
¶13.  (SBU) USAID reiterated its hope that the MOEI would act soon to 
ratify the draft "protocol" between Afghanistan and Turkmenistan on 
the project, and confirmed its readiness to provide additional 
assistance to MOEI in preparing for further discussions and actions 
with Afghanistan as outlined in the protocol.  USAID's recently 
awarded REMAP project has resources available to assist the MOEI in 
this direction, and to promote further engagement of Turkmenistan 
with Afghanistan and expanded cooperation with other countries of 
Central Asia. 
 
¶14.  COMMENT: USAID awaits the endorsement by the Turkmenistan 
Government's Cabinet of Ministers of a Memorandum of Understanding 
that prescribes the mode of interaction with MOEI under REMAP, and 
reiterated at this meeting its interest in seeing this MOU signed. 
USAID was advised on the margins of the March 11 meeting that the 
MOEI and MFA have already passed their comments on the MOU to the 
Cabinet of Ministers.  END COMMENT. 
 
MILES