Bishkek, June 26, 2013 – The World Bank’s Power Sector Chapter of the Public Expenditure Report was presented today in Bishkek to describe the sector’s significant growth potential and the range of financial and operational challenges to the sector’s development. The report notes an urgent need to rehabilitate aging power plants and transmission systems, coupled with reforms in governance and tariffs that would be aimed at improving the sector’s financial condition. This assessment was undertaken by the World Bank based on data provided by the Ministry of Energy and Industry, including the State Department for Fuel and Energy Complex Regulation, and the state-owned companies operating in the sector.
“The power sector has been included in the World Bank’s medium-term Public Expenditure Review of Kyrgyz Republic because of the sector’s importance to the overall economy and increasing significance in the Government’s fiscal decisions going forward,” says Ani Balabanyan, the World Bank’s Senior Energy Specialist for Europe and Central Asia Region. “Our key objective is to offer recommendations for improving the sustainability of public revenues and expenditures in the power sector and the efficiency in provision of electricity supply. We believe these measures will help bring better, more reliable electricity service to Kyrgyz citizens.”
According to the study, the principal challenges that the sector has been facing in the country are:
- Supply reliability. The current stock of power plants and transmission grids is old and severely under-maintained, posing a constant threat to supply reliability. During winter months, reliability is particularly poor. From 2010 to 2012, Severelectro alone reported an average of 20 outages per day during the winter and 15 outages per day on an annual basis. A recent survey ranked Kyrgyz Republic 2nd worst in the Europe and Central Asia (ECA) region in terms of electricity service quality.
- Supply adequacy. The reliability issue is expected to continue. A winter power supply deficit is expected to emerge in 2014 and grow quickly. The deficit could reach 2,750 GWH by 2020, equal to 30 percent of domestic consumption in 2012.
- Governance. Sector governance is another concern because it exacerbates problems with supply reliability and financial viability. There is a high level of technical losses (electricity lost as heat during transmission) and commercial losses (electricity delivered but never billed), and low collections (electricity billed but never paid). The World Bank report notes that all of these issues should be addressed.
- Financial viability. Sector revenues have increased in recent years but there is still a sizable gap between expenses and cash collected. The gap is due to technical losses, commercial losses, and poor collections, but also due to tariffs that are well below the cost of providing electricity. Residential electricity tariffs in Kyrgyz Republic are the lowest in the ECA region, and among the lowest in the world. The result is under-spending on maintenance, delayed capital expenditures, and an accumulation of accounts payable.
The challenges of supply reliability and adequacy, governance, and financial reliability are closely linked. Therefore, the report recommends an integrated package of reforms, including:
- Rehabilitating existing assets. Rehabilitating old power plants should be a priority because it can improve supply reliability and reduce the power deficit at low cost. Rehabilitating hydropower plants (Toktogul, Uch-Kurgan, and At-Bashi) will reduce the probability of outages and — for some of the plants — increase the available power capacity. Rehabilitating transmission and distribution assets will reduce technical losses and thereby reduce the power generation needed to meet demand. This will improve supply adequacy and reduce outages.
- Considering alternative fuels to reduce winter heating demand. Roughly one quarter of customers rely on electricity for heating in winter; this reliance increases as district heating services deteriorate, aggravating the winter power deficit. Alternatives to electric heating should be explored as a way of improving supply adequacy and reliability, and reducing the cost of domestic supply.
- Strengthening sector governance. Strengthening and enhancing the sector’s transparency and accountability will help improve supply reliability and financial viability. For example, reductions in technical and commercial losses by one percent annually could cut the domestic power deficit more than half by 2020.
- Raising tariffs while protecting the poor. A 10 percent annual increase in tariffs, combined with consistent loss reduction, would place the sector on sustainable financial footing by 2020. Higher tariffs will mean more household expenditure on electricity, but the impact is likely to be moderate. The report recommends consideration of subsidy mechanisms for the poorest customers. Subsidy mechanisms will be the subject of a forthcoming World Bank study in Kyrgyz Republic on electricity tariffs and subsidies.
“The World Bank looks forward to continuing the policy discussion with the Government on the findings and recommendations in this report,” says Dinara Djoldosheva, the World Bank’s Senior Country Officer for Kyrgyz Republic. “We are preparing a Power Sector Policy Note for Kyrgyz Republic to elaborate the policy options recommended in this report.”
The World Bank’s support to Kyrgyz Republic is intended to reduce poverty, promote economic growth and shared prosperity. 45 percent of the World Bank’s assistance to Kyrgyz Republic is in the form of grants. The other 55 percent is in highly concessional credits – no interest, and only a 0.75 percent service charge. Credits are repayable in 40 years, including a 10-year grace period, while grants require no repayment. The financial assistance to Kyrgyz Republic since 1992 amounts to more than US$1 billion.