E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) THE KYRGYZ APRIL 2018 REPUBLIC • Kyrgyz households enjoy some of the lowest electricity prices in the world at $0.01 per kWh, PREPARING THE GROUND FOR benefiting from the country’s abundant hydro SUSTAINABLE ENERGY SUBSIDY REFORM resources. • The growth in demand is outpacing supply, Adequate and affordable energy supply is fundamental however, and in 2014, Kyrgyzstan went from being to economic growth, higher living standards, and social a net power exporter to a net importer. equity. In the Kyrgyz Republic, the power sector is not making the most of its abundant hydro endowment • The sector is in poor financial shape with aging and potential for low cost generation. Even though infrastructure, but concerns over public unrest citizens enjoy universal access to electricity, the energy have hampered efforts to increase prices. sector is financially distressed and its assets antiquated. • The World Bank, supported by ESMAP, is working Maintaining quality services is a challenge, and state with the regulator to develop a new Medium-Term support to the sector comes at the expense of other Tariff Policy for 2018-2023, that will be adopted in spending priorities such as better roads, education, and Spring 2018, and under which the regulator plans other services, and deteriorating macro-stability in the to increase residential electricity tariffs. face of a growing debt burden. • Apart from supporting analysis of the distributional impacts of tariff increases, ESMAP is funding In 2014, as part of the Government’s energy sector communication and outreach to increase development strategy, the World Bank, drawing on understanding in the population on why energy Energy Sector Management Assistance Program (ESMAP) tariffs need to rise and to build acceptance for support, initiated a technical assistance program at the the new tariff policy. request of the Kyrgyz Ministry of Energy and Industry. The objective of the technical assistance was to support the Kyrgyz Republic in establishing an autonomous reg- ulatory agency to improve accountability in the power transparent and equitable tariff setting methodology and heating sectors and to put in place a sustainable, aimed at ensuring service quality. E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) In 2017, a follow-up ESMAP grant provided further support to the Kyrgyz Government in developing a shared vision of the challenges of energy sector reform, including assessing the impact of potential tariff reforms on poverty and raising awareness of the need for reform and the cost of inaction. BACKGROUND The Kyrgyz Republic is blessed with abundant hydro resources and its citizens enjoy universal access to power. Electricity has also been a source of additional revenue for the exchequer when produced in sufficient quantities to be exported. In 2014, however, the country went from being a net power exporter to a net importer of power, largely due to a spell of unseasonably dry weather which resulted in low hydropower generation and a gap forming between demand and supply. capacity is beyond its useful service life. Aging transmis- Exacerbating the shortage in supply is the need for sion and distribution assets also exacerbate the risk of heating. The cold climate and long winters have meant network failures. Generation assets, combined heat and that access to reliable and adequate sources of heat is power (CHP) plants and heat-only-boilers operate at 20 to essential. Although the majority of Kyrgyz households rely 50 percent of their installed capacity, and network losses on traditional solid fuels (coal-fired stoves), in recent years often exceed 25 percent. More than 700 transmission electricity has come to increasingly be used for heating, towers, built in the 1960s and 70s, are decrepit and in with the result that household electricity consumption dire need of rehabilitation or replacement. Most assets has increased significantly: a twelve percent increase in the district heating sector were commissioned 20 to in the number of residential electricity consumers from 50 years ago and are also in poor condition. Energy 2007 to 2016 was accompanied by a 58 percent growth supply reliability and quality is a major concern in winter. in residential consumption. Kyrgyz households enjoy some of the lowest electricity THE CHALLENGE prices in the world at $0.01 per kWh. Despite the low cost of power generated using the country’s hydro The persistent cost recovery gap has contributed to the resources, however, these residential tariffs are far from accumulation of debt to the state by the energy com- covering the cost of power supply. In 2016 the overall panies year after year. Given the sector’s considerable energy sector (comprising electricity and heat and hot need for new investment, it is unlikely that this debt water) revenue was 21 percent below the cost of service. would be repaid in the foreseeable future. (The gap was even higher, at 32 percent, in 2014 when With the goal of reaching cost recovery in the medi- expensive imports added to the cost.) um-term, the Government committed to a steady increase A major factor underlying the call for additional resources in tariffs and predictable tariff path for heat and hot water stems from the necessity to replace old and poorly-main- and electricity services in the Medium-Term Tariff Policy tained assets. About 45 percent of available generation (MTTP) adopted for 2014-17. However, the MTTP was E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) repeatedly revised and actual tariffs do not match the • Technical assistance to the energy sector regulator; original plan. Large/non-residential users are carrying • Capacity-building for poverty and social impact the weight of electricity tariff increases that took place analysis; from 2014 to 2016. Heat and hot water tariffs increased • Communications and outreach to build public trust in 2014 and 2015 as per the MTTP, but no price increases for tariff reforms. took place in 2016 for any customer group, contrary to what was envisioned. The technical assistance involves a multi-sector approach intended to fill regulatory gaps while addressing public Efforts to reform energy tariffs over the years have failed concerns and ensuring that the impact of reforms on the largely over concerns about public protests. In 2010 an poor is mitigated. The team has conducted qualitative attempt to increase residential prices led to political unrest. and quantitative assessments of existing social assistance Even though there was no public resistance in 2015 after programs to develop recommendations on mitigation tariffs were increased by 10 percent for households, the measures for the poor and to inform the design of tariff President of the country publicly walked back on agreed reforms. Consultations with key stakeholders, including increases in 2016 for both heating and residential electricity the government, regulator, and energy companies, are tariffs on the basis that a downturn in the economy was ongoing and a public outreach campaign has been already imposing hardship on the population. launched, aimed at generating confidence in the sector Although electricity is cheap, it is still a concern for the as a starting point for reform. poor. Spending on electricity comprises only a small per- The team is supporting the regulator to develop a new centage of households’ total expenditure: between 2.3 MTTP 2018-2023, to be adopted in Spring 2018, with the and 2.6 percent of household spending across quintiles. objective of increasing residential electricity tariffs for the But consumers’ willingness to pay is limited unless there first time since 2015. Since this is politically sensitive, a is genuine concern about resultant supply shortages communications strategy has been launched by sector – such as was the case during the winter 2014/15. The social assistance system is extensive, accounting for more than two percent of GDP. But the assistance system is poorly targeted, which further exacerbates the situation. THE RESPONSE To increase the transparency of the tariff setting process, in 2014 a dedicated sector regulator was set up. Among other responsibilities such as tariff setting and monitoring of quality, the regulator was tasked with increasing the understanding of citizens regarding the consequences of low electricity prices and what that entails for indus- try. A combination of sector reforms to improve service quality and outreach to citizens to build confidence in the sector was implemented by the donor community. Recognizing that tariff increases would be needed, fol- low-up support from ESMAP approved in 2017 targeted three areas: E N E R G Y S U B S I D Y R E F O R M FA C I L I T Y ( E S R F ) institutions, explaining the underlying reasons for tariff technical capacity in the analysis of household data and reform. A media firm has been hired for preparation holding training courses to increase knowledge about of communications material targeting the government the reform and provide the basis for a factual assessment and external audiences, and is making extensive use of of the impact on different household groups. social media in addition to traditional platforms such as media outlets. MOVING FORWARD The ESMAP technical assistance is complemented by the full range of World Bank activities in the energy sector. Following through on tariff reform will require sustained The Bank’s engagement in the sector through invest- government commitment and continuous World Bank ment project financing, development policy operations, support to successfully adopt the 2018-2023 medium-term analytical and advisory activities and policy dialogue tariff policy when it is issued. The Bank team recog- have created the groundwork for a robust partnership nizes that it is necessary to continue the engagement with the government. Efforts have also been made to on enhancing the financial sustainability of the energy align this work with that of other donors working in the sector and to ensure targeted support to the poor while energy sector and to inform them about the findings reaching out to the public to build trust and enhance of the analytical work. Collaboration with the ADB in understanding of the rationale for tariff reforms. 2018 will ensure nation-wide outreach to the popula- tion affected by tariff reforms. The World Bank Poverty team, which is leading the capacity building program ESMAP’s $20 million Energy Subsidy Reform Facility financed by ESMAP on evaluating the impacts of tariff (ESRF) was set up in 2013 to help countries remove reform, has brought together participants from a range fossil fuel subsidies while protecting the poor. of government ministries and agencies, including the ESRF provides technical assistance to governments, develops tools for assessment and decision-making, Ministry of Economy, Ministry of Finance, Ministry of and facilitates knowledge-exchange for a global Social Protection, State Regulatory Agency, Statistical community of reformers. Office and the National Bank. The team is also building ABOUT ESMAP The Energy Sector Management Assistance Program (ESMAP) is a global knowledge and technical assistance program administered by the World Bank. It provides analytical and advisory services to low- and middle-income countries to increase their know-how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and economic growth. ESMAP is funded by Australia, Austria, Denmark, the European Commission, Finland, France, Germany, Iceland, Italy, Japan, Lithuania, Luxembourg, the Netherlands, Norway, the Rockefeller Foundation, Sweden, Switzerland, and the United Kingdom, as well as the World Bank. ESMAP | 1818 H Street, NW | Washington DC 20433 | 202.522.3018 | www.esmap.org