REVIEW OF THE PRIME COST

OF ELECTRICITY

March 3, 2011
DRAFT FOR REVIEW AND COMMENT
This report was prepared by Tetra Tech under the USAIDsponsored RESET Program. The conclusions stated herein do
not necessarily reflect the opinions of USAID or the United States
Government.

REVIEW OF THE PRIME COST

OF ELECTRICITY

Executive Summary .......................................................................................................................... 1

1. Objective....................................................................................................................................... 3
2. Scope of Assignment..................................................................................................................... 3
3. Data Constraints and Caveats ....................................................................................................... 3
4. Technical Approach....................................................................................................................... 4
4.1 Review of the Current Methodology...................................................................................... 4
5. Preliminary Analysis Results ......................................................................................................... 6
5.1 Scenario 1: Continue Deterioration of the Power System....................................................... 6
5.2 Scenario 2: Restore Reliable Service by Catching-Up with Urgently Needed Repairs and
Replacement ............................................................................................................................... 12
5.3 Scenario 3: Ensure Power Supply Security throughout the Year and throughout the Republic
.................................................................................................................................................... 16

Glossary

CURRENCY EQUIVALENTS
(as of 20 February 2011)
Currency Unit

som

1.0 som

$0.022

$1.00

46.0 som

MEASURES
MW(megawatt)

1,000,000 watt

GWh (gigawatt-hour)

109 watt-hour

MWh (megawatt-hour) -

106 watt-hour

kWh (kilowatt-hour)

103 watt-hour

Km

kilo meters

kV

kilo Volt

NOTE

In this report, $ refers to U.S. dollars

Executive Summary
In response to the Minister of Energys 28 January 2011 request, a quick review of the prime cost of
electricity in Kyrgyzstan was carried out. This section summarizes the preliminary results presented
to the Minister on 19 February 2011.
The cost of electricity depends on the level and quality of service demanded by consumes. Using the
methodology used by the Regulator, the preliminary prime cost of electricity was estimated for
three levels of service quality. The estimation was based on unaudited expenditure data reported by
the six Joint Stock Companies in the power sector supplemented with a number of conservative
assumptions. The preliminary results are shown in Table E-1 below.
Table E-1: Preliminary Estimates of the Prime Cost of Electricity
Scenario 1
Scenario 2
Scenario 3
Level of Service Quality
Continuing unreliable Restoring reliability Ensuring reliable and
deteriorating service of the existing power
secure electricity
system
throughout the year
and throughout the
Republic
Prime Cost of Electricity
1.0 som/kWh, or
1.65 som/kWh, or
2.03 som/kWh, or
2.2 Cents/kWh
3.6 Cents/kWh
4.4 Cents/kWh
Revenue Requirement
8.7 billion som, or
15.0 billion som, or
19.1 billion som
$190 million

$326 million
+$136 million*

$415 million
+$225 million*

* above Scenario 1

The estimated prime cost of electricity in Scenario 1 (similar to the existing conditions) is about 1
som per kWh (2.2 cents/kWh), and the associated revenue requirement from the power sector
would be about 8.7 billion som ($190 million). With an already staggering 12,578 unplanned power
outages per year (34 per day), the current level of service in the Kyrgyz Republic can only be
described as unreliable.
As described in this report under Scenario 1, the attempt to continue operating the sector at this
level of revenue under current management practices will result in a continuous worsening of
reliability and service quality, and will impose great daily hardship and costs on the population,
businesses and industry of the Kyrgyz Republic. Continuation of the status quo under Scenario 1 will
put the countrys dilapidated power system at risk of a catastrophic breakdown.
Scenario 2 shows the need to increase the revenue requirement from the power sector by about 6.3
billion som per year ($136 million per year) by including into the calculation of the prime cost of
electricity the necessary costs of repair and replacement. This level of additional expenditures is
needed just to restore the reliability of the existing power system by catching up the urgently
needed repair and replacement. This funding gap has been building up over the last 20 years due to
the failure to make the proper repair, rehabilitation and replacement of existing facilities that are
necessary to ensure reliable and efficient electricity service.

To ensure the long term security and reliability of electricity service throughout the year and
throughout the Republic, the calculation of the prime cost of electricity must include the annualized
costs of the strategic transmission lines needed to ensure supply throughout the Republic and the
new thermal base load generation plant (about 600 MW) needed to ensure supply in winter and in
dry years. That prime cost of electricity would be at least 2.03 som per kWh (4.4 cents/kWh), as
shown in Scenario 3, and would result in additional revenue requirement from the power sector of
10.4 billion som ($225 million) above Scenario 1.
It should be noted that each of the above preliminary estimates of the prime cost of electricity is
different from the standard calculation of the Cost of Service. In accordance with international
practice, the calculation of the Cost of Service must include a reasonable return on fixed assets and
working capital to enable electricity service companies to attract and finance new investments.
When a power systems fixed assets have passed their economic lives and are fully depreciated -such as is the current situation of Kyrgyzstans power system -- the fixed assets must be reevaluated
in order to provide adequate depreciation costs that enable electricity companies to replace the
existing worn-out power system. In addition, a reasonable cost of non-payment of electricity bills
should be considered as part of the Cost of Service. However these costs were not included in the
above prime cost estimates in accordance with the methodology currently used by the Regulator.
Furthermore, due to unavailability of all the required data, a number of conservative assumptions,
such as a favorable project financing with a 3% loan interest and 20-year loan term, and conservative
cost assumptions for replacing and rehabilitating the existing dilapidated power facilities and
equipment, were used in the analysis. The results of this quick analysis can only be considered to be
a preliminary estimate, and represent the lower end of the possible range of the prime cost of
electricity. A more accurate estimate of the full Cost of Service made in accordance with
international practice would require much more data than was available and would take
substantially more time than the Ministers specified time constraints.

1. Objective
On 28 January 2011 the Minister of Energy requested us to provide costs of electricity
service in Kyrgyzstan.
We therefore undertook a quick review of the existing available unaudited data reported by
the Joint Stock Companies.

2. Scope of Assignment
The cost of electricity must include all the reasonable and prudent expenses necessary to
provide reliable, secure, and efficient electricity service to consumers in a sustainable
manner. According to international best practices, the scope of these costs must include:

Efficient costs of generation, transmission, distribution, power control and

dispatch, system operation and maintenance, metering, billing, collection and
other customer service activities
Depreciation (return of investment to create the ability to replace existing assets)
A return on fixed assets (return on investment to create the ability to make new
investments to expand or improve the system )
The cost of reasonable energy losses and non-payment of electricity bills
The cost of working capital (for spare parts inventories, operating cash flow, etc),
and
Any taxes, fees, or levies required by the Laws of Kyrgyzstan

3. Data Constraints and Caveats

A list of preliminary data requests pertinent to the calculation of the Cost of Service was
submitted to the Ministry of Energy (MOE) on 3 February 2011. However, we did not receive
about 30% of the necessary data we requested. This is because the companies did not have
the necessary data or did not respond to the request. The Joint Stock Companies are not
required by government Regulator to collect and report some of the data that is necessary to
calculate the Cost of Service in accordance with international practice.
Conducting a full Cost of Service study to international standards would require substantially
more data than was provided to us and would take several months to complete.
It should be noted that this analysis was based on the unaudited data as reported by the
Joint Stock Companies in the power sector. Where the data appeared to be inconsistent or
outside of normal ranges, clarifications and double checking were made with the Joint Stock
Companies. The verification and assessment of the reasonableness or validity of the
reported data could not be done within the specified time constraints.
In addition, a number of assumptions had to be made to facilitate this quick analysis.
Therefore, the results of this quick analysis can only be considered as a preliminary
estimate, and should be updated when the requested data become available. It should be
noted that all assumptions that had to be made to complete this analysis were conservative.

4. Technical Approach
To meet the Ministers request by 20 February 2011, it was agreed to start with a review of
the methodology used by the Regulator for analyzing the prime cost of electricity service,
and the latest analyses performed by the Regulator in 2010. The methodology used by the
Regulator accords with the Governments traditional accounting practices still in use in
Kyrgyzstan. The unaudited 2009 and 2010 data on the energy, revenues and expenditures
submitted by JSC Power Plants, JSC NESK, JSC Severelectro, JSC Vostokelectro, JSC
Oshelectro, and JSC Jalalabatelectro were provided to the consultants for analysis.
However, not all the data provided were consistent or accurate. Considerable efforts were
made to clarify and double check the data during the review.

4.1

Review of the Current Methodology

The methodology that has been used by the Regulator to estimate the prime cost of
electricity can be characterized as an approach that focuses on operating expenditures. The
expenditures considered include the following categories:

Repair, operation, and maintenance

o Repair and maintenance
o Supplies and parts
o Fuels (for Bishkek and Osh Combined Heat and Power (CHP) plants only)
o Other fuels and lubricants
o Own energy consumptions (in buildings, offices, stations, etc)
o Uncompensated Value-Added Taxes (VAT)
Salaries, wages and social fund contribution
Depreciation
Fees, levies, taxes and other expenses
Debt service
o Repayments of loan principal
o Loan interests and fees
Capital investment
o Reconstruction
o New construction and Upgrading.
Cost of power purchases (applicable for distribution companies only)

In the annual budget process, each Joint Stock Company in the power sector develops a
business plan that includes a proposed budget for the above-mentioned categories and
submits it to the Ministry of Energy (MOE) for approval. In determining the prime cost of
electricity, the MOE considers the expenditure levels necessary to meet the operating and
maintenance requirements, and allow for certain amount of capital investment and operating
profit. The MOE also considers the consumers ability to pay. After considering the interests
of both Joint Stock Companies and consumers, a recommended tariff level reflecting the
prime cost of electricity is submitted to the government for final approval.
This methodology is very different from the international practice of a Cost of Service
analysis. The following cost items should be included in the standard Cost of Service
Analysis, but they are not explicitly considered in the current methodology used by the
Regulator:

Return on net fixed assets

Return on working capital (allowance for inventories and arrears (allowed days
receivables)
Allowed reasonable cost of non-payment of electricity bills and losses

The return on fixed assets is typically set at a level that is sufficient to finance and attract
new investments, and to enable Joint Stock Companies to generate sufficient cash flow to
self finance a certain level (e.g., 20% to 25% equity portion) of new capital investments. The
depreciation is also established at a level adequate to enable energy companies to replace
existing assets. For a power sector on which most assets have passed their economic lives
such as Kyrgyzstans power sector the international practice requires re-evaluation of the
fixed assets so that the return on fixed assets and depreciation expenses would enable Joint
Stock Companies to replace worn-out equipment and facilities, and to upgrade and expand
the system to ensure reliable power supply and meet growing power demand.
International practice would also include a reasonable cost (e.g., 3% to 5%) of non-payment
of electricity bills in the cost of electricity. This is especially relevant as the reported
collection rates of electricity bills for the distribution joint stock companies in Kyrgyzstan are
relatively low, especially for residential consumers (see Table 1 below). However, the cost of
non-payment of electricity bills is not currently considered in the methodology used by the
Regulator.
Table 1: Reported Collection Efficiency of Electricity Bills
2009
2010
JSC
Residential Overall Residential Overall
Consumers
Consumers
%
%
%
%
JSC Severelectro
84
100
90
96
JSC Vestokelectro
87
93
83
87
JSC Oshelectro
80
87
81
86
JSC Jalalabatelectro
78
92
80
84

International practice would also include a reasonable cost of energy losses in Cost of
Service analysis. The methodology currently used by the Regulator calculates the prime cost
of electricity by dividing the total cost by the billed electricity volumes. The billed electricity
volumes are computed by subtracting estimated total (both technical and commercial)
energy loss from the total power purchases. Thus, the cost of energy losses is reflected in
the Regulators calculation of prime cost of electricity. However, the reported energy losses
in Kyrgyzstans power sector are excessively high as shown in Table 2. It would be more
desirable to compute cost of energy losses separately so they can be monitored closely and
targets can be set for further improvement.
Because virtually all the costs of energy losses are included in tariff under the Regulators
methodology, there is no economic incentive for sector managers to reduce them.

Table 2: Reported Total Energy Losses

JSC
2009
%
JSC Power Plants
0.4
JSC NESK
5.7
JSC Severelectro
25.3
JSC Vestokelectro
25.9
JSC Oshelectro
25.8
JSC Jalalabatelectro
25.7
System Total*
31.7

2010
%
0.4
5.2
24.9
31.1
26.5
28.6
33.4

* including generation, transmission & weighted distribution losses

On the other hand, expenses of (i) loan principal repayments, (ii) loan interest payments,
and (iii) capital investments that are currently included in the methodology used by the
Regulator are not included directly in the international practice of Cost of Service analysis. In
international practices these costs are considered when determining the value of the fixed
assets. These factors are then used to determine the annualized cost of investments which
must be included in tariffs to sustain the companys ability to attract and make new
investments.

5. Preliminary Analysis Results

The cost to provide electricity service increases with the increasing level and quality of
service that is demanded by consumers. In this quick analysis, the prime cost of electricity
was estimated based on the following three scenarios of service level and quality.

5.1

Scenario 1: Continue Deterioration of the Power System

The estimated prime cost of electricity in this Scenario assumes a similar level of
expenditures as approved by the government in the past two years. The level of approved
expenditures can be characterized as the level necessary to meet the minimum operating
requirements of the Joint Stock Companies without explicitly taking into consideration the
costs that are necessary to replace worn-out equipment and dilapidated facilities in order to
ensure reliable and safe electricity supply.
As shown in Table 3, the total prime cost of generation, transmission and distribution was
estimated to be approximately 1.0 som per kWh in 2010. The associated revenue
requirement from the power sector would be 8.7 billion som ($190 million).

Table 3: Scenario 1 - Prime Cost of Electricity Services with Continued Physical and Financial Deterioration of Power Sector (2010 Data)
JSC PP
JSC NESK
JSC Severelect
Vostokelect
Oshelect
Jalalabatel

Components
A. Costs
I. Materials and Services

Sector Total
3

10 som

Unit
3

333,307
502,417

2,063,810

54,121
151,506

23,769
5,426

15,793

0
3,105,161

0
127,999

37,433
5,217
88,783

25,669
74,557

600,634
101,730

357,851
60,780

474,054

177,501
493,324
14,077

278,120
502,271
6,418

170,037

341,664
207,522

3
3

Repair/maintenance services
Supplies/materials

10 som
3
10 som

Fuels (for CHP plants)

10 som

Other fuels and lubricants

Own Energy consumptions

10 som
3

Uncompensated VAT
Subtotal

10 som
3
10 som
3
10 som

II. Salaries, wages

III. Social fund contribution

10 som
3
10 som

IV. Depreciation expenses

V. Other expenses (fees)
VI. Other taxes
VII. Financing cost

10 som
3
10 som

Loan principal repayment

Loan interest expense
VIII. Capital investment
Reconstruction investment

10 som
3
10 som

New Constr/upgrade investment

IX. Income tax

10 som
3
10 som

10 som

19,115
79,690

20,631
136,875

979
32,115

462
43,218

375,015
852,094

2,063,810

16,710
1,527

15,933
2,079

163,758
165,754

58,204
134,739

37,930
99,622

210,585
3,831,016

165,534
26,778

240,614
45,217

181,714
34,601

2,020,400
350,880

107,479
25,680

21,550
38,929
386

29,678
104,600
977

21,076
17,458
604

697,961
1,264,060
48,141

132,984
112,122

17,100
50,461

6,534
463

0
0

4,910
0

503,192
370,568

45,865

4,135

5,226

5,848

61,075

174,308

86,454

174,171

23,368

18,634

3,740

480,675

5,215,920

195,535
1,860,534

1,435,561

362,232

579,684

369,572

195,535
9,823,504

288,939
81,774

521
57,778

X. Power import cost

XI. Cost of Frequency Regulation
Total Cost

10 som
3
10 som
3
10 som

B. Other Revenues
I. Heating revenue

10 som
3
10 som

10 som
3
10 som

II. Hot water revenue

III. Frequency Regulation
IV. Sale revenue to LIC

543,287
214,207
329,712

C. Net Costs
D. Energy Balance
I. Gross generation/input
II. Own use & others
III. Sale to Kumtor
III. Line and transformer losses
Quantity
Percentage
IV. Net generation/output/sale
E. Average Cost of Electricity
F. Profit (Loss)

10 som
3
10 som

4,458,426

1,530,822

1,435,561

362,232

579,684

369,572

8,736,298

MWh
MWh
MWh

11,857,243
854,413

11,525,257
194,882
271,268

4,411,491
26,953

1,296,805
5,431

1,696,914
2,844

1,268,755
464

8,673,965

MWh
%
MWh
som/kWh
3
10 som

44,579
0.38%
10,958,251
0.41

596,239
5.17%
10,462,868
0.15

1,097,181
24.87%
3,287,358
0.44

403,527
31.12%
887,847
0.41

449,968
26.52%
1,244,101
0.47

363,274
28.63%
905,016
0.41

(531,915)

104,555

9,720

(63,845)

(92,257)

1,323

G. Total Prime Cost of Electricity Service

Component

2,313,950
2,954,768
33.3%
6,324,323
(572,419)

2010
(som/kWh)

Generation
Transmission
Distribution

%
0.41
0.15
0.43
0.99

10,462,868

41.2%
14.8%
44.0%
100.0%

Total breakdown of the estimated prime costs are summarized below.

Component

2010

Percentage

Cost of Generation (som/kWh)

Cost of Transmission (som/kWh)
Cost of Distribution (som/kWh)

0.41
0.15
0.43

41%
15%
43%
7

Total

0.99

100%

For the export markets, the total cost of electricity supply and transmission was
approximately 0.56 som per kWh in 2010 as the cost of distribution is excluded.
Exhibit 1 is a pie chart showing the relative portion of the cost components in 2010. As can
be seen, the salaries, wages and contribution to social funds represent the largest portion
(27%) of the total cost, followed by fuels expenses for Bishkek and Osh CHP plants (20%),
repairs (19%), and taxes and fees (13%). In contrast, the depreciation and capital
investment account for only 8%, and 5%, respectively, despite the fact that the power
system was built 30 years to 40 years ago and urgently needing major repairs, replacement
and modernization to ensure reliable and secure electricity service.

Exhibit 1: Components of Prime Cost of Electricity in 2010

It should be pointed out that the estimated 1.0 som per kWh prime cost of electricity does not
adequately include the following cost items that should be included as part of the cost of
electricity:

The costs that are urgently needed to replace worn-out equipment and
machineries, to rehabilitate the dilapidated facilities, and to upgrade and expand
the power systems to meet the growing power demands. Therefore, the
depreciation expenses and capital investment included in the computation of 1.0
som per kWh do not represent the true costs required to provide reliable service.

The costs associated with non-payment of electricity bills incurred by the

distribution Joint Stock Companies.

Continuing Deterioration of the System

Most of the generation plants and transmission and distribution systems were built 30 to 40
years ago and have passed the end of their economic lives. Little capital investment has
been made since independence to perform proper repairs and maintenance. If the true costs
required to replace worn-out equipment and dilapidated facilities are not included in the cost
of electricity service, the financial and physical conditions of the power sector can be
expected to continue to deteriorate and will put the power system at risk of a catastrophic
breakdown.
Example observations of the power sectors deteriorating conditions include:

Unreliable electricity service as seen in the reported unplanned power outages

that were extremely high in 2010 at 12,578 (or more than 34 outages per day).
Such a level of unplanned outages would be categorized as unreliable services
in international practices (see Table 4).
Transmission and distribution networks have been substantially deteriorated and
urgently need major repairs or replacements. For example, JSC Severelectro
stated that technical conditions of about 50% of its 10 kV to 0.4 kV distribution
lines and transformers are unsatisfactory or not in working order.
Growing power demands resulting in overloading of the transmission and
distribution networks, especially in winter peak demand period.
Most hydropower plants and CHP plants were built 30 years ago and have been
decreasing their capacity and efficiency. For example, Bishkek CHP plant has
been derated to around 300 MW from a nameplate capacity of 660 MW, and 11
out of 24 boilers are currently down for repairs.
50% of the current transformers at low voltage distribution level have been
burned out and have not been repaired resulting in inaccurate metering of
electricity consumption.
Inadequate metering of bulk power transactions at transmission voltage levels.

Table 4: Reported Unplanned Power Outages at Distribution Level in 2010 *

JSC
Number of Outages
JSC Severelectro
4 370
JSC Vestokelectro
2 215
JSC Oshelectro
3 692
JSC Jalalabatelectro
2 301
Total
12 578
* source: State Energy Inspectorate

In addition, the financial health of the power sector continues to deteriorate. The total
financial loss of the sector in 2009 and 2010 was reported at 2.75 billion som, resulting from
high energy losses, low collection rate (see table 5), and below-cost tariffs. For example,
total reported energy loss in 2010 was over 33% (0.4% at the generation level, 5.2% at
transmission and 27.7% at distribution level)

In summary, the 1.0 som per kWh estimate of the prime cost of electricity service in
this Scenario does not reflect adequately (i) the cost of expenditures urgently needed
to replace worn-out equipment and machineries, and to rehabilitate or replace
dilapidated facilities to ensure reliable and secure electricity supply, and (ii) the cost
of non-payment of electricity bills. If such an inadequate estimate of the true costs
continues to be used as the basis for tariff setting, the already deteriorated physical
condition and financial performance of the power sector could worsen and put the
power system at risk of a catastrophic breakdown.

10

Table 5: Reported Profit (Loss) of the Joint Stock Companies

Year
2009
2010
JSC Power Plants
Electricity sales (MWh)
Domestic
9,038,320
9,488,771
Export
864,059
1,469,480
Total
9,902,379
10,958,251
Sales Revenue (103 som)
Domestic
2,549,996
1,722,904
Export
1,568,077
2,029,534
Frequency regulation
84,827
174,254
Heating supply
298,272
543,287
Hot water supply
100,649
214,027
Total Revenue
4,601,821
4,684,006
Average Domestic Tariff(som/kWh)
0.282
0.182
Average Export Tariff(som/kWh)
1.815
1.381

Company

Total Expenses (10 som)

Profit (loss) (103 som)*
JSC NESK
Total electricity transmitted (MWh)
Total Revenue (103 som)
Including Frequency regulation
Sales to Kumtor
Average Transmission tariff (som/kWh)
Total Expenses (103 som)
3
Profit (loss) (10 som)
JSC Severelectro
Electricity sales (MWh)
3

Sales revenue (10 som)

Transit Revenue (103 som)
Total Revenue (103 som)
Average tariff (som/kWh)
Total Expenses (103 som)
Profit (loss) (103 som)
JSC Vostokelectro
Electricity sales (MWh)
Total Revenue (103 som)
Average tariff (som/kWh)
3

Total Expenses (10 som)

Profit (loss) (103 som)
JSC Oshelectro
Electricity sales (MWh)
Total Revenue (103 som)
Average tariff (som/kWh)
3

Total Expenses (10 som)

Profit (loss) (103 som)
JSC Jalalabatelectro
Electricity sales (MWh)
Total Revenue (103 som)
Average tariff (som/kWh)
3

Total Expenses (10 som)

Profit (loss) (103 som)
Sector Total Profit (Loss) (103 som)
*

6,552,875
(1,951,054)

5,215,921
(531,915)

9,324,109
1,325,345
169,654
356,069
0.086
1,491,718
(166,373)

10,462,868
2,288,474
383,382
466,909
0.137
2,183,919
104,555

3,088,602
2,519,854
1,822
2,521,676
0.816
2,582,700

3287358
3,509,569
0
3509704.8
1.068
3,499,985

(61,024)

9,720

921,040
747,303
0.811

887,848
896,400
1.010

750,584
(3,281)

960,245
(63,845)

1,255,664
1,031,759
0.822

1,244,101
1,215,599
0.977

1,005,779
25,980

1,307,856
(92,257)

870,587
632,837
0.727

905,016
848,314
0.937

651,839
(19,002)

846,991
1,323

(2,174,754)

(572,419)

JSC PP's 2010 actual expenses decreased as about 579 million som materials, fuels
and equipment were paid for by the World Bank grants, and humanitarian aid from Kazakhstan;
JSC PP would have a 1.3 billion profit if 1.83 billion som non-paymnet was collected

11

5.2 Scenario 2: Restore Reliable Service by Catching-Up with Urgently

Needed Repairs and Replacement
This Scenario assumes a certain amount of annual capital investments to provide the long
overdue repairs and maintenance of the dilapidated power system because so little capital
investment has been made in the past 20 years to repair and maintain the power system in
order to ensure reliability and efficiency.
Urgently Needed Reconstruction Investments
The major reconstruction projects and approximate cost estimates provided by the Joint
Stock Companies are summarized below:
Generation:
Uch-Kurgan HPP built in 1962, rehabilitation at a cost of $32 million
Toktogul HPP built in 1975, partial rehabilitation at a cost of $22 million
Bishkek CHP plant built in 1977, rehabilitation at a cost of $300 million1
Kurpsai HPP built in 1982, partial rehabilitation at a cost of $4 million, and
Atbashi HPP built in 1990, rehabilitation at a cost of $26 million
Total
$384 million
Transmission:
Replacement of worn-out equipment & rehabilitation of the existing transmission grids at a
total cost of $250 million, including a proposed $45 million ADB financing for transmission
substation upgrades and new metering equipment.
Distribution:
Replacement of worn-out equipment, meters and control systems,
and rehabilitation of the existing distribution networks with the
following cost estimates2:
JSC Severelectro
JSC Vostokelectro
JSC Oshelectro
JSC Jalalabatelectro
Total

$260 million to $500 million

$210 million to $400 million
$215 million to $415 million
$150 million to $290 million
$835 million to $1505 million

The above rough cost estimates are assumed to be required and spent over the next 5 to 10
years. The costs total $1.5 2.1 billion. These are rough estimates but reasonable estimates
given that no investment in existing energy sector infrastructure has been made in the last
1

Based on the estimated cost of restoring reliable heating and electricity supply included in a paper issued in
2008 before consideration of privatization.
2
JSC Severelectro stated in 2009 it would cost $260 million to modernize its distribution network, but provided
in February 2011 an updated estimate of $783 million. The upper range of $500 million was assumed for the
purpose of this analysis. Other distribution JSC have not provided yet the requested data so the figures shown
are in proportion to the size of JSC Severelectros fixed assets.
12

20 years. The capital investment requirements would be in the range of $20 million to $50
million each year across the generation, transmission and distribution subsectors in the next
5 to 10 years.
To include these capital investment costs in the prime cost of electricity analysis using the
current methodology established by the Regulator, the fixed assets of the power sector are
assumed to be re-evaluated based on the current replacement or rehabilitation costs. This is
because the power systems were built 30 to 40 years ago and most have passed their
economic lives. As so little replacement or rehabilitation works have been carried out in the
past 20 years, replacement and major rehabilitation of the fixed assets is urgently needed to
restore reliable and efficient electricity service. Annual depreciation expenses based on the
reevaluated fixed assets would enable Joint Stock Companies to gradually replace the
dilapidated power systems and restore reliable electricity service.
Table 6 shows the assumptions and computations of the fixed asset values and new annual
depreciation expenses. The assumed replacement or rehabilitation costs are based on
discussions with the Joint Stock Companies3 and our professional judgments. More accurate
re-evaluation of fixed assets could be established with a detailed asset re-evaluation study.
Also shown in Table 6 are the book values of the fixed asset of the Joint Stock Companies at
the end of 2010. They are extremely low as most of the assets have been fully depreciated,
and no fixed asset re-evaluation has been carried out in the past 15 years. For example, the
fixed asset value of JSC Power Plants was about 7 billion som, or $152 million. In other
words, it has an average value of about $40 per KW of generation capacity, only a fraction of
the current replacement cost (a minimum of $1000 kW). With such low fixed asset book
values, the associated depreciation expenses could not possibly be sufficient to replace the
systems.
The computed annual depreciation expenses required to replace worn-out equipment and
rehabilitate dilapidated power systems were then included in the calculations of the prime
cost of electricity. As shown in Table 7, the computed prime cost of electricity in this scenario
(Restore Reliable Service by Catching-Up with Urgently Needed Repairs and Replacement)
would be 1.65 som per kWh. This includes 0.65 som per kWh for generation, 0.25 som per
kWh for transmission, and 0.75 som per kWh for distribution. The associated total revenue
requirement from the power sector would be 15.0 billion som ($326 million), or $136 million
above Scenario 1.
This estimate was based on the same 2010 reported expenditures, energy production and
sales used in the Scenario 1 analysis with the exception that depreciation expenses were
based on the re-evaluated fixed assets in order to provide sufficient revenues to rehabilitate
physical facilities and restore reliable service. In addition, the system total energy loss was
assumed to be reduced from over 33% in Scenario 1 to around 27% in this Scenario
resulting from investments made to improve the power networks.
Under this Scenario 2, the performance of the power sector can be expected to improve.
The frequency of unplanned power outages and energy losses would be reduced, and winter
power deficits would be alleviated as the rehabilitated Bishkek CHP would be more able to
produce the needed thermal energy and electricity.

Included JSC Power Plants, JSC NESK, and JSC Severelectro.

13

Table 6: Estimates of Reevaluated Fixed Assets and Annual Depreciation Expenses

Depreciation
JSC
3
%
$ million/yr 10 som/yr
JSC PP
Installed Capacity (MW)
Assumed replacement/Rehab cost ($ million/MW)
Total reevaluated fixed asset value ($million)
Current (2010) fixed asset book value ($ million)
JSC NESK
Transmission Lines (Km)
No. of Transformers/substations
Assumed Replacement/Rehap cost ($ million/Km)
Total reevaluated fixed asset value ($million)
Current (2010) fixed asset book value ($ million)
JSC Severelectro
Lines (Km)
No. of Transformers/substations
Assumed cost ($ million/Km)
Total reevaluated fixed asset value ($million)
Current (2010) fixed asset book value ($ million)
JSC Vostokelectro
Lines (Km)
No. of Transformers/substations
Total reevaluated fixed asset value ($million)
Current (2010) fixed asset book value ($ million)
JSC Oshelectro
Lines (Km)
No. of Transformers/substations
Total reevaluated fixed asset value ($million)
Current (2010) fixed asset book value ($ million)
JSC Jalalabatelectro
Lines (Km)
No. of Transformers/substations
Total reevaluated fixed asset value ($million)
Current (2010) fixed asset book value ($ million)

3,768
0.5
1,884
152
6,600
190
0.15
990
120
21,813
8,522
0.03
654
47
12,982
4,477
377
11
13,679
4,604
394
8
9,308
3,385
274
8

0.033

62.2

2,859,912

0.033

32.7

1,502,820

0.033

21.6

993,364

0.033

12.4

571,721

0.033

13.0

598,704

0.033

9.0

415,651

14

Table 7: Estimated Cost of Service under Scenario 2 - Restoring Reliable Service with Catching Up Repairs and Replacement Investments
Components
JSC PP
JSC NESK JSC Severelect Vostokelect
Oshelect
Jalalabatel Sector Total
A. Costs
I. Materials and Services
Repair/maintenance services
Supplies/materials
Fuels (for CHP plants)
Other fuels and lubricants
Own Energy consumptions
Uncompensated VAT
Subtotal

103 som

Unit
103 som
103 som

333,307
502,417

19,115
79,690

20,631
136,875

979
32,115

521
57,778

462
43,218

375,015
852,094

103 som

2,063,810

2,063,810

54,121
151,506

37,433
5,217
88,783

15,793
25,669
74,557

16,710
1,527
58,204
134,739

15,933
2,079
37,930
99,622

163,758
165,754
210,585
3,831,016

165,534
26,778

240,614
45,217

181,714
34,601

2,020,400
350,880

10
103
103
103

som
som
som
som

0
3,105,161

23,769
5,426
0
127,999

II. Salaries, wages

III. Social fund contribution

103 som
103 som

600,634
101,730

357,851
60,780

IV. Depreciation expenses

V. Other expenses (fees)
VI. Other taxes
VII. Financing cost
Loan principal repayment
Loan interest expense
VIII. Capital investment
Reconstruction investment

103 som
103 som

2,859,912
493,324
14,077

1,502,820
502,271
6,418

107,479
25,680

571,721
38,929
386

598,704
104,600
977

415,651
17,458
604

6,942,171
1,264,060
48,141

103 som
103 som

341,664
207,522

132,984
112,122

17,100
50,461

6,534
463

0
0

4,910
0

503,192
370,568

103 som

45,865

4,135

5,226

5,848

61,075

174,308

86,454

174,171

23,368

18,634

3,740

480,675

7,898,331

195,535
3,085,234

2,258,888

912,403

1,148,710

764,147

195,535
16,067,714

2,755,522

2,258,888

912,403

1,148,710

764,147

14,980,508

MWh
MWh
MWh

11,857,243 11,525,257
854,413
194,882
271,268

4,411,491
26,953

1,296,805
5,431

1,696,914
2,844

1,268,755
464

MWh
%
MWh
som/kWh
103 som

35,663
476,991
0.30%
4.14%
10,967,167 10,853,384
0.65
0.25

877,744
19.90%
3,506,793
0.64

322,821
24.89%
968,553
0.94

359,975
21.21%
1,334,095
0.86

290,619
22.91%
977,671
0.78

2,363,814
26.7%

(3,214,326) (1,120,145)

(813,607)

(614,016)

(661,283)

(393,252)

(6,816,629)

New Constr/upgrade investment10

IX. Income tax
103
X. Power import cost
103
XI. Cost of Frequency Regulation 103
103
Total Cost

som
som
som
som
som

103
103
103
103
103
103

som
som
som
som
som
som

B. Other Revenues
I. Heating revenue
II. Hot water revenue
III. Frequency Regulation
IV. Sale revenue to LIC
C. Net Costs
D. Energy Balance
I. Gross generation/input
II. Own use & others
III. Sale to Kumtor
III. Line and transformer losses
Quantity
Percentage
IV. Net generation/output/sale
E. Average Cost of Electricity
F. Profit (Loss)

G. Total Average Cost of Electricity Service

288,939
474,054
81,774
993,364

543,287
214,207
329,712
7,140,837

2010
Component (som/kWh)
Generation
0.65
Transmission
0.25
Distribution
0.75
Total
1.65

%
39.4%
15.3%
45.3%
100.0%

15

5.3 Scenario 3: Ensure Power Supply Security throughout the Year and
throughout the Republic
This Scenario assumes that certain new capital investments will be made to address the
serious challenges faced by the power system that have been highlighted in previous tasks
of the Kyrgyzstan Energy Advisor Service (KEAS) project sponsored by the USAID. These
challenges include:

Reliance on the power grids and dependence on neighboring countries to deliver

power from Kyrgyz power plants to serve consumers both in the north and south
of Kyrgyzstan,
Current single line 500 kV south-north transmission line is vulnerable because it
does not provide any contingent backup in case one of the key transmission
components breaks down (This means that Kyrgyzstan does not meet the
international norm that is called the minimum N-1 reliability standard), and
Power deficits in winter and in dry years.

To address the above-mentioned transmission vulnerability problems and improve

transmission system security and reliability, JSC NESK has proposed two new investment
projects. These include:

Construction of a new southern transmission project at an estimated cost of $208

million, including (i) 220 kV southern transmission lines, (ii) a new Datka 500/220
kV substation, and (iii) a new 220/110 kV substation at Kurshab.
Construction of a new south-to-north transmission project at an estimated cost of
$342 million, including (i) a 500 kV transmission line from Datka to Kemin, (ii) a
new 500 kV substation at Kemin, (iii) a new 220 kV transmission line from Kemin
to Bystrovka, and others.

To ensure reliable electricity supply throughout the year and in dry years, JSC Power Plants
has proposed to build a base load coal-fired power plant at the Kara Keche coal field. The
proposed capacity would be in the range of 1,000 MW to 1,200 MW with an estimated cost
in the range of $1,350 to $1,620 million. JSC Power Plants has not conducted a detailed
feasibility study yet. In Task 6 of the KEAS project sponsored by the USAID, a smaller plant
size at 600 MW was reviewed. The proposed plant size can be expanded later in increments
if there is a need for a larger size coal-fired power plant in the future. For this review of prime
costs, 600 MW plant size with a rough estimated cost of $977 million was assumed.
This proposed thermal power plant would produce much needed firm power to supplement
the drastically reduced hydropower in winter and in dry years, and to provide year-round
power in dry years in order to avoid power deficits or much more costly power imports. In
addition, the Kara Keche power plant uses indigenous coal, reducing the countrys
dependence on foreign fuels. The development of indigenous coal resources and a new
mine mouth power plant will also create many needed new jobs in the region.
In this Scenario, a quick analysis of annualized costs of the proposed transmission and
power plant projects was carried out. As shown in Table 8, the transmission investments are
assumed to receive project financing with a 3% loan interest to JSC NESK and a 20-year

16

loan term. The cost estimates are based on completed feasibility studies.4 Other
assumptions used in the analysis are also shown in the table. The estimated incremental
transmission cost would be 0.16 som per kWh. If the government approves these investment
projects, JSC NESK expects to have these two new projects commissioned 3 to 5 years
after the government approval.
Table 9 shows the cost analysis of the proposed Kara Keche coal-fired power project. The
cost estimate was based on benchmark figure of $1,500 per KW for engineering,
procurement and construction. A very favorable project financing similar to that assumed for
the transmission projects (i.e., 3% loan interests with 20-year loan term) was also assumed
for the proposed plant. Two coal prices at the mine mouth ($20 per ton and $40 per ton)
were assumed in the analysis. It was also assumed that one half of the electricity output
from the proposed plant would be for the domestic market.
Based on the assumptions used, the cost of electricity from this proposed power plant would
be in the range of 1.24 som per kWh (2.7 cents/kWh) to 1.75 som per kWh (3.8 cents/kWh)
depending on the assumed coal prices used in the calculations. The incremental cost to the
overall electricity supply to domestic consumers would be in the range of 0.17 som per kWh
to 0.27 som per kWh. It should be noted that the cost of constructing a new transmission line
to connect the proposed power plant to the nations power grid is not included in the above
cost computation.. If the government approves the project, the anticipated plant
commissioning date would be 7 to 10 years after the government approval.
If the new transmission and generation investment projects to eliminate winter power deficits
were completed at the same time, the prime cost of electricity would be 0.17 som per kWh to
0.27 som per kWh more for generation, and 0.16 som per kWh more for transmission than
those in the Scenario 2. As summarized below, the total prime cost of electricity would be
2.05 som per kWh, including 0.87 som per kWh for generation, 0.41 som per kWh for
transmission, and 0.75 som per kWh for distribution. The associated revenue requirement
from the power sector would be 19.1 billion ($415 million), or 10.4 billion ($225 million)
above Scenario 1.
Cost Component
Generation (som/kWh)
Transmission (som/kWh)
Distribution (som/kWh)
Total

Scenario 2
0.65
0.25
0.75
1.65

Scenario 3
0.87
0.41
0.75
2.03

Feasibility Study for the Southern Kyrgyzstan Transmission Upgrade Project, Task 7 Final Report, submitted by
T&D Engineers and Consultants, Inc. to the U.S. Trade and Development Agency, 2008, and the updated $208
million project cost announced by the Minister of Energy on 5 February 2011. Feasibility Study for 500 kV
Datka-Kemin Transmission Line, Final Report, prepared by Auriga Corporation, December 23, 2009.

17

Table 8: Cost Analysis of Transmission Security Improvement Investments

I. Capital Costs of the Transmission Improvement Projects
a. New South to North Transmission Line
Capital Cost ($million)*/
342.0
b. New Southern Transmission System
Capital Cost ($million)**/
208.0
Total Capital Cost (a + b) ($million)
550.0
II. Annualized Costs of the Transmission Improvement Projects
a. Assumed Financing (3% interest rate, 20 years loan term)
Capital Cost ($million)
550.0
Total Investment
550.0
Amortization rate
0.067
Annualized capital cost ($million/yr)
37.0
Annual O&M Cost (1%) ($million/yr)
5.5
Less wheeling charges paid to Uzbek
7.0
Total annual cost ($million/yr)
35.5
IV. Annualized Transmission Cost
Total Amount of Power Wheeled (GWh/yr)
10000
Incremental Wheeling Tariff ($/KWh)
0.004
Incremental Wheeling Tariff (som/KWh)
0.16
* From the feasibility report; ** Updated cost estimate announced by the Ministry of Energy on 25 Feb. 2011

18

Table 9: Cost Analysis of Kara Keche Coal-fired Plant Investment

I. Basic Cost Assumptions
Unit Variable (fuel & operation) Cost ($/MWh)
Coal Price at $20/ton Scenario*/
13.15
Coal Price at $40/ton Scenario*/
24.15
II. Fixed Cost Estimates
a. Assumed financing (3% interest rate, 30 years loan term)
Construction Cost ($/MW) - benchmark figure
1,500,000
Construction Period (yrs)
5
Interest During Construction ($/MW)
112,500
Negotiation & Contract Cost @1% ($/MW)
15,000
Unit Investment Cost ($/MW)
1,627,500
Annual Amortization Rate
0.051
Annualized Unit Capital Cost per year
83,034
Annual Fixed O and M Cost @2% ($/MW)
30,000
Total Annual Fixed Capital Cost ($/MW)
113,034
Total Capital Investments($million) for 600 MW
977
III. Cost of Electricity Generation
i. Fixed Cost Component
90% capacity factor (7884 hours/yr operation)
Cost per KWh
0.01
ii. Variable Cost Component
Coal Price at $20/ton Scenario ($/KWh)
0.01
Coal Price at $40/ton Scenario ($/KWh)
0.02
iii. Total Cost of Electricity Generation
Coal Price at $20/ton Scenario ($/KWh)
0.03
Coal Price at $40/ton Scenario ($/KWh)
0.04
IV. Potential Effect on Cost of Electricity Supply
Coal Price at $20/ton Scenario ($/kWh)
0.004
Coal Price at $40/ton Scenario ($/KWh)
0.006
Coal Price at $20/ton Scenario (som/kWh)
0.17
Coal Price at $40/ton Scenario (som/KWh)
0.27
* From KEAS report entitled Estimating Generation Available for Domestic and Export Markets, September 2009

19

U.S. Agency for International Development/CAR/Bishkek

171 Prospect Mira, 720016
Bishkek, Kyrgyzstan
Tel: (+996) 312 55-12-41
www.usaid.gov

U.S. Agency for International Development/CAR/Bishkek

171 Prospect Mira, 720016
Bishkek, Kyrgyzstan
Tel: (+996) 312 55-12-41
www.usaid.gov

U.S. Agency for International Development/CAR/Bishkek

171 Prospect Mira, 720016
Bishkek, Kyrgyzstan
Tel: (+996) 312 55-12-41
www.usaid.gov

20