The speech of the Minister of Industry, Energy and Fuel Resources of the Kyrgyz Republic, Mr. Chudinov at the conference "Energy reforms in Kyrgyzstan - ways to improve efficiency and usage of renewable energy sources" hold on September 16, 2007

Dear participants and guests of the conference,

As you all know, our main energy resource is hydroelectric power. According to the amount of hydro resources, Kyrgyzstan is third among CIS countries, after Russia and Tajikistan.

To develop the hydro energy potential of Kyrgyzstan, about 142 billion kilowatt-hours of electricity, is the main strategy to develop the energy sector of the republic. On the Naryn River and its tributaries, it is possible to build 22 hydroelectric power stations with an annual energy production of more than 30 billion kilowatt-hours. Today we exploit no more than 10% of our hydro resources.

The significant part of the untapped hydro-energy potential is represented in the form of mini and micro-hydro power stations that might successfully meet local consumption needs. According to estimations, the total and technically feasible energy potential of small power stations is 5-8 billion kilowatt-hours of electricity per year.

The current system of energy supply was installed during the Soviet Union as an integral part of the regional (Central Asian) system. Within that system, the hydro-energy resources of the Kyrgyz Republic and Tajikistan have been complemented by the mineral (and organic) and fuel reserves of Kazakhstan, Turkmenistan and Uzbekistan. It is important to emphasize that in those days the priority of the hydro system was water supply. However, after the collapse of the USSR, the Kyrgyz Republic has changed its priorities in exploitation of the hydro system in order to meet its own needs in electricity. Considering the interests and water needs of downstream countries (Kazakhstan and Uzbekistan), the production of electric power is a priority for exploiting the current system.

Since water is the only widely available natural resource, the Kyrgyz Republic is to receive organic fuel types from two downstream neighbors in order to meet the high energy consumption in winter (including heating demands).

Nowadays, when it is necessary to improve the industrial component of Kyrgyzstan's economy, electric energy does not contribute to solving this task. Therefore it may become a constraining factor on the way to sustainable economic growth of 8-9% needed to maintain the competitiveness of the country and provide for the socio-political stability.

Another important factor for the Kyrgyz energy sector is to improve its competitiveness on the regional energy market.

Ladies and gentlemen, the main challenges and risks of the energy sector today are the following:

First -regional. Many countries of the region have a high rate of the economic growth, which increases an objective need for energy. At the same time, some intensive works to improve the energy potential of Tajikistan, Kazakhstan and China have started. In this context, there will be strong competition in the energy market. Kyrgyzstan must keep its potential in regional hydropower.

Taking into account the fact that the energy production in Kyrgyzstan is concentrated on the hydro power stations, the considerable factor (which creates a number of risks) is the regulation of water resources to be used by the contiguous states for agricultural purposes.

Second- internal. The increasing consumption of electric power in Kyrgyzstan is far ahead of its production capabilities, which risks Kyrgyzstan turning from a country of energy surplus into a country of energy shortage.

The long-term operation of the energy/power sector under the conditions of financial and technical deficiency, accompanied by increasing and changing consumption structures, has resulted in the technological deterioration (more than 50%) of the sector components.

The large commercial and technical deprivations limit the commercial potential of the energy/power sector, and reduce the chances of modernizing technology and attracting foreign investment into the sector.

The substantial inequality in energy consumption (the divergence is more than twofold) and an obvious domination of household consumption, while the service functions remain underdeveloped, limit perspectives for economic rationalization of the energy/power sector.

Also it is important to take into account the common economic environment.

The Kyrgyz energy system functions under the limitations to mobilize the resources from external sources. The government strictly minimizes its external loans, rejecting a number of opportunities to receive loans from external commercial banks and limiting the amount of loans that are being received with low interest rate from multiparty financing.

Our own financial markets, both the bond market and stock market, are almost non-functional.

Moreover, the price of the imported gas steadily goes up, reflecting the global trends. As a result of the current economic environment, sectors independently look for internal sources necessary for operation maintenance and investments' implementation. In other words, the only way to meet the major financial needs of the sector, i.e. to cover the exploitation and technical maintenance costs, to service loans, and to meet the needs in circulating capital and capital expenditure, is to strengthen the financial order, decrease the amount of losses and introduce appropriate tariffs.

The main laws that regulate this sector are the Laws on "Energy and power" of 28.01.1997, #8; on "Energy" of 30.10.1996, #56; on "Energy saving" of 07.07.1998, #88, and on the "Special status of the Toktogul hydroelectric stations' cascade and the national high voltage transmission lines" of 21.01.2002, #7. These laws provide for sector regulation, but do not entirely encourage market relations in this field; it concerns the capitalization potential of this sector where electric power can be turned into the market product.

To develop market relations and attract foreign investment into the sector, the following laws have been adopted: the Law of the Kyrgyz Republic on "The amendments and additions to the Law of KR on "The special status of the Toktogul hydro power stations and the national high voltage transmission lines" #100 of July 30, 2007 and the Law of KR on "The construction and exploitation of the Kambarata hydro power station 1 and 2" #120 of July 31, 2007."

Working environment. The productivity of the sector as a whole, and especially of the thermal stations and distribution networks, is too small to overcome problems brought about by economic conditions. This relates to the fact that in order to keep low tariffs, the government in the past reduced its expenses considerably on technical services and capital investment -especially in the field of distribution networks. As a result, in order to meet the actual financial demands the tariffs must be higher. From another side, it provides an opportunity to substantially increase the production rate. However, it will require larger capital investments, which also necessitate higher tariffs. All aspects of commercial activity remain weak. There are serious problems in measuring power consumption (energy provision without quantity meters, non-functional meters, manipulations of meters' indexes, etc). Undoubtedly, the payment collection process must improve; however, such improvements will not solve all financial needs of the sector.

Social environment. The Kyrgyz Republic with its GDP per capita of about 300 dollars is considered one of the poorest countries in the world. Despite recent poverty reduction, about 2,8 million people (a little bit more than a half of the country's population) remain in extreme poverty conditions. However, energy is available throughout the whole country, and during the harsh winter season, dependency on electricity is high -especially in the villages where the access to other sources of energy is limited. Consequently, within the realities of strong demand and almost unrestricted availability of power, the energy tariffs are of serious social and political significance.

There is a strong divergence in energy consumption within the regions of the country: the difference between the north and south is more than twice. It brings problems of social discrimination, social injustice, and creates conditions for social and political destabilization.

Ladies and gentlemen, within the above said, we see the following tasks as necessary to solve in order to realize the Strategy for sustainable energy sector development.

The main task in developing the energy sector is to provide energy security in the Kyrgyz Republic for the long-term (until 2025). Other tasks:
- To effectively use the hydroelectric resources of the country and the potential of the power/energy sector;
- To provide maximum effect to trigger economic growth in the country and to improve the quality of life of citizens;
- To turn the power/energy sector of Kyrgyzstan into a regional "energy market."

Measures necessary to solve the above tasks
• Investment measures, to be realized within the period of 2007-2010;
• Measures to realize the investments after 2010;
• Political measures to create opportunities for the socially responsible mobilization of means to realize investments.

Investment measures. Within the period of 2006-2010, investments have to concentrate mainly on:
• The priority investments are to be made into the distribution networks in order to reduce the technical, and above all, commercial losses. Restoration and privatization of the distribution networks will allow for the reduction of losses until optimal technical efficiency.
• Investments into energy production in the mid-term will concentrate on expanding energy production opportunities, and will include investments into: a) the construction of the Sary-Jaz hydroelectric stations; b) restoration of the current energy facilities at the Bishkek Heat station 2, with an increase of coal consumption; and c) restoration of the current hydroelectric stations in Uch-Kurgan and At-Bashi.
• New investments in the electricity transmission field will be directed to reduce dependency on using the networks of neighboring countries along with the expansion of export potential towards the South Asis via Tajikistan. Hence, the priority will be given to the following high voltage transmission channels: air transmission line "Datka-Kemin" (500kw) and sub-station "Datka" (500kw); air transmission line "Aigul-Tash-Samat" (110 kw) and sub-station "Kara-Bulak" (110kw).
• As for natural gas, the priority will be to invest into both the transfer and distribution of gas; first of all, to complete the construction of the second line of the gas pipeline "Buhara-Jambul-Bishkek-Almaty."
In addition to the above, in the period of 2007-2010 there will be the following works in preparation and analysis of the technical-economic grounding:
• To expand the export potential, the necessary operations to complete the constructions of the Kambarata Hydroelectric station will be finalized, including analysis of the investment needs and potential market for the energy supply, planning of financing, etc;
• To reduce the dependency on imported fuel, to meet the increasing local demand and to expand the export of energy, the necessary work to evaluate a plan to construct the new heat station, based on the coal in the coalfield Kara-Keche and the further reconstruction of the Bishkek heat station -1, including an analysis of potential sources of coal, both local and foreign, will be done.
• To define variants to reduce the import of organic fuel (oil, gas), a number of programs for direct investment to explore and develop new fields of oil and gas, including the optimization of taxing in the sphere of field development and organic minerals extraction.
• The program to expand use of alternative energy sources (such as small hydro-power stations, solar facilities, wind energy stations and facilities for biofuel), including the formulation of network access rules, energy trade and fixing tariffs for energy produced from such alternative sources will be developed;
• By the end of 2007, the program of energy saving and effective use of energy, which is to become an integral part of regional and municipal programs for socio-economic development, will be evolved.

According to estimations, the financing that is required to produce, transmit and distribute power, and to transport and distribute natural gas for the period of 2007-2010, is about 950 million dollars. The needs in financing of projects (such as the construction of the Kambarata hydroelectric stations) along with the needs to finance projects on energy production based on coal, will be defined on the basis of the abovementioned investigations, and these investigations are to be carried out within the period of 2010 and 2015.

Political measures. To mobilize financing and to realize these investments, the government intends to take the following necessary political measures:

• The government will realize the program to improve the financial responsibility of energy consumers and energy companies. This task will be realized by means of a) elimination of barter practice and mutual payments and other forms of cashless settlement; b) an off-mode for non-payers, and elimination of political interference, directed at reconnection of consumers (including budget organizations and preferential consumers) when they pay their debts; c) to initiate the program of material encouragement together with strict budget limitations in order to force budget organizations to save energy, and d) to eliminate preferential tariffs for certain companies which deal with on-selling of energy. Moreover, the corresponding legal acts will be adopted to consider electricity and gas as "products", which will allow criminal investigation for their theft.
• The government will realize the program of corporate management of energy companies. This will be accomplished by means of a) incorporation of transparent selection and appointment of qualified and competent specialists for managerial positions in the management of energy companies via conducting a transparent, open and competitive selection, starting from October 1, 2007; b) to provide for the annual audit of energy companies by independent auditors with measures to be taken on the auditors' comments; c) to incorporate from November 1, 2007, the practice to conclude contracts between the management of energy companies and the Government (government of the Kyrgyz Republic) that could stimulate according to results, which will contribute to the effective functioning of companies. Also, the maximum transparent work of the energy sector will be provided, including: a) material and financial separation of energy accounts produced by energy companies for the local market and for exporting, and b) acquisition of energy resources (especially of coal) by means of conducting international competitive trades aimed at concluding long-term agreements of supply.

• In the beginning of 2008, the Government will adopt the mid-term tariff policy regarding electricity for the period of the second half of 2008 until 2012. The main goal of the mid-term tariff policy is to fix the tariffs by 2010 at a rate that will guarantee complete compensation of expenses to produce, transmit and distribute power. The tariffs will go up gradually and regularly, i.e. once per half a year. The tariff increase will be balanced in order to stimulate the growth in the real economy sector and to exclude the cross-cut subsidizing of energy consumers. As much as possible, the transition into the new structure of tariffs will be carried out in such a way that a tariff rate will be defined depending on the class of voltage that is used by the end user. The current tariff is 0,015dollar/kwh, while the current rate of cost-compensation is about 3,00 dollar/kwh. It will be used as the target indicator for 2010; when the tariff rate is changed, the rate of inflation, exchange rate and investments' rate will be automatically considered.

• The mid-term policy on gas tariffs for the period of 2008-2012 will be developed. The gas tariffs have to be based on principles of automatic acceptance of the imported gas price, while the regulated price will include the internal transportation expenses as well as the costs of technical service and capital needs.

• The government will start working on regulating schemes of social protection on energy supply and finalize it by the end of 2007. This is to be accomplished by means of: a) development and incorporation by March 1, 2008, the system of moneterization of preferential tariffs for household users by adoption of a corresponding law until February 15, 2008 by the Jokorku Kenesh of the Kyrgyz Republic, and c) provision in the country's budget to fully finance the expenses of social assistance regarding energy supply.
• The government will take measures directed at maximization of the private sector's participation in the development and functioning of the energy sector. This is to be attained by means of: a) adoption until December 31, 2007 by the Parliament of the forth stage of the Program of privatization of "Kyrgyzenergo" (since 1998) in order to allow for the private sector to participate in energy distribution on the basis of concessions and/or management contracts; b) to make legal amendments by December 31, 2007 in the law on prohibition of private companies' participation in development and energy transmission to allow for private investments into i) current heat stations; ii) new energy projects' production by any means, and iii) investments into new transmission companies; c) adoption until July 1, 2008 by the Parliament of the Plan for restructuring of the gas sector that allows for the private sector's participation in distribution of natural gas, and e) conducting until August 31, 2008, a tender on the privatization or concession transfer of the Joint Stock Company "Severelektro". The special attention in the private sector's participation in the realization of investments within the new projects will concentrate on the Kambarata hydroelectric stations and the Bishkek heat stations, as well as the creation of favorable conditions for attracting foreign and private investments into the construction of the Sary-Jaz cascade of hydroelectric stations, Kokomeren and Upper-Naryn hydroelectric stations. It is planned that the large part of financing for these projects will come from private investors and non-state financial institutions, while the Government will retain the role of catalyst for these projects.
• The government will expand its activities in the sphere of regional cooperation, aiming at finding new markets for the electricity produced in the country. Further developments in the expansion of regional cooperation in water, fuel and energy sectors in the Central Asian region will continue to take place within bilateral and multilateral forums such as the Eurasian Economic Community. However, according to the experience of the last decade, cooperation will meet the interests of all concerned; the Kyrgyz Republic has its own variants to transfer energy within the country as well as diversified markets for energy export. Accordingly, the Kyrgyz Republic will continue to play an active role in the establishment of the Central South Asian Regional Energy Market (CASAREM). With this in mind, in October 2006 in Dushanbe, the Governments of the Kyrgyz Republic, Pakistan, Afghanistan and Tajikistan signed the first intergovernmental memorandum on mutual understanding, and the final agreements are to be signed by the middle of 2008. The Kyrgyz Republic will provide priority policies and investments to create opportunities for exporting its energy to South Asia directly through Tajikistan.
• The government will create the corresponding institutional basis for policy development and sector regulation. This is to be attained by means of strengthening the institutional structure and the development of the Ministry of Industry, Energy and Fuel Resources.
• The Government will create the corresponding legal basis for the next stage of energy sector development. To realize the Development Strategy, the Government will work in close cooperation with Parliament, since most components of the Strategy require Parliament's consideration. Particularly, the legal acts on a) recognizing energy as a market product; b) regulation of social protection on energy supply; c) permission on the private sector's participation in all parts of the energy sector.
• Monitoring and evaluation of the Energy Sector Devleopment
• The development of the Kyrgyz Republic's energy sector has been delayed partially because of the problems in the realization of certain elements of strategy and reforms that remain unsolved. Therefore, in order to overcome such problems at the higher stages, it appears to be reasonable to establish a Coordinating Council on attracting foreign investment into large energy projects.
• Moreover, a detailed program on National Energy, which distributes the functions of different state agencies to realize elements of the strategy, was developed. The monitoring of the Strategy is to be dealt with by the Ministry of Industry, Energy and Fuel Resources, and the Prime-Minister's Cabinet of the Kyrgyz Republic.

Results.

If these investment and political measures are realized, they will have the following results:

• By 2010 the aggregate production of energy will increase to 16,5 billion kilowatt hours, including the heat stations, which will increase by 0,7 billion kilowatt hours, while the production of energy by the hydroelectric stations will increase to 1 billion kilowatt hours. The problem of energy shortages during the winter season will be eliminated. The amount of energy export to the South Asia market should be around 1000 Mwh annually. By 2015, the aggregate energy production is to be about 22 billion kilowatt hours.
• Within the period of 2008-2010, the decrease of losses will be 6% annually on average while the increase of payments will be on average 9% annually. This will allow the gradual reduction of the index of quasi-fiscal deficit in the energy sector by reaching its indicator by 2010 of 1,9% of GDP.
• The energy tariff change and changes in the tariff structure for various categories of consumers will be realized in accordance with the currently developing plan, and as a result, by 2010, the average rate of tariffs will be 0,03 dollars/ kilowatt hour.
• The distributing energy companies will be privatized or given as concessions to strategic investors in accordance with the following dates: Limited Joint Stock Company "Severelektro" by September 1, 2008, and the Limited Joint Stock Companies "Oshelektro," "Jalalabadelektro" and "Vostokelektro" according to the results of the Limited Joint Stock Company "Severelektro" after privatization or concessions.

Text of the speech was provided by the Ministry of Industry, Energy and Fuel Resources of the Kyrgyz Republic.