Energy Sector Strategy 2008

1 — Security: Achieve nationwide stabilization, strengthen law enforcement, and improve

1. Security: Achieve nationwide stabilization, strengthen law enforcement, and improve personal security for every Afghan.

2 — Governance, Rule of Law and Human Rights: Strengthen democratic practice and

2. Governance, Rule of Law and Human Rights: Strengthen democratic practice and institutions, human rights, the rule of law, delivery of public services and government accountability.

3 — Economic and Social Development: Reduce poverty, ensure sustainable development

3. Economic and Social Development: Reduce poverty, ensure sustainable development through a private sector-led market economy, improve human development indicators, and make significant progress towards the Millennium Development Goals. AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) I Foreword For the preparation of the Afghanistan National Development Strategy II AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) In the name of Allah, the most Merciful, the most Compassionate Six and half years ago, the people of Afghanistan and the international community joined hands to liberate Afghanistan from the grip of international terrorism and begin the journey to rebuild a nation stunned by a long past of violence, destruction and terror. We have come a long way in this shared journey. In just a few years, as a result of the partnership between Afghanistan and the international community, we were able to draw up a new, Constitution, embracing the values of democracy, freedom of speech and equal rights for women. Afghans voted in their first ever presidential elections and elected a new parliament. Close to five million Afghan refugees have returned home, making it one of the largest movement of people to their homeland in history. Thousands of schools have been built; over six million boys and girls have been enrolled, the highest level ever for Afghanistan. Hundreds of health clinics have been established boosting our basic health coverage from 9 percent six years ago to over 85 percent today. Access to diagnostic and curative services has increased from almost none in 2002 to more than forty percent now. We have rehabilitated 12,200 km of roads. Our rapid economic growth, with double digit growth almost every year, has led to higher income and better living conditions for our people. With a developing network of roads and a state-of- the-art communications infrastructure, Afghanistan is better placed to serve as an economic land-bridge in our region. These achievements would not have been possible without the unwavering support of the international community and the strong determination of the Afghan people. I hasten to point out that our achievements should not make us complacent distracting to face the enormity of the tasks that are still ahead. The threat of terrorism and the menace of narcotics are still affecting Afghanistan and the broader region and hampering our development. Our progress is still undermined by the betrayal of public trust by some functionaries of the state and uncoordinated and inefficient aid delivery mechanisms. Strengthening national and sub-national governance and rebuilding our judiciary are also among our most difficult tasks. To meet these challenges, I am pleased to present Afghanistan’s National Development Strategy (ANDS). This strategy has been completed after two years of hard work and extensive consultations around the country. As an Afghan-owned blueprint for the development of Afghanistan in all spheres of human endeavor, the ANDS will serve as our nation’s Poverty Reduction Strategy Paper. I am confident that the ANDS will help us in achieving the Afghanistan Compact benchmarks and Millennium Development Goals. I also consider this document as our roadmap for the long-desired objective of Afghanization, as we transition towards less reliance on aid and an increase in self- sustaining economic growth. I thank the international community for their invaluable support. With this Afghan-owned strategy, I ask all of our partners to fully support our national development efforts. I am strongly encouraged to see the participation of the Afghan people and appreciate the efforts of all those in the international community and Afghan society who have contributed to the development of this strategy. Finally, I thank the members of the Oversight Committee and the ANDS Secretariat for the preparation of this document. Hamid Karzai President of the Islamic Republic of Afghanistan AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) III Message from the Oversight Committee For the preparation of the Afghanistan National Development Strategy IV AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) In the name of Allah, the most Merciful, the most Compassionate We are pleased to present the Afghanistan National Development Strategy, which reflects the commitment of the Islamic Republic of Afghanistan to poverty reduction and private sector-led economic growth for a prosperous and stable Afghanistan. The ANDS Oversight Committee (OSC) was mandated by the Government to produce a Millennium Development Goals-based national strategy that is Afghan-owned and meets the requirements for a Poverty Reduction Strategy Paper. The OSC met on a regular basis to design, discuss and oversee the development of the strategy, including the identification of the needs and grievances of the people, and the prioritization of resource allocations and actions. To embrace ‘Afghanization” and ownership, the OSC facilitated inclusive and extensive consultations both at national and sub-national levels. Sustained fiscal support and continuous evaluation and monitoring are essential now to meet the challenges ahead related to ANDS implementation. The democratic aspirations of the Afghan people are high, yet financial resources remain limited. While much has been accomplished since 2001, more remains to be done as we move from “Compact to Impact”. The Afghan Government with support from the international community must act decisively, strategically, and with an absolute commitment to the ANDS goals and vision. We look forward to working with our government colleagues, civil society representatives, tribal elders and religious scholars, the private sector, the international community and, most importantly, fellow Afghans to implement the ANDS, to help realize the Afghanistan Compact benchmarks and Millennium Development Goals. Prof. Ishaq Nadiri Ahmad Zia Masoud Dr. Rangin Dadfar Spanta Senior Economic Advisor to the First Vice-President Minister of Foreign Affairs President Chair, ANDS and JCMB Dr. Anwar-ul-Haq Ahady Sarwar Danish Dr. Amin Farhang Minister of Finance Minister of Justice Minister of Commerce and Industry Dr. Jalil Shams Dr. Zalmay Rassoul Haneef Atmar Minister of Economy National Security Minister of Education Advisor AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) V Acknowledgments For the preparation of the Afghanistan National Development Strategy VI AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) In the name of Allah, the most Merciful, the most Compassionate The Afghanistan National Development Strategy (ANDS) could not have been developed without the generous contribution of many individuals and organizations. The ANDS was finalized under the guidance of the Oversight Committee, appointed by HE President Hamid Karzai and chaired by H.E. Professor Ishaq Nadiri, Senior Economic Advisor to the President and Chair of the ANDS Oversight Committee. The committee included: H.E. Rangeen Dadfar Spanta, Minister of Foreign Affairs; Anwar-ul-Haq Ahady, Minister of Finance; H.E. Jalil Shams, Minister of Economy; H.E. Sarwar Danish, Minister of Justice; H.E. Haneef Atmar, Minister of Education; H.E. Amin Farhang, Minister of Commerce; and H.E. Zalmai Rassoul, National Security Advisor. We would like to sincerely thank the First Vice-President and Chair of the Economic Council, H.E. Ahmad Zia Massoud. Special thanks are also due to H.E. Hedayat Amin Arsala, Senior Minister and H.E. Waheedulah Shahrani, Deputy Minister of Finance and the Ministry of Finance team. In addition, we would like to thank the Supreme Court, the National Assembly, Government Ministries and Agencies, Provincial Authorities, Afghan Embassies abroad, national Commissions, the Office of the President, Civil Society Organizations, and International Community. All Ministers, deputy ministers and their focal points, religious leaders, tribal elders, civil society leaders, all Ambassadors and representatives of the international community in Afghanistan; and all Afghan citizens. National and international agencies participated actively in the ANDS consultations. Their contributions, comments and suggestions strengthened the sectoral strategies, ensuring their practical implementation. Thanks are also due to the Ministry of Rural Rehabilitation and Development for their significant contributions to the subnational consultations. Special thanks are further due to the President’s Advisors, Daud Saba and Noorullah Delawari for their contributions, as well as Mahmoud Saikal for his inputs. We are also indebted to the Provincial Governors and their staff for their contributions, support and hospitality to the ANDS staff. Special thanks go to Wahidullah Waissi, ANDS/PRS Development Process Manager, for his invaluable contribution and for the efforts of his team of young Afghan professionals who dedicated themselves tirelessly to completing the I-ANDS, Afghanistan Compact and the full ANDS in consultation with both national and international partners. The Sector Coordinators included Rahatullah Naeem, Farzana Rashid Rahimi, Shakir Majeedi, Attaullah Asim, Mohammad Ismail Rahimi, Zalmai Allawdin, Hedayatullah Ashrafi, Shukria Kazemi, Saifurahman Ahmadzai, and; the Sub-National Consultations Team consisted of Mohammad Yousuf Ghaznavi, Mohammad Fahim Mehry, Shahenshah Sherzai, Hekmatullah Latifi, Sayed Rohani and Osman Fahim; and Malik Sharaf, Naim Hamdard, Saleem Alkozai, Ahmadullah Kakar, Mir Ahmad Tayeb Waizy, Sayed Shah Aminzai, Khwaga Kakar and Mohammad Kazim. Thanks to Nematullah Bizhan for his special contribution from the JCMB Secretariat. We are also indebted to the many national and international advisers who supported this effort. In particular, we would like to thank Zlatko Hurtic, Paul O’Brien, Jim Robertson, Barnett Rubin, Peter Middlebrook, Richard Ponzio, Anita Nirody, Shakti Sinha, Ashok Nigam, Christopher Alexander and Ameerah Haq. Finally, I would like to thank all who contributed towards this endeavor in preparation of the first Afghanistan National Development Strategy, a milestone in our country’s history and a national commitment towards economic growth and poverty reduction in Afghanistan. \ Adib Farhadi, AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) VII The Energy Sector Strategy was developed as a result of the commitment and efforts of members of key Afghan ministries, United Nations, donors, NGOs, civil society and the private sector. The invaluable contribution of H.E. Mohammad Ismail Khan, Minister of Energy & Water, H.E. Dip. Eng. M. Ibrahim Adel, Minister of Mines, H.E. Mohammad Ehsan Zia, Minister of Rural Rehabilitation and Development, has been invaluable in the development of this sector strategy. Finally, we would like to thank everyone who assisted the ANDS Secretariat in working to develop the Energy Sector Strategy. We look forward to the firm commitment of all our stakeholders throughout the implementation of this strategy. Certainly, contributions to the Energy Sector will remain key to the success of this strategy in particular, and of the ANDS in general. Special thanks also go to the following for their valued help and support: H.E. Eng. Mir M. Sediq Ashan, Energy Deputy Minister, Ministry of Energy and Water; H.E. Eng. Abdul Qudos Hamidi, Deputy Minister, Ministry of Mines; Eng. Zia Gul Saljuki, Planning Director, Ministry of Energy and Water; Eng. Ghulam Rabani, Director General, DABM; Eng. Mohammad Hashim, Technical/PIU, Ministry of Energy and Water; Eng. Mohammad Sarwar, Ministry of Energy and Water; Eng. Abdul Waheed Qayum, Deputy Planning Director, DABM; Mary Louise, Advisor to DABM; Arsalan Ghalieh, Advisor to Ministry of Rural Rehabilitation and Development; Salem Shah Ibrahimi, Assistant to Minister, Ministry of Rural Rehabilitation and Development; Eng. Khuzhman Ulomi, Head of Policy and Coordination Department; Ministry of Mines; Dip Eng. Chaman Shah Ahmadi, Advisor to ministry on Oil and Gas, Ministry of Mines; Eng. Mohmmad Farid Fazaly, Deputy for Oil and Gas Department, Ministry of Mines; Eng. Abdull Khaliq, Director of Coal for North, Ministry of Mines; Eng Aziz Areb, Head of Mining Department, Ministry of Mines; Eng. Wais Ahmad, NSP Chief Coordinator, Ministry of Rural Rehabilitation and Development; Roya Husseni, Officer (ANDS), Ministry of Rural Rehabilitation and Development; Amin Shafiee, Coordinator (ANDS), Ministry of Rural Rehabilitation and Development; Diana Nawazi, Officer (ANDS), Ministry of Rural Rehabilitation and Development; Russell Profozich, Former Advisor to ANDS; Matthew W. Addison, Former Advisor to ANDS; Aziz Darwish, Executive Secretary to Minister, Ministry of Mines, Hafiz Afzaly, Project Executive Officer, Ministry of Mines. VIII AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) IX X AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Table of Contents EXECUTIVE SUMMARY.....................................................................................................................................1 Energy Sector Strategy....................................................................................................................................... 1 INTRODUCTION..................................................................................................................................................5 CHAPTER I............................................................................................................................................................11 Current State Of The Energy Sector .............................................................................................................. 11 THE STATE OF THE OVERALL ENERGY SECTOR ............................................................................ 11 THE STATE OF THE ENERGY SUB-SECTORS ..................................................................................... 13

1

1. Electricity........................................................................................................................................ 13

2

2. Petroleum ....................................................................................................................................... 15

3

3. Natural Gas .................................................................................................................................... 15

4 — Production and Reserves............................................................................................................. 16

4. Production and Reserves............................................................................................................. 16 E. Crude Oil........................................................................................................................................ 16

5 — Petroleum Products ...................................................................................................................... 16

5. Petroleum Products ...................................................................................................................... 16

6

6. Coal.................................................................................................................................................. 17

7 — Rural and Renewable Energy ..................................................................................................... 18

7. Rural and Renewable Energy ..................................................................................................... 18

8

8. DEMAND....................................................................................................................................... 19

9

9. SUPPLY .......................................................................................................................................... 20

10 — Afghanistan as an Energy Transit Route .................................................................................. 21

10. Afghanistan as an Energy Transit Route .................................................................................. 21

11 — Energy for the New City at Dehsabz......................................................................................... 22

11. Energy for the New City at Dehsabz......................................................................................... 22 Institutional Players ..................................................................................................................................... 22 Legal, Policy and Regulatory Frameworks.............................................................................................. 24 Donor Programs and Projects .................................................................................................................... 24 A. Rural Energy Donor Operations ................................................................................................ 25 The Role of the Private Sector .................................................................................................................... 25 Challenges, Risks and Constraints ............................................................................................................ 26 A. Private Sector Provision............................................................................................................... 26 C. Capacity.......................................................................................................................................... 26 B. Information and Planning ........................................................................................................... 27 C. Efficiency ........................................................................................................................................ 27 D. Fuel .................................................................................................................................................. 27 E. Imports............................................................................................................................................ 27 F. Cost Recovery................................................................................................................................ 27 G. Rural Energy .................................................................................................................................. 27 CHAPTER II ..........................................................................................................................................................29 Energy Sector Strategy..................................................................................................................................... 29 Energy Strategic Vision ............................................................................................................................... 29 THE THIRD PRONG IS RURAL ENERGY INSTEAD OF RURAL ELECTRIFICATION......................................... 31 A. Rural Energy in the Vision .......................................................................................................... 31 Needs Assessment........................................................................................................................................ 33 Electricity ....................................................................................................................................................... 33 Priority Policies and Objectives ................................................................................................................. 35 A. Objectives ....................................................................................................................................... 37 Desired Outcomes ........................................................................................................................................ 38 Inputs & Outputs ......................................................................................................................................... 41 Prong One – Efficient Operation of Infrastructure................................................................................. 41 Prong Two – Sector Governance ............................................................................................................... 41 A. Legal and Regulatory Reform Program.................................................................................... 42 B. Private Sector Provision Program.............................................................................................. 43 C. Integrated Policy and Planning. ................................................................................................. 44 D. Least-Cost Expansion Plan.......................................................................................................... 45 E. Needs Assessment and Data Base. ............................................................................................ 45 Prong Three – Rural and Renewable Energy .......................................................................................... 46 Prong Four - Expand Supply...................................................................................................................... 46 (1) North East Power System (NEPS) ....................................................................................................... 47 (2 Rehabilitation of Sheberghan Gas Fields and Power Plant. ............................................................. 47 South East Power System (SEPS)............................................................................................................... 48 Reserve Estimation and Exploration......................................................................................................... 48 CHAPTER III ........................................................................................................................................................49 Energy Sub-Sector Strategies .......................................................................................................................... 49 Electric Power ............................................................................................................................................... 49 Measures to Increase Power Generation and Delivery ......................................................................... 50 A. One-Stop Shop- The Private Public Partnership Office ......................................................... 51 B. Multi-sector Regulator & Regulation by Contract .................................................................. 52 Projects ........................................................................................................................................................... 53 Petroleum Sector........................................................................................................................................... 57 Natural Gas ................................................................................................................................................... 57 A. Reserve Estimates ......................................................................................................................... 58 B. Production and Infrastructure.................................................................................................... 58 C. Natural Gas Development Program.......................................................................................... 59 D. Measures to Support Gas Exploration/development ........................................................... 60 Crude Oil and Petroleum Products........................................................................................................... 61 A. Petroleum Products ..................................................................................................................... 61 B. Measure to Support Oil Exploration ......................................................................................... 62 B. Coal.................................................................................................................................................. 63 C. Coal Sector Policy ......................................................................................................................... 66 Rural and Renewable Energy..................................................................................................................... 67 Power Distribution in Ghazni .................................................................................................................... 69 Rural Electrification in Bangladesh........................................................................................................... 69 Barriers to Access ......................................................................................................................................... 70 Recommendations........................................................................................................................................ 70 CHAPTER IV ........................................................................................................................................................73 CROSS-CUTTING ISSUES .............................................................................................................................. 73 Environment.................................................................................................................................................. 73 Anti-corruption............................................................................................................................................. 73 Region Cooperation ..................................................................................................................................... 74 Gender and Poverty Reduction ................................................................................................................. 74 Counter Narcotics ........................................................................................................................................ 74 Capacity Building......................................................................................................................................... 74 Coordination and Effectiveness:................................................................................................................ 75 Risk Assessment ........................................................................................................................................... 75 CHAPTER V ..........................................................................................................................................................76 Monitoring And Evaluation............................................................................................................................ 76 BIBLIOGRAPHY..................................................................................................................................................77 Annex I. Energy Sector Strategy Action Plan................................................................................................80 ANNEX II: ENERGY SECTOR STRATEGY MONITORING MATRIX.................................................84 Annex III: List Of Programs And Projects (Energy Sector) ........................................................................85 Annex Iv: List Of Provincial Priority Projects (Energy Sector)..................................................................90 Glossary and Abbreviations I AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) AC Afghanistan Compact MOJ Ministry of Justice ADB Asian Development Bank MoM Ministry of Mines ADF Afghan Development Forum MoUD Ministry of Urban Development AISA Afghanistan Investment Support Agency MRRD Ministry of Rural Rehabilitation and ANDS Afghanistan National Development Strategy Development ARTF Afghan Reconstruction Trust Fund MW Mega-What (measure of energy capacity) BCM Billion cubic meters MWH Mega-Watt Hours (measure of energy flow) BPD Barrels per Day NEPA National Environmental Protection Agency BTU British Thermal Units NEPS North-East Power System CAR Central Asian Republics NGOs Non-Government Organizations CASA Central and South Asia NRRDC New & Renewable Energy Research and CDCs Community Development Councils Development Center CFL Compact Fluorescent Lights NSP National Solidarity Program DABM Da Afghanistan Breshna Moassessa (the NTS Northern Transmission System Afghan electric utility) NURC National Utility Regulatory Commission EIA Environmental Impact Assessment O&M Operation and Management ETS Eastern Transmission System PPA Power Purchase Agreement EU European Union PPP Public-Private Partnership GDP Gross Domestic Product PSA Production Sharing Agreement GEF Global Environmental Facility PV Photovoltaic GWH Giga-Watt Hour RIMU Reform Implementation Management Units GOA Government of Afghanistan RLED Rural Livelihoods and Energy Department JCMB Joint Coordination and Monitoring Board SEPS South-East Power System ICE Inter-Ministerial Commission on Energy SHS Solar Home System IPP Independent Power Producers SOE State Owned Enterprises IROA Islamic Republic of Afghanistan TAP Trans-Afghan Pipeline kW Kilowatt (Unit of electric capacity) TCF Trillion cubic feet kWH Kilowatt-Hour (Unit of electric energy) TSC Technical Standards Committee MDG Millennium Development Goals USGS United States Geological Survey MEW Ministry of Energy and Water USAID US Agency for International Development MHP Micro-Hydro Plant WB World Bank MoE Ministry of Economy WTS Western Transmission System MOF Ministry of Finance GLOSSARY: DABM Da Afghanistan Breshna Moassessa (the Afghan electric utility) Darya River II AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) EXECUTIVE SUMMARY ENERGY SECTOR STRATEGY Afghanistan’s energy sector and its economy commercialization of DABM, investments in are at a crossroads. Energy, abundantly and transmission and distribution to reduce losses, cost effectively supplied, can be a very and, repair and maintenance of all power important input in the sustainable assets. Moreover, it is important to focus now development of Afghanistan. However, on efficient use of energy and the enabling energy is no panacea. In fact, if it is supplied policy, legal and regulatory frameworks imprudently, instead being a vehicle for should address this issue. growth, it will pull down the Government’s development efforts and be a drag on When this is considered against the Afghan economic growth. Capital investment in Compact Goals, the importance of efficiency energy is rising rapidly attesting to the efforts becomes even more important. By 2010 the to the Islamic Republic of Afghanistan (IROA) number of connections to meet the AC goals and the donor community. At the same time will rise by 211 percent while capacity will though, the efficiency of energy operations is increase only 194%, assuming that imports go not increasing. If left unchecked, much of the according to plan. This means that unless investment that is being made will be wasted. there are changes in efficiency, the average kWh consumed per connection must go down. To illustrate this gravity of the problem, the This is not a recipe for economic growth. cost of losses has been estimated. Because of Compounding the problem and not included the state of the infrastructure and the familiar in this analysis are that the demand for power short comings of Government owned and will actually rise and that with more operated energy provision, losses are connections the cost of un-served energy will enormous. Losses in 2005 amounted US$ rise. While it is imperative that additional 128.5 million. infrastructure be added, it is even more important that the IROA focus on efficiency. Figure 1. Annual Impact of Poor Commercial Operations and Subsidies While much can be done by the Government, the real solution lies in creating and expanding a meaningful role for the private sector. Realizing that the Afghan economy is starved of reliable and cost effective energy, the immediate task of the IROA, with assistance from the Donor community, is then to provide energy to those that can use best use and pay for it (and that may well be business), in the quantities and quality that they need, at a price that covers cost (for all but the poorest members of society), and to do so in the most cost effective manner. At the same time The actual cost to the economy is greater! though, it must begin to take steps that will What this highlights is that continuing to provide a solid footing for the transition of the operate on a business as usual basis is sector from Government provision to Private unsustainable. The number one priority in the Sector provision. This strategy acknowledges energy sector must be on operating efficiency: that there are many steps that need to be taken Executive Summary 1 on the road to fully involving the private MoCI need to prioritize their policies, sector. It will begin with changes in policy programs and projects towards the production and laws and involvement of the private of fuels for electricity generation. The strategy sector in rural energy provision and in is based on five3 prongs or pillars. outsourcing at DABM. It is a gradual process that will be enhanced by a deliberate process 1. Increased Efficiency in Existing of reform. Operation: At this time, it is easier, faster and cheaper to gain a megawatt of power The availability of secure energy supplies from increasing efficiency than from within Afghanistan was significantly building a new generating plant. For disrupted by the conflicts of the past two example, for every US $5 the Government decades. Post-conflict efforts by the Islamic spends in providing compact fluorescent Republic of Afghanistan (IROA) and light bulbs, it actually saves US $51 and 49 international donors to date have focused on watts. expanding the availability of energy resources throughout the country. Particular emphasis 2. Improved Sector Governance and Public- has been on expanding and rehabilitating the Private Partnership Promotion1: The electricity sector in the major economic hubs of ultimate success of the energy sector the country and providing basic service in depends critically on mobilizing the rural areas. Efforts also have been taken to private sector. This can begin now with improve the supply of natural gas, increase establishing a multi-sector regulator, availability of hydro-electric generation, looking to outsource at State Owned rehabilitate and expand electricity and natural Enterprises, preparing the enabling legal, gas transmission and distribution systems, policy and regulatory infrastructure for develop renewable energy resources in rural business, and the commercialization of and remote areas, increase low-cost power SOEs. imports and improve the capability of energy sector institutions. 3. Improved Coordination and Capacity Development: Additionally, coordination Since 2001, Afghanistan energy efforts have among the Government entities must focused on “bailing out the boat” or keeping increase and coordination between the the lights on and providing heat in the winter. Government and the Donor community At some point, one must also focus on must likewise be strengthened. Assistance stopping the flow of water before they become needs to be given to ICE to strengthen its exhausted. The short term focused activities capacity. An integrated energy master alone can continue only so long before the plan is required to serve as a road map for long term growth path of the country is the Government and Donors alike. To adversely impacted. Having achieved accomplish this, capacity must be moderate success in these areas, the time is significantly strengthened and training is ripe to review current activities and programs an imperative and place greater emphasis on behalf of the IROA and donors on a more long-range, 4. Rural Energy versus Rural Electrification: sustainable future for the energy sector. This Most rural Afghans are unable to pay for would include balancing on-going efforts to expensive electricity. Energy is required rehabilitate and expand energy resources with for growth but energy alone won’t do the a longer-term strategy for the sector. job. The role of rural energy to seek out opportunities for economic activities that The Afghan Energy Strategy contains an lack energy, that will pay for energy and implicit prioritization of energy sub-sector thereby subsidize rural energy activities. Electricity is given far greater preference or priority than other sectors because modern economies are built on 1 Clearly there is overlap between pillars 1 and 2. electricity. Priority is then assigned to other Increased efficiency will in some part necessitate sub-sectors based on their supporting role in improved Governance and the ultimate efficiency gains will be possible only with private provision. These electricity and in overall economic activity. In commonalities notwithstanding, these two areas are practical terms this means that MoM and different in their major focus. 2 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) consumption while raising rural incomes reduced. Thus, the long term strategy will at the same time. increasingly focus on cogeneration, distributed power, renewable and end-use efficiency as

5 — Expanded or New Supply: Investments in

5. Expanded or New Supply: Investments in well as the more traditional areas. new capacity or energy infrastructure: A lot of progress has been made, but not The strategy is focused on poverty reduction enough, in creating new supply. It is time through all its five pillars. First, by improving now that the Government and Donor operating efficiency, the drain on government community can consider alternative resources is reduced. More is available for supplies such as wind energy or reducing other programs. Similarly, by focusing on consumption alongside the more end-use efficiency, the drain on the customer’s traditional methods. New supply must be resources is reduced. More of their income is rationalized and efforts focused on a few available for other things. Second, improving large projects such as the North East sector governance will also have a significant Power System. impact on poverty. It will bring about better subsidy mechanisms so that the subsidy is These are the pillars of Afghanistan’s near targeted to those that need it the best way term energy strategy. Alongside addressing possible. While it will reduce the overall level the immediate and short term needs, it is of subsidy in the sector but the neediest imperative that the country look to longer members of society will have access to energy term issues. Because it is building its energy at subsidized rates. Moreover, every Afghani infrastructure anew, it can learn from the of subsidy that can be freed up in this sector lessons of experience in other countries. It can can be used in other sectors. Third, this focus on energy efficiency, renewable energy strategy reorients rural energy to focus on and decentralized energy. If it does this at the income generating activities. Thus, by same time it builds its industrial base, then the definition this is a poverty reduction activity. benefits are enormous. Thus, while a national Fourth, the economy is starved for energy. grid is important to transport power from The fifth pillar is the investment in new energy cheaper markets, it will prove more beneficial supply and the economy can’t grow without in the long run to focus on decentralized energy; poverty can’t be reduced in power. A recent British study concluded that Afghanistan without economic growth. 61 percent of the energy value of the primary Finally, the combined impact of these policies, fuel disappears. “Another 4 percent vanished programs and projects will be more energy in transmission.” This means that roughly supplied more efficiently and reliably. This is two thirds of the energy is lost in a centralized a solid prescription for economic growth, system. By locating power generation closer which growth is important for poverty to users, these losses can be significantly reduction. Executive Summary 3 4 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) INTRODUCTION Energy, abundantly and cost effectively in rural and remote areas, increase low-cost supplied, is an important input in the power imports and improve the capability of sustainable development of Afghanistan. It is energy sector institutions. a necessary but not sufficient condition for economic growth. Energy provided cost Since 2001, Afghanistan energy efforts have effectively in sufficient quantity and quality on focused on “bailing out the boat” or keeping a sustainable basis will support economic the lights on and providing heat in the winter. development and employment; help reduce The short term focused activities alone can poverty; contribute to social and political continue only so long before the long term stability both within Afghanistan and growth path of the country is adversely regionally; improve living standards; and impacted. Having achieved moderate success contribute to a reduction in environmental in these areas, the time is ripe to review impacts. Energy alone, though, is no panacea current activities and programs and place to Afghanistan’s problems. In fact, if it is greater emphasis on behalf of the IROA and supplied imprudently, instead being a vehicle donors on a more long-range, sustainable for growth, it will drag down the future for the energy sector. This would Government’s development efforts and be a include balancing on-going efforts to drag on economic growth. rehabilitate and expand energy resources with a longer-term strategy for the sector. Realizing that the Afghan economy is starved of reliable and cost effective energy, the To illustrate this gravity of the problem, the immediate task of the IROA, with assistance cost of losses has been estimated. Because of from the Donor community, is then to (1) the state of the infrastructure and the familiar provide energy to those that can use best use short comings of Government owned and and pay for it, (2) in the quantities and quality operated energy provision, losses are that they need, (3) at a price that covers cost enormous. Total losses is 40% (Technical 23% (for all but the poorest members of society), and 17% commercial) where as in a reasonable and (4) to do so in the most cost effective system they would be on the order of 10%. manner. At the same time though, it must This 20% loss of energy equates to a begin to take steps that will provide a solid substantial financial drain. In 2005, footing for the transition of the sector from Afghanistan produced and imported 1,162.3 Government provision to Private Sector Gwh of power2. If 20% of this is lost, this provision. means 232.5 MWH and at $0.12 per kWh3, the cost of these losses amounts to $27.9 million The availability of secure energy supplies was annually. To this must be added the cost of significantly disrupted by the conflicts of the subsidies, or $56 million a year. Finally, there past two decades. Post-conflict efforts by the are commercial losses. This covers everything Islamic Republic of Afghanistan (IROA) and from theft to that the fact that (1) not all power international donors have focused on sold is billed and (2) not all power billed is expanding the availability of energy resources collected. Collections are 60% of billing. It can throughout the country. Emphasis has been on safely be assumes that total losses are 40% expanding and rehabilitating the electricity (23% technical and 17% commercial), or 371.9 sector in the major economic hubs of the mWh for a cost of $44.6 million. This is country and providing basic service in rural dramatically illustrated in the following areas. Efforts also have been taken to improve figure. the supply of natural gas, increase availability of hydro-electric generation, rehabilitate and expand electricity transmission distribution 2 AEIC website 2005 electricity production. system, develop renewable energy resources 3 Soucre: MEW Power Sector Strategy. INTRUDUCTION 5 The total cost of losses and subsidies equaled an overview of Afghanistan’s energy sector $128.5 million in 2005. The actual cost to the highlighting basic elements and issues and economy is greater! What this highlights is then offers an Energy Sector Strategy to that continuing to operate on a business as address these issues over the next 2-to-10 year usual basis is unsustainable. The number one period. priority in the energy sector must be on efficiency: commercialization of DABM, Importance of Energy for Economic investments in transmission and distribution Development to reduce losses, repair and maintenance of all power assets. Changing business as usual also The goal of the Afghanistan Energy Sector means changing how subsidies are provided. Strategy is to deliver sufficient energy to For example, if DABM provided each support economic growth of about 9% per connection with one CFL to replace one annum,4 which in turn will help lower incandescent bulb at the manufacturers cost of poverty by 3% a year5 and to do so in the most $5, it would save 38.8 thousand mwh per year cost effective manner. In accordance with the in generation and reduce its losses by $US 3 AC, this is translated into the following sector million per year. It would cost DABM only specific goals. $1.2 million to change out the bulbs, a rate of return of 17% and the bulb program would By end-2010: electricity will reach at least pay for itself in 2.5 years. Beyond the financial 65% of households and 90% of non- rewards, this is the easiest way to reduce residential establishments in major urban commercial losses and make more power areas and at least 25% of households in available. This is equivalent to a 38.8 MW boost in power with no additional investment rural areas; at least 75% of the costs will be and in a very short time frame. A 38.8 MW recovered from users connected power plant would cost on the order of $40 to the national power grid. A strategy for the million. development and use of renewable energies Figure 2. Annual Impact of poor commercial will be developed by end-2007.” operations and subsidies Economic growth that raises incomes and reduces poverty is strongly correlated with increased energy use. Energy is used in the production process of every sector of the economy. The provision of adequate and reliable energy services at affordable and cost- based prices, in a secure and environmentally sustainable manner, and in conformity with social and economic development needs, is an essential element of sustainable development. A sufficient supply of energy is a vital input for eradicating poverty, improving human welfare and raising living standards. The The IROA will continue to rely on energy from correlation between commercial energy and diversified sources. However, modern development is aptly shown in Figure 3 where economies are driven by electricity and the per capita GDP is measured against per capita paramount objective in jump starting energy consumption. If Afghanistan is to Afghanistan’s energy sector and its economy grow and take its place among industrializing is to give priority to electricity and then nations, then it must have more electricity, transportation fuels. In rural areas, it means linking income generating activities to energy and this means providing a slate of energy 4 This has been the Government’s growth goal for the supply options. This will mean a great deal of economy since 1383 (2004) (See: Securing Afghanistan’s coordination among ministries and agencies Future), and is estimated to be sufficient growth to build and it may mean subordinating one Ministries a legal economy while eliminating illicit the trade without causing devastating poverty. plans to that of another. This report provides 5 Afghanistan Compact benchmarks. 6 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) petroleum products, and natural gas. Modern Figure 3. Energy & Economic Development economies require modern fuels. En erg y & Econ o m ic D evelo pm en t Correlation does not imply causation and 350 adequate supply of commercial energy is a 300 Per Capita Energy 250 necessary but not sufficient condition for 200 economic growth. Economies can’t grow 150 Consumption 100 without commercial energy but simply 50 providing more energy to an economy does 0 0 5000 10000 15000 20000 25000 30000 not guarantee growth. What this means for Pe r Capita G DP the Energy Sector Strategy is that energy must often be combined with other interventions. Providing adequate, cost effective energy The overwhelming majority of the population supplies to an area where there is commercial of Afghanistan lives in rural and remote areas. and/or industrial activity, may lower costs Over the medium to long term is where and allow things to be done. This in turn will energy investments and policy reforms can create jobs and expand the economy. Jobs will make the greatest impact in reducing poverty, include those in the sector; for example, improving the quality of life, and supporting miners, electrical workers and oil rig workers achievement of the ANDS cross-cutting goals. as well as those in industries set up because A priority effort in this regard will be to energy was available. However, supplying conduct a comprehensive energy needs and the same energy to an area where there are consumption survey to support more focused few economic activities is no panacea. In that and effective delivery mechanisms for rural case, energy supply must be coupled with projects. Figure 4: Energy-Poverty Framework economic activity if it is to be effective and highlights goals, impacts and outcomes, as sustainable. they relate to the energy-poverty nexus. Figure 4. Energy Poverty Framework 1 Leveraging Donor Support developed a power sector master plan (2003-04), gas sector master plan (2004-05), Since 2002, Government has worked with and renewable energy plan (2006). These donors to assess sector needs and has Introduction 7 require continued updating but have financial, resource and environmental provided foundation information. consequences could be devastating for Donors have contributed to rehabilitation long-term development of the sector. of the power grid, millions $USD funding for diesel fuel and support of more than Dispersed institutional support. Seven 1700 small renewable energy projects. ministries include energy as part of their portfolio. In addition national programs Since 2006, some commercialization of such as the National Environmental operations in power. Protection Agency, Civil Service Reform and ANDS contribute to how sector policy 2 Sector Governance and Institutional is being developed. The institutional, Reform regulatory and legal framework under which Afghanistan’s energy market Establishment of the Inter-Ministerial currently functions is insufficient and in Commission for Energy (ICE) in 2006 to the absence of these frameworks makes coordinate government policy in energy, virtually every aspect of sector operations leverage donor resources and integrate vulnerable to corruption. sector planning. No legal or regulatory regime is in place Establishment of Cadastre , (energy law is under preparation) to guide monitoring/evaluation and environment sector operations; there are no legal maintenance departments to better professionals trained in commercial implement/organize gas/petroleum and energy law or regulatory processes. minerals agreements and environment preservation. Entrenched way of doing business. A strong legacy of central planning that has not Cabinet approval of Minerals Law,; under sufficiently shifted where government is review by Parliament according to plans regulator and policy-maker while private envisaged; Mineral Regulations is in the sector implements sector activities has not process of drafting and review. transpired. The sector is particularly Cabinet approval of Hydrocarbon Law, challenged with the need to rebuild a Hydrocarbon Regulations draft has been market structure on-top of a well under review by MoJ. developed system of informal networks and institutions that have operated as a Gas Law is in the process of drafting ‘shadow state’ over the course of more than two decades of conflict. While the 3 Promotion of regional energy linkages Modern market-based procurement and Afghanistan signed as a member of the public administration is essential for Central Asia South Asia (CASA) 1000MW sector development. project November 2007. No divesting or meaningful commercialization Power purchase agreements (PPA) in the of state energy assets. Government and process for regular power imports from energy enterprise operations are Iran, Turkmenistan, Uzbekistan and overstaffed and highly inefficient, lacking Tajikistan; new PPA agreements being fundamental tools and capacity to support negotiated for increased power imports. technically and commercially viable operations. These include power, natural Ongoing Afghan participation in the gas, coal and liquid fuels. Upon close Turkmenistan-Afghanistan-Pakistan-India review, some of the state owned (TAPI) natural gas pipeline enterprises and budgetary units operate with considerable government support 1 Sector Governance. Existing governance and virtually no audit, fiscal or legal arrangements are inherently flawed to oversight. support a market-based energy system. The inadequacy of sector governance will 2 Prioritization of sector actions. continue to provide areas for imprudent Government faces considerable challenge in practices and, if left unchanged, the 8 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) maintaining and operating the existing system details of provincial priorities refer to while simultaneously seeking to expand and annex IV): improve operations. Provinces seek to develop their own energy priorities, an astounding Energy and Poverty Reduction and Economic lack of spare parts, virtually no metering of Growth power use and no health and safety equipment for workers results in a primitive setting where quality improvements simply The Energy sector of Afghanistan has the can not be achieved. Prioritizing where to start potential to drive urban and rural economic presents considerable challenge. growth for years to come. Energy as a commodity can provide essential supply service 3 Funding/Capital Investment. that indirectly helps to create employment. Reconstitution of the Afghan energy system Energy is purchased by consumers to power and expansion of same will require billions of equipment, facilities and manufacturing US$ over the course of years. Absent private processes that generate income. Energy as a investment, government cannot sustain the business can create direct employment in the investments required to ensure a technically development of power plants, oil, gas and coal sound system. Government must leverage fields, the construction of grid systems and the currently available donor funds to ensure commercial operations of the sector. For the longer term access to private investment and rural poor, small energy installations are capital. Policies to support private investments highly successful in cost-recovery and must be established. Improved procurement, contribute to local economic development. accounting functions, contracting and Through improved sector governance and reporting at the government level is not increased private sector participation, sufficiently in place to support sound budgetary resources may be improved at the investment. national and provincial levels. In addition, as sector governance improves, poor and marginalized populations will have increased Sub-National Consultations and PDPs opportunity to learn about energy Integration developments that may benefit from them. Energy as a service can have dramatic impact on This Sector Strategy incorporates feedback urban and rural health, social well being, and comments from the Sub National security and other quality of life aspects. Basic Consultations (SNCs) and as such is a street lighting provides security; refrigeration response to the people of Afghanistan’s and cooling for medical supplies and home vocalized needs and development goals, light and heat for improved family living, both nationally and with provincial schooling and comfort. Increased attention to emphasis. Projects identified and energy use can result in improved energy prioritized during the SNC process are resource and environmental stewardship included in the Energy Strategy (for throughout the country. Introduction 9 10 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) CHAPTER I CURRENT STATE OF THE ENERGY SECTOR THE STATE OF THE slightly less than 2 million BTU per person to just around 0.5 million BTU. This is at a time OVERALL ENERGY SECTOR when all other economies in region exhibited As mentioned earlier, modern economies strong growth. The significant jump in demand energy and there is a strong direct consumption between the late 1980s and early relationship between per capita GDP and per 1990s was due to the export of natural gas to capita energy consumption. Economic growth Russia. is not accompanied by declining energy consumption! Perhaps the most compelling Reliable energy data for Afghanistan is about description of the energy sector in Afghanistan as scarce as energy in Afghanistan. The data is shown in Figure 5. In 1980, the per capita below are from the US Energy Information energy consumption of Afghanistan was Administration, the US National Renewable fourth in the region, greater than that of Sri Energy Laboratory and other Afghan sources. Lanka and Bangladesh. By 2004, per capita consumption had fallen drastically from Figure 5. Per capita Energy Consumption Electricity (hydro and imports) comprises the Figure 6 below presents the composition of vast majority of energy consumed or about commercial energy in 2005. Petroleum 77% of commercial energy. This is followed products account for less than 1% of primary by coal, natural gas and then petroleum. energy consumption. CURRENT STATE OF THE ENERGY SECTOR 11 such as coal, oil, and gas. It excludes the vast Figure 6. Primary Energy Consumption, 2005 amount of biomass energy that is consumed and in countries like Afghanistan traditional energy represents a major source of energy. Afghanistan has gone from an energy exporter, natural gas to the Soviet Union, to where it imports a substantial amount of energy. In 2005, over half of the commercial energy consumed came from imports. This is due to the deterioration in energy infrastructure rather than an increase in consumption. As can be seen, consumption has remained relatively the same over the last Table 1 presents commercial energy or energy several years being constrained by the ability that is bought and sold in commercial markets to import energy. Table 1. Historical Primary Energy Data (Quadrillion Btu) Table 2. 1980 1990 2000 2001 2002 2003 2004 2005 Production 0.073 0.119 0.014 0.007 0.010 0.009 0.009 0.008 Consumption 0.027 0.109 0.024 0.017 0.020 0.018 0.018 0.019 Imports -0.046 -0.010 0.010 0.010 0.010 0.008 0.009 0.011 Source: US EIA Energy in Afghanistan in recent history can be (2) some energy that is consumed is not billed, categorized as a period where supply has (3) some energy that is billed is not collected, always been short of demand, as it has in and (4) the price of energy is below the cost of many similar countries. The demand for production. When the utility does not collect energy outstrips current supply in every enough, it begins to let maintenance slip and category of energy, including traditional as a result, technical losses increase; energy which is unsustainably harvested. consumers with unreliable service see less Much of the deficit in supply can be blamed reason to pay and so collections are even on the lack of investment, cannibalization and lower, leading to downward spiral. As carnage that has accompanied Afghanistan’s mentioned earlier, combined losses and civil crises since 1978. As civil strife strains subsidies are costing the Government $128.5 financial resources new investment is million annually. As can be clearly seen in abandoned, routine maintenance is postponed; Table 2, this is unsustainable. Given that spares are taken from one plant for another; infrastructure investments are growing and skilled human resources that are needed to increasingly more power is being produced, maintain the capital stock leave; and soon unless radical changes take place, losses will parts are stolen and sold for other uses. Sad steadily climb. These losses are not only a and unpreventable as this is, a large share of drain on the power system. They represent the gap can be blamed on faulty resource resources that could be going to produce more allocation policies. Subsidies, as they are so energy or to other development needs. It is often carried out, create a vicious downward clear that changing this must be a top priority cycle. For example, the electric utility often in the electricity sector. does not collect enough to pay for operating cost let alone capital costs. This is because (1) Table 3. The Cost of Losses and Subsidies thirty percent of the energy it supplies is lost, (2005) 12 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) MWH US $ Thousands 2005 (AEIC) Supply 1,162,304 Technical Losses 232,461 $ 27,895 Available for Sale 929,843 Commercial Losses 371,937 $ 44,632 Subsidies $ 56,000 $128,528 The energy sector in Afghanistan is grid-connected installed capacity6. Following predominately state owned and operated with hydropower, thermal generation, primarily little private sector participation. Although diesel generation, supplies power mainly to encouraging private investment is a stated urban areas. Utilization of indigenous fossil goal of the IROA, the substantive work that is fuels (natural gas and coal) for power required to create the enabling environment generation is very limited as is utilization of for meaningful private sector participation is solar, wind and other renewable energy absent. The proper place to begin is with the resources. Reliance on diesel is both expensive adoption of an overarching energy law and and environmentally hazardous. Diesel redrafting of the sub-sector laws to adequately generation costs almost 30 US cents per khw establish the required enabling frameworks. compared to natural gas at 3.5 US cents per The energy sector and its sub-sectors (electric kWh. Efforts are underway to utilize local power, coal, oil, gas, and renewable energy) natural gas for power production and this are undergoing significant expansion. should remain a top priority. However, poor infrastructure, insufficient budgetary resources, lack of trained personnel Figure 7. Power Capacity (MW) 2007 and weak government policies (including non- resolution of inter-ministerial cross-cutting issues) have complicated and in some instances significantly delayed energy resource development and deployment. The result is that each sub-sector’s entities often are not able to effectively maintain, repair, manage or expand the system to meet the country’s needs. Development of Afghanistan’s fossil fuels, in particular natural gas and coal, require large capital investment and significant private sector participation to reach fruition. Rural power supply continues to rely mostly on micro-hydro plants (MHPs), limited diesel THE STATE OF THE ENERGY (mostly privately owned), and batteries, with very limited availability to the rural SUB-SECTORS population.7 Most rural power generation efforts are funded by donors with limited cost-

1 — Electricity sharing by the Government

1. Electricity sharing by the Government. Electricity drives modern economies and per 6 In the 1980 Master Plan it was estimated that capita consumption of electricity in Afghanistan has the potential of developing about 23,000 Afghanistan is one of the lowest in the world. MW of additional hydro generating capacity, with After a long period of decline, generating 18,000 MW located on the Panj and Amu Rivers that capacity is beginning to grow again. Hydro form the border with Tajikistan and Uzbekistan. The plants account the largest share of capacity remaining 5,000 MW potential is primarily in two areas, with imports in second place and growing. about 1,800 MW on the Kokcha River and 3,200 MW in the Kabul River basin. 7 There is no reliable estimates of rural electricity The most promising long-term resource for coverage; some anecdotal evidence, including discussions power generation in Afghanistan is with senior executives with DABM, indicates coverage hydropower, which accounts for over 50% of from all sources is over 7%, other estimates place it as high as 14%. CURRENT STATE OF THE ENERGY SECTOR 13 Table 3 provides historical data on generation, Table 4. Historical Electricity Data consumption and capacity. 1980 1990 2000 2001 2002 2003 2004 2005 Generation (billion kWh) 0.94 1.10 0.47 0.39 0.69 0.81 0.76 0.75 Imports (billion kWh) 0.00 0.00 0.10 0.20 0.15 0.10 0.10 0.10 Consumption (billion kWh) 0.88 1.02 0.53 0.56 0.79 0.86 0.81 0.80 Capacity (million kW) 0.426 0.494 0.405 0.265 0.264 0.323 0.323 0.320 on rehabilitating and upgrading generation, Connecting each new customer to the system funding for and implementation of is expensive, and can cost up to $1,000 or more transmission and distribution system in distribution costs alone. For Kabul, total improvements must now be a high priority. costs to expand the distribution system are Since it is faster and cheaper to correct estimated at US $310 million. Weak technical losses than to put in a new large distribution systems can lead to significant scale power plant, this should take equal, if power losses, with estimates for the Kabul not greater, priority with capacity additions. system at about 30%. As stated earlier, technical losses amount to around $28 million Table 5. Electricity Generation Cost (kWh) per year. Since most initial assistance focused 1386 (2007) S/N Type Average Estimated Unit Price (USc/kWh) 1 Hydro 2.29 2 Thermal (NW Kabul) 27.115 3 Imported 2.62 4 Diesel (All Provinces) 29.53 5 Hydro and Diesel 5.19 6 Hydro, Thermal and Diesel 6.473 7 Natural Gas 2.8 to 3.5 1MW=4.5 ton of coal, cost of one ton of coal is priced

8 — Coal

8. Source: DABM. The estimated cost of of cost of coal fired capacity is available Table 4 shows the cost of generating power from various sources on the Afghanistan power system. The cost of generation differs significantly and displacing diesel generation with other energy sources through a least-cost expansion plan can reduce costs significantly. Moreover, it excludes the cost of transmission and distribution. When this cost is included, extension of the grid may often be more expensive than decentralized generation including many renewables. The financial condition of the sector and the utility is going from bad to worse because there has been little improvement in tariffs and operations while at the same time substantial assets have been added to the system. Maintaining and operating these is expensive and if the Government does not shift its focus from building new infrastructure alone to efficiently operating and maintaining what is has, the burden on 14 AFGHANISTAN NATIONAL DEVELOPMENT over the standard incandescent bulb. If a 60W bulb is replaced with a 14 watt CFL, there is saving of 46 watts. Over the life of the bulb, 10,000 hours on average, this is saving of 657 kWh. If the bulb costs US$ 5, then the cost of freeing up a kWh is US subsidy amounts to 0.8 US cents per kWh or one third that of hydro and it takes far less time to do this. If the Coal Afs.2200. power from natural gas is based on Sheberghan power plant; no estimate at this time. the economy will be enormous. So, what Table 4 clearly shows that if DABM wants to expand generation, then there is a rank order based on cost? Clearly, hydro and imports are preferred to diesel as is natural gas. However, what Table 4 does not show is the cost of increasing electricity supply and this is a more important concept in the case of Afghanistan given both the imperatives of cost and time. Electricity supply can be increased by increasing generation, increasing efficiency (reducing technical and commercial losses) and by reducing the demand for electricity. In fact, because the Government subsidizes electricity, it actual saves money for every kilowatt hour it can reduce demand while it loses on every kWh that it generates. One simple example will explain the importance of concentrating on reducing demand. For every compact fluorescent light (CFL) bulb used, there is a saving in energy STRATEGY (ANDS) subsidy is considered, then the Government actual saves money by helping consumers to be more efficient. For every US$ 5 the Government spends (on a new CFL), it reduces the amount it spends on the subsidy by US$ 51. This can be seen in Figure 8. Figure 8. Cost of Supply

2 — Petroleum significant source of energy for the country

2. Petroleum significant source of energy for the country and an important source of revenue to the According to geological studies already made, Government. The consumption of natural gas considerable resources of gas/petroleum is supply constrained just as it is for all other existed in Afghanistan and due to the last few energy resources. decades problems, sufficient growth has not been made in this respect. Based on MoM Consumption and production have been strategy and policy, growth of resource to be declining from the highs of the 1990s because undertaken by private sector. the infrastructure has been abandoned in practical terms and there has been very little

3 — Natural Gas effort to locate new resources. The data in the

3. Natural Gas effort to locate new resources. The data in the table below Natural gas it not yet a significant energy resource, although it has the potential to be a Table 6. Natural Gas Energy Data (Billions of Cubic Feet) 1980 1990 2000 2001 2002 2003 2004 2005 Production 60 104 8 2 2 1 1 1 Consumption 2 67 8 2 2 1 1 1 Reserves NA NA 3,530 3,530 3,530 3,530 3,530 3,530 Source: US EIA. CURRENT STATE OF THE ENERGY SECTOR 15 products and improve the quality of refined

4 — Production and Reserves products consumed in the country

4. Production and Reserves products consumed in the country. Production of gas is estimated at about 21.2 Preliminary estimates for this investment million cubic feet/day, although it is likely range from $12-$32 million, depending on that this is an overestimate8.. configuration, infrastructure requirements and other factors. Like other energy prices, current gas prices are too low to cover costs of rehabilitation, O&M In Afghanistan, due to lack of oil filtration and expansion of production and unit, all petroleum products are imported infrastructure. For incremental gas from foreign countries. production, tariffs may be less than half of the level needed to cover costs. Also, extraction, All petroleum are imported through the delivery, distribution, sale and collection of neighbouring countries of Pakistan, Iran, gas payments to be made by Afghan Gas Turkmenistan, Uzbekistan, and Tajikistan9. enterprise and the gas cost payment is directly Afghanistan consumes approximately transferred to the government account. . . A 1,200,000 tons of state-supplied fuel per year10. large part of the infrastructure for storage, This includes all types of petrol and diesel as transmission and distribution has been well as mazut and kerosene. It is estimated damaged while the remaining capacity is in that about 80% of these fuels are consumed for need of rehabilitation. According to estimate automotive purposes, while 20% are used for of US geological survey ,the evaluation made power auto-production (gasoline mainly) or is indicative of 444 billion cubic meters of small-scale grid power generation (diesel natural gas reserves, 219 million tons of mainly), and water pumps. Demand for petroleum, and 75 ml tons of condensation. liquid fuels in Afghanistan has increased dramatically in the past five years. With continued and increased reliance on diesel E. Crude Oil generation, air traffic and home uses, this According to the studies made, there demand is expected to continue to increase. existed some 45 ml tons of geological Additionally, fuel quality is quite poor petroleum reserves whilst with respect to compared to international standards and is often adulterated. the above, the recent studies indicate that the reserves seem to have been much While previously the government had a more than the above estimation. monopoly on petroleum products trade, this Ministry of mines plans to lease one sector is now entirely in private hands. Ten petroleum area and two gas areas in 2008 traders are registered with the Ministry of through biddings to private sector for Transport, as are the 2,658 trucks that are exploration, extraction that also includes authorised to import petroleum products into filtration, delivery and sale process. Afghanistan. The Petroleum and Gas Enterprise (Liquid Fuels), under the auspices

5 — Petroleum Products of the Ministry of Commerce and Industries,

5. Petroleum Products of the Ministry of Commerce and Industries, provides oversight for 1600 gas stations and Afghanistan does not have an operating 1300 fuel trucks. Infrastructure as well as refinery and so imports all of its refined operational improvements could provide an products. During the Taliban regime a 3,000 opportunity for private investment and more bpd refinery had been constructed but was transparent operations. never operational. To increase value added output, the IROA is considering construction There has been no donor support to this of an oil refinery (approximately 10,000 bpd) sector. Instead, more than 30 reported private in North East Afghanistan to refine crude oil contractors work with the Petroleum and Gas produced domestically in the region. If Enterprise to supply Afghanistan’s gas constructed, this refinery would reduce Afghanistan’s dependence on imported oil 9 Energy Sector Review and Gas Development Master Plan; ADB TA 4088; Sofregaz, June 2004. 8 Engineer Amir Zada, Director of Oil and Gas, 10 This figure excludes privately imported or other fuel Ministry of Mines, November 2006 imports not reported to the state. 16 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) stations with fuel as well as to import diesel some 40 mine deposits have been identified in fuel for power generation. 80 areas of Afghanistan. 12. LPG has been increasingly popular as a Source: US EIA residential fuel in Afghanistan and the monthly consumption is estimated to have Until the end of 2006, Afghan coal operations increased to 12 000 tons over Islamic year were primarily contained in state enterprises

1382 — The retail price of LPG in Kabul is of 50

1382. The retail price of LPG in Kabul is of 50- of Northern Coal Enterprise and Sabzak Coal 60 Af / kg, and far less in Herat, which is with oversight of the Ministry of closer to the supplying countries. Mines.Following the enforcement of mining Turkmenistan is the main supplier, followed material law, a number of coal mines by Iran. The product is carried within including karkar, Dodkash, sabzak of Herat, Afghanistan in 15-20 tons trailer vessels, or in Chalaw of Kabul province, Parsa of Ghorband cylinders. LPG is stored in three dedicated district have been leased to private sectors depots: Kotal-e-Khain near Kabul, (80 tons through biddings. Also it is intended that tens capacity), Herat (110 tons capacity), and of other coal mines according to government Hairatan near the Uzbekistan border (120 tons economic policy to be submitted to private capacity). The unloading and bottling sector for exploration and exploitation, capacities at these plants are unknown, but through which ground will be prepared for these storage capacities seem small in establishment of private companies having the comparison with the estimated overall LPG right of mining especially in the sphere of coal demand. LPG is sold to final consumers in and cement.. In May 2007, President Karzai cylinders with capacities of 10, 20, and 40 kg. announced the establishment of a Coal Commission aiming at evaluating and

6 — Coal11 studying coal for generation of thermal

6. Coal11 studying coal for generation of thermal Like all other energy products in Afghanistan, electricity . As the commission in its initial the demand for coal is very extensive, gathering considered coal throughout the however the coal production that solves the country and strongly affirmed its significance country’s demand seems extremely low.. The as an important fuel resource for power table below illustrates the production and production and responding other industrial consumption position of coal since 1980. The demands. Although Afhanistan is seriously in Afghan coal ind ustry is operating at low need of energy, no programmatic assistance production rates, less than 300,000 tons has been provided to the Afghan coal sector . reported per year; devastation of more than 3 decades of war and years of neglect, has Coal deposits and cost: according to preceding affected very seriously the Afghanistan’s coal studies, in general terms there are 11 coal mines. The supply of coal is essential for mines in Afghanistan the total number of domestic energy / heating and industrial which fortunately reaches 40 mines at present , uses.Based on studies and laboratory analysis as majority of that are under exploration and that has been fulfilled concerned with the coal exploitation. . Considerable coal reserves have mines is indicative of the fact that Afghanistan yet to be explored in Afghanistan. Coal is used has got tremendous coal deposits that exist in in these mining areas as well as transported high level quality . And it needs to be explored into Kabul and other cities; transport of coal is further. This operation can be completed generally conducted by private market entities within 3 to 5 consecutive years. The although some mines maintain their own preliminary studies indicate that the coal transportation as well. The current price of deposits are hundred times further than the coal is indicated to be $65-$90 per ton preceding figures and till now approximately depending on transport costs – the actual coal price per ton is estimated to be around $25-34. In terms of regional coal costs, this is high. 11 This section is taken from the work of Mary 12 Emergency Mine Rehabilitation assessment, Louise Vitelli. World Bank, 2004. CURRENT STATE OF THE ENERGY SECTOR 17 The health and safety conditions at the mines, demand for coal in Afghanistan is many of which are underground, are horrific. approximately 250,000 tones per year (for An example is the ongoing fires at the Dahne residential, commercial, and light industrial Tor coal mine. US Geological Survey (USGS) uses nationwide). Over the next three years it experts visited the site in 2006 and indicated is expected that demand for coal will also that unregulated mining observed is increase as a result of the manufacture of conducted in a seam that is several hundred cement and possible coal power development. feet (stratigraphically and topographically) Therefore, recovery of the cement industry higher than the main seam that was will significantly alter the total demand for mined decades ago. The main mine was semi- coal. Mechanisms are not in place to mechanized, but everything is now collapsed, transparently and rapidly address winter coal attributed by Afghan coal managers to issues. landslides, poor technical oversight and Coal for power: In addition to the Aynak general subsidence. It is estimated that copper power needs, Government has begun millions of dollars are required to sufficiently to assess the power needs of the proposed upgrade the health and safety conditions at Hajigak Iron Ore deposit as well as simply the these mine operations.Longer-term strategies generation of coal for power to supply the for growth in the Afghanistan coal sector central and western parts of the country that remain several years away but consideration now have no or limited power access. This is a of coal power is underway; the Ministry of topic where both the Ministry of Mines and Mines has included a 100MW coal fired power the Ministry of Energy and Water have plant in its 1386 budget figures; this presents important roles but have yet to determine interesting inter-ministerial issues as the strategic priorities for development of coal for Ministry of Energy and Water is responsible power including methods to attract for state power generation which is implied in sustainable investment. Opportunities such as this budget proposal. The confirmed quantity this argue for the development a cogeneration and quality of coal resources remains policy and simplified power purchase relatively unknown but appears good. Coal agreements for co-generated power. Uses. Afghan coal is primarily used for home cooking and heating needs. The estimated Table 7. Coal Energy Data (million short tons) Coal 1980 1990 2000 2001 2002 2003 2004 2005 Production 0.131 0.116 0.089 0.092 0.096 0.099 0.103 0.099 Consumption 0.131 0.116 0.089 0.092 0.096 0.099 0.103 0.099 Source: the US Energy Information Agency\ and is economical compared to diesel as

7 — Rural and Renewable shown in the table below

7. Rural and Renewable shown in the table below. Energy Table 8. Wind Potential Renewable energy offers the greatest hope for Afghanistan in general and rural energy in Total Wind Wind Wind Capacity particular. Renewable energy includes hydro, Resource Speed Class Installed solar, wind, geothermal, biomass and wood. Utility Scale m/s (MW) Hydro, both large and small, represents Good 4 6.8-7.3 75,970 significant untapped resources. According to the ADB, there is 18,400 MW of untapped Excellent 5 7.3-7.7 33,160 hydro potential in the country13. Afghanistan Excellent 6 7.7-8.5 33,100 has excellent wind potential in many areas Excellent 7 > 8.5 15,800 Total 158,100 13 Renewable Energy in Afghanistan, Regional Economic Source: National Renewable Energy Laboratory Cooperation Conference, Ali Azimi, 2006. 18 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Not all of this potential wind energy can be assistance15.16 The results from other countries economically converted into electricity consistently indicate that there is a hierarchy because of a number of factors such as for demand to services and electricity is distance from population centers and wind usually further down on the ladder than speed. However, the first initial survey services such as an all weather road, water indicates that there is significant potential supply, schools, and clinics. For example, if which can be tapped at around US$ 0.09 per the preponderance of survey respondents kWh. already has access to road, water and schools, then electricity may well be their next choice There is significant solar potential but it still of service. In rural-remote Afghanistan, if remains a high cost energy resource for Afghans are similar to the peoples of the electricity. The Indian Government has region, then access to electricity will not be funded a solar village initiative. While solar their most urgent priority. PV is expensive compared to the cost of generation for other alternatives, there is Additionally, experience the world over has strong evidence that with the proper enabling provided an important lesson with regard to environment of micro credit and training, blindly providing access to electricity. There solar home systems are a viable electricity is no guarantee that increased access to source14. Solar cookers have shown significant electricity will bring economic benefits. promise in other countries and may have Simply look around in Kabul and other urban widespread application here. Solar cookers areas where residential access has increased. were deployed in Afghan refugee camps in If access to electricity is not targeted to or Pakistan. coupled with income generating activities, then rural access brings lighting and little else. There are many environmental benefits from using renewable energy such as reduced 8. DEMAND emissions (both indoor and outdoor) but the development of renewable energy must also Although there is little data for Afghanistan consider the potentially negative on rural energy use, inferences can be drawn environmental impacts. It is important that from similar countries in the region. There is a EIA guidelines be followed and the as with tendency to assume that grid connected any energy project, public debate is an electricity offers the best form of energy for important tool. rural populations. Experience throughout the world has shown that there is a progression in There is an overwhelming view that rural the use of energy. Due to the dispersed nature areas need electricity and that providing of the rural population, renewable energy access is the best use of resources for energy. offers the best solution for electrification for An Asia Foundation survey in 2006 concluded the majority of Afghanistan’s rural population that hack of reliable electricity at the local level that currently does not have access to was the second most important problem behind unemployment. When survey respondents were asked that what the largest problems at the national level were, they have citied electricity as the ninth most important 15 According to their survey, 49% of rural respondents problem. The Asia Foundation sample was had access to electricity and 89% of urban respondents not representative of the country from an had access. Their sample was not representative of the country with regard to energy access. In part, what they energy perspective and used a definition for call rural actually represents sizable population centers. rural that obfuscates the real patterns of Moreover, their question did not ask if access to energy importance in planning development was an issue but rather the extent to which energy is a problem. 16 The distinction between rural and urban in Afghanistan also causes blurring of responsibilities 14 For example, according to Micro Energy between MEW and MRRD and so we use the term International solar PV in Bangaldesh cost between US$ rural-remote to denote those areas of very low population 0.45 to US$ 0.60 per kWh. Despite this high cost density that are far removed from population and Grameen Shakti 70,000 solar home systems between commercial centers and lack access to basic services. 1996 and 2004. More will be developed on this later in the strategy. CURRENT STATE OF THE ENERGY SECTOR 19 electricity and has no real expectation of through the gathering of fuel wood, crop connection to the grid17. residues, and other biomass. Energy expenditures were dominated by wood, It is very important that the economic charcoal, and kerosene. Wood and charcoal conditions and opportunities of rural are used mainly for cooking and heating, population be fully understood when devising while kerosene is the main source of lighting. a rural energy strategy. Too often donors and Rural Afghanistan is similar. Government officials have blindly followed a policy of rural electrification. The result has Extreme poverty in rural areas also is related been much higher cost energy delivered than to lack of income earning opportunities. The people can afford and little, if any, associated productive use of energy helps reduce poverty economic activity. The goal of increasing by providing alternative sources of livelihoods energy is poverty reduction and economic and increase educational and training growth. Electricity alone in rural areas is opportunities. The remoteness of rural unable to do that job. locations and the rough terrain make expansion of the electricity grid into these What is not known about rural Afghan’s areas economically infeasible. Therefore, the economic and energy characteristics? First, application off-grid technologies to these rural Afghani’s are poor by most countries’ areas—including renewable energy standards. “Over 20.4% of the rural resources— and other forms of energy is the population cannot meet the minimum level of primary focus of IROA activities. dietary energy required to sustain a healthy life.” 18 Unemployment is rampant. Average 9. SUPPLY household income is estimated to be no greater than $231 a year.19 There is no reliable data on traditional energy use in rural Afghanistan. The bulk of Probably less than 4% of rural households commercial energy is supplied by kerosene, Hydro power and diesels. Hydro, wind and have access to electricity20. Of those with solar offer opportunities for small scale access, 7% use electricity for lighting. supply. Following hydro, solar energy has the Kerosene lamps are the major source of greatest potential as a renewable energy lighting, representing roughly 86 percent. It is source, but cost remains a major barrier. highly likely given what is known about other Estimates indicate that in Afghanistan solar countries, that the main source of cooking fuel radiation averages about 6.5 kWh per square is from self collected fire wood from which meter per day and the skies are sunny about there is no monetary outlay or charcoal. This 300 days a year. Consequently, the potential information is valuable because it tells us how for solar energy development is high, not only much of a rural household’s money income is for solar water heaters for homes, hospitals devoted to energy. Using detailed data for and other buildings, but also for generating Balochistan, the average rural household electricity. In addition, some 125 sites have spends only 3.5% of its budget on energy and been identified for micro-hydro resource this includes imputed or noncash outlays. development with the potential to generate Clearly, for many families on the lower end of 100 MW of power. the income spectrum, the vast majority of energy services are self supplied – that is Other renewable energy technologies, particularly micro-hydro and wind energy, 17 Government of Afghanistan; Ministry of Energy and have broad applicability within rural areas of Water: Policy for Renewable Energy Rural Afghanistan and offer employment Electrification, December 8, 2006. 18 ANDS Macroeconomy and Poverty Diagnostic, opportunities directly through operation and Chapter 3. maintenance requirements, and indirectly 19 This was based on the ratio of rural household income through businesses like agro-processing that to urban household income in Pakistan. Clearly, the provide off-farm work. rural population of Pakistan is on average better off than that of Afghanistan. The IROA, primarily through the Ministry of 20 AEIC Rural Rehabilitation and Development in http://www.afghanenergyinformationcenter.org/Rural.ht cooperation with the MEW has developed ml 20 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) projects to promote micro-hydro development At the present time, with support from the in rural areas. In addition, under the US ADB and the World Bank, the four countries National Renewable Energy Laboratory, wind of Tajikistan, Kyrgyzstan, Afghanistan and mapping has been undertaken for many parts Pakistan are actively exploring construction of of Afghanistan as a basis for developing a high tension line that would transmit 1300 individual projects. The data indicate good MW of power from Central Asia through potential for generating wind electricity in Afghanistan to Pakistan, with Pakistan several parts of the country. The lead institute receiving 1,000 MW, and Afghanistan gaining to support development of these resources in 300 MW. Construction of such a project Afghanistan is the National Renewable Energy would directly address Afghanistan’s need for Research and Development Center, a part of power, and might also help to lay the MEW. groundwork for an eventual natural gas pipeline. Hydropower, solar, wind and biomass offer the most potential to contribute to energy During the mid-1990s, Unocal had pursued a supply. Development, however, requires possible natural gas pipeline from sound institutional and financial support, Turkmenistan's Dauletabad-Donmez gas basin sustained commitment and a long-term via Afghanistan to Pakistan, but withdrew development horizon. Use of renewable after 1998. The Afghan government has energy is beset by a number of factors, recently tried to revive the Trans-Afghan including high upfront costs,21 lack of Pipeline (TAP) plan, and has held talks on suppliers, inadequate financing mechanisms, these matters with Pakistan, and and weak institutional and technical capacity. Turkmenistan. Little progress appears to have been made. The President has stated his belief

10 — Afghanistan as an Energy that the project could generate $100-$300

10. Afghanistan as an Energy that the project could generate $100-$300 million per year in transit fees for Afghanistan, Transit Route while creating thousands of jobs in the Due to its location between the oil and natural country. Given the obstacles to development gas reserves of the Caspian Basin and the of a natural gas pipeline across Afghanistan, it Indian Ocean, Afghanistan has long been seems unlikely that such an idea will make mentioned as a potential energy route. This any progress until the security position is might include power transmission via high resolved. The estimated cost of the pipeline is tension lines, or perhaps eventually a gas $2.5-$3.5 billion which represents a further pipeline. obstacle to its implementation. Afghanistan is well positioned to be a transit CASA-1000 and Proposed Power Levels. route for electricity produced in CAR CASA-1000 is a proposed transmission system countries and exported to South Asia, and to transmit 1,000 Megawatts of surplus perhaps eventually it might also become a net electricity from Tajikistan and the Kyrgyz exporter of power produced from its own Republic to Pakistan, with power transiting hydro, natural gas, and coal resources. Efforts through and energy deliveries happening are currently underway to increase electricity within Afghanistan. If it goes forward, it imports from Uzbekistan, Tajikistan, would start operations circa 2011. Kabul Turkmenistan and Iran and to upgrade cross- would have a substation, which initially border transmission links. Development of a would receive approximately 100 MW going regional power network with Afghanistan as a up to about 300 MW by 2016. Over the life of transit route between CAR and South Asia is the project about 90% of the power would be an important potential medium-term used by Pakistan while, 10% would be taken objective. by Afghanistan. With 562 km of HTDC transmission, Afghanistan has the largest share of CASA 1000 transmission lines, representing about 21 For example, estimate for Photovoltaic electricity, as 52.1% of the total project costs. Total per MRRD (Mostafa Torkan, May 24, 2007) is estimated project costs are $545.6 mil of which $12,000/kW, as compared to: (i) Micro-hydropower at $1,200/kW and Diesel generated power at $500/kW. Afghanistan’s allocation is $284.5 mil. CURRENT STATE OF THE ENERGY SECTOR 21 Afghanistan would receive common equity of requirements of other cities and local rural $59.8 mil and begin receiving dividends requirements it is conceivable that the following a grace period. Current analysis production of biomass for fuel could gradually indicates a return of 16% on equity by year replace poppy cultivation in large parts of the

2033 — In addition, Afghanistan would begin nation

2033. In addition, Afghanistan would begin nation. receiving a 52.1% share of Transit Fees once CASA-1000 becomes operational. The energy strategy includes the concept of a robust network, able to withstand the rigors of

11 — Energy for the New City at the climate and the terrain. Traditional power

11. Energy for the New City at the climate and the terrain. Traditional power networks operate on the concept of centralized Dehsabz production and wide area distribution, Guiding the energy strategy for Dehsabz is the making them vulnerable to environmental Trias Energetica concept comprising three effects, system defects and, if the generation pillars: Reduce energy demand to the lowest capacity is outside the nation, market effects. rate possible; supply the energy that is The Dehsabz energy strategy is founded on required from sustainable resources; and, the principle of widely distributed and diverse where fossil energy is required, use it as generation, coupled to network enabled but efficiently as possible. Although Afghanistan localized distribution. In effect energy is has one of the lowest per capita energy consumed as close to the point of production consumption rates in the world, that rate is as possible, reducing losses in the transmission expected to increase to a level comparable to system while reducing the expense and that of Kazakhstan and Turkmenistan over the engineering required in a high tension next 30 years. Energy demand will increase as distribution system. The power grid is the city grows, so the energy supply must networked however so that power can be keep pace with the anticipated demand if distributed among the districts at peak times project momentum is to be achieved and and to mitigate system failures or maintained. Consequently energy generation environmental effects. and distribution infrastructure will be a priority in each construction phase. Such a fully integrated and sustainable energy network has never been built before, thus Reducing energy demand is a design Dehsabz has the potential to become a world consideration incorporated in every building leader in the field, showcasing leading edge and system in DehSabz. From the use of technologies. The national prestige accruing concrete core activation methods to heat and from such a project will generate national cool floors walls and ceilings via geothermal pride and help to restore Afghanistan to its sources, to the correct solar orientation of each rightful place as a valued regional trading building, the demand for energy is minimized. partner and economic ally. Energy that is required is generated as much as possible through sustainable means INSTITUTIONAL PLAYERS including hydro-electricity, micro hydro- electricity, passive and active solar generation, Responsibility for energy is complicated; at biomass and refuse combustion, deep present, four ministries have portfolios that geothermal power. But, as exciting as the include direct engagement with the energy possibilities of zero ecological footprints sector and its development in Afghanistan: through sustainable energy production are, there will be gaps in the energy production Ministry of Energy and Water (electricity cycle that will have to be filled by diesel generation (hydro, imports), generators. But even here sustainable transmission, distribution) technologies can be applied. Afghanistan is Ministry of Mines (oil, gas, coal) searching for replacement crops for Opium Ministry of Rural Rehabilitation and Poppies so as to ensure sustainable livelihoods Development (rural electrification) in rural districts. The production of biodiesel Ministry of Commerce and Industries for the generators will require a yield of (liquid fuels) approximately 42,000 dry Tonnes of oil seed per year. Combined with the biodiesel 22 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) The Ministries maintain Kabul headquarters The establishment of ICE was designed to and regional offices (i.e., MoM has seven help the Government understand, support, regional offices) in addition to state owned design, and monitor energy development enterprise offices throughout the country (i.e., based on commercial principles. It has the Ministry of Energy and Water (MEW) oversees DABM that maintains 19 regional oversight of energy sector policy and “breshnas” or operations). infrastructure investments and coordinates support from development partners. ICE A fifth ministry, the Ministry of Urban brings together a wide array of Development, is engaged with energy in two government and donor interests to assure forms: (1) street lighting primarily in Kabul coordinated action and practical planning. and (2) heating22 of the five Kabul-based It is not be responsible for project “Macrorayon Apartment blocks” constructed implementation but develops sound policy during the Soviet era. Until late 2006 there was in line with fiscal and policy priorities and weak coordination of energy related development among these ministries. international standards. ICE is supported Coordination has continued to be weak by an ADB grant, which includes through 2007. Coordination may improve formation of a commercial advisory team somewhat in the years 2008 – 2010. within the Commission that assists the Government in identifying energy In addition, the Ministry of Finance plays an investments and shaping ongoing projects. integral role in determining and agreeing to It also assists the Government in development and national budget funds for agreements to stimulate private sector energy-related projects. The Ministry of investment. The Ministry of Finance is the Economy was identified in August 2006 to lead and coordinate the above ministries as executing agency for the project. members of the Inter-Ministerial Commission for In addition to the above established Energy (ICE) discussed below. Finally, the institutions, the following advisor positions Cabinet of Ministers and High Economic Council of Ministers (comprised of key economic ministers) and national programs play a role in energy have undefined but definite roles in reviewing sector development in Afghanistan: energy project selection, funding levels and Advisor on Mines and Energy to the approval at various times to various degrees. Office of the President. Parliament’s Economic Committee has included Afghanistan Investment Support Agency energy in its portfolio and conducted (AISA). occasional meetings with energy ministers and Afghanistan National Development their staff. Strategy (ANDS). There are eleven state owned enterprises Afghan National Standardization operating in the energy sector. They include Authority (ANSA). companies such as DABM and Afghan Gas. MRRD’s National Solidarity Program (NSP) The Inter-Ministerial Commission for Priority Reform and Reconstruction Energy (ICE) was established by a Presidential Program (PRR) Decree signed in December 2006 as the The complexity of this institutional framework coordinating and policy making body for contributes to the difficulties in developing an energy sector activities. Chaired by the effective strategy for the sector and in Minister of the Economy, it includes the implementing and monitoring sector Ministries of Energy and Water, Finance, and rehabilitation and reform measures. Attention Mines as core members and the Ministries of to sector governance aimed at streamlining Commerce and Industry, Foreign Affairs, and combining functions within the ministries Urban Development and Rural Rehabilitation with the ultimate goal of reducing the IROA’s and Development as ad hoc members. direct involvement in the energy sector in favor of increased private sector participation 22 District heating was installed as part of the need to be an important part of the IROA’s initial construction. overall Energy Sector Strategy. CURRENT STATE OF THE ENERGY SECTOR 23 LEGAL, POLICY AND The WB is intensively involved in the power sector. It has a five-year plan totaling $1.2 REGULATORY billion, depending on the country’s absorptive FRAMEWORKS capacity. The WBs plan has the following goals for 2008: MoM laws and regulations in accordance with the country’s constitution form an appropriate Rehabilitate 94MW of hydropower basis for attraction of investments. capacity; Establish 25,000 new connections in There are three energy laws: Kabul; Integrate the Energy Programme with the Power Consumption Law of 1982; plans for the new city at Dehsabz addresses power imports, generation, Rehabilitated medium voltage network in transmission and distribution; Kabul and Mazar-e-Sharif; Hydrocarbons law has already been TA in energy sector, including the dispatched to the parliament for corporatization of DABM; approval. Trade facilitation to encourage energy transfer from Central Asia; and Coal: Minerals Law of 2005; regulations Continued involvement in NEPS. to be drafted in 2007-08. Additionally, the Environment Law has been The ADB has also been very active in the in force since January 2007 and this provides a energy sector: As a total amount of 12 USD has framework for reviewing projects and their been allocated in grant for testing and impact on the environment. preparing gas wells aimed at settling the requirements of the gas factory of 100 DONOR PROGRAMS AND megawatt turbine based in Sherberghan. Also, Afghanistan PROJECTS 23 While there are many donors involved in all Development Bank(ADB) has allocated aspects of energy production, the largest are another 24 ml USD for rehabilitation of gas the World Bank, the Asian Development Bank, infrastructures that is 12 for rehabilitation of Germany, India and the US. The Table below gas wells and the remaining 12 ml will be for is a summary of the donor participation in the exchange of gas delivery network from the gas electric power sector according to Afghanistan based area of Khawja Gogerdak till power and Energy Information Center (AEIC) as of mid- fertilizer factories with a length of 100kms.

2006 — Additionally the ADB is involved in the Loan 2165AFG/Grant 0004AFG Power

2006. Additionally the ADB is involved in the Loan 2165AFG/Grant 0004AFG Power gas field rehabilitation at Sheberghan and WB Transmission and Distribution Project ($50M), is supporting coal mine feasibility study. The and iii) Loan 2304AFG Regional Power WB has also sponsored studies of distribution Interconnection Project (Afghan side$35M systems for major load centers in the north from ADB out of the total project cost of and has planned similar work in the southern $55.5M (in Loan 2303 TAJ, $21.5M from ADB cities of Kandahar and Lashkar Gah once the out of the total project cost of $54M)). security situation there has stabilized. Also as indicated in the Table, the donors are active in ADB support has been vital in implementing: both actual infrastructure projects as well as in institutional and capacity building efforts. A capacity-building and training program for the MEW and its enterprises; More recently there have been projects to A Project Preparatory Technical upgrade the distribution systems at Lashkar Assistance (PPTA) for small and medium Gah, Qalat, and Aybak underbillion, hydropower development; depending on the country’s absorptive capacity. A capacity-building TA at the MEW; A hydropower and transmission project; 23This section draws heavily from LBG/BV and Needs Assessment Infrastructure report. 24 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Continued support for NEPS and the mechanisms coexist in one country. There are Priority Reform and Restructuring other examples where countries have chosen Program. one model and others where the country transitions over time from the simplest model A. Rural Energy Donor (management contract) to complete ownership and operation. Operations At present, about 650 villages are supplied To be sure, there are obstacles in with electricity from photovoltaic (PV), Afghanistan to greater private sector through a program funded by the National involvement, primarily to investment, but Solidarity Program (NSP) and under the some of these obstacles can be overcome auspices of MRRD. The NSP is a nationwide or offset with innovative mechanisms. community-driven development program run The private sector can be called upon to by the Ministry of Rural Reconstruction and manage, operate, invest and/or own Development (MRRD) and funded by various bilateral and multilateral donors, primarily energy entities and operations. Each through the Afghanistan Reconstruction Trust different mechanism has its advantages Fund (ARTF). NSP is supported by non- and disadvantages. Often, there is a government (NGO) partners that facilitate the progression from management through election of Community Development Councils ownership that takes into account the (CDCs) and help the councils to identify current situation. In the electricity sub- community development projects. NGOs are sector for example, it is highly unlikely contracted as facilitating partners to assist under the current security, institutional, policy communities in the technical and financial and legal/regulatory situation that private implementation of projects that for energy investors will be attracted to invest in a large- have include micro-hydro and diesel power scale power plant. However, until these installations. NSP’s partners have identified issues are resolved, there are many other over 3000 rural energy projects. NSP has ways to use the private sector. Billing can funded around 1700 diesel generators and 500 micro hydro plants. be outsourced. The construction arms of DABM could be sold off, allowing DABM Other donors (e.g., Government of India) and to focus on core operations. Following NGOs (e.g., Norwegian Church Aide) are DABM’s commercialization, distribution active in this area. The private sector also is could be given on a management contract. encouraged to participate and invest in rural Individual power plants could be given electrification and deployment of energy on management contract. There are a efficiency and renewable energy technologies. variety of mechanisms available now for Although, NGOs and donors provide much the IROA to tap the private sector as it assistance, there appears to be no clear IROA policy for rural electrification or for promoting prepares the enabling frameworks and private sector participation in rural energy other requisite mechanisms to foster full projects; also coordination among ministries private sector ownership and operation. and other project participants' needs improvement. One of the questions that have been posed in this strategy exercise is whether or not DABM (and other SOEs) should be THE ROLE OF THE PRIVATE unbundled. In this context, unbundling SECTOR has meant the separation of the utility into Throughout the world, the role of the private different operating units and the sector in energy is growing and is significant privatization by sale of one or more of in most countries. In Afghanistan, it is those units or ownership unbundling. virtually nonexistent. The roles of the private For example, the distribution part of sector vary from managing government DABM might be separated into several owned assets to outright ownership and smaller distribution companies and then operation. There are examples where all these sold as could be generation. The CURRENT STATE OF THE ENERGY SECTOR 25 empirical evidence is mixed and does not The strategy envisions that with time DABM strongly support one position or the other. and other energy sector SOEs will go step by In fact, many of the earlier proponents of step to legal unbundling. Some non-core unbundling have now taken a more functions will either be outsourced or completely divested, reaching the last step of conservative position that the virtues of ownership unbundling. The outcome of this unbundling depend upon numerous strategy exercise is that there are more factors such as the size of the market, the fundamental reforms required in the laws, availability of substitutes, the cost rules and regulations and at DABM before production and the overall structure and large scale ownership unbundling should be position of the sector within the economy. considered. Simply put, when a country or market are small, unbundling may not achieve the results it will in larger, more mature CHALLENGES, RISKS AND markets. Afghanistan’s market is quite CONSTRAINTS small and immature. Ownership A number of challenges, constraints and risks, unbundling is the last stage of a four step both real and perceived, associated with the process. At this time it is not possible ability of the IROA to develop and implement because the other steps have not yet a comprehensive Energy Sector Strategy need begun. to be addressed. These include the following. To be sure, the commercialization of A. Private Sector Provision DABM and other SOEs will require some The single most important challenge facing unbundling. The first step is accounting energy is attracting the private sector in a unbundling or the separation of accounts meaningful way. The sector is plagued by of different functions. Functional inefficiency and under investment. While unbundling will follow. This is the second best measures can be put in place, such separation of functions within the as the commercialization of DABM, the company and the imposition of optimal solution is eventual private sector restrictions on activities such as physical provision throughout the sector. Private sector separation of people, of management, participation in Afghanistan’s energy sector is crucial to achieving the long term objectives of separation of information that competitors the sector. Efforts to attract private investment may need separation of services that are incorporated within IROA programs and should be regulated from those that are projects, but there is no coordinated approach competitive in nature, etc. Functional to achieving this goal. In particular, options unbundling can either take place within for private participation beyond equipment the same company or be unbundled into and supplies and management contracts need an affiliate company. Functional to be explored, and effective policies put into unbundling also means accounting place. The IROA and donors, through the unbundling. Then there is legal “one-stop shop” at the MEW, the Afghanistan unbundling but this “does not imply a Investment Support Agency, or other mechanisms need to address this issue and change of ownership of assets and nothing increase opportunities for local and prevents similar or identical employment international investors in the energy sector conditions applying throughout the whole The constraints facing greater private sector of the vertically integrated undertakings. involvement include legal protection for However, a non-discriminatory decision- private sector investors, lack of a regulatory making process should be ensured environment, credit worthiness of a potential through organizational measures buyer, and general security. regarding the independence of the decision-makers responsible.” Legal C. Capacity unbundling will of necessity include accounting and functional unbundling. 26 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Perhaps the single biggest constraint in the constraints here are (1) the lack of complete sector is the very limited capacity given the and effective commercialization of SOEs such tasks that need to be accomplished. Both the as DABM and (2) lack of priority given to Ministries and the SOEs are characterized by funding these efforts. This is also the result of limited capacity and few trained/skilled insufficient capacity. personnel below the senior levels. It is imperative that basic managerial skills be D. Fuel developed and that training in accounting and finance also take place. Additionally, while a The cost of fuel to support electricity sector PMU is recommended, it is also generation, especially for Kabul and until important that project management, and NEPS is completed, will be about $100 monitoring and evaluation skills be upgraded million/year and another $25 at the Ministries and SOEs. million/year for SEPS. Funding and procurement mechanisms to obtain this A lot of resources have gone into capacity building and the concern is how to make fuel are not yet established and need to be delivery more effective. First, general addressed. management, finance and accounting training are needed and this can take place as part of E. Imports larger training programs not specifically Prices and availability of power from other focused on the energy sector, second, training CAR countries also are uncertain. Imported efforts at the Ministries and SOE’s need to be power costs will probably be as much, if not elevated. Third, for technical training, it is more, than 4 cents/kWh or more in 2010 recommended to use developing country requiring an annual hard currency training venues, for example, in India there are requirement of $160 million and potentially the National Thermal Power Corporation and placing a significant burden on the IROA. IREDA; ICIMOD in Nepal; TNB in Malaysia However, this is still much cheaper than diesel and the Egyptian Electricity Holding generation. Company in Cairo. In petroleum, there are excellent training venues in the Gulf countries. Donors have helped to establish impressive F. Cost Recovery institutionalized training programs in The average cost of power to residential countries throughout the region and relying customers currently is about 3.8 Afs/kWh. on these reduces cost and increases However to cover costs of supply, it would effectiveness. need to increase to 7 Afs/kWh or more24. The IROA‘s goal is to raise tariffs to cover 75% of B. Information and Planning DABM’s costs, thus rising to at least 5.3 Afs/kWh or 28% by 2010. This will place a As mentioned in several places in this report, significant burden on households and the lack of information severely hampers both represents a political risk for the Government, analysis of current and historical information especially if service quality isn’t improved and planning. While the IROA and Donor significantly commensurate with tariff strategy has out of necessity focused on increases. To help offset this revenue shortage, immediate needs, the long run health of the efforts at DABM to improve billing and sector and the economy depend critically on revenue collection and reduce losses the collection, dissemination and evaluation of (currently estimated at a minimum of 40%) energy information and its use in planning. need to be a primary focus. C. Efficiency G. Rural Energy The second most important challenge facing Addressing rural energy needs and expanding the energy sector is the efficient operation of access to commercial supplies of energy is a SOEs and heavy reliance on subsidies to support these SOEs. Focus has been on expanding supply and major rehabilitation of 24 MEW puts the cost of power generation at generation and NEPS. The two principal US $0.123 per kWh. CURRENT STATE OF THE ENERGY SECTOR 27 daunting task, requiring a long-term economic activities. Constraints are the low commitment of resources, both financial and levels of income and lack of access to micro institutional and a coordinated approach to credit and the political inertia of providing addressing this issue through regional and rural, grid based electricity. Added to this is local organizations. Moreover, an evaluation the need to rationalize rural electrification and prioritization of rural energy resource and between MEW and MRRD so that each can delivery options is needed to ensure the best address the problems with their specific effectiveness of programs and projects, and a resources. comprehensive monitoring and evaluation process is needed. The GOA, with the support Additionally, as households transition from of donors needs to review, evaluate and revise biomass to other fuels for cooking, heating and its rural energy programs to effectively lighting, efforts need to be made to consider address these needs. the differential impacts and uses between women, children and men. These differences The biggest challenge in addressing effective are significant and adoption and use of rural energy needs will be to find innovative different energy sources depends on ways to couple energy service delivery with addressing the needs of these different groups. 28 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) CHAPTER II ENERGY SECTOR STRATEGY ENERGY STRATEGIC VISION Above all, this means that development of the electricity sector and the fuels that feed it are “An Energy sector that provides citizens of the single most important priority in the Afghanistan and drivers of growth in the energy sector! economy with long-term reliable, affordable energy access based on market-based private India, a country with far greater security, more sector investment and public sector resources, a larger and better trained technical oversight.” cadre and a much better established framework for energy and commercial Overall Energy Sector Goals ventures, began serious embarking on IPPs in

1992 — The first IPP, a gas combined cycle by a

1992. The first IPP, a gas combined cycle by a Restructured sector governance and cost- local company, was commissioned in late recoverable operations 1996. Many foreign IPP developers such as Rehabilitation and expansion of the Enron, Congentrix and AES all started the IPP public power grid process but only a handful finished. The bottom line is that today, 15 years after the IPP The attraction of private investment in program started, most generation is still the energy sector Government owned and most IPPs are Indian Improved rural energy access owned and financed. Afghanistan can learn from India’s mistake and their success but Development of indigenous resources for can’t expect to have large IPP projects in less power and energy use time than they did. This is not to say that we can’t and won’t have private sector involvement; we must and we will. And the There is a time in Afghanistan’s future when time to begin preparing for the private sector energy will be abundant, blackouts will be a is now. thing of the past, and most of its energy needs will be provided directly by the private sector. Afghanistan must not only focus on the Private investors will develop power plants, immediate energy needs but turn attention to operate and own distribution systems and the longer run. It knows where it is going and develop in situ resources, just as they have but not necessarily how to get there. This begun to do in many countries. But that is the strategy will address the questions of where distant future. For now, Afghanistan must we are going and how we get there. What this work hard to increase energy production, means for energy is that as we continue to doing so efficiently and in a cost effective focus our efforts on short run options to manner. It can do this by building new increase supply25, one must begin developing capacity and by improving the efficiency of the foundation that will support long run existing infrastructure, building capacity in its sustainable growth. It means stemming the workforce, and reorganizing its energy losses at SOEs like DABM, reorganizing them operations to make them more transparent, and commercializing them. It means investing increase operating efficiency and prepare in repair and maintenance and in loss them for eventual entry into the private sector. At the same time though, it must begin laying the ground-work for the eventual large-scale 25 Increasing supply can come about through participation of the private sector. building new capacity, increasing imports or reducing technical losses. ENERGY SECTOR STRATEGY 29 reduction. It means making difficult choices expansion of energy services using high cost among various projects of the different resources such as diesel. Long-term Government entities for the next two to five sustainability requires promoting years. It means in some cases organizing other development of energy resources on a least- Ministries’ projects around electricity supply cost26 basis in an environmentally sound and because this is what will drive the economy. It socially acceptable way. Now is the time to is imperative that in the near future more begin developing the tools that will help electricity be provided to more people in the Afghanistan take a broader more long-term most expeditious manner possible while being approach, to review options, and to look at mindful of the long run economic impact. At developing least-cost energy resources for the same time, Afghanistan must be laying the meeting Afghanistan Compact goals and legal, regulatory, commercial and institutional objectives. This strategy incorporates projects foundations to unleash the power of the that are already in the pipeline but also private sector when conditions are considers what policies, programs, and appropriate. projects could be re-evaluated and given a new priority (e.g., sector governance) to Afghanistan does not have an integrated ensure that they provide results at lowest cost energy strategy. Rather, it has a coal strategy, and maximize impacts for a given level of an electric power strategy, and a hydrocarbons assistance. strategy. In part, this reflects the government’s treatment of energy as separate The broad goals for the energy sector are: institutional and sector silos and, in part, it reflects the lack of institutional depth to see Increased Private Sector Provision of that energy markets and, perhaps, more Energy importantly, that electricity supply projects are Better Sector Governance highly intertwined with other sub-sectors. In Increased trade with neighboring part it reflects the nature of assistance countries, focusing on the activities that focused on keeping the lights on and the vehicles rolling. transmission of energy; Expand the availability of electric Integrated energy planning and policy power; development are key to a well functioning Develop a Master Plan for Rural energy sector. But the IROA is not yet Energy; and, equipped to develop an integrated strategy, Establish market-based tariffs with a plans or policy analysis because the basic clear timetable to phase out subsidies. energy sector data is missing or rudimentary; energy-economic models do not exist; The best strategy at this time is a four mechanisms for sharing information and paralleled prong approach. The first prong is collaborating are not in place. In short, work to improve the efficiency of existing must begin on all of these so that better sub operations. This will be accomplished by sector and integrated energy planning and physical investments such as the repair and policy analysis/formulation can take place. renovation of existing energy infrastructure For example, fundamental gaps in data on energy supply and consumption and the 26 A correct least cost program would define developable resource base coupled with cost in the economic definition of cost and not uncertainties in forecasts of key the financial definition. Thus, it would include developmental indicators (economic growth, the environmental benefits or costs and price income, level and structure of energy demand, externalities. In this manner, the least-cost rates of population growth and urbanization) method would produce an economically have made development of an effective sector optimal solution. However, this is rarely ever strategy, including determining the done and cost takes on a purely private effectiveness of short-term assistance definition with the result that too much fossil activities, all the more difficult. fuel energy is consumed and produced relative to other forms of energy and, in To date, the primary focus has been short- general, too much energy is used in the term, the rehabilitation of generation and economy. 30 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) and the procurement of spares. It will involve enabling laws, policies and regulations that changes in the operations of energy sector unleash the full potential of private sector SOEs. The most important of these is DABM. investment and operation of large scale energy Commercialization of DABM must be fast facilities. tracked. It must operate on a commercial basis with clear targets for loss reduction and THE THIRD PRONG IS RURAL officers and employees need to be rewarded ENERGY INSTEAD OF RURAL for increasing efficiency and cutting losses and held accountable for performance. Aside from ELECTRIFICATION. the financial implication of continued losses, there are other sound reasons for focusing on A. Rural Energy in the Vision this area. Adding a megawatt of power mpirical evidence from the developing through repair and renovation is usually quicker and certainly cheaper than building world clearly indicates that household's new capacity. Progress is being made on transition to different forms of energy building new capacity but repair and based on complex economic, cultural, renovation is slower than it should be. For technical and social relationships. People example, it is only now, in September 2007, do not just go from cooking on firewood that DABM has begun a limited campaign to to cooking on electricity. Additionally, if identify losses. Training is urgently required they used a certain amount of lumens or in all areas from general accounting to btus in, for example, lighting, they do not advanced power system controls. he second use the same amount when moving up prong must be to significantly improve sector from candles to kerosene or from kerosene governance and begin involving the private sector in various aspects of energy until the to electricity. legal, commercial and security climate is The findings discussed earlier lead to several conducive to transfer most aspects of the major conclusions that have profound energy sector to the private sector27. The implications for rural energy. single most important governance measure will be the establishment of a multi-sector First, given these income levels, some regulator under the Ministry of Economy. electricity services will need to be Arguments are frequently made that the subsidized. As shown above, if rural private sector won’t participate or that it households were putting all their energy should not participate until and unless expenditures into electricity, this would significant reform and improvements have mean consumption of 13.5 kWh per been made. The reality is different. month or enough to run two 60 W electric Afghanistan can begin now by introducing light bulbs for about 4 hours per day. management contracts for some aspects, Second, residential energy use will be outsourcing others and in the case of very limited and there is a definite peripheral operations such as construction, transitioning in energy use that takes they can be spun off. Small as these measures place. The order of use will most likely may be, they will invigorate the sector by be lighting, radio, fan, TV, and then an tapping private sector resources and iron or some other small appliance. It management. They will allow Government will be a long time before electricity takes entities to focus on core activities and build a on uses for cooking and heating in rural successful track record in private sector areas. This means that, until incomes rise involvement. At the same time though, every significantly, only a small portion of effort must be made to lay the foundation of energy expenditures will be directed to electricity. Rural residential consumers 27 Clearly there is overlap between prongs 1 and 2. will consume very small amounts of Increased efficiency will in some part necessitate electricity for the foreseeable future. improved Governance and the ultimate efficiency gains Income generating activities WILL will be possible only with private provision. These require other forms of energy as well as commonalities notwithstanding, these two areas are electricity. different in their major focus. ENERGY SECTOR STRATEGY 31 Third, another problem exists because of can be defined as either income low income levels and imperfect markets. generating activities such as milling or Even if consumers were willing and able irrigation or end use in clinics or schools. to afford the full cost electricity per There is an important difference between kilowatt hour, they certainly could not these two types of productive uses. In the first afford the connection costs. This is called case, the productive uses are those that have the first cost problem. For example, it has economic impacts in the near term and those been estimated that the cost of act to increase consumption and ability to pay purchasing a small solar home system because the demand for electricity grows as (SHS) would be 61% of a typical rural income increases. This first case impacts rural Pakistani household’s annual income. In electrification in two ways. First, it acts as a essence, it means that even if consumers base load with the consequent reductions in would benefit or save money by paying the cost of supply. Second, in the near term it their monthly electricity bill, they could increases economic activity in the area and not afford the “first cost” of adopting a increases demand due to the positive spillover more electricity intensive consumption effects. In the second case, those that consume pattern. With rural Afghanis spending education and health services will see an the bulk of their income on food, they economic impact but it is usually in the distant would be unable without some form of future. The second use can benefit rural subsidy to purchase a SHS. This leads electrification by acting as a base load and many countries to subsidize connection reducing costs in that manner. All of this costs even if they do not subsidize leads to some important implications for the consumption or to provide other forms of third prong of the energy strategy. One, focus concessional financing. on income generating activities, Two, Fourth, even when the first cost problem determine the type of energy and amount of is overcome, the low population density energy best suited for that specific income coupled with the low income and low generating activity. Three, follow an demand, will mean that either: (a) the integrated model that combines energy consumption will need to be met by small provision with that of other services. The modular units like solar; or (b) that a base Global Village Energy Partnership provides an load needs to be identified and developed excellent platform for sharing experiences and such as a school or clinic or a larger scale lessons learned. economic use such as milling or irrigation. Finally, and most importantly, Afghanistan needs a program focused on rural energy Fifth, where incomes and consumption needs as opposed to focusing on rural are unlikely to support electricity, then electrification and one that is focused on rural electrification may need to focus on appropriate technology finding or creating a customer that can act as the base load as well as subsidize The fourth prong is new supply of energy the other users28. Then, productive uses such as new investment in transmission, of electricity that will reduce costs, generation or distribution assets. It is increase incomes or both. This must be principally concerned with the grid connected the cornerstone for most rural systems – generation, transmission and electrification activities. It also means distribution assets. Priority activities here that this productive use will subsidize remain the NEPS and SEPS and the activities other consumers. Productive use here in other energy sub sectors that support them. 28 This subsidization can be indirect in that the increase The overall policy framework for the sector is: consumption allows economies of scale in supply and lower costs. For example, the project sponsor identifies 1. Restructured energy sector governance the use of electricity for a grain mill and then uses mini and commercialized operations hydro instead of solar. This will result in lower costs of production for all users. The subsidization can be direct 2. Rehabilitation and expansion of the Afghan when the base load use pays more than its marginal public power grid supply costs, thereby lowering the amount needed to be covered from other users. 32 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS)

3 — Expansion of rural energy and electricity energy sub-sectors such as power or oil and

3. Expansion of rural energy and electricity energy sub-sectors such as power or oil and services gas, in some specific instances illuminating

4 — Promotion of private investment to develop important aspects of the strategic development

4. Promotion of private investment to develop important aspects of the strategic development indigenous energy resources (including of the energy sector in the overall context of renewable, natural gas, coal and oil) Afghanistan’s development agenda. At the same time, the sub-sector-based approach, 1 Public Power Grid. Emphasis on improved while necessary to adequately address the distribution and transmission of power will technical complexities of the energy sector, has require funding from international donors and not captured the inter-related nature of energy provides opportunity for private investment. sector developmental issues and, Capacity building of Afghan staff to operate consequently, the trade-offs that may be and maintain the system is essential. entailed in the strategic decision-making 2 Oil, Natural Gas, Coal. Immediate call for process.”29 This is a consequence of the tenders to explore and develop known fragmenting of energy across institutions and coal/natural gas reserves, noticeably for the lack of comprehensive, integrated power, may be conducted.. planning policies and procedures. In reality, no energy sub-sector can stand on its own but 3 Liquid Fuels. There is no plan to divest or is highly dependent upon what transpires in assess the Liquid Fuels Enterprise under the the other sub-sectors. For example, a forecast Ministry of Commerce and Industries. of the demand and supply of hydrocarbons Operating some 1600 gas pump stations and that does not at the least consider the demand 1300 fuel trucks should provide considerable and supply of electricity, a major consumer of opportunity for private investment, improved hydrocarbons, will surely miss the mark. quality of product and competitive pricing. While as an academic exercise this may have Renewable Energy. There is not a coordinated little consequence, nothing can be further from approach in place to support the development reality when scarce human, institutional and of renewable energy sources. A number of financial resources are required to develop an small renewable projects are underway, many optimal mix. In short, the failure to forecast are affiliates of larger programs – i.e., and analyze on an integrated sectoral basis alternative livelihood programs in poppy means suboptimal investment plans and growing regions. Use of solar water heating operating conditions, and a lower rate of and lighting, water pumping and micro-hydro economic growth than would otherwise have can be expanded and privately operated. In happened. Thus, an Overall Energy Sector rural locations, communities have gathered Needs Assessment does not exist and at this resources to construct small hydro and limited will be simply an aggregate of the individual solar facilities that support minimal but sub-sector needs assessments. important light and small power supply. More emphasis required. ELECTRICITY NEEDS ASSESSMENT The Afghanistan Compact developed at the London Conference in Jan-Feb 2006 defined Several needs assessments have been carried energy benchmarks for Afghanistan: out. They fall into two broad categories. The first category projects demand and supply or “By end-2010: electricity will reach at least 65% of given an assumption about economic growth, households and 90% of nonresidential investigates how demand and supply will establishments in major urban areas and at least respond. The second category is prescriptive 25% of households in rural areas; at least 75% of in nature that is it is based upon some policy the costs will be recovered from users connected variables and sets targets about how the sector to the national power grid. A strategy for the development and use of renewable energies will should respond. For example, it sets a rate of be developed by end-2007.” household connections as a target and then uses Government policies and control of the To achieve these goals, IROA and donor sector to move towards that target. Each of assistance has focused on actions to these is useful but one major drawback is that ALL have been at the sub-sector level. “These 29 World Bank Afghanistan Energy Sector Strategy studies have primarily focused on individual 2005 ENERGY SECTOR STRATEGY 33 rehabilitate hydro and thermal generating increased by 66% albeit from a very low facilities; increase power imports and develop base.A key objective of these initiatives is to PPAs with Central Asian countries; purchase increase the number of connections, adding small diesel generating sets for supplementing about 850,000 residential and non-residential power supply in selected urban areas; develop connections by 2010 to increase access in selected transmission lines to maximize urban areas from an estimated 27% currently deliverability from domestic generation to 65% by 2010 ; and, country-wide from 6% sources and increase use of imported power; currently to almost 25 % by 2010. By 2015 the and develop micro-hydro and other energy goal is to increase urban access to 90% and resources in rural and remote areas. Through achieve an overall national access rate of 33%. these combined efforts, the supply of electricity throughout Afghanistan has Table 9. Afghanistan Compact Goals Table 10. Number of Customers Customer Capital Cost ($ Year Peak MW Supply Residential Nonresidential Additions mm) 2006 365,221 38,868 323 2007 485,058 51,621 132,591 132.5 429 2008 644,216 68,560 176,096 176.1 570 2009 855,598 91,056 233,878 233.9 757 2010 1,136,339 120,933 310,618 310.7 1,006 Total 853,182 853.2 Notes: 33% annual growth in customers; $1,000 cost per customer connection;800 watts peak demand per customer. The estimated cost of increasing customer 75% of the cost of power recovered through access to electric power to meet Afghanistan tariffs. However, data on the number of Compact goals is $853 million for the period households in Afghanistan, on their income 2006 to 2010. In addition, the cost of and consumption patterns and overall energy expanding generating supplies (domestic and demand generally is not available or is of very imported) is approximately $400 million. poor quality. The same situation exists for Therefore, on this basis the funding needed to non-residential establishments; for the cost of meet Afghanistan Compact goals would be power delivered by DABM; and the cost of about $1.2 billion for the period 2006-201030, improving revenue collection in order to excluding the costs of developing the energy recover costs from customers. Until data supplies when indigenous resources are used. collection and analysis capabilities are Meeting these goals in relation to existing improved, the costs of meeting the ANDS budget constraints necessitates developing an benchmarks cannot be known with any overall Energy Sector Strategy that will certainty. Given this gap, the Energy Sector identify least-cost options to meeting sector Strategy proposes to develop better quality requirements in the longer-term; maximize the and more complete data and modeling benefits of IROA and donor initiatives; and capabilities that are crucial to effective increase participation and investment by the planning and to achievement of Afghanistan’s private sector.Information on Afghanistan’s overall national economic and energy sector energy situation is constrained by a serious goals. In this regard, a recent report prepared lack of good quality data. This hampers efforts for USAID estimated electricity demand for to develop and implement a clear sector Afghanistan for the period 2010-1020 needed strategy. For example, ANDS goals are clear in to meet ANDS objectives31. the benchmarks that are to be met by 2010, Table 10 on the next page: East Electricity Demand including the percentage of urban and rural for Afg 2010-2020 households and non-residential establishments with access to electricity and 31 Needs Assessment Infrastructure Report: Energy and Transport Sector; Infrastructure and Rehabilitation 30 Ministry Strategy (With Focus on Prioritization); Program (IRP); Contract No. 306-I-00-09-00517-00; Ministry of Energy and Water, September 30, 2006. prepared for USAID, 2007. 34 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Required Generation (MW) (including losses) NEPS System Area Year 2010 Year 2015 Year 2020 Kabul System 671.6 1,066.9 1,206.8 Balance of Planned NEPS 272.2 405.0 473.4 Subtotal 943.8 1,472.0 1,760.2 Aybak 16.1 25.4 30.0 Khulm 20.0 31.8 37.6 Doshi 6.5 8.8 10.4 Charikar 10.5 20.9 34.1 Subtotal 60.1 94.9 112.1 NEPS with Intermediate Loads 1,003.9 1,566.9 1,872.3 Planned SEPS 160.4 251.3 296.3 Girishk 11.5 18.4 22.3 Qalat 77.9 123.7 146.5 Subtotal 249.8 393.4 465.1 Other Major Load Centers Jahalabad 86.2 103.1 121.8 Ghazni 44.9 71.4 84.5 Gardez 32.2 51.2 60.6 Heart 102.1 150.0 164.9 Subtotal 265.4 375.7 431.8 TOTAL ESTIMATED DEMAND 1,519.1 2,436.0 2,769.2 Source: Needs Assessment Infrastructure Report: Energy and Transport Sector; USAID, 2007 Based on available data and information, the section provide more detail on elements for results of this analysis are shown in Table 8. an Afghanistan Energy Sector Strategy, This analysis indicates that total electricity including those that address overall energy generation needed in 2010 is 1,519.1 MW, sector needs (e.g., prioritizing projects based while MEW estimates that available on a cost-benefit analysis) as well as sector- generating capacity in 2010 will be about 1,200 specific elements (e.g., electricity tariff reform MW. This indicates a potential shortage of and completion of the Sheberghan gas field supply of about 320 MW. The data also show a development). The intent is for this Strategy to need for an additional 917 MW by 2015. provide overall guidance on achieving Afghanistan’s energy sector goals in a timely and cost-effective manner and to address five PRIORITY POLICIES AND primary areas: OBJECTIVES Adopt policy that: Following from the broad objectives above and using the four prong strategy approach, 1. Recognizes the priority of electricity supply priority policies to support implementation of projects and develop the mechanism to ensure the Sector Vision have been put forward. This coordination among the other Government ENERGY SECTOR STRATEGY 35 entities as required. This means viewing consumption that is cross sector in nature, e.g. electricity supply projects on an integrated energy efficiency, cost recovery, basis so that development of fuel supply and environmental issues. The National Energy other required infrastructure is an integral Policy should provide guidance on the role of part of the electricity project. energy in the Nation’s economy and set guidelines for how energy will be used. prioritizes projects on the basis of their time and cost focusing on: 7.Establish procedures to ensure effective coordination among the different sector Reducing technical losses in transmission Government entities and sharing of data by and distribution. these institutions. Reducing demand through end use

8 — Ensure that Government energy entities are

8.Ensure that Government energy entities are efficiency such as CFLs. effective by implementing capacity building Metering of existing cross border programs and reorganizing these entities as transmission. and when their roles change.32 Expanding transmission capacity to neighboring countries. 9.Improve the production and delivery of rural energy by clarifying the roles of MEW Rehabilitating the Sheberghan gas fields and MRRD and evaluating options for project and construction of its solar power plant. development and ownership, technical Develop New Hydro capacity. support and pilot projects based on international best practices and attraction of And investment in oil, natural gas and private sector participation. coal infrastructure based on tenders using performance contracts and a permitting 10.Enhance policy and planning and the system. effectiveness of donor support by (Greater detail on these and other priority strengthening Inter-agency cooperation and programs are presented in detail in the sub- adopting tools that will allow integrated sector strategy areas.) planning and analysis. Energy Sector Governance is the single most 11.Develop and deploy tools to evaluate and important issue for the long run health of the prioritize options such as a least-cost plan. sector. The enabling frameworks and implementing rules and regulations need to 12.Improve data collection and analysis. be established along best practice guidelines. Activities include: 13.Establish a comprehensive monitoring and evaluation program, and

3 — Develop and adopt a modern,

3.Develop and adopt a modern, comprehensive energy law and then separate 14.Improving assistance coordination. laws for electricity, oil and natural gas. Concurrently develop the implementing rules 15.Accelerate private sector provision while an and regulations. effective supporting framework is being put into place by such measures as:

4 — Adopt in policy and embody in law, the

4.Adopt in policy and embody in law, the principle of private sector provision of energy. 16.Making an unequivocal commitment to The overarching energy law should explicitly involving the private sector including an address the role of the private sector which aggressive time-table for action. role is further developed in sub-sector law.

17 — Recognizing that in the long run diesel

17.Recognizing that in the long run diesel

5 — Establish a Multi-Sector Regulator for power is too expensive but, in short run, it

5.Establish a Multi-Sector Regulator for power is too expensive but, in short run, it electricity, coal, Petroleum and Petroleum Products and Water. 32 As the private sector takes on increasingly

6 — Develop an Energy Policy that establish more aspects of energy, Government’s role

6.Develop an Energy Policy that establish more aspects of energy, Government’s role guidelines for energy production and will change to one of planning, policy and regulation. 36 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) may serve as a stop gap measure. Explore a value of accounts receivable from other limited term IPP for diesel, say five years. Government entities. Similar treatment to This meets the immediate objective of getting other SOE in the energy sector. power while developing some expertise in negotiation and power contractual A. Objectives instruments. It also has the advantage of restricting diesel power to a limited time 1 Reform of Sector Governance. This strategy period, time in which lower cost power can supports the consolidation of energy planning come on line. and policy-making functions through the Inter-ministerial Commission for Energy (ICE)

18 — Issuing tenders for private investment in as well as improved line ministry staff

18.Issuing tenders for private investment in as well as improved line ministry staff IPPs based on a ceiling bulk power tariff capacity to plan and budget. The law of (avoided cost) or some other method that hydrocarbons was referred to the Parliament might promote more competition in cost, and for probe into and approval while its a “one-stop shop” window at the MEW. regulations are still underway in MoJ that upon its enforcement, appropriate ground will 19.using “regulation by contract,” be prepared for participation of private sector management performance contracts and “light in this section. handed regulation” concepts33; 2 Institutional Reforms, A new market

20 — Issuing tenders for coal sector development paradigm is being supported for Afghan

20.Issuing tenders for coal sector development paradigm is being supported for Afghan based on a permitting system. energy; significant institutional changes and relevant staff capacity is required.

21 — Expediting the commercialization of Stated

21.Expediting the commercialization of Stated owned Enterprises such as DABM; and, Inter-Ministerial Commission for Energy (ICE). Support of the government

22 — Outsourcing activities now that can sponsored institution brings together the

22.Outsourcing activities now that can sponsored institution brings together the immediately benefit from private sector seven energy-relevant ministries, donors involvement such as meter reading and billing and private sector to review priority energy development aspects. Offices for Establish a commercially oriented financial ICE are established. environment by: Sector Regulation. Significant change in Increasing tariffs (while maintain a life how the sector is regulated is required. line rate or mechanism) Steps are underway in hydrocarbons and more is required in electricity and liquid Public awareness programs providing fuels. information about the link between the cost of energy and its availability. Line Ministries. As the energy line ministries shift from operating as GoA to pay subsidy directly to the Utility production based to become policy- Establish subsidized tariffs for the poor making regulatory agencies, staff capacity and ensure that they are targeted and in-house functions will need to be reoriented to market practices. Require both Governments to pay the utility for all power that is has purchased Ministry of Finance. In order to ensure and require the utility to settle its that the introduction of market-based accounts with other Government entities. contracting, a predictable royalty regime Given the initial hardship that this could and tax payments are inherent to the impose, reconcile the accounts up to the hydrocarbons sector. Liquid fuel and petroleum product import aspects as well 33 Light-handed regulation is based on the Threat of as tariffs for power all need to be Regulation providing an incentive on companies considered. This strategy supports the with market power to exercise self-regulation. establishment of a working group (likely Regulatory approval of rate levels resulting from under ICE) that will operate for 5 years to arm's length negotiations, rather than calculated monitor and evaluate the performance of on a cost of service basis, and subject to challenge the sector vis-à-vis government return. only under a complaint proceeding. ENERGY SECTOR STRATEGY 37 3 Legal and Regulatory reform and Uzbek, Tajik and Turkmen power imports. standards. Finalization of primary legislative The installation of a Dispatch and Control and regulatory tools is essential. These include system as well as Reactive Power system will mining and hydrocarbons as well as drafting be under way in 2008. legislation for the electricity sector. There are no meaningful technical standards for 3 Increased Access to Rural energy services. operation are in place; these need to be Micro-hydro, solar, waste and even small urgently developed as well as staff capacity to diesel power and energy generating sources implement them. will be promoted to improve rural access. Commercial operation of these services and B.4 Commercialization and/or divestiture of technical standards will be encouraged to state and “quasi-state” assets, Development ensure cost-recoverability, sustainability and of a plan that includes promotion of private safety. operations will support a new operational market paradigm for the sector. Government 4 An effective enabling environment for will immediately assess its sector assets and a private sector investment. A market-friendly plan for liquidation, restructuring and enabling environment to facilitate private commercialization or sale. In particular investment will be created. Key areas for Government will provide more support for the investment in the near term: (1) power corporation and commercialization of generation that includes new hydro power, national power operations. natural gas and coal-fired power; (2) power distribution including lines, substations and metering; (3) power construction and services DESIRED OUTCOMES (i.e., outsourcing); (4) exploration and 1 Restructured energy sector exploitation of coal, natural gas and oil; (5) governance/commercialized operations. installation and operation of rural energy Improved governance can mobilize services. Commercial contracts in the areas of investment, mitigate corrupt practices and accounting, project finance, legal and improve technical quality of energy supply. integrated resource planning will also be This strategy supports the shifting of considered. government as energy producer to energy regulator with viable legal and regulatory 5 Reduced Poverty: Provide essential energy frameworks that include the development of supply services that will help private sector market-based power purchase and production development, job creation and poverty sharing agreements. Market-based enterprise reduction. Investments in Energy sector will operations will support loss reduction, by itself create direct employment in the improved billing and collection, market development of power plants, oil, gas and coal procurements and efficient energy practices fields, the construction of grid systems and the that result in more energy supply and cost commercial operations of the sector. Develop savings. small energy installations that are highly successful in cost-recovery, and contribute to 2 Expanded Public Power Grid. Government local economic development. Increase has committed to improved energy access for mobilization of the domestic revenues by the population. Through a series of large and improving governance in the energy sector, small infrastructure improvements in the and stimulating private sector development. generation, transmission and distribution of Improve public service delivery by providing electricity throughout the country, this greater access to electricity for urban and rural objective is becoming a reality. The strategy communities, and especially for the schools supports the (1) rehabilitation and upgrading and health institutions. Maintain the subsidies of Kabul and other key infrastructure areas for electricity cost for the poorest households. (i.e., distribution – lines, substations, and For details refer to Annex I (Action Plan) meters); (2) development of the North East Table 11. Desired short and intermediate term Power System (NEPS); to be followed by the targets South East Power System (SEPS), Western and Eastern Power Systems; (3) construction of new transmission and related distribution for 38 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Industry Sector Short-Term (2-to-5 years) Intermediate-Term (5 to 10 years) Cross-Sector Issues Sector Governance Modern Energy Law Modern Electricity Law Modern Hydrocarbon Law Sector Governance Enabling Rules and Regulations in Support of new Energy Legislation Sector Governance Review and reform sector governance to support Significant involvement of the restructuring and private investment private sector Improve Through ICE improve coordination to increase Monitor and improve as needed GOA/Donor/ effectiveness of assistance efforts NGO coordination Sector Governance Functioning Sector Regulator Fully Functional Regulator Capacity Building Sector capacity enhanced through training Monitor and evaluate program; up-date as needed Least-Cost Expansion Least Cost Expansion Plan for the sector through Up-date models& expansion plan Plan ICE on a regular basis Needs Assessment Needs Assessment & data base at the Afghanistan Up-dated assessment and data and Data Base Energy Information Center base and modeling & assessment capabilities developed Sector Governance Integrated Energy Planning & Policy Analysis Monitoring & Incorporate an M&E plan for all assistance efforts Evaluate and update as needed Evaluation Plan Electricity Sector Corporate DABM operating on commercial basis Management Contract for DABM (in Governance Some areas in private hands whole or in parts) Technical Losses 27.5% 20% Collections 70% collection to billed 85% collection to billed Private Sector Issue tenders based on ceiling bulk power Implement regulatory reform & Investment tariff; “one-stop shop” for project approval; institutionalize regulatory process; regulation by contract; & performance unbundled & privatize electricity incentive contracts sector DAMB Complete commercialization; improve Unbundle & Privatize Commercialization metering, billing & collection; implement management performance contract Tariff Reform Complete tariff reform for DABM Modify tariff structure & rates as needed Power Imports Complete PPAs to support expanded Develop in accordance with least-cost imports from CAR expansion plan Installed Capacity 850 MW (2011) 1,019 MW (2013) New Connections 730,000 Dehsabz 1.4 million connections by 2025 Oil & Gas Sector Rehabilitation of Complete assessment of fields and issue Revise procedures as needed & issue Sheberghan gas fields PSA; rehabilitate infrastructure; issue tender new tenders for development of sector ENERGY SECTOR STRATEGY 39 , construction of & for IPP; consider bundling with gas power plant processing & fertilizer plant Indigenous Fuels Feasibility Study for CNG Develop CNG Infrastructure if cost- Development including stations and vehicle conversion effective. Complete feasibility Complete feasibility study for oil refinery as Develop refinery if cost-effective study for oil refinery part of least cost energy sector plan Complete Tariff Complete tariff reform for gas sector based Modify tariff structure & rates as Reform on economic costs of service needed Regulatory Reform Establish National Energy Regulatory Capacity building and institutional Commission strengthening as needed Modify Modify Hydrocarbons law to clarify roles & Develop rules & Regulations to Hydrocarbons Law responsibilities of IROA and developers for complete implementation of oil and gas development Hydrocarbons Law Private Sector Call tenders for instant services of Complete sector restructuring and Investment exploration and exploitation of recognized implementation of Hydrocarbons Law areas of gas/coal aiming at attracting investments in the form of product division(PSA ) in the sections of energy production, construction of plants , gas/ fertilizer process Petroleum Imports Improve control of imports and collection of Expand role of the private sector import duties; enforce quality standards; increase storage capacity Coal Sector Issue Tenders for Issue tenders for private sector development Evaluate and up-date process as exploration and based on a Permit System with independent needed; issue new tenders exploitation of coal evaluation team reserves Approval of minerals Implementing rules and regulations law by the parliament Rural & Renewable Energy Sector Sector Reform Consolidate all authority for rural energy Develop programs consistent with development within the MRRD expanded role of the private sector Develop Rural Develop “light-handed regulation” and as a Monitor and up-date as needed Energy Policy policy for rural energy projects Renewable Energy Deploy 10 MW of Wind Power Deploy 50 MW of Wind Power Renewable Energy Geothermal Prospecting at 1 site Geothermal Feasibility Study Rural Energy Rural Energy Master Plan and Rural Updated as necessary Electrification Master Plan Assess rural Develop methodology to assess and deploy Develop methodology and develop renewable energy renewable energy technologies pilot projects based on assessment technologies Assess models for Assess and develop models for project Assess and develop models based on project ownership ownership, including coops, franchises, maximum benefits provincial or district entities Assess models for Assess models for technical support, Assess and develop models based on technical support including university outreach; maximum benefits MRRD/DABM district offices; franchises; district/provincial government Pilot Projects Develop & implement pilot projects to test Assess and develop projects and 40 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) best practices implement bases on maximum benefits PRONG ONE – EFFICIENT OPERATION INPUTS & OUTPUTS OF INFRASTRUCTURE Policy actions: important policy actions Fast Track Commercialization of DABM. in terms of institutional and capacity Work here will also provide a model for development, regulation and legislative commercialization of other SOEs in the activities and policy measures to support energy sector. Begin loss reduction implementation of the energy sector’s programs including metering of retail overall goals and priorities and customers. achievement of the desired outcomes are: Procure spare parts and fuel (i) integrated energy policy; (ii) overarching energy law and redrafting of Repair existing transmission and the electricity sub-sector law along with distribution systems including the implementing rules and regulations; rehabilitating and/or upgrading (iii) commercialization of DABM and substations and distribution networks for operation on a commercial basis; (iv) towns under NEPS main transmission institutional reform, including creation of lines (estimated cost, US $120 M), Kabul a National Utility Regulatory distribution grid reconstruction and Commission; (v)accelerate private sector extension (estimated cost, US $ 250-300 provision through explicit policy and M) legislative cover for the private sector; Install meters for cross border (vi) service delivery standards and transmission options; (vii) refocus policy to stress repair and maintenance, loss reduction Repair existing thermal plants and commercial operation equally with National Energy Conservation Program new investment; and, (viii) tariff reform (NECP),34 and (iv) implement with a slow but deliberate phase out. complementary activities to achieve its Programs: Key programs to support targets which may include such measures implementation of the energy sector’s as demand side management and other goals and priorities and achievement of best practice energy efficiency measures. the desired outcomes are discussed For details of projects refer to annex III. briefly below and in greater detail in Section V. The overall public investment need for the next five years is ??? The PRONG TWO – SECTOR financing gap that will need to be covered GOVERNANCE externally (donors and private investments) is. A detailed list of Improved GOA, Donor & NGO programs, sub-programmes and projects Coordination. Effective assistance and is part of the Sector Investment Program achievement of long-term sector goals (Annex II). and sustainability require effective coordination and cooperation among all Indicative costs stakeholders. Donor planning on an The energy sector program is projected to individual basis is well developed; cost USD billion, or about USD m per however, integration of donor plans with year over. Funding is committed Leaving firm commitments for funding and well a balance 34 To economize for cost-savings, people in Kabul This section presents Major Programs and Projects by prong or focus area. have started using fluorescent bulbs (also called white bulbs), 8,11 and 18 watts; these produce as much light as 60-100 watts (regular) bulbs. White bulbs also do not produce heat and have a longer life, 6 months or more. However, white bulbs are expensive; 18 watts costs 120 Afs, as compared to 20 Afs for a regular 100 watt bulb. ENERGY SECTOR STRATEGY 41 defined integration with energy sector Training will also support the ministries and other stakeholders needs commercialization of DABM and to be improved. Specific attention needs other energy sector SOEs. to be paid to these issues within the ICE Additionally, all SOEs need training to ensure that ANDS goals are met in basic management, accounting and efficiently and on time. finance. Reduce Subsidies and cross-subsidies in both power and fuel. This will be done so Improved Sector Governance. Currently, in a way that matches improvements in energy sector governance is spread the sector and recognizes the hardships among numerous IROA Ministries, that quick withdrawal of the subsidy agencies, and SOEs where effective could have. Universal service obligations coordination often is lacking. should be directly funded through Moreover, the roles and Government payments to the utility. responsibilities of IROA entities will Subsidies are an important and integral tool of change as sector restructuring and Government policy. Energy subsidies that private participation advances and provide a basic level of energy services to the the role of the Government evolves poor exist in almost every country. So the from direct sector intervention to issue it not whether there should be subsidies oversight and regulatory functions. but rather who gets the subsidy and the how Actions to privatize SOEs need to be the subsidy is provided. Subsidies need to be completed and the IROA needs to identified and made transparent during the restructuring process and removed. review the roles and responsibilities of Ministries and other IROA entities In 2004/05, the average tariff collected by in light of the structure and DABM was only five cents/kWh, compared to expanding private sector role within an average unit cost of power production of the sector. Consolidation of functions about 12 cents/kWh. Currently, power and re-definement of roles and subsidies cost the government $56 M/year, responsibilities among IROA entities which is unsustainable and undesirable. needs to be addressed. Improved governance is more than just properly Assistance is required to review the existing tariffs and develop a targeted subsidy plan aligning Ministries and IROA entities. and a phase-in plan for subsidy reduction. It includes the establishment of sector Assistance will need to include a public regulation, the increased role of the outreach program. This could be one of the private sector, and integrated policy first tasks of the regulator (See below). and planning. Almost all major reviews of the energy sector or sub-sectors Capacity Building. Current efforts to conclude that it would be best to train IROA energy personnel lack consolidate all energy operations under coordination and effectiveness. A one Ministry, a Ministry of Energy. This comprehensive vocational training is something that needs to be considered in the intermediate term. program to ensure future human resources adequate for the energy A. Legal and Regulatory sector and to demonstrate evidence of a comprehensive, multi-disciplinary Reform Program. and multi-ministry approach by the Currently, there is only an embryonic legal IROA is required. Development of an and regulatory framework for the Afghanistan Afghanistan Vocational Training energy sector, which is insufficient to support Center is needed. The recently restructuring and private investment. The established National Capacity laws are silent with regard to private Building Program may be the proper provision of energy. This lack of explicit basis for the private sector will serve to increase risk entity to accomplish this task. and cost and delay the entrance of the private 42 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) sector in a meaningful way. Norway is activities could be to develop modern providing assistance to redraft the production sharing agreements. Develop and hydrocarbons law and it will be completed implement the organizational structure and soon. Drafting of an overarching energy law staffing plan for NURC. and the electricity sector law is a top priority. Recognizing the time to enact legislation and establish an effective regulatory authority, it may be Government needs to make an unequivocal appropriate to accelerate the process through a commitment to involving the private sector Presidential Decree that would establish the including an aggressive timetable for action. regulatory authority while legal and administrative Amend the law to restructure the energy sector issues are being resolved. with a strict timetable specifically mentioning (a) sector restructuring, and (b) private provision of energy.35 B. Private Sector Provision Establish a multi-sector regulatory body Program. (water, electricity, coal, and petroleum) As mentioned earlier, the country can no independent of the energy related ministries. longer wait to actively begin attracting the This program would support the creation private sector to the energy sector. The and ongoing operation of a new enabling legislation, policy and regulation will Government Entity to regulate the sector. addressed through other efforts. This To jump start the process, a shadow program is to establish a Public-Private regulator would be created composed of Partnership Office to facilitate increased expect staff in key positions to actually private sector involvement in the perform day-to-day functions and train infrastructure areas beginning first with the local staff on both on-the-job training and energy sector. At a later date, it could focus on non-infrastructure reas. It would be housed in formal training. As local staff is trained, the Ministry of? And be responsible for expert assistance would be reduced. This developing the laws and implementing rules serves the purpose of immediately and regulations that are not specific to any providing regulatory assistance in country sector but rather cross cutting, such as to establish the necessary frameworks and concession law or a BOT law. The PPP office provide “guidance” so as to create a would also develop prototype commercial favorable environment for the private instruments such as contracts, developing a sector. tendering system that would be run by the PPP office on behalf of client Ministries or The lack of a regulator, independent from the SOEs. Ministries that deal with energy, is an obstacle to efficient operation of the sector even if the Develop and implement the organizational operations are under Government control. structure and staffing plan for PPP Office. Because of the importance of catalyzing This needs to be accompanied by a shadow private sector provision of these services expat staff to provide additional resources and (water, electricity and natural gas), the critical on-the-job training. regulator needs to begin using a more French/Arabic model of regulation and evolve Reforms that lead to transparency, fair with the sector over time. Emphasis needs to competition, a functioning legal framework, be on acting as a watchdog of SOE and rule-of-law can meaningfully bring commercialization and performance private sector participation. For electricity, improvement, and providing the early private sector can be mobilized through the technical input into the contracts used with use of: Independent Power Producers (IPP’s), private sector entities. One of the first Management and Maintenance Contracts, Concessions, Build, Operate, Transfer (BOT) and Full Privatization of Assets, the highest 35 Private provision is a catchall phrase that is used extent of privatization. to convey all the possible ways of involving the private sector from management contracts through the sale to and operation by the private sector. ENERGY SECTOR STRATEGY 43 As a start, DABM will outsource Works medium sized stand-alone grids,37 (iii) and Services and Billing/Meter reading. Management/maintenance contracts for In the works and services area, the utility regional power programs and major will no longer undertake construction and power plants, (iv) The installation and rehabilitation but will give them under operation of alternative energy sources tender to the private sector. Other areas (solar and wind installations), potentially that will be encouraged include O&M with subsidies in the short- and medium- contracts. Moreover, when terms, (v) For the longer term, through commercialization is complete and unbundling and divestiture of power distribution unbundled in an accounting generation plants which could operate as sense, DABM will seek a performance stand alone units that sell power to the based management contract for grid, and (vi) over the longer term (2015 distribution. In the regulatory arena, our or beyond), subsidized development of strategy includes: establishing enabling coal fired power plants to support major environment including commercial and industry such as mining. power-sector specific contract laws such as for dispute resolution. Moreover, Security remains an important issue functioning courts can be an important including for private sector participation enabler to attract private sector and operation. To reduce security-related investments. It is proposed to create a risks, the Government is increasingly Minimum Infrastructure Platform (MIP)36 implementing corrective measures for private sector led growth. including increased security, creating employment opportunities and Given the on-going power infrastructure apprehending criminals. activities, including those planned, under proper regulatory environment and Additional regulatory improvements are security conditions, over time, selectively, also underway to lower risks to the there is a good potential for the private sector. Also, the public will be privatization of power. While a great deal educated to help accept privatization, as it of success has been achieved in the is gradually phased in. MEW will work telecom sector, a key difference is the towards improving the regulatory public’s perception that providing power framework to reduce risks and costs. is the government’s responsibility, and IROA is committed to encouraging and also much higher costs of power increasing private sector role in power. infrastructure as compared to telecom. Nevertheless, areas such as concessions C. Integrated Policy and and licenses can be looked into for Planning. potential use. It is imperative that the energy sector be seen from an integrated point of view and that the Some of the privatization areas that will Ministries and Agencies involved in energy be investigated are: (i) Equipment and coordinate their policy and planning exercises human resource supply to power so that the complex interactions among sub- construction and rehabilitation projects, sectors are adequately considered. This will (ii) Owning and operating small and result in a more optimal allocation of resources and a more effective capital investment planning process. ICE needs to be 36 Proposed MIP is a comination of elements including: (i) business environment; (ii) investment facilitation; 37 The Omary Electric Company in Ghazni serves 8,500 (iii) human capital; (iv) financial services; (v) Power customers with 24 hour electricity and only 42 staff sector-specific laws including dispute resolution, and (vi) (compared to DABM in Ghazni who serve 1,460 Physical and support infrastructure. customers with 5 hours of supply from 29 staff). 44 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) strengthened both institutionally and from a What policy, institutional, legal and capacity point of view for this critical work. legislative reforms are needed to develop a sustainable energy sector with private D. Least‐Cost Expansion Plan sector participation? based on a rigorous cost-benefit analysis. As What studies and data and informational the coordinating institution for the energy resources are needed to fill gaps in sector, it is recommended that ICE undertake understanding and knowledge of the development of a Least-Cost Expansion Plan to sector and to support development of an achieve IROA objectives for the sector over the effective energy sector strategy? next 2-to-10-year period within overall budget What is an effective strategy to increase constraints. This plan would utilize and participation, build support, and expand upon current economic models maintain realistic expectations among developed through USAID-funded assistance sector stakeholders with regard to to evaluate current and proposed projects and assistance efforts? be updated on a regular basis. Based on this analysis, a comprehensive expansion plan for E. Needs Assessment and Data Afghanistan’s energy resources—including Base. electricity, natural gas, oil, coal and renewables—would be drafted, vetted and put The IROA should undertake a detailed needs into place; and would include a detailed assessment and develop a comprehensive data monitoring and evaluation program, base for the Afghanistan energy sector, indicating objectives, benchmarks, and including information on energy use by reporting requirements. This plan would various categories of consumers (households, include capacity building; regulatory, legal commercial, small and large industry, and legislative reforms; private sector transportation); options for meeting sector initiatives, and other programs needed to demand; rural and urban household achieve ANDS objectives, in addition to information, economic growth, level and specific projects to rehabilitate and expand structure of energy demand, rates of energy sector infrastructure. It would population growth and urbanization; energy prioritize projects and programs according to cost and availability; etc. This information short-term (2-to-5 years) and intermediate- would be used to create a comprehensive data term (5-to-10 years) requirements given base to support achievement of Afghanistan’s overall IROA and donor budget constraints. long-term energy sector objectives located at the Afghanistan Energy Information Center As the implementing and coordinating entity, (AEIC). ICE could assign specific projects and programs to individual ministries and entities. Project Management Unit. These energy This Plan should review: projects and programs are so large and institutional capacity at implementing What is the optimal balance over time of entities so thin that is it imperative that a domestic energy production from hydro, Project Management Unit be established natural gas, oil, coal, renewable resources to handle all project management aspects and energy conservation? including monitoring and evaluation. The PMU would work with ICE and the What is the least-cost balance over time implementing entities to develop a between domestic versus imported comprehensive project management energy? program that would be applied to the What is the optimal balance over time of largest and most critical projects. At the energy resource use for rural energy time, the capability to monitor and services? evaluate would be strengthened at the ICE and implementing entities Given resource constraints, what is the addressing all other assistance efforts not optimal balance over time of IROA versus brought under the PMU. It is critical that private sector involvement in the energy efforts to rebuild and expand sector, including rural energy? Afghanistan’s energy sector, to ENERGY SECTOR STRATEGY 45 strengthen energy sector institutions and for grid connection is require; and, there is a to attract private sector investment be as need to collaborate on technical standards for effective and efficient as possible. Current rural electrification. efforts have produced some important results, but efforts need to be Coordinate donor assistance activities for strengthened, particularly with regard to rural-remote energy through RLED. rural energy programs, to ensure that projects are completed on time, that they In collaboration with NURC, develop produce the desired results and that they Rural-remote Energy Policy and include contribute to Afghanistan’s sustainable Light Handed Regulation as an official energy future. For details of projects refer policy to promote development of stand- to annex III. alone rural energy systems. Policy and regulation must set guidelines for cost- recovery. In essence projects need to be PRONG THREE – RURAL AND able to recover operation and RENEWABLE ENERGY maintenance costs and set aside a sinking fund for capital replacement. Amend electricity law to clearly demarcate the boundaries between MEW and MRRD with Undertake a Rural Energy Master Plan respect to rural energy; concentrate rural- for rural-remote and develop criteria for remote energy activities within the Rural project selection based on the policy of Livelihoods and Energy Department (RLED). income generation and cost recovery and It is important to more clearly define the areas on the master plan and do so in of control between the MRRD and MEW in coordination with MEW as their rural providing energy services. MEW is electrification plan is developed. principally concerned with providing Develop and implement the electricity services to: (1) urban and peri- organizational structure and staffing plan urban areas; (2) secondary towns and cities of for RLED. This needs to be accompanied 5,000 persons or more; and, (3) large by a shadow ex pat staff to do the heavy industrial, mining, commercial or agro- lifting and provide critical on-the-job industries. To more accurately reflect these training. differences, the distinction between rural energy and rural-remote will be made Establish the Rural Energy Fund following the Bangladesh experience. administered by RLED and allocated on the basis criteria developed above. Rural-remote energy is energy that serves MEW to develop a rural electrification master remote communities of a village or village and plan to cover their area of control and where the settlement is less than 5,000 persons coordinate it with the MRRD. For details of that is a reasonable distance from a projects refer to annex III. transmission line, or an urban or peri-urban area or any other area that would be covered by MEW. This is the clear domain of MRRD PRONG FOUR - EXPAND and this may include conventional energy SUPPLY such as diesel, liquid fuels, and coal and it may include small scale renewable such as Imports from neighboring countries expanded biogas and micro or mini hydro. – Establishment of a Dispatch and Control While demarcating clearer lines of authority Center (US $25 M) for energy services, this does not reduce the need for the two ministries to collaborate. The Power Purchase Agreements for Power need to collaborate arises for many reasons Imports – Strengthening Power Purchase such as: The MEW will have expertise in Agreements (PPA’s) with Afghanistan’s renewable energy, albeit large scale, that may suppliers to assure guaranteed supplies at be of use to MRRD; Eventually, some of the MRRD areas will connect to the grid and so a common understanding of the requirements 46 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) agreed upon costs and quality38. This is a top (2 REHABILITATION OF priority activity that cuts across several MEW projects and is critical to additional power SHEBERGHAN GAS FIELDS needs. It is currently covered under an AND POWER PLANT. existing USAID project. Focus needs to be on Afghanistan needs to develop indigenous non-western style PPAs that are consistent energy resources, including natural gas with the Central-South Asia way of doing reserves in the Sheberghan area. Data on gas business. reserves indicate that there is sufficient low- cost gas reserves available to operate a (1) NORTH EAST POWER combined cycle turbine plant at Sheberghan for 25 years and that the cost per kWh of SYSTEM (NEPS) power generated would be in the 2.8 to 3.5 NEPS is the most important supply effort cent range. While this is more expensive than consisting of generation, transmission and the cost of imported power, which currently is distribution. It includes a 100 MW power plant in the 2.0 to 2.5 cents/kWh range, future based on indigenous natural gas39 and power prices are expected to be 4.0 cents/kWh or imports. . NEPS’s primary objective is to serve more. Also, it is important to note the urban centers in Kabul, Nangarhar, Parwan, domestic benefits resulting from developing Balkh, Jawzjan, Kunduz and Baghlan. The the gas fields and gas-fired power plant. transmission lines to transmit imported power from Uzbekistan, Turkmenistan, and USAID is exploring options for some funding Tajikistan to major urban centers in the North of a 100MW gas-fired power plant to be and East, in particular Kabul are being located near the Khwoja Gegertak, Jarkaduk completed on a priority basis. The completion and Yatimtaq gas fields and an associated urea will help meet the existing shortfall on quicker plant. USAID is confirming the sufficient size basis. of the reserves, quality of the gas and delivery prospects for the plant and plans to move In addition to the 100 MW gas fired forward with construction of the generating generation, NEPS will also include the plant pending results of these assessments. rehabilitation of Hydropower plants (HPPs) in Pul-i-Chumri and Khanabad in the North, and A high priority for the Energy Sector Strategy Naghlu, Saurobi and Mahipar in the east. The is to complete assessment of the Sheberghan generated power will feed through the NEPS. natural gas fields, issue a production sharing For the long-term, 15 years and beyond, it is agreement for development of the fields, proposed to establish new hydro power plants complete the rehabilitation of the gas pipeline in Baghdara and a second plant in Saurobi; and develop the 100 MW Sheberghan gas-fired pre-feasibility studies for these hydro plants power plant to feed into the NEPS grid. These have been completed. In addition, a activities should include reviewing options for transmission line will also be extended from private sector participation in development of Kabul to Logar and Gardez the power plant, such as a management contract and bundling the project with rehabilitation and expansion of the gas processing and fertilizer plants. Moreover, the GOA needs to consider options to attract private sector participation and investment in the gas sector, including management contracts for Afghan Gas, to rehabilitate and operate the gas processing facility and to 38 Currently, PPAs are skeletal and include no terms expand and operate the fertilizer plant. concerning technical quality, quality of service, or metering. In addition, MOU with Tajikistan has not been finalized. 39 Estimated gas reserves available as of 2006: 1197.17 billion, current demand including for the 100 MW power plant is estimated at 21.09 billion ft3; Expected life of gas reserves, 56 years. Plant operational target date: late 2008 ENERGY SECTOR STRATEGY 47 SOUTH EAST POWER power systems such as decentralized systems, mini-grids and others, in areas where security SYSTEM (SEPS) becomes a threat. SEPS aim is to serve urban centers in Helmand and Kandahar). It will enhance power supply to Kandahar and Helmand by rehabilitating RESERVE ESTIMATION AND two turbines, and by extending a third turbine EXPLORATION at Kajakai. In addition to enhancing power Increased power generation requires the supply, another key aim is to gradually reduce reliance on expensive diesel generation. use of indigenous resources of natural gas Furthermore, MEW will attempt to advance and coal. The Government is committed the proposed time-frame for the feasibility to developing the enabling frameworks study to expand hydro power production in that will promote private sector Kajaki through a second dam. investment in exploration and development of gas reserves and coal. However, security is a particular concern Top priority will be given to existing gas especially in the South-east including Kajakai- and coal fields. For details of projects dam area. In the event it becomes a serious refer to annex III. threat or an actuality, the Government will explore the feasibility of installing, small-scale 48 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) CHAPTER III ENERGY SUB-SECTOR STRATEGIES population having electricity. However this ELECTRIC POWER remains an extremely ambitious goal.Hydropower holds the greatest promise The goal of the IROA ‘s strategy for the power for Afghanistan followed by natural gas and sector is to provide supplies of reliable, coal. Utilization of indigenous fossil fuels affordable electric power sufficient to support (natural gas and coal) for power generation is a growth rate in GDP of 9% per year and very limited as is utilization of solar, wind and reduce poverty by 3% per year. If these targets other renewable energy resources. are met, by 2013 these achievements would result in over 90% of residents in the three Figure 9. Cost of Power Under MEW Strategy major cities and more than 50% of the rural Source: Ministry of Energy and Water. Figure 9 shows that the cost of delivered Commercialization of DABM including power can be significantly reduced through outsourcing and/or privatization some efforts by the IROA and MEW to displace functions. costly diesel power with other sources, such as Institute a CFL penetration program. natural-gas and coal and with lower cost power imports. Most of the cost of power is Increase operating capacity in associated with generation (as opposed to Afghanistan from 448 MW to 850 MW by transmission and distribution), so replacing 2012. costly diesel generation will have a major Increase power distribution in Kabul to impact on the delivered cost of power 500 MW by 2013. (seeFigure.8). Increase power distribution in other Priority objectives of the Government in major urban centers by 100 MW by 2013. electricity include: Provide 100 MW to electrify 25 small towns and 800 representative rural ENERGY SUB-SECTOR STRATEGY 49 households by 2013 (MRRD estimates North-East Power System (NEPS) to that as of 2006, there were over 38,000 connect Kabul to Pul-e-Khumri with ties villages in Afghanistan.). to Tajikistan, Uzbekistan and Turkmenistan for power imports and the Promote supply of energy services to addition of thermal power through rural and remote areas. indigenous gas at Shebergahan. Support development of renewable North Transmission System (NTS), energy resources, particularly micro- including constructing 220kV lines from hydro, solar and wind. Nahri Shahi (Mazar-e Sharif) to Surkhan Support institutional strengthening and Daria in Uzbekistan and to Pul-e-Khumri capacity building and private sector and beyond. involvement in the power sector. Eastern Transmission System (ETS) is Tariff reform. being rehabilitated and strengthened, including the existing 110kV lines from Kabul to Mahipar, Naghlu and Sarobi. MEASURES TO INCREASE Western Transmission System (WTS) POWER GENERATION AND includes strengthening the existing 110 DELIVERY kV line connecting Herat and Mary in Turkmenistan and the 132 kV line Rehabilitation and expansion of power connecting Herat to Taiband. The South generation, low-cost power imports, and East Power System (SEPS) which via a increased access to rural electricity supply are 110kV line connects Kandahar to Lashkar the core components of the IROA ‘s efforts to Gah and Dural Junction and connects increase accesses to electric power in Dural Junction to Kajakai. Afghanistan. Installation of diesel generation in Major efforts by the IROA and donors to various cities where no alternatives are increase power generation and delivery available. include the following40: For small towns and cities, strengthen power availability including: the Qalat Rehabilitation of the NW Kabul thermal Electrification Project and the Aybak plant (44MW). Distribution Project to strengthen distribution networks and establish 4,300 Reconstruction of East GT (45MW). new connections in rural areas; micro- Development of a gas-fired generation hydro projects in various parts of the plant at (100MW) country; limited wind energy projects (such as in Herat, with over 120 days of Reconstruction of Thermal Power Plant potentially strong winds); and an 50 MW in North West of Kabul estimated 200 small biogas digesters in Construction of Diesel Power Plant 108 Kandahar. MW in East of Kabul Longer-term initiatives that might be Power generation activities directed to undertaken between 2012 and 2020 might off-grid supply, including micro-hydro eventually include some of the following: and solar powered systems, potentially adding about 21MW. Developing a national grid, and becoming a power transit country; plus Installation of 25 diesel generators to help the following specific projects meet winter and emergency needs in Kabul and Kandahar (21MW). Kajakai 2 (100 MW) and Saurobi 2 (180 MW) hydropower development. 40 This list is intended to indicate IROA and donor Kokcha hydro cascase, (perhaps up to activities undertaken to expand availability of electric 1000 MW) power. The status of these activities often is unclear as to whether they have been completed, are being Baghdara (280 MW) implemented or have been delayed. 50 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Kunar, (300 MW) inventorying of DABM’s assets; training to selected DABM staff in procurement, Panshir (Gulbahar) (120 MW); billing and collection; and approval of Possible hydro projects in Bali Murghab bye-laws to authorize DABM’s and Balkh, with currently unknown conversion to a new commercial entity. capacities; and Tariff reform for DABM, including Perhaps one or more coal power facilities raising tariffs to cover 75% of costs by with a capacity of up to 350 MW. 2010. These activities will take some time to Establishment of an independent Energy complete. New generation to serve the Kabul Regulatory Commission with authority area is not expected to be available until over tariffs, service quality, and other December, 2008, including delivery of issues. expanded power imports from Central Asia. Energy needs survey. Completion of the Sheberghan power plant depends on completion of the resource A major part of the IROA ‘s efforts to increase assessment and finalizing the production supply of electric power needs to be sharing agreements; development of other development of an effective policy to attract resources options, such as coal-fired private investment to the sector, Here, lessons generation or new hydro plants, depends on learned from other countries in the region may completing a number of ongoing initiatives be helpful. designed to clarify the roles and responsibilities of the IROA and developers and to reduce to manageable levels the risks and uncertainties associated with A. One‐Stop Shop‐ The Private development of these resources. In addition, a recent analysis of the sector indicates a Public Partnership Office potential electricity supply shortfall in 2010 of In 1987, Pakistan requested assistance from the about 320 MW, or perhaps more, depending World Bank to increase private sector on how ‘demand is defined.’ Currently most participation in the electricity sector41. An customers receive some power some of the initial framework of incentives to attract time. There seems to be latent demand for far private investment was put in place in 1988 to more power than is planned for any time in address the following constraints: the foreseeable future. Absence of a comprehensive policy Institutional, Regulatory and Legislative framework concerning incentives, fiscal Policy Requirements treatment, reparation of profits, availability of foreign exchange and While physical improvements to the power pricing. structure are underway, simultaneously initiatives are being taken to build institutional Lack of long-term financing for projects. and implementation capacity across relevant power sector entities many of which will Inadequacy of institutional arrangements increase transparency. Such efforts include: for the review, negotiation and approval of projects. Strengthening institutional capacity at MEW, MRRD and MoM to be completed In 2002 the Government adopted a Strategic by 2015. Plan for power sector privatization, which Technical training of technicians and included commercialization and unbundling engineers at DABM in power sector and eventual privatization of the electric infrastructure maintenance; management utility; establishing an independent regulator courses and training in procurement, billing and collection and other areas. 41 Lack of Access to Energy; The Enabling Efforts to unbundle and corporatize Environment Conference: Effective Private Sector Contribution to Development in Afghanistan; The DABM also are underway, including World Bank Group, June 2007. ENERGY SUB-SECTOR STRATEGY 51 for the sector; and issuing tenders for private process (the tariff needs to be evaluated sector development of power projects based and altered over time in successive on two important elements: tenders to reflect market conditions). Standardized security package (including A “one-stop shop” to address all issues Government and Donor guarantees) to relating to development of an IPP. reduce country and project risk. A ceiling bulk power tariff against which A standardized and transparent review potential developers would bid. and approval process (with a dispute The World Bank provided assistance to the resolution procedure) so that the best Power Ministry to develop procedures to (most economical) projects are selected implement this Plan, with major elements to: and review criteria are known and fairly (1) develop policies to support investment; (2) applied. create a vehicle for long-term financing for private power projects; and (3) establish a new entity to evaluate, negotiate and approve This type of procedure could be adapted to private power project investments. This new Afghanistan as it is designed to address very entity was a “one-stop shop” within the power similar conditions that currently exist in its utility in charge of evaluating proposals and electric power sector. In addition, this negotiating agreements between the procedure could accelerate development of Government and the project developer IPPs in Afghanistan while current efforts at necessary to bring the project to market (e.g., regulatory and tariff reform and PPAs, FPAs, pricing, financing, etc.). commercialization of DABM are ongoing. This policy and institutional framework B. Multi‐sector Regulator & proved to be very successful in bring to market 20 IPPs with a total capacity of 4,500 Regulation by Contract MW, with an average closing time of 2 years. Regulation by contract is a mechanism that specifies the roles, responsibilities and This process can be utilized while other obligations of the electricity distribution activities to commercialize and privatize the company and the regulator in providing government-owned utility, establish an electric power service to retail customers43. independent regulator and complete tariff This contract is similar to, but more detailed reform are ongoing, thereby shortening the than a Power Purchase Agreement, which time for private sector project development. defines the terms and conditions for the sale of Major elements of this policy to ensure success power from a generator to a distribution include the following (some of these elements company. Also management contracts are a were missing from the Pakistan program, but type of regulation by contract, in that they are based on lessons learned from that specify certain performance requirements for process)42. the contractor tied to rewards and penalties in exchange for a commitment by the A clear policy and package of incentives government to provide revenue to cover costs, to promote private investment. including profit. A “one-stop shop” to address all issues related to approval, financing and Recently established regulatory commissions development of projects. in developing countries often do not have adequate experience or expertise in effectively Establish a bulk power tariff ceiling price regulating power providers and also are often indexed to inflation that developers bid not truly “independent” from political against to accelerate project development, influence. In addition regulatory procedures rather than a using a competitive bidding and mechanisms, including dispute resolution procedures, generally are not well established. 42 “Lessons from the Independent Power Experience in Pakistan;” by Julia M. Fraser; Energy and Mining 43 Regulation by Contract: A New Way to Privatize Sector Board Discussion Paper No. 14; The World Bank Electricity Distribution?; World Bank Working Paper Group, May 2005. No. 14, September 2003. 52 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Therefore, developers may be reluctant to investment in distribution assets so as to invest in distribution facilities as the promote private investment while also perception of regulatory, financial and ensuring adequate protection of political risk remains too high in relation to customers by supporting adequate, safe, expended benefits from the investment. To efficient, and economically priced service. address this situation, and also to speed up the development process while the necessary Elements of a regulatory or performance- conditions are being put into place to establish based contract typically include: an effective regulatory commission, the concept of “Regulation by Contract” may be Pass through of power purchase costs usefully applied. Recovery of distribution costs Regulation by contract does not specify prices. Loss reduction and other quality of It pre-specifies a regulatory treatment for service requirements for the distribution individual cost elements, which taken together company determine the prices charged for electric service. The contract is a detailed tariff-setting Obligation to provide service by the agreement between the service provider and distribution company the regulator that forces the regulator to set Performance requirements on behalf of tariffs based on a set of specific formulas and the distribution company, such as procedures. In this way it limits the discretion minimum efficiency standard, number of of the regulator and reduces the risks new hook-ups, revenue collection targets, associated with investing in a power etc. distribution company. In exchange, it establishes certain service and performance Distribute resolution mechanism obligations on the distribution company to Mechanisms to reduce foreign exchange ensure that customers receive adequate risk service. The key component of the regulatory contract is a performance-based, multi-year tariff setting system. This type of mechanism PROJECTS has been used for a number of years with To ensure that ongoing activities to expand success in a number of developing and electricity supply mesh effectively with the developed countries, including the US, UK, IROA‘s longer-term objectives for the France, India, Brazil, Chile, Peru, Colombia, electricity sector and produce cost-effective and Bolivia. results, it is recommended that the following activities be undertaken as part of an overall The agreement or contract contains a formula Afghanistan Energy Sector Strategy: with pre-specified parameters that determine how annual total revenue or average tariffs

1 — DABM Commercialization and Capacity

1. DABM Commercialization and Capacity levels will be established by the regulator. The Building. It is critical that DABM be formulas generally distinguish between placed on a sound financial basis. Some controllable and non-controllable costs. progress has been made to commercialize Controllable costs are tied to external indexes DABM and improve its operational or benchmarks with performance targets and management and efficiency, these efforts associated rewards or penalties. Non- need to be completed. Emphasis on controllable costs are allowed to be passed improving, metering, billing and through to customers on a regular basis. There collections is needed; consideration also also is usually a mechanism to deal with should be given to implementing a unforeseen events, such as natural disaster management contract to the private sector that might affect the company’s costs or for these functions. revenues and a dispute resolution mechanism to address disagreements between the Support for full-scale COMMERCIAL company and the regulator. AUDIT The purpose of this regulatory contract is to reduce the risks associated with ENERGY SUB-SECTOR STRATEGY 53 Audit to be performed by one of the possible MS Great Plains (needed three major international audit firms immediately) doing business in Kabul. Social Safety Net44: -- Design & Training Capacity building within the power Issues. utility to deal with outside auditors and respond to AUDITOR’S COMMENTS. Retirement Incentives for redundant personnel to leave Pre-audit training, or audit preparations, Vocational training plans for up to to help DABM become ready to be audited. This would be a major piece of 3000 DABM employees to enter the work, given the general condition of labor force financial reporting in DABM over the Labor-intensive activities and past (say) 30 years, because of the war, performance standards that may etc. make it economically feasible to Capacity building for Accounting Systems retrain and retain workers and Software Implementation productively. DABM will begin Implementing Capacity Building-and Training for Microsoft “Great Plains” Accounting Commercial Procurement & Inventory Software. Comprehensive integrated Control Systems package. Design/implement/manage Significant training will be required to: transparent and efficient o Modernize and standardize all procurement policy, systems, and accounting procedures at all procedures, with internal audit provincial offices, reporting to procedures and pre award central finance department; certification by external auditor o Systematize preparation of all Inventory, warehouse and minimum financial reports and statements and stock controls training develop meaningful financial management reports and annual Standardization of equipment, parts, report that allow decision makers to and materials training prioritize activities and focus producing optimal value for money Requisition, standardized at each decision point specifications, purchase order systems, receiving reports and o Design and implement budget professional inspection at product planning and control systems delivery to insure compliance with o Systemize cost accounting and specifications, quantity verification, resource management to optimize transfer to job site or warehouse, etc. decisions involving outsourcing, management contracting, etc. Training in preparing and maintaining specifications sheets o Provide required financial data inputs for tariff models and 44 DABM has approximately 5,800 employees; the news projection of subsidy requirements. DABS will probably have something like 2,000 to Capacity Building for perhaps 2,500 employees. The residual staff will remain with DABM for some time, and/or remain on the design/implementation of Ministry’s complement. These people need a Social sophisticated internal Audit Systems Safety Net package, to allow them to retire, (if they are old enough) or be retrained with other marketable skills if Computer training in Basic they are of a suitable age. It is imperative to address this Operations, Programming, Database now so that it does not become an obstacle to full Management, Networking, and if commercialized business practices and provides a model for other SOEs. 54 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Capacity Building-Tariff Policy Creative finance solutions, project finance schemes for off-balance sheet Training in preparation of cost-sheet (off-budget) systems/equipment and cost accounting management upgrades that produce high return on Training in development of rational investment [for Senior Management tariff development, rate structure, Group, particularly the CEO, CFO, and part of the Change Management Office and rate justification staff.] Strategies for appropriate system Project management concepts for specific wide data collection, data problem solving and short term management for rate assessments, transformative projects, inter- and cost accounting procedures departmental projects, and corporate suitable for tariff defense issues Training for development, Commercial Policy Development and documentation, and presentation of a implementation45 rate case for tariff o Opportunities options and analysis modification/adjustment for new services Capacity Building- Equipment Maintenance 1. Demand side management and Management Systems energy efficiency Training and technical assistance to help 2. ESCO Services the power utility determine whether to develop and implement in-house 3. Wiring safety inspections prior equipment maintenance management to new connections or service systems with standard EMMS software upgrade (e.g., from 25 to 50 or outsource equipment maintenance amp service, or single phase to management through a management 3 phase) contract 4. Re-wiring services for Capacity building for operation of the customers system - or - for contract development, 5. Certification/sale of energy management, and evaluation if efficient products outsourcing is the preferred option.

6 — Project finance of Energy

6. Project finance of Energy (Including preventive maintenance efficiency products management systems, schedule enforcement, etc. 7. Vocational training for private service Capacity Building or training in contract management for specific, high value o Spin-off of non core services, after equipment such as generation plants, start-up dispatching, substations and Development and implementation of key transformers performance indicators for each Capacity building for optimization of routine maintenance, cleaning of components, and minor functions that 45 There is virtually no local capacity for any of the will normally be performed by utility above services and no licensed electricians. Energy personnel. (planned maintenance efficiency projects increase service levels without adding management by objectives) generation costs and can be financed through utility bills. Obsolete wiring must be replaced or houses will Capacity Building-for Corporate Culture burn when new capacity is online in late 2008 and Transformation customers add appliances that their houses were not wired to sustain. The electric utility can initiate these Transition from tradition line item businesses with some quality control, employing some budget and bureaucratic governmental excess DABM staff. Later these business units can be cyclical management approach to cost spun off at full commercial value. effective goal setting ENERGY SUB-SECTOR STRATEGY 55 department, business unit, cost/profit Capacity Development for Revenue Protection center Systems H.R. & Personnel Policy Development Practical economics for task (Software and hardware) prioritization Personnel Development and corporate Technical training for loss reduction career development Meter replacement programs,

8 — Job specification with

8. Job specification with transformer replacement programs,( performance standards project finance schemes)

9 — Personnel evaluations

9. Personnel evaluations Metering/billing/collection/audit

10 — Individual and group policies, etc

10. Individual and group policies, etc. performance incentives based Collection strategies on objective key performance indicators Baseline verification, best practices, outsourcing only when value-for-money Capacity Building-Information Technology, is clearly demonstrable Information Systems o Tariff Reform. There is an immediate Integrated management reporting need for tariff reform and improved systems financial viability of DABM while regulatory reform and other Communications systems and initiatives are ongoing. In 2004/05 equipment the average tariff collected by DABM Database management (Systems was 5 cents/kWh compared with an approach to handle financial and average unit cost of 12 cents/kWh. technical data referenced in key items The average annual cost of this above, and relevant information from all subsidy to the government is an departments throughout the corporation) unsustainable $56 million. The goal of the IROA is to increase tariffs to Acquisition and installation of technical cover 75% of costs by 2010. management systems (hardware and Completion of tariff reform is software for line management, GIS and urgently needed. others) o Power Imports. The PPAs for power Capacity Building-/Training in Security imports from the CAR region need to Management Systems & Procedures46 be completed and signed in order to reduce the uncertainty of increasing Facilities security the supply of power to Kabul and Inter agency security agreements other demand centers and support construction of cross-border o Training for basic utility security transmission facilities. o Commercial security outsourcing o Regulatory Reform. Currently, there o Agreements with Military and Para- is only an embryonic legal and military agencies to ensure security regulatory framework for the at high value installations (Dams, Afghanistan energy sector, which is Generation Plants, other major insufficient to support restructuring infrastructure) and private investment. None of the energy laws address the need for an o Training for implementation of independent regulatory regime to such agreements separate IROA policy functions from sector oversight and to remove political considerations from day-to- 46 DABM has contractual obligations to provide day operations of the sector. sophisticated security at major installations being commission or turned over by contractors in Feb 2008, but has no capacity to comply. 56 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) As part of the multi-sector regulator, bring and inclusion of capacity development electricity regulation under this body. for DAMB staff. Afghanistan’s energy sector is small and EPC (Turnkey) contract and O&M for the technical capacity limited. Therefore, the gas-fired plant in Sheberghan. IROA should consider establishing one regulatory commission with authority over the Small-scale manufacturing of turbines, electricity, natural gas and water sectors. The solar installations, networks. National Utility Regulatory Commission Suppliers to the on-going reconstruction (NURC) would have responsibility over tariff effort. setting; selection of facility sites; service standards and quality; technical, health and Owners/operators of stand-alone power safety issues; dispute resolution; data grids and gas distribution systems. collection and enforcement authority; grid codes; power and fuel purchasing agreements; and production sharing agreements. PETROLEUM SECTOR The indigenous fossil fuels in Afghanistan are Private Sector Investment. To coal, oil and natural gas. Currently petroleum encourage development of PPPs products such as diesel, gasoline, and jet fuel including IPPs, the IROA should are imported, mainly from Pakistan and develop a policy to issue tenders to Uzbekistan, with limited volumes from the private sector based on a ceiling Turkmenistan and Iran serving regional bulk power tariff against which markets. Turkmenistan also has a petroleum potential developers would bid and product storage and distribution facility at Tagtabazar near the Afghan border, which incorporating a clear package of supplies northwestern Afghanistan. The incentives and a “one-stop shop” that Government has given high priority in policy would address all issues relating to to development of oil and gas infrastructure as development and financing of PPP a potentially significant source of energy for proposals. The IROA also should the country and revenue to the GOA. It also implement “regulation by contract,” plans to address import issues, including including management performance increasing private sector participation and contracts to encourage private improving quality standards and collection of investment in various segments of import duties. But plans have not been the energy sector. substantially put into action! Private sector involvement in Afghanistan’s energy sector could include: NATURAL GAS Commercially, the most important energy Place metering and billing for DABM resource in Afghanistan economically includes under a commercial management natural gas following water power and coal. . contract with performance incentives The natural gas reserves need to be evaluated and inclusion of a training program for and estimates of proven and recoverable DABM staff. resources confirmed and fields developed; Distribution area management contracts many existing gas fields and wells need to be rehabilitated and infrastructure rebuilt and Legitimizing existing informal small local level electricity providers expanded. Currently ministry of mines attempts to develop petroleum/gas sector in Development of IPP facilities, both on- accordance with law of hydrocarbons and and off-grid. related rules/regulations in the country In conjunction with ongoing through the full participation of private sector infrastructure projects, such as NEPS, so that Afghanistan get access instantly to NW Kabul, and Kabul 100MW additions; energy of natural gas and oil that are seriously provide for commercial management required for rehabilitation and growth of contracts with performance incentives economics in the country. The volume of ENERGY SUB-SECTOR STRATEGY 57 investment and incomes depend on gradual A. Reserve Estimates development of gas/oil sector. Based on the existing reports, 120 cubic meters The enforcement and improvement of of gas reserves and approximately 14,5 million domestic energy resources in the country is tons of petroleum reserves have been directly linked with development of the identified. However in accordance with recent natural gas reserves that helps implement evaluations, the size of gas/coals reported to economic growth and reduce negative have been more than the above estimation. As impacts. There exists sufficient amount of gas based on the US geological survey , 444 billion reserves in Sheberghan that not only tackles cubic natural gas reserves, 219 million tons oil power production but also ensure the needs of and 75 million tons kandansat have been local demands of people and factories as well. identified in latest investigations. Also it is envisaged that the existing gas wells be rehabilitated , gas production be expanded In addition to proven reserves, there exist and the pipelines networks to be extended / numerous un-drilled prospective structures updated toward fertilizers production plants that have undergone various stages of and other consumers. exploration. If even a small number of these un-drilled structures contained commercial Development of Afghanistan’s natural gas hydrocarbon accumulations, the estimated resources has the potential of improving undiscovered gas resources in northern domestic energy resources, reducing Afghanistan could dramatically exceed environmental impacts and supporting current resource estimates.47 economic growth. Natural gas reserves are potentially large enough to support Based on studies and assessments conducted development of electricity generation as well to date, there is a consensus among most as a fertilizer plant and local commercial and international experts that some important residential markets in the Sheberghan area. issues require further review: Plans are underway to rehabilitate the gas fields to expand production and to upgrade The manner in which these undiscovered the existing gas pipeline network to supply the reserves are categorized. fertilizer plant and the local market. Activities It is possible that some of these structures to promote exploration and development of may have no hydrocarbons or only additional gas resources have been underway marginal accumulations. Only by drilling for some time. and testing the wells can this information be confirmed. Data on gas reserves indicate that there is sufficient low-cost gas reserves available to It is likely that many of these reserves operate a 100 MW combined cycle turbine will be categorized as higher risk. plant at Sheberghan for 25 years and that the cost per kWh of power generated would be in B. Production and the 2.8 to 3.5 cent range. Also, gas fired Infrastructure generating capacity would be much less expensive than diesel power at about 30 Production of gas is estimated at about 21.2 cents/kWh. million cubic feet/day. This figure comparing with gas price in the region would exceed to Ministry of Mines has drafted and proposed a 50 million US dollar in a year.Unless new series of new modifications in the wells drilling and new production is not hydrocarbons law with the purpose to better commenced , the exact expenditure related to accelerate the gas sector development process. gas price seems very difficult. This is a The Afghan-Tajik and Amu river zones were problem that encounters private investment blocked , and work has been running in with difficulty aimed at developing gas sector. provision of tender documents for attraction Mazar-Sheberghan pipelines that were not of private sector investment and it is due that in 2008 MoM would lease two gas fields and 47 Evaluation of Investment Options for the development one oil filed through biddings to private of Oil and Gas Infrastructure; Hill International, 2004- sector. 2005. 58 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) extended technically seem to have been shortage of natural gas and low pressure of disconnected since the last three years due to gas .. lacking natural gas and it will also not be applied in future. C. Natural Gas Development Program Afghan Gas The natural gas development program supported by the IROA is intended to increase In addition, current gas prices are too low to production and develop the transmission and cover costs of rehabilitation, O&M and distribution infrastructure so that a higher expansion of production and infrastructure. proportion of the Afghanistan’s energy Since currently the gasification system is full requirements can be met by natural gas and of technical defects, it causes problems in dependence on imported oil can be reduced. collecting the exact revenues. The tariffs should be arranged in a way to cover the real Key issues relating to the natural gas sector are cost and implement the interest-based that are receiving IROA attention include: sustainable activities. As now the extraction, delivery, distribution and sale of natural gas Strengthening the capacity of key has been running by Afghan gas enterprise institutions to rehabilitate and develop its and the relevant payment of gas price is also related capacities, to better arrange collected by the above enterprise and agreement affairs and investments related transferred to government account. to extraction, exploration and exploitation of natural gas The majority of more than 12,000 residential Reviewing policy, institutional, customers and more than 700 business regulatory and environmental issues customers are not metered. Afghan Gas based on an efficient policy and management indicates that metered and non- regulatory framework. metered customers generally pay the same rate for gas. No meaningful data is available to Developing a policy framework to adequately present the costs of operating and support private investment in gas maintaining the system at this time.48 exploration and exploitation. Moreover, the technical standard of Afghan Increasing Government revenues by gas operations is extremely low. There is no phasing out gradual price subsidies and incentive to conserve or to optimize use of gas improving revenue collection. resources as the present cost is so low and Establishment of codes, standards and operations are so inefficient. mechanisms for growth of the sector. Afghan Gas reports that its customers are $15 The operational strategy of the Government million in arrears for the past 10-15 years. for the gas sector is to promote economic According to Asian Development Bank (ADB) growth by removing impediments to the funded data49, non-payment is high. reconstruction and modernization program According to Afghan Gas if a customer fails to and to open the sector to private investment, pay for gas use on time, they are cut off. particularly for gas exploration and However, there is a common occurrence of development. carrying the customer debt to the next billing period and not cutting them off so long as Efforts to attract private investment depend on some payment is made. In the lapse of few developing policy reforms and structural years, illegal connection has been reduced changes to support longer-term sector considerably , legal connections and expansion development and expansion. Progress to date of gas delivery network is not available due to has been slow, thereby limiting investor interest. Options to speed up this process and 48 Engineer Amir Zada, Director of Oil and Gas, to increase private sector involvement need to be explored. Ministry of Mines, November 2006 49 Establishing a Gas Regulatory Framework; ADB TA 4354-AFG; Energy Markets, Ltd., May 2006 ENERGY SUB-SECTOR STRATEGY 59 D. Measures to Support Gas Based on World Bank and USTDA Exploration/development assessments of the Sheberghan gas fields, USAID is considering construction of a 100MW gas-fired power plant to be located The following measures are being undertaken near the Khwoja Gegertak, Jarkaduk and to support natural gas exploration and Yatimtaq gas fields. USAID is confirming the development: size of the reserves, quality of the gas and delivery prospects for the plant and plans to Complete a detailed study of the gas move forward with construction of the fields to determine their potential size generating plant pending results of these and development potential. assessments. Modify the hydrocarbons law to clearly A high priority for the Energy Sector Strategy define roles and responsibilities of the is to complete assessment of the Sheberghan government and developers with regard natural gas fields, issue a production sharing to exploration and development of gas agreement for development of the fields, reserves. (Underway through assistance complete the rehabilitation of the gas pipeline from Norway.) and develop the 100 MW Sheberghan gas-fired Draft a gas sector law to address down- power plant to feed into the NEPS grid. These stream (delivery, pricing and sale) issues. activities should include reviewing options for private sector participation in development of Bring regulatory oversight operations the power plant, such as a management under NURC. contract and bundling the project with Capacity building and training for MoM rehabilitation and expansion of the gas and Afghan Gas. processing and fertilizer plants. Moreover, the IROA needs to consider options to attract Efforts need to be undertaken to coordinate private sector participation and investment in ongoing assistance efforts to improve their the gas sector, including management effectiveness; develop a focused policy for contracts for Afghan Gas, to rehabilitate and development of the sector, including attracting operate the gas processing facility and to private investment; and to establish pricing, expand and operate the fertilizer plant. tax and royalty regimes that promote sustainable development and provide a steady

1 — Complete Tariff Reform to raise

1. Complete Tariff Reform to raise source of revenue to the Government. natural gas prices to cover costs and improve Activities that need to be taken as part of the metering, billing and collections. Energy Sector Strategy include:

2 — Come under NURC for effective

2. Come under NURC for effective

1 — Development of Sheberghan Gas

1. Development of Sheberghan Gas oversight of the sector as outlined above in the Fields and Power Plant. Afghanistan needs to Electricity Sector section. NURC would have develop indigenous energy resources, authority over licensing, sitting, tariff, and including natural gas reserves in the other rate making and oversight authority. Sheberghan area. Data on gas reserves indicate While this authority is being established that there is sufficient low-cost gas reserves options to promote development of these available to operate a combined cycle turbine sectors, including attraction of private sector plant at Sheberghan for 25 years and that the investment should be employed, such as a PPP cost per kWh of power generated would be in Office to promote development and issuance the 2.8 to 3.5 cent range. While this is more of management contracts and other PPP expensive than the cost of imported power, instruments. which currently is in the 2.0 to 2.5 cents/kWh range, future prices are already moving closer

3 — Revamp the Hydrocarbons Law to

3. Revamp the Hydrocarbons Law to to 4.0 cents/kWh or more. Also, it is important reflect a modern oil and gas sector and to note the domestic benefits resulting from incorporate international best practices; clearly developing the gas fields and gas-fired power define the roles and responsibilities of the plant. government and developers with regard to exploration and development of gas oil reserves and to address environment, health 60 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) and safety issues; and set a timetable for CRUDE OIL AND designated turning sector areas over to the private sector. This is being done through PETROLEUM PRODUCTS assistance from Norway and the consultants Afghanistan has only limited supplies of oil. need to work closely with others to Currently oil mines extraction is not fulfilled. incorporate PPP provisions in the law. The extractive oil wells of Rangot has been under conservation since the last two

4 — Reserve Estimation and Exploration years.extrative oil.50 As a result, Afghanistan

4. Reserve Estimation and Exploration years.extrative oil.50 As a result, Afghanistan is important to determine the location, size, depends on imports for most of its and economics of recoverable reserves. This consumption. Oil is produced in limited has to be coupled with reform so that the quantities primarily from the Angot oil field, private sector will begin to undertake the located in Sar-i-Pol province. Given the exploration and development natural gas. serious supply shortfall, in order to meet country’s needs, most petroleum products—

5 — Conduct a CNG feasibility study

5. Conduct a CNG feasibility study. diesel, gasoline and jet fuel included—are CNG holds significant promise both imported primarily from Pakistan and economically and environmentally in most Uzbekistan. countries in South Asia have already embarked on CNG vehicle programs. Clearly, Infrastructure for local production of oil is the viability of a CNG program is linked to the largely non-existent and what infrastructure is availability of natural gas and items 1 and 5 present is functioning inefficiently and suffers above will provide the basis for the feasibility from low capacities.. In addition, the level of study. local expertise in oil exploration and development is limited. As a result, sector

5 — Afghan Gas Reform. The Afghan Gas is

5. Afghan Gas Reform. The Afghan Gas is entities have been unable to operate faced with a couple of problems due to the effectively, to repair and maintain the system, following factors: inadequacy of tariffs to nor engage effectively in new exploration and finance costs, non-existence of appropriate development. A large part of the equippment required, methods and update infrastructure for storage, transmission and procedures, lacking sufficient funding, low distribution of petroleum products has been working capacities and unawareness about damaged, while the remaining capacity is in technology reasons including tariffs that don’t need of rehabilitation. cover costs, a lack of functioning equipment, modern methods and procedures, funds and All known petroleum reserves of Afghanistan trained personnel, customers that aren’t exist in Amu Darya Basin while there are metered and don’t pay and an infrastructure implications signaling that petroleum also that is crippled. Performance at Afghan Gas exists in Afghan-Tajik basin (north -east) of the can be improved. In addition to the capacity country and its existence has been forecasted. building measures already underway, the Based on the USGS estimation, oil reserves in company should be unbundled and north of the country reaches to 219 ml tons. functionally separated into upstream (resource development) and downstream (gas Ministry of mines envisages to lease one oil transmission and distribution) entities with an block in the course of 2008, the oil extraction, eventual eye towards some form of private exploration, production and filtratioan affairs sector involvement. At the earliest, this could will be made by private sector. take the form a management performance contract, including performance incentives The IROA also has a proposal to install a and training requirements for MoM and crude oil refinery in the country. Afghan Gas staff. The economics do not support metering but there are creative ways of effectively recovering for service and these A. Petroleum Products need to be explored by the NURC. 50 Securing Afghanistan’s Future: Accomplishments and the Strategic Path Forward; OIL AND GAS Technical Annex, January 2004. ENERGY SUB-SECTOR STRATEGY 61 All petroleum products consumed in The low quality of automotive fuel imports Afghanistan are imported from the imposes serious health impacts on the urban neighbouring countries of Pakistan, Iran, population as well as financial costs in terms Turkmenistan, Uzbekistan, and Tajikistan51. of engine maintenance and higher fuel The gasoline produced by refineries in these consumption. The IROA needs to put into countries does not conform to the place a system for certification of petroleum international standard for lead content (0.13 g traders and to randomly test products at retail / l of lead content) to achieve the 91 RON outlets and storage depots to enforce quality (octane) that modern car engines require. standards. It also should look at increasing Currently, Angot area isnot extracted and all storage facilities and review the import duty local refineries have been destroyed and left and collection process to ensure maximum inactive. . revenue to the Government. Afghanistan consumes approximately Ministry of mines endeavors to lease one oil 1,200,000 tons of state-supplied fuel per year52. area through international biddings to private This includes all types of petrol and diesel (i.e., sector for oil exploration, extraction, JP1, JP4, TC1 – generation, heating, aviation) production and refining. as well as mazut and kerosene. It is e estimated that about 80% of these fuels are B. Measure to Support Oil consumed for automotive purposes, while Exploration 20% is used for power auto-production (gasoline mainly) or small-scale grid power The operational strategy of the Government generation (diesel mainly), and water pumps. for the hydrocarbon sector is to promote economic growth by removing impediments At present, eight border transfer points exist to to the modernization and reconstruction facilitate the import of liquid fuels into program. In particular policy, financial, Afghanistan. Prices to its stations are set by regulatory and institutional constraints need the state monopoly, Petroleum and Gas to be addressed. The Government plans to Enterprise (Liquid Fuels) operating under the open up the oil sector to private participation, auspices of the Ministry of Commerce and specifically for exploration,extraction, Industries. Operations include 1600 gas production , petroleum imports and stations and 1300 fuel trucks that are closely marketing. It is recognized that there is a need controlled and impact virtually every province to establish separate policy and regulatory in the country. Infrastructure as well as functions, to undertake sector restructuring, operational improvements could provide an and to improve operation, maintenance and opportunity for private investment and more safety standards. It will take time to put these transparent operations. Demand for liquid reforms in place; therefore, a parallel approach fuels in Afghanistan has increased is being pursued by using existing dramatically in the past five years; with Government structures to implement continued and increased reliance on diesel reconstruction and capacity building generation, air traffic and home uses, this programs while exploring options and demand is expected to increase. developing a consensus on policy reforms and structural and institutional changes. However, There has been no donor support to this this strategy suffers from a lack of technical sector. Instead, more than 30 reported private expertise and poor coordination among IROA contractors work with the Petroleum and Gas entities. Enterprise to supply Afghanistan’s gas stations with fuel as well as to import diesel Given the current security, institutional, policy fuel for power generation. and infrastructure situation, it may be difficult to attract interest by the private sector to invest in the Afghanistan oil sector. If significant interest is not displayed, other options such as management contracts for 51 Energy Sector Review and Gas Development Master development of oil fields could be pursued. Plan; ADB TA 4088; Sofregaz, June 2004. 52 This figure excludes privately imported or other fuel imports not reported to the state. 62 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) In order to pursue its objectives for the oil sharing agreement. It could also take the form sector, the IROA is addressing a number of of privatizing service stations. initiatives relating to strengthening the sector and establishing a basis for future expansion 2. Modify the Hydrocarbons Law and private sector investment. Key issues of 2005 to clarify ownership and development relating to the oil sector that are being of resources; to provide for exploration and addressed include: development by the private sector, including stetting production sharing agreements, Strengthening the capacity of key establish fiscal, tax, health and safety policies institutions to support sector and standards; and establish an independent rehabilitation and reconstruction. regulatory authority. Undertaking a review of policy, . institutional, regulatory and environmental issues. 3. Petroleum Imports. The IROA needs to improve control of imports and Establishing an efficient policy and collection of duties; test products at retail regulatory framework, including support outlets and storage depots to improve quality; for private investment in oil exploration, and should consider increasing domestic production, import and marketing. storage facilities.. Increasing Government revenues by gradually phasing out government The government should improve and control subsidies and improving revenue revenues collection, monitor quality of oil collection. materials in the areas of importation, storage and market and finally to pay attention to Implementing regulatory reform to supplying oil through domestic separate policy, regulatory and establishments. operational functions. Creating institutional capacity for B. Coal negotiating agreements and monitoring investments in exploration and extraction Afghanistan has reasonably good quality coal of oil. resources that exceeds almost 2 ml tons and is estimated to have significant coal reserves Establishing appropriate codes and (probable reserves estimated at about 400 standards and developing enforcement million tons), most of which are located in the mechanisms for the sector. northern part of the country in the region between Herat and Badakhshan53. Although Recommendations: Afghanistan produced over 100,000 short tons The IROA has made broad policy of coal annually as late as the early 1990s, , its commitments and engaged in technical production currently reaches to 300.000- assistance and capacity building efforts 400.000 tons annually supported by donor funding to restructure and develop the oil sector. However, these The primary coal resources in Afghanistan activities have not been incorporated into a occur in the Katawaz Basin south and west of comprehensive strategic plan for the energy Kabul. Prospective economically viable coal sector. As part of the Energy Sector Strategy, deposits are found in five coal districts: Karkar the IROA and donors need to undertake the dodkash, Ishpushta, Dara-i-Suf, chal wa following activities with regard to the oil namakab and sabzake Herat. However, the sector: real extent of coal deposits in the country is not known and there is an urgent need for

1 — Review Options for Attracting exploration and exrtraction

1. Review Options for Attracting exploration and exrtraction. Private Sector Participation and investment, including management contracts for research and development of oil reserves; development of a small oil refinery and distribution of crude 53 Securing Afghanistan’s Future: Accomplishments oil products; and development and and the Strategic Path Forward; Mining Sector, implementation of the first oil production Technical Annex, January 2004. ENERGY SUB-SECTOR STRATEGY 63 Some current coal operations are taking place To develop the coal sector and increase at Karkar and Ispushta mining districts. The production to support new electricity literature indicates that Dara-i-Suf appears to generation, the Government needs to adopt have the greatest potential for significant appropriate policies and programs to reserves, already estimated to be over 84 stimulate private sector investment, rather million tons. This coal is believed to be of than direct government investment in coking grade with a high calorific value in the operations. To achieve these objectives range of 7,000 kilo-calories/kg. The mines at internationally competitive mining legislation Kalich in the Ispushta district are active. Coal and fiscal measures are necessary. in these districts is extracted by either crude, inefficient, mechanized mining methods or by There is good potential for the mining sector— “artesian” methods. Current production from including coal—to be an important source of all operations is estimated to be about 110,000 growth for the Afghanistan economy. In short tons. assessing that potential, the IROA needs to assess existing constraints on development of The existing industrial sized coal mines are the sector in terms of enabling policy; marginal (if not out of operation) due to regulatory and taxation regimes for private antiquated machinery and lack of maintenance investment; institutional capacities; and new investment. However, there is infrastructure, safety and other constraints. considerable small scale production. At Upon addressing these constraints, a present, the small scale mining sector, reasonable sector development scenario needs including coal is wholly unregulated and to be developed, including estimates of occupies large numbers of persons in difficult benefits (production value, taxes, jobs, value security, health, and environmental added). conditions. Moreover, coal demand and prices in urban centers have risen due to domestic Comprehensive data on the scale and energy needs during the winter months and economic recoverability of coal and other also due to increasing industrial demand to mineral resources is largely unavailable and a fire construction bricks. strategy to exploit these resources in an economic and sustainable basis needs to be Development of coal and other mineral developed. The MoM places recoverable coal resources requires investments in excess of reserves in Afghanistan at over 1 billion metric private sector.. Therefore the IROA‘s economic tons. Other estimates are quite a bit lower at policy is to establish an enabling environment about 400 million tons.54 Recent estimates conducive to attracting and retaining place recoverable coal reserves for investment by private sector both local and Afghanistan at about 200 million tons. international groups. However, privatization Allowing for coal handling losses and and/or leasing of existing state owned mining preparation processing further losses of about enterprises to private groups is, at present, 20% can be expected, bringing the recoverable held up by the lack of adequate mining resource to about 165 million tons. legislation and the need for a clear policy on sector development. Enabling legislation and a If conducted in an environmentally proper mineral concession system is needed to sustainable manner, exploitation of coal establish clear lines of authority and resources can provide substantial tax revenues responsibility for the Government and for to central and local governments, create direct private developers in the area of investments. and indirect jobs, and stimulate spin-off industries in and around the mining If appropriate measures are taken to operations. While Afghanistan has excellent distinguish regulatory from operational geological potential the mining sector is functions within the ministry departments significantly under developed. Three responsible for coal; put existing operations on a commercial basis so that they may attract private investment; and establish market 54 Energy Sector Overview and Gas Sector Master Plan: prices for coal, it is estimated that the value of Final Report; TA-4088AFG; Sofregaz, June 28, 2004; annual coal production could increase from and US Energy Information Administration; the current US$ 10 million to US$ 40 million. Washington, DC. 64 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) difficulties currently hinder development of private investment to the sector, the following the sector: initiatives are receiving IROA attention, although a coordinated and comprehensive Mining rules and regulations and program is needed: taxation arrangements do not reflect modern practices and are not Explaining the country’s coal fields to conducive to new private sector attract investors of minerals law aimed at investment. Additionally, the capacity lightening their minds in Afghanistan. and technical know-how of Explaining minerals law for lightening government institutions responsible the minds of investors for the sector are not up to modern standards. Establishing a clear base for State institutions to attract The security situation in the country national/international investors for has limited the ability of the central investing on coal mines as per the laws government to establish national enforced in the country sovereignty over mineral resources and to promote exploration and development. Create a modern and internationally Development of coal and other competitive legal and regulatory mineral resources requires framework emphasizing the primary role investments in excess of government of the private sector, the regulatory role abilities. The IROA needs to establish of the Government, and taking into an enabling environment conducive account the special condition of small to attracting and retaining investment scale producers. This includes. by both local and international o Clarifying state ownership of mineral entities. resources in their natural state. Afghanistan’s coal reserves are under- o Clarifying the legal basis for private surveyed. Current production is about access to mineral rights. 300.000-400.000 tons annually, of which about 250.,000 short tons comes from government- o Establishing a clear mandate for controlled mines. The supply is far less than government institutions to grant the demand. Coal has the potential to displace private access to mineral rights. fuel wood and charcoal used in the vast o Establishment of a Mining Cadastre. majority of rural households. The MoM estimates annual demand at about 500,000- o Clear identification of the form and 600.000 short tons used primarily for kilns in nature of mineral rights available to the construction of bricks, cement and the private sector. commercial and industrial uses, including o Transparent and uniform fiscal and power generation. taxation package. Estimates of the cost of coal produced o Security of tenure for license holder. from new underground mines in o Transferability of title. Afghanistan at about $28.5 USD/short o Appropriate environment, health and ton, not including taxes and royalties, safety requirements. which typically average about 10%. The Institutional strengthening for Ministry of cost of coal from a surface mine is Mines. estimated at about $18/ short ton, excluding taxes and royalties. Establishment of an internationally competitive taxation regime. Measures to Increase Coal Production Reinforcement of the geological and geo- science database. To increase coal production for power generation and other uses, and to attract ENERGY SUB-SECTOR STRATEGY 65 Improvement in small, medium and large where the Government has issued three types scale mining. of permits to the private sector to encourage development of mineral resources. These Establishment of environmental and include: social management capacity. C. Coal Sector Policy A Reconnaissance Permit, is a license by which the private sectors can identify Afghanistan’s coal sector requires immediate coal deposits and its other parameters capital investment to support development of aimed at exploring an area at the size of resources as well as for development of power 250 km/square in accordance with the plants that utilize coal for fuel. The current mining material law . Of course, the process by the MoM to complete resource exploitation areas shouldnot be more assessments and invite private participation in than 50 km/square. The above permit the sector to be enforced and improved.. This and its availability: Based on the mining process relies in the MoM to evaluate material law and the government development potential, decide which economic policy, private entrepreneurs resources and projects to develop and then (national /international companies) can issue a tender for potential developers to avail the above permit toward settling the respond to. The MoM is simply capable of country’s requirements in terms of strengthening the growth of private sector shortage of energy and growth and development based on the market economic improvement of industries in policy and according to mineral rule and Afghanistan and to expand mining in the regulations. As a result, development of area of coal based on mineral law. projects that could contribute to economic growth and employment, provide an A Prospecting License, which is a license important source of revenue to the for exploring, locating, and proving a Government, and provide a fuel source to mineral or hydrocarbon deposit. It is support expanded power generation are granted for a 3-year period for the area unnecessarily delayed. where development is to occur. A Development License, which permits A solution to this dilemma would be for the the project developer to undertake MoM to issue tenders to which the private development activities to bring the sector would respond and propose projects for project to completion and market its development of coal resources and associated output. power plants based on the private sector’s analysis of the potential value of the project. There are a number of advantages to this The MoM—through a panel of experts process: convened with donor assistance—would evaluate the proposals and award contracts to It relies mainly on development of the those projects with the greatest economic private sector, prepares the ground for potential, including revenue source to the consolidation and exploration of coal in Government. This mechanism places the the country. With implementation of the impetus for developing domestic energy above program, the exploration and resources on the private sector rather than on exploitation of deposits as well as coal the MoM, thereby providing a much greater mines not only improve the country’s incentive to complete these projects in a timely coal industry, but also provides a secured and efficient manner. condition for absorption of investment in the country. This step also helps dissolve Private sector (national and international shortage of energy, protect environment companies) can invest with respect to mineral and prevent the demolition of efficient law and the government economic policy and non-efficient forests/trees and concerned with mines and other implications provide better livelihood and of coal mines in the country. employment opportunities for people in Afghanistan. This type of approach to resource The tenders provide information on development has proven successful in India, which proposals will be ranked and 66 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) awarded so that all developers know the air pollution, which adversely affects the rules of the game and the best (most health of women and children in particular. economically attractive) projects can be selected. These criteria can be altered with successive tender offerings to reflect Extreme poverty in rural areas also is related new information and market conditions to lack of income earning opportunities. The to ensure that new projects provide the productive use of electricity helps reduce greatest benefit. poverty by providing alternative sources of The availability and perpetuation of livelihoods and increase educational and functioning mines(exploration and training opportunities. The remoteness of exploitation) to be handled rural locations and the rough terrain make simultaneously based on the law of expansion of the electricity grid into these mining materials, it takes less time and areas economically infeasible. Therefore, the will also encourage private sector to application off-grid technology to these invest on coal mining. areas—including renewable energy resources—is the primary focus of IROA Recommendations: As part of Afghanistan’s activities. Energy Sector Strategy, the IROA needs to undertake the following programs: The role of the IROA is to provide policy and regulatory frameworks to encourage and

1 — Providing proper condition for

1. Providing proper condition for facilitate participation by the private sector private sector development of coal resources and civil society in rural electrification and and associated power plants. This would application of renewable energy technologies. include issuing a Reconnaissance Permit, Ultimate responsibility for renewable and Prospecting License and Development License rural electrification resides in the Ministry of as discussed above, with specific deadlines Energy and Water (MEW), although other and incentives to develop resources and entities, particularly the MRRD and its associated infrastructure. program, NSP, CDCs, NGOs, and donors are

2 — Provision and completion of active in rural development projects. MEW

2. Provision and completion of active in rural development projects. MEW functioning mine rules according to law orders also is charged with establishing a renewable of mining materials to clarify ownership and and rural energy policy in conformance with development roles and responsibilities of the the development objectives of the IROA and IROA and the private sector in this respect. ANDS. In addition to hydro, solar energy is RURAL AND RENEWABLE considered the most important renewable ENERGY energy source. Estimates indicate that in Afghanistan solar radiation averages about 6.5 Due to the dispersed nature of the rural kWh per square meter per day and the skies population, renewable energy offers the best are sunny about 300 days a year. solution for electrification for the majority of Consequently, the potential for solar energy Afghanistan’s rural population that currently development is high, not only for solar water does not have access to electricity and has no heaters for homes, hospitals and other real expectation of connection to the grid55. buildings, but also for generating electricity. In addition, some 125 sites have been identified Most of Afghanistan’s 25 million people have for micro-hydro resource development with no access to modern forms of energy. Fuel the potential to generate 100 MW of power. wood accounts for an estimated 75% of total rural energy supplies. This is having an Other renewable energy technologies, adverse impact on forests and watersheds. In particularly micro-hydro and wind energy, addition, burning these fuels increases indoor have broad applicability within rural areas of Afghanistan. The GOA, primarily through the Ministry of Rural Rehabilitation and 55 Government of Afghanistan; Ministry of Energy and Development in cooperation with the MEW Water: Policy for Renewable Energy Rural has developed projects to promote micro- Electrification, December 8, 2006. ENERGY SUB-SECTOR STRATEGY 67 hydro development in rural areas. In addition, suppliers, inadequate financing mechanisms, under the US National Renewable Energy and weak institutional and technical capacity. Laboratory, wind mapping has been undertaken for many parts of Afghanistan as a The objectives of the IROA‘s program for rural basis for developing individual projects. The and renewable energy development are to data indicate good potential for generating provide a sufficient level of efficient, clean wind electricity in several parts of the country. energy service to all rural customers. Current The lead institute to support development of activities to promote rural and renewable these resources in Afghanistan is the National energy projects include: Renewable Energy Research and Development Center, a part of MEW. Development of micro-hydro and solar power systems in rural areas. It is proposed that a Rural Energy Institute Installation of diesel generation in small (REI) be established in the MRRD to and medium size cities where no demonstrate the application of appropriate alternatives to electricity access are technologies to rural environments and to available. demonstrate business models for income generation and cost recovery. The National NSP is working with Community Renewable Energy Research and Development Development Councils (CDCs) to install Center would still remain the focal point for over 500 micro-hydro projects since 2003. development of large renewable and would Development of wind energy and biogas coordinate and lend assistance as required to systems in selected rural locations. the REI. This is consistent with both the new delineation of roles and the mission of MRRD Institutional reform and capacity building as working with and through other Ministries. initiatives at MEW and MRRD. Rehabilitation of hydro generation plants At present, about 650 villages are supplied in Pul-i-Chemri, Khanabad, Saurobi, and with electricity from photovolaics, through a Mahipar. program funded by the National Solidarity Program (NSP). Other donors (e.g., Feasibility studies for new hydro power Government of India) and NGOs (e.g., plants in Baghdara (280MW) and Saurobi Norwegian Church Aide) are active in this 2 (180MW). area. The private sector also is encouraged to Electrify 25 Small Towns and 800 participate and invest in rural electrification Representative Rural Households by 2013 and deployment of energy efficiency and (80MW). The Inter-ministerial renewable energy technologies. Although, Commission for Energy (ICE) is NGOs and donors provide much assistance, supporting several action items there appears to be no clear IROA policy for including57: (1) strengthening the NSP rural electrification or for promoting private program; (2) initiating a rural sector participation in rural energy projects; electrification action-oriented agenda and also coordination among ministries and other establish an energy committee to connect project participants' needs improvement. small towns such as Khulm, Aybak, Doshi, Chatikar and Baghlan. Hydropower, solar, wind and biomass offer the most potential to contribute to energy Rural and renewable energy projects supply. Development, however, requires contribute several types of benefits that help sound institutional and financial support, improve rural well being. They contribute to sustained commitment and a long-term physical capital through infrastructure development horizon. Use of renewable development, financial capital through credit energy is beset by a number of factors, provision, human capital through training, including high upfront costs,56 lack of at $1,200/kW and Diesel generated power at $500/kW. 56 For example, estimate for Photovoltaic electricity, 57 ICE is a coordinating body, not an as per MRRD (Mostafa Torkan, May 24, 2007) is implementing body. It is not clear that it is $12,000/kW, as compared to: (i) Micro-hydropower supporting these actions in any direct way. 68 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) and social capital through enhancing the POWER DISTRIBUTION IN ability of communities to work together to better the lives of inhabitants. Project activities GHAZNI also focus on rural enterprise development Omary Electric Company (OEC) is a private and local empowerment. Alone, they do little company operating in Ghazni for over 8 years. to increase economic activity but combined as It operates 8 diesel generators with a total part of an integrated rural development capacity of about 1 MW and distributes power package they are very effective. throughout the city on its own low-voltage system. OEC serves more than 8,500 Electrifying rural areas faces daunting customers with a staff of 42 and offers 24-hour challenges, including dispersed populations; service. The power tariff is based on the cost of often difficult terrain; high initial capital and diesel fuel and in July 2006 was 35 Afs/kWH. operating costs of power systems; poor load All customers are metered and new customers profiles; weak rural energy implementing pay a non-refundable connection fee of entities; need for continual subsidies; poor between 1,000 and 3,000 Afs depending on the private sector participation; and lack of connection distance. OEC is essentially self- standards and regulation. A comprehensive regulated, and provides a good example of strategy is needed to promote an enabling private sector initiative that could be environment that supports project encouraged through an official “light handed development and also ensures participation by regulation” policy. the poor in decision-making and project implementation. RURAL ELECTRIFICATION Development of rural and renewable energy IN BANGLADESH58 resources, including rural electrification, is taking place in Afghanistan without a clear The Bangladesh off-grid electrification fund institutional or policy framework. There is a supported by the World Bank Rural de facto split of responsibility for rural Electrification and Renewable Energy electrification among ministries and Development Project (RERED) provides solar coordination between ministries and donor- home systems to rural households and has funded programs needs improvement. The supported deployment of as many as 3,000 Government needs to articulate a policy that household systems per month. With the clearly defines goals and objectives; clarifies assistance of Participating Organizations the role and expected scope of subsidies; and (POs), including municipalities, NGOs and the emphasizes the role of the private sector. A private sector, the program has resulted in the clear, standardized procedure for assessing installation of nearly 90,000 solar home and evaluating renewable energy resources as systems and has extended its funding to cover the basis for supporting development of pilot biogas and community electricity systems. projects needs to be established. Various methods of supporting rural energy projects, The fund is administered by the Infrastructure such as community development entities, Development Company Limited, a non-bank rural cooperatives, and franchises, need to be financial institution and provides both credit evaluated and tested as to their applicability to and Global Environmental Facility (GEF) Afghanistan. subsidies to 14 Pos to purchase PV household systems from a list of venders approved by a Examples of successful rural energy projects Technical Standards Committee (TC). Overall, that could be supported by the IROA and the Fund provides the following benefits: donors include the following: Provides loans to POs who pass the funds on to customers (up to 80% of cost of a PV system). 58 While the market characteristics of Bangladesh are significantly different than Afghanistan, the example highlights how innovative mechanisms can be effectively used. ENERGY SUB-SECTOR STRATEGY 69 Provides the GEF-financed grant. Examples of supportive policies and programs include “Light Handed Regulation for Stand Develops customer awareness of solar Alone Systems” similar to that currently home systems or other rural energy practiced by the Omary Electric Company. programs. However, to be effective this needs to be part Provides technical assistance to POs in of an official IROA policy for rural developing proposals for financing. electrification. The policy would allow self- contained power systems in rural or urban Selects POs based on their performance areas to be “self-regulating” in terms of setting and financial track record. service quality, pricing, connection and Supervises activities of POs and disconnection standards, billing, etc. and coordinate activities between POs, would apply to cooperative or private sector suppliers and customers. providers. Basic licensing, safety and technical standards would be applied by the GOA. Assists the TSC on program-eligible equipment specifications. The need for small-scale, site specific The success of the program relies on the ability solutions means that significant technical to mobilize the POs and micro-finance and financial resources are required to providers based on their experience and bring modern energy services to the bulk knowledge of rural communities in of the rural population. Given the scope of Bangladesh to support development of solar home systems. the problem and the limitations on Government resources, it is particularly important to prioritize specific means BARRIERS TO ACCESS measures to be pursued in order to For Afghanistan, barriers to increasing access maximize impact and ensure to electric power, particularly in rural areas— sustainability. The Government should in addition to policy constraints—have much seek to promote rural electrification with to do with the physical nature of the an emphasis on income-generating investments required, the large scale of the activities where possible. undertaking, and broad country issues (e.g., security, remote location, difficult terrain). This underscores the importance of These issues need to be effectively addressed maximizing the benefit of limited through IROA policies and project resources and of considering the trade- development and implementation. offs within an overall Energy Sector Strategy of rural versus urban programs; government versus private intervention; Solutions to these problems can be found and fossil versus renewable energy through a mixture of policies and programs resources. Given the scope of rural energy that continue to rely on IROA involvement in needs and the limitations on IROA the sector (with donor assistance) particularly over the short-term while the necessary resources, it is important to prioritize framework is being put into place. These specific measures to be pursued, to ensure programs also need to unleash the potential of that they meet IROA objectives and the the domestic and international private sector effort by the GOA, donors and NGOs are to provide an expanded array of energy properly coordinated to maximize results. services and allow the withdrawal over time of direct involvement in the sector by the IROA and its transition to an oversight and RECOMMENDATIONS regulatory function. To accomplish these goals within the Energy Sector Strategy, the following activities should The IROA needs to explore options for be pursued. achieving this goal and to put in place policies and programs that will remove barriers to 1. Increase collaboration between private participation in the energy sector. MEW and MRRD and Delineate Responsibility 70 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) for Rural Energy Development. As noted under (large scale, mini and micro), diesel, the Electricity Sector section, responsibility for solar, wind, biomass; and evaluating and all rural-remote energy efforts should be prioritizing potential projects based on consolidated within one institution, RLED, expected benefits; and a rural and renewable with membership by all stakeholders to help energy development program needs to be coordinate rural-remote energy programs and incorporated within the IROA’s overall energy projects. It appears that the MRRD is the sector strategy, including an effective proper entity to head up this effort. Rural monitoring and evaluation program. energy is defined as off grid applications such as SHS, micro-hydro, and diesels in areas of 4. Assess and Establish Models less than 2,500 persons. It could also include for Project Ownership and sustainability with the use of wind power for both electrical and emphasis on capital and operating mechanical energy, for example. It would not requirements, government subsidies, and include any grid connected applications. It financing methods. Models could include also includes rural electrification. Since there electric cooperatives, franchises, provincial or is no universal definition of rural, the district government entities, or some definition for this purpose is something needs combination. Any policy needs to incorporate to work out. REDA would also be responsible household and community involvement to the for developing a rural-remote energy master maximum extent possible. plan.

5 — Assess and Establish Models

5. Assess and Establish Models

2 — In collaboration with NURC, for Technical Support (technical standards,

2. In collaboration with NURC, for Technical Support (technical standards, develop Rural Energy Policy to include Light installation, O&M support) such as university Handed Regulation as an official policy of the outreach or extension program; IROA and implemented by the MRRD to MRRD/DAMB offices at the district level to promote development of stand-alone rural include rural technical support and funding; energy systems by cooperatives or the private district or provincial governments; private sector. Policy and regulation must set sector involvement. guidelines for cost-recovery. In essence all project need to be able to recover operation 6. Pilot Projects utilizing and maintenance costs and set aside a sinking alterative project implementation techniques fund for capital replacement. The rural energy (e.g., coops, franchise) and technologies (e.g., policy and master plan will investigate wind, solar, hydro) need to be developed. appropriate fuels for cooking. Best practices in developing, operating, monitoring and assessing the benefits for projects from within the region and elsewhere need to be applied. Pilot projects may also

3 — Develop a Methodology for

3. Develop a Methodology for include appropriate cooking and heating that Assessing Rural and Renewable Energy is not electricity based. Resources and Technologies, including hydro ENERGY SUB-SECTOR STRATEGY 71 72 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) CHAPTER IV CROSS-CUTTING ISSUES To achieve its goals, in addition to providing be incorporated into sector implementing for affordable and sustainable energy rules and regulations. In addition, all development the Energy Sector Strategy will environmental impact assessment and incorporate mechanisms to support cross- pollution control provisions of the cutting issues that impact all energy sector Afghanistan Environmental Law will initiatives. These include the environment, complied with in regard to the counter narcotics, anti-corruption, gender and construction, upgrading and operation of regional cooperation—in addition to capacity facilities and infrastructure for the building. generation, transmission, distribution and use of electricity developed through this strategy. ENVIRONMENT Energy, even renewable energy, has an The National Environmental Protection environmental impact. This strategy directly Agency (NEPA) will issue new addresses environmental impacts by: Environmental Impact Assessment regulations in conjunction with the Focusing on policies and projects that Ministry of Justice. Energy sector improve the operating efficiency of institutions, including the MEW, MoM, energy production. It strives to get the and MRRD will establish a working most energy delivered for the minimum relationship with the NEPA to learn environmental impact. For example, about the EIA process and ensure that its reducing technical losses or cogeneration. provisions are incorporated into all energy sector activities. Focusing on policies and projects that improve end use efficiency. These are areas that seek to reduce the amount of ANTI-CORRUPTION energy needed for any given activity. A The energy strategy directly tackles corruption CFL program is one such measure. in several ways. One of the most important measures for reducing corruption is limiting Shifting investment and production to the role or influence of Government. In cleaner sources of energy, for example, energy, we are promoting increased private wind power. sector participation; we are reducing the role of Government. Additionally, in SOE’s, such Through the promotion of combining as DABM, we introduced loss reduction energy supply with income generating programs that are targeted at finding and activities, as incomes increase, there is deploying ways of controlling corruption. We less pressure on natural assets. And, are also introducing better, more transparent Through focusing on appropriate energy procurement procedures. Furthermore, such as better cooking fuels and better increasing private investment in the energy lighting, thereby reducing indoor air sector requires rule-of-law and increased pollution. transparency and accountability; thereby indirectly strengthening anti-corruption, and For oil, gas and coal, current law provides anti-narcotics measures. Finally, the a set of environmental requirements to introduction of a multi-sector regulator conform to NEA regulations. These will outside the concerned ministries and under CROSS CUTTING ISSUES 73 the Ministry of Economy will provide greater involve an “employment audit” which oversight. indicates numbers of temporary and permanent jobs expected; plans for training and replacement of foreign workers. REGION COOPERATION The most important areas furthering regional cooperation include expansion of energy trade COUNTER NARCOTICS by upgrading electricity transmission ties with The strategy does not directly address this Central Asian countries and exploring options issue but it is clear that increased economic for transport of electricity and natural gas growth supported by an expanded energy through Afghanistan for regional supply. The sector particularly in rural and remote areas NEPS represents one of the largest sector will help counter the cultivation of poppies investments and the cornerstone of success in and illicit drug trade. In many programs that NEPS is expanded energy trade. Technical have targeted poppy areas, success has been standards and commercial instruments will be made when alternative livelihoods are found. developed. Physical investments are being A cornerstone of this strategy is the linking of made to improve trade. CASA 1000 is looking energy supply to income generating activities. at using Afghanistan as an energy transit corridor. Regional cooperation will be enhanced by projects such as NEPS and efforts CAPACITY BUILDING to increase cost-effective electricity imports Finally, the major emphasis within the Energy from neighboring countries. Sector Strategy placed on institutional strengthening and capacity building—and on GENDER AND POVERTY institutional reform, such as consolidating authority over rural electrification and rural REDUCTION energy projects and separating policymaking Most energy interventions have the potential from regulatory authority—will result in to provide positive benefits for women and fostering a professional, open environment children in particular and also for the poor in and increase opportunities for participation in general. For example, women have specific energy sector activities on behalf customers energy needs in water pumping, agriculture and other stakeholders. This, in turn will processing, security, work productivity and support achievement of the ANDS cross- health – most often that energy is provided by cutting goals. The strategy explicitly provides their own effort meaning that work for capacity building projects and capacity significantly longer days than men. More building is one of the four pillars of the efficient stoves, drinking water pumping and strategy. agro-processing can reduce women's workloads, improve their health, and expand income-earning potential. Achieving improvements in capacity building requires a coordinated approach. The IROA The energy sector has the potential to provide has recently initiated the National Capacity a wide pool of jobs as it is developed; for Building Policy and Program designed to example, in the construction and repair of effectively address capacity building and thermal plants, in coal mines, and in oil fields. training needs throughout the Government. It Labor intensive construction methods should establishes an Inter-Ministerial Committee to be considered. For skilled technical jobs, the coordinate and monitor capacity building energy sector can initiate training and efforts throughout the IROA to ensure their apprenticeship schemes to provide on the job effectiveness. To improve program experience for new trade and technical implementation and effectiveness, it graduates and engineers. Foreign personnel established Reform Implementation can contribute to such schemes as mentors and Management Units (RIMU) within IROA can also be tapped to advice on competency Ministries. All capacity building initiatives based occupational analyses, new curricula for developed through the Energy Sector Strategy training colleges and universities. Planning for will operate through this mechanism, and will major energy development projects should 74 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) include elements to address cross-cutting RISK ASSESSMENT issues. 1 Sector Governance, Firmly entrenched Moreover, achievement of counter narcotics practices of how Government implements and anti-corruption goals will be promoted sector operations have resulted in perceived through Energy Strategy efforts to expand and actual risk for viable private sector access to electricity and promote economic investment. A lack of legal and regulatory development in rural and remote areas and to basis from which investors ordinarily operate, reform the sector by separating policy, no technical standards and a disperse array of regulatory, and operational function and institutions responsible for sector promoting involvement by the private sector. development create serious risk for transparent procurement, contract certainty, predictability of the market and overall COORDINATION AND investor confidence. EFFECTIVENESS: 2 Security outside sector control, Whether

1 — Government. Use of the ICE mechanism as sometimes perceived or often real, security

1. Government. Use of the ICE mechanism as sometimes perceived or often real, security well as improved public information will be aspects of infrastructure development in essential for improved government Afghanistan remain at the fore of investor coordination in the energy sector. Ideally, concerns. some now related if not duplicated energy functions at various ministries will be 3 Hardware and technical capacity Virtually consolidated and appropriate line ministry none of the equipment, supplies or spare parts “terms of references” for sector aspects will be required to operate the energy sector are drafted and agreed to. produced or even available in the country. When they are on the local market they are

2 — International Community. While an ICE often of seriously technically inferior quality

2. International Community. While an ICE often of seriously technically inferior quality working group on donor coordination will be and at very high cost. Some of the larger effective, it is essential that the donors equipment (i.e., diesel generators, drilling rigs) themselves improve the way in which they are can take up to one year to procure or to lease. engaged with the Afghan energy sector. At Much of the modern technology that is being present there are 25 donors engaged in the installed to upgrade the power sector has sector; in addition there are 15 different US never been part of the system and no staff agencies. Afghan counterpart resources are capacity exists to operate same; capacity limited and stretched; donors need to respect building that includes health and safety these limits. awareness is essential. CROSS CUTTING ISSUES 75 CHAPTER V MONITORING AND EVALUATION Monitoring and Evaluation Reporting System: A.1 Overall Reporting, Because of the diversity and breadth of energy sector operations, it is impossible to have one reporting system; different technical, financial and operational reporting is required. Still, there are common reporting requirements and approaches that will be followed. Sector Specific Reporting through Regulatory Bodies. It is expected that the cadastre and inspectorate functions for hydrocarbons and mining will be operational by end August

2008 — More momentum for power regulation is required but will also provide reporting

2008. More momentum for power regulation is required but will also provide reporting requirements and monitoring standards presently absent from the sector. Liquid fuels will also benefit from some external regulation. Ultimately, the establishment of a multi-sector regulatory body is possible (i.e., would regulate oil, natural gas, coal, electricity, liquid fuels, renewable) ICE. Through the ICE mechanism very definite reporting schedules have been instituted tracking high-priority projects (i.e., Northeast Power System) as well as identifying project funding and other gaps. This mechanism will continue to play an important role in how energy developments are tracked and monitored by Government. A.2 Project-based reporting, Because many energy projects are donor funded, international standard reporting and monitoring mechanisms are in place. Government will abide by these requirements and where possible, adopt them to line ministry and overall sector project developments otherwise funded. Fro details refer to Annex II (Monitoring Matrix). MONITORING AND EVALUATION 76 BIBLIOGRAPHY “A Quantitative Assessment of the Implementation of Strategy in the Electric Power Sector in Afghanistan;” Afghanistan Energy Assistance Program (AEAP); Advanced Engineering Associates, Inc., USAID, March 7, 2006. “Afghanistan: Challenges of Increasing Access to Electricity;” Prepared by The World Bank Group, November 2006. “Afghanistan Development Forum (ADF) 2007; Report;” Islamic Republic of Afghanistan, April 29th – 30th, Kabul, Afghanistan. “Afghanistan Energy Sector: Corruption Assessment;” by Mary Louise Vitelli; Asian Development Bank Afghanistan Country Partnership Strategy and Program (CPSP), June 2007. “Afghanistan: Energy Strategy; Preliminary Findings and Recommendations;” The World Bank, February 2005. “Afghanistan Fact Sheet;” Energy Information Administration; United States Department of Energy, June 2004. “Afghanistan National Development Strategy Policy Overview;” Islamic Republic of Afghanistan, undated. “Afghanistan’s Uncertain Transition from Turmoil to Normalcy;” by Barnett R. Rubin; The Center for Preventive Action; Council on Foreign Relations; CSR NO. 12, March 12, 2006. “A Survey of the Afghan People”, Asia Foundation, 2006. “CELT Overview: Capacity, Energy, Load Transmission;” Afghanistan Energy Information Center; USAID, January 2007. “Donor Comments on Infrastructure Strategies: Afghanistan National Development Strategy;” Compiled by the World Bank, July 13, 2007. “Energy and Natural Resources Workshop;” Infrastructure and Rehabilitation Program (IRP); Louis Berger Group, Inc. and Black and Veatch Special Projects Corp. Joint Venture for USAID, November 25, 2006, Kabul Afghanistan. Energy Sector Review and Gas Development Master Plan: Final Report; TA 4088-AFG; Sofregaz, June 28, 2004. “Energy Sector Strategy for the Afghanistan National Development Strategy (With Focus on Prioritization);” FIRST DRAFT; Islamic Republic of Afghanistan; Ministry of Water and Power, July 23, 2007. “Establishing a Gas Regulatory Framework;” ADB TA 4354-AFG; Energy Markets Limited, May 2006. Evaluation of Investment Options for the Development of Oil and Gas Infrastructure in Afghanistan; Final Report; Prepared for the International Bank for Reconstruction and Development by Hill International, March 28, 2005. BIBLIOGRAPHY 77 “Gender Mainstreaming Guidelines: A Guide on Mainstreaming Gender in Sector Strategies; Draft;” Islamic Republic of Afghanistan, July 15, 2007. Infrastructure and Rehabilitation Program (IRP); Needs Assessment Infrastructure Report: Energy and Transportation Sector; Contract No. 306-I-00-06-00517-00; Prepared by the Louis Berger Group, Inc. and Black and Veatch Special Projects Corp. Joint Venture for USAID, 2007. Interim Strategy Note for Islamic Republic of Afghanistan For the Period FY-07-FY0: Report No. 35794- AF; The World Bank Group, April 12, 2006. “Lack of Access to Energy;” The Enabling Environment Conference: Effective Private Sector Contribution to Development in Afghanistan; The World Bank Group, June 2007. “Lessons from the Independent Private Power Experience in Pakistan;” by Julia M. Fraser; Energy and Mining Sector Board Discussion paper No. 14; The World Bank Group, May 2005. “Ministry of Mines Strategy for Afghanistan national Development Strategy (With Focus on Prioritization); Draft;” Islamic Republic of Afghanistan; Ministry of Mines, April 18, 2007. “Ministry Strategy with Focus on Prioritization;” Afghanistan Ministry of Water and Power, September 30, 2006. “National Capacity Building Policy and Program for the Islamic Republic of Afghanistan;” Ministry of Economy, Draft, April 2007. “Petroleum Storage Rehabilitation;” report of the ADB; project TA 3874-AFG, March 2003. “Policy for Renewable Energy Rural Electrification;” Government of Afghanistan; Ministry of Energy and Water, December 8, 2006. “Power Sector Strategy for the Afghanistan National Development Strategy (With Focus on Prioritization);” Islamic Republic of Afghanistan; Ministry of Energy and Water; Draft, Revised May 28, 2007. “Power Strategy: Executive Summary;” Ministry of Energy and Water; Islamic Republic of Afghanistan, February 20, 2007. Private Participation in Infrastructure: Lessons from Asia’s Power Sector;” by Anil Malhotra; Finance and Development, December 1997. Regulation by Contract: A New Way to Privatize Electricity Distribution?; World Bank Working Paper No. 14; The World Bank Group, September 2003. “Securing Afghanistan’s Future: Accomplishments and the Strategic Path Forward; OIL AND GAS Technical Annex,” January 2004. “Securing Afghanistan’s Future: Accomplishments and the Strategic Path Forward; MINING SECTOR, Technical Annex.” January 2004. “Securing Afghanistan’s Future: Accomplishments and the Strategic Path Forward; POWER SECTOR; Technical Annex,” January 2004. “Strategy of Ministry Rural Rehabilitation and Development (With Focus on Prioritization); Draft;” Islamic Republic of Afghanistan, Ministry of Rural Rehabilitation and Development, March 15, 2007. 78 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Technical Assistance to the Islamic Republic of Afghanistan for Poverty Reduction and Rural Renewable Energy Development; TAR: AFG 38044; Asian Development Bank, December 2004. The Investment Climate in Afghanistan: Exploring Opportunities in an Uncertain Environment; Finance and Private Sector Development Unit; South Asia Region; The World Bank, December 2005. “World Bank Comments on the Power Sector Strategy for the Afghanistan National Development Strategy;” World Bank, April 17, 2007. CROSS CUTTING ISSUES 79

ANNEX I. ENERGY SECTOR STRATEGY ACTION PLAN — ENERGY SECTOR STRATEGY ACTION PLAN

ANNEX I. ENERGY SECTOR STRATEGY ACTION PLAN PILLAR : INFRASTRUCTURE SECTOR : ENERGY Outcomes Policy Actions or Activities Category Time frame Responsible Agency An enabling environment Issuance of tenders for exploration and exploitation in Development 1387-1388 (2008-2009) MoM, MEW,MoF for private sector northern country notably for power investment in energy Develop private sector opportunities to take on long-term Development 1388-1389 (2009-2010) MoM, MEW, MoCI sector created production, transport, supply of CNG Outsourcing operations at DABM (audit, billing) Development 1386-1388 (2007-2009) MEW Implement Private distribution projects Development 1387-1389 (2008-2010) MEW, MoM Private sector promotion in renewable energy Development 1387-1388 (2008-2009) MRRD, MEW, AISA Divestiture of the Liquid Fuels Enterprise Development 1387-1388 (2008-2009) MoF Assess and revitalize oil refinery Development 1387-1389 (2008-2010) MoCI, MoM Development of Sheberghan Gas Fields and Power Plant Development 1387-1388 (2008-2009) MoM Promotion of regional cooperation to facilitate various Institution Building / RC 1387-1389 (2008-2010) MEW, MoFA projects under the energy sector Cross Cutting Issues To mainstream into all administrative reform programs Institution Building/ AC 1387-1388 (2008-2009) MEW, MoM measures required to address the systems and incentives Cross Cutting Issues promoting anti-corruption within the public administration system and Development Activities. To maintain the highest level of transparency, accountability Institution Building/ AC 1387-1388 (2008-2009) MEW and integrity in the relationship between the public and Cross Cutting Issues private sector. Gender mainstreaming in the policies in the energy sector. Development / Gender Continue MEW, MoWA Cross Cutting Issues Encouragement to Community Based Natural Resource Institution Building / Env. 1388-1389 (2009-2010) MoM, MEW Management for meeting energy needs of the people. Cross Cutting Issues Awareness generation of policy makers on the environmental Institution Building / Env. Continue MEW, MoM issues so that they are taken care of in all projects in the Cross Cutting Issues energy sector. Leveraging available donor assistance, pilot CNG for public Development 1388-1391 (2009-2012) MEW, MoCI, MoM vehicles (i.e., buses) and taxis; conversion of engines, fitting gas pump stations. AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) 80 PILLAR : INFRASTRUCTURE SECTOR : ENERGY Outcomes Policy Actions or Activities Category Time frame Responsible Agency Establishment and operation of a regulatory authority Legislation 1388-1390 (2009-2011) Energy Sector Ministries and Institutions Independent Power Producers (IPP) – agreement and Development Continue MEW, MRRD incentives Expanded public power Procure spare parts and fuel for thermal generation Development 1387-1388 (2008-2009) MEW grid Repair existing transmission and distribution systems Development 1387-1389 (2008-2010) MEW including rehabilitating and/or upgrading substations and distribution networks Install meters for cross border transmission Development 1387-1389 (2008-2010) MEW Repair existing thermal plants Development 1387-1388 (2008-2009) MEW Starting National Energy Conservation Program (NECP) Development 1388-1389 (2009-2010) MEW Implement ICE technical assistance (ADB) Development Commenced, ongoing MEW, MoM, MoCI, MoF, through 1388 (2009) MRRD, MoEc Take appropriate measures to reduce electricity loss Development 1387-1389 (2008-2010) DABM/S, MEW, MoF Promotion of energy efficiency Development 1387-1388 (2008-2009) MEW DABM Kabul distribution procurement Development 1387-1388 (2008-2009) MEW, MoF, DABM/S Completion of NEPS transmission Development 1387-1388 (2008-2009) MEW, MoF Complete Turkmen assessment Development 1387-1388 (2008-2009) DABM/S Assessments of South, East and West Transmission needs Development 1387-1388 (2008-2009) MEW Procurement for meters Development 1387-1388 (2008-2009) MEW, MoF, DABM Installation of Dispatch and Control System Development 1387-1388 (2008-2009) MEW, DABM Motion detectors Development 1387-1388 (2008-2009) DABM/S Line inspections (regular protocols) Development 1387-1388 (2008-2009) MEW Health & Safety protocols Development 1387-1388 (2008-2009) MEW,MoM Operation & Maintenance protocols Development 1387-1389 (2008-2010) MEW Priority to providing energy in areas having substantial Development/ CN Cross Continue MEW narcotics cultivation to promote economic activity to generate Cutting Issues alternate livelihoods Repair and rehabilitation of hydropower generation projects Development Continue MEW Independent Power Producers (IPP) – agreement and Development Continue MEW, MRRD 81 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) PILLAR : INFRASTRUCTURE SECTOR : ENERGY Outcomes Policy Actions or Activities Category Time frame Responsible Agency incentives Increased Access to Rural Link rural energy with micro and small finance programs Development 1387-1388 (2008-2009) MRRD Energy Services Develop a comprehensive and appropriate rural energy Development MEW, MRRD 1387-1388 (2008-2009) program Public awareness on rural energy opportunities, benefits, Development MEW, MRRD 1387-1388 (2008-2009) funding Assessment of priority areas based on income-generation Development MEW, MRRD 1387-1388 (2008-2009) opportunities Special attention to gender issues in providing energy for Development MEW, MRRD, MoWA Continue rural areas. Promotion of Private Private Sector promotion in close as formalization of existing Legislation MoM, MEW, MoF sector operator rights; tender for new rights (i.e., to support power 1387-1388 (2008-2009) generation) Private power generation policy Legislation 1387-1388 (2008-2009) DABM/S In collaboration with National Regulation Utility Commission Legislation MRRD, MEW 1387-1388 (2008-2009) (NURC), develop Rural-remote Energy Policy Power Purchase Agreements for Power Imports Legislation 1387-1388 (2008-2009) MEW Establishment and operation of a legal/regulatory authority Legislation Energy Sector Ministries and 1388-1390 (2009-2011) Institutions Restructured Energy Revise 2 laws and 2 regulations related to Hydrocarbons, Legislation MoM 1387-1389 (2008-2010) Sector Governance and minerals and Market Cadastre & Inspectorate Commercialized 1387-1388 (2008-2009) Corporatization and ongoing commercialization of DABS Legislation MEW, MoF operations Power tariff reform Legislation 1387-1388 (2008-2009) MoJ, MEW Establishment of viable ICE working groups Institution Building 1387-1388 (2008-2009) MoE MEW Improved GoA, Donor & NGO Coordination Institution Building Energy Sector Ministries and 1387-1388 (2008-2009) Institutions Build Afghan capacity to operate and maintain system Institution Building Energy Sector Ministries and 1387-1389 (2008-2010) Institutions Needs Assessment and Data Base Institution Building Energy Sector Ministries and 1388-1389 (2009-2010) Institutions Establish Project Management Unit Institution Building Exist MEW Establish Pricing regime for natural gas Institution Building 1387-1388 (2008-2009) MoM, MoF AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) 82 PILLAR : INFRASTRUCTURE SECTOR : ENERGY Outcomes Policy Actions or Activities Category Time frame Responsible Agency Define Government roles in clearly defining TORs for MRRD Institution Building MRRD, MEW 1387-1388 (2008-2009) and MEW on rural energy aspects Development of basic technical standards based on MRRD Institution Building MRRD 1387-1388 (2008-2009) materials Annual audit of all operations Institution Building 1388-1389 (2009-2010) MoM,MEW,MRRD Develop and implement the organizational structure and Institution Building MRRD, MEW staffing plan for Rural Livelihoods and Energy Department 1387-1388 (2008-2009) (RLED) 83 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS)

ANNEX II: ENERGY SECTOR STRATEGY MONITORING MATRIX — ENERGY SECTOR STRATEGY MONITORING MATRIX

ANNEX II: ENERGY SECTOR STRATEGY MONITORING MATRIX PILLAR: INFRASTRUCTURE SECTOR: ENERGY Expected Outcomes Indicator Baseline Targets An enabling environment for private Index on the progress of creating an enabling environment for private sector TBD Enabling Environment for Private Sector by sector investment in energy sector investment in energy sector. 2009 created Expanded public power grid % of households electrified in urban areas 30% 65% (2011) % of households electrified in rural areas. 10% 25% (2011) % of non-residential consumers provided electricity. 35% 90% (2011) Index on the progress of expanding public power grid. TBD TBD Increased Access to Rural Energy Index on the progress of increasing access to rural energy 6% A strategy for the development and use of Services renewable energies will be developed by March 2008 Promotion of Private sector Index on the progress of promotion of private sector in energy sector TBD TBD Restructured Energy Sector Index on the progress of restructuring energy sector governance and 60% Energy sector governance restructuring and Governance and Commercialized commercialized operations commercialized operations by 2010 operations 75% of the costs will be recovered from % of recovery of cost of supply 60% users by March 2011 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) 84

ANNEX III: LIST OF PROGRAMS AND PROJECTS (ENERGY SECTOR) — LIST OF PROGRAMS AND PROJECTS (ENERGY SECTOR)

ANNEX III: LIST OF PROGRAMS AND PROJECTS (ENERGY SECTOR) Project Total Total Gap AFG Breakdown of Requirement (US$ Million) Core/ S/ Duration Requireme Fundin (US$ Major Responsibl Budget Program/Project Title Extern N nt (US$ g (US$ Million Donor e Agency Ref 1392 al Start End 1387 1388 1389 1390 1391 Million) Million) ) + Feasibility Study for AFG/ Hydro Power Plants on 1 1383 1390 2.500 25.00 50.00 100 100 277.500 1.180 276.320 AFG Core MEW 0316701 Kokcha Rivers (upper and lower) Rehabilitation and AFG/ Expansion of Power 2 1382 1.450 1.450 1.450 0.000 AFG Core MEW 0317801 Distribution Networks in Kabul Category 1 Capacity Building and AFG/ Institutional Development 3 1382 2.260 2.40 4.660 2.260 2.400 WB Core MEW 0455501 of (Project Coordination Unit,PMU)Stations AFG/ Emergency Power 4 1384 1389 41.900 45.00 45.00 131.900 29.000 102.900 WB Core MEW 0473301 Rehabilitation Project Feasibility Study for AFG/ 5 Baghdara Hydro Power 1384 0.460 0.460 0.460 0.000 ARTF Core MEW 0473705 Plant Power transmission and Distribution project(110kV Trans Line from Shirkhan Bandar to AFG/ Himam Sahaib,220/20KV ADB, 6 1385 49.000 16.20 65.200 49.000 16.200 Core MEW 0501701 S/S Taliqan,110KV/20KV AFG at Sari Pul,110KV Trans Line From Naghlu to East Jilalabad, Mihtherlam & Jilalabad 85 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Project Total Total Gap AFG Breakdown of Requirement (US$ Million) Core/ S/ Duration Requireme Fundin (US$ Major Responsibl Budget Program/Project Title Extern N nt (US$ g (US$ Million Donor e Agency Ref 1392 al Start End 1387 1388 1389 1390 1391 Million) Million) ) + Rehabilitation of 220 kv AFG/ Transmission Line from ADB, 7 1382 6.410 6.410 6.410 0.000 Core MEW 0524401 Hairatan to Pul-e-Khumri, AFG NBD switching station Kabul and Mazar-e- Sharif Distribution AFG/ 8 Network and 1386 26.000 20.00 46.000 26.000 20.000 ARTF Core MEW 0524404 Construction of Aybak Substation Extension of 220 kv transmission line from AFG/ Tajikistan boarder to ADB, 9 1384 36.500 15.00 51.500 36.500 15.000 Core MEW 0603801 kundoz and pulikhumri ISDB including baghlan and kundoz substations Procurement of 25 Diesel Generator Sets for Kabul AFG/ 10 City including 1383 0.090 0.090 0.090 0.000 AFG Core MEW 0604601 synchronizing of diesel generators Extension of transmission line from Kabul to Logar, AFG/ 11 Khost, Paktika and 1385 15.000 30.00 25.00 70.000 15.000 55.000 ADB Core MEW 0665701 Gardiz including of its network and substations Extension of 220 kv AFG/ 12 Transmission line from 1386 3.500 4.21 7.710 3.500 4.210 ADB Core MEW 0728901 Konduz to Taloqan Rehabilitation of AFG/ 13 Jabalulsaraj Hydro power 1386 1.390 1.390 0.000 1.390 Core MEW 0729001 plant AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) 86 Project Total Total Gap AFG Breakdown of Requirement (US$ Million) Core/ S/ Duration Requireme Fundin (US$ Major Responsibl Budget Program/Project Title Extern N nt (US$ g (US$ Million Donor e Agency Ref 1392 al Start End 1387 1388 1389 1390 1391 Million) Million) ) + Electrification of Robat AFG/ Sangi , Gulran and Koshk 14 1386 3.000 3.000 0.000 3.000 Core MEW 0729101 districts of Herat province Rehabilitation of AFG/ 15 Pulikhumri 2 Hydropower 1386 1.000 1.000 0.000 1.000 Core MEW 0729501 plant Power distribution AFG/ 16 networks of Major Urban 1387 1390 25.000 50.00 100.00 100.00 35.00 310.000 5.000 305.000 AFG Core MEW 0781401 Centers including Kabul Design and Construction of Small and medium AFG/ Power Plants in 17 1387 8.790 23.00 23.00 54.790 8.790 46.000 ADB Core MEW 0806401 Provinces (Bamyan, Ghor, Badakhshan and Kunar) Feasibility Study of AFG/ Olambagh Power Plant in 18 1387 0.500 2.00 2.500 0.000 2.500 Core MEW 0806601 Orozgan Province at Capacity of 90 MW AFG/ Construction of Combine 19 1387 5.000 10.00 15.000 0.000 15.000 Core MEW 0806701 Cycle Construction of Substation in Kholm and Extension of Distribution AFG/ 20 Networks in Kholm 1387 60.000 18.00 78.000 15.000 63.000 ARTF Core MEW 0806801 ,Pulikhomri ,Aybak, Doshi, Jabilsarag, Gulbahar and Charikar 21 Design of Irrigation and 1387 3.000 2.00 5.000 0.000 5.000 Core MEW AFG/ Power Dam of Lower 87 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Project Total Total Gap AFG Breakdown of Requirement (US$ Million) Core/ S/ Duration Requireme Fundin (US$ Major Responsibl Budget Program/Project Title Extern N nt (US$ g (US$ Million Donor e Agency Ref 1392 al Start End 1387 1388 1389 1390 1391 Million) Million) ) + 0807501 Kokcha Feasibility Study of AFG/ 22 Sorobi 2 Power Plant in 1387 0.500 2.50 3.000 0.000 3.000 Core MEW 0813501 Capacity of 180 MW AFG/ Sheberghan Gas Power 23 1387 1388 75.00 75.00 0.00 150.000 149.170 0.830 USAID External MEW 0752501 Plant AFG/ National Load Control 24 1387 50.00 0.00 0.00 50.000 50.000 0.000 USAID External MEW 0752602 Center - NEPS AFG/ REFS PASA support to 25 1387 18.00 0.00 0.00 18.000 18.000 0.000 USAID External MEW 0752901 infrastructure:Core Cost Construction 220 kV Double Circuit Transmission Line from AFG/ Pul-e-Khumri to Kabul 26 1386 48.43 3.36 3.36 55.145 55.145 0.000 IND External MEW 0780301 and Baghlan and construction of Sub- Stations ( Pule-e-Khumri, Charikar and Kabul) Reconstruction and AFG/ completion of Salma 27 1387 1390 36.00 25.00 35.00 40.00 136.000 36.000 100.000 IND External MEW 0816901 Dam Power Project (42 MW ) in Heart province AFG/ 28 100 MW Kabul Genesets 1387 65.00 0.00 0.00 65.000 65.000 0.000 USAID External MEW 0827501 Operation and AFG/ 29 Maintenance of Power 1387 2.00 0.00 0.00 2.000 2.000 0.000 USAID External MEW 0827601 Facilities 30 Rehabilitation and 1383 1392 75.00 100.00 125.00 100.00 400.000 0.000 400.000 MEW construction of small and AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) 88 Project Total Total Gap AFG Breakdown of Requirement (US$ Million) Core/ S/ Duration Requireme Fundin (US$ Major Responsibl Budget Program/Project Title Extern N nt (US$ g (US$ Million Donor e Agency Ref 1392 al Start End 1387 1388 1389 1390 1391 Million) Million) ) + medium sized hydro power plants (Nationwide) Power Transmission line 31 and distribtution networks 1385 1389 39.00 70.00 31.00 140.000 0.000 140.000 MEW Turkministan 32 Sorobi 2 Power Plant 1387 1394 10.00 35.00 50.00 100.00 195.000 0.000 195.000 MEW 33 Kajaki Power Plant 1387 1393 50.00 100.00 125.00 125.00 125.00 525.000 0.000 525.000 MEW 34 Kalagosh Power Plant 1387 1391 15.00 25.00 50.00 60.00 150.000 0.000 150.000 MEW 35 North East Power Supply 1387 1390 70.00 90.00 40.00 200.000 0.000 200.000 MEW South Power System 36 (Logar, Paktia, Paktika, 1387 1389 50.00 50.00 100.000 0.000 100.000 MEW Khost) Ulambagh Hydro Power 37 1387 1393 15.00 25.00 40.00 75.00 155.000 0.000 155.000 MEW Project (Uruzgan) Baghdara (Panjsher) 38 1387 1393 25.00 75.00 100.00 125.00 325.000 0.000 325.000 MEW Power Plant 39 Renewable Energy 1387 1392 25.00 25.00 25.00 25.00 100.000 0.000 100.000 MEW Fuel Subsidies for Diesel 40 1387 1392 40.00 50.00 50.00 50.00 50.00 240.000 0.000 240.000 MEW Generators Total: 676.68 863.67 912.36 845.00 795.00 50.00 4,142.71 574.96 3,567.75 89 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS)

ANNEX IV: LIST OF PROVINCIAL PRIORITY PROJECTS (ENERGY SECTOR) — LIST OF PROVINCIAL PRIORITY PROJECTS (ENERGY SECTOR)

ANNEX IV: LIST OF PROVINCIAL PRIORITY PROJECTS (ENERGY SECTOR) Responsible Project Duration (year) No. Project Name Project Location agency Start End 1 Upgrading of the electricity system from 6 kilowatt to 20 kilowatt. Balkh MEW 1387 Construction of small electricity hydropower dam in Mangalha, Tala, Duab, Esfahan, Khorosh and Char 2 Bghlan MEW 1387 Dar, and it will be beneficial to 200000 families. 3 Construction of Ajar Hydropower Dam. In Kahmard about 10 MW Bamyan MEW 1387 Construction of Gazak hydropower dam and Sabgee bridge in Ykawlang district (90000 beneficiaries) 4 Bamyan MEW 1387 about 5 MW 5 Construction of hydropower dame in Doabi Bolola .Shibar. 6 MW Bamyan MEW 1387 6 Conatrucion of Yamgan hydropower dam in Yamgan district. Badakhshan MEW 1387 th 7 Construction of Singal hydropower dam (100 MW) in Centre of province 4 district. Badakhshan MEW 1387 9 Construction of Gangor Chi hydropower dam in Kishim district. Badakhshan MEW 1387 10 Construction of Shar e Sabz hydropower dam in Shaki district. 1500 KW Badakhshan MEW 1387 11 Construction of Karonj and Shaghnan hydropower dam in Shaghnan district. Badakhshan MEW 1387 12 Construction of Tagab district hydropower dam. Badakhshan MEW 1387 13 Construction of dam in Nalij Miramoor. (320m) Daikundi MEW 1387 14 Construction of dam in Nilli for production of electricity power (30MW) Daikundi MEW 1387 15 Construction of hydro power dam in Sangtakht and Bandar. (One dam, 800 kw) Daikundi MEW 1387 16 Establishment of electricity energy station in Almar. (One sub station) Faryab MEW 1387 Extension of 11kw electricity line from Shibirghan to Aqach and Qarqin area and establishment of 17 Jawozjan MEW 1387 power sub station in Shibirghan district.Jangal Bagh road (400000 beneficiaries). 18 Construction of electricity power station in Qarqin and Darzab districts (10 kw). Jawozjan MEW 1387 19 Establishment of small hydropower dam in Anaba ( 1000 Kw) Pajshir MEW 1387 20 Construction of factory rooms for Daronta hydro power dam. Beneficiaries 1000000 Nangarhar MEW 1387 21 Hydro power and irrigation project for Surkh Rood.Beneficiaries 100000 Nangarhar MEW 1387 22 Electricity cable from wodkhil sub-station and set up of transformers. Kabul MEW 1387 23 Electricity cables in Bagrami district. Kabul MEW 1387 24 Construction of electricity dam in Dara-i-Suf Bala district. Samangan MEW 1387 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) 90 Responsible Project Duration (year) No. Project Name Project Location agency Start End 25 Construction of electricity sub-station in the centre of the province Samangan MEW 1387 26 Extension of electricity net work in the centre of the province. Samangan MEW 1387 Construction of a hydro power plant in Kohistan, Kohband, Nijrab and Alasai. (About 150000 m3 and 27 Kapisa MEW 1387 8650 families as beneficiaries.) 28 Construction of electricity dam of Takht Langa. Badghis MEW 1387 29 Construction of electricity dam of Takht Langa. Badghis MEW 1387 30 Provide the Energy (Electricity) to the District Shawali Kot for 140000 people About 500 k. watt. Kandahar MEW 1387 31 Dynamo generated power source from Nahre Shahe to the centre (150 kw). Laghman MEW 1387 32 Construction of a hydropower dam in Khak Afghan & Tamo (50000 beneficiaries). Zabul MEW 1387 33 Provision of Electricity for Taren kot City 200 Kw Beneficiaries All Taren Kot Urozgan MEW 1387 Provision and Distribution of Electricity in centre of Chahar Cheno Khas Urozgan Gizab and chora 34 Urozgan MEW 1387 District 200 kw Beneficiaries 30000 35 Construction of dam at the districts level (20 dams). Ghor MEW 1387 36 Establishment of small hydropower dame in Taiwira, Lalsarjangal and Tolic districts about 20 dams. Ghor MEW 1387 37 hydropower dame in Taiwira, Lalsarjangal and Tolic districts about 20 dams. Ghor MEW 1387 38 Construction of hydro dam in provincial centre. (300000 beneficiaries). Ghor MEW 1387 39 Establishment of electricity network in Farah city Beneficiaries 300000. Farah MEW 1387 40 Creation of Kamal khan dam on the hilmand River in Charbujak district.2 km Beneficiaries 200000. Nimroz MEW 1387 42 Construction of electricity production projects in centre of Bargumtal. Noristan MEW 1387 43 Construction of small hydpr-power dams. Centre of Noorgram district. Noristan MEW 1387 44 Construction of a hydropower dam in Armoor district, Kamdish. Noristan MEW 1387 45 Construction of a hydropower dam in Paroon, Nooristan district. Noristan MEW 1387 46 Construction of a hydropower dam in Wama district . Noristan MEW 1387 Construction of head power in Spena Barkha district, Want Waigal and Mandol district . Is this the 47 Noristan MEW 1387 same as hydro power? 48 Construction of hydropower headworks in Barginatal (2mw). Noristan MEW 1387 49 Provision of electricity to Bust Area of Lashkargah beneficiaries 2% People Hilmand MEW 1387 50 Reconstruction of Kajaki Dam Beneficiaries All Province From Water and electricity Hilmand MEW 1387 51 Construction of hydro dam in Kamkai Mazghor.Beneficiaries 300000 Khost MEW 1387 91 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) Responsible Project Duration (year) No. Project Name Project Location agency Start End 52 Construction of dam in zambar centre of Khost. Beneficiaries 200000 Khost MEW 1387 53 . Rehabilitation of Kachki dam in Shamalkhel bak district. Beneficiaries 16000 Khost MEW 1387 55 Construction of hydropower in Drang Sahak, Zurmat district (800 kw 50,000 beneficiaries). Paktia MEW 1387 56 Creation of a hydropower dam in Tera district, Gardiz city. (production 500 kw). Paktia MEW 1387 57 Rehabilitation of electricity network in district # 18. Kabul Urbon MEW 1387 58 Establishment of 10 megawatt hydropower dam, in Kasham Qura Mangorchi.(8000 beneficiaries). Badakhshan MEW 1387 59 Construction of Kamki Marzghor hydropower dam Khost MEW 1387 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (ANDS) 92 AFGHANISTAN NATIONAL DEVELOPMENT STRATEGY (AND

Energy Sector Strategy 2008

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