Decades of Kyrgyz utility price cutting

Another decrease in utility prices lies ahead in Hungary, while Hungarian investments in the energy industry are lower than they have been for many years. The link is clear: it isn’t worth investing in a place where you can’t make money. There are few opportunities to make money since all kinds of extra taxes have been levied on the sector and the utility price reduction is causing revenue problems. But is that such a big problem? Why shouldn’t energy supply be state-owned and non-profit? I don’t know the answer to that, but I do know a country where the state acts as supplier and which has been witnessing utility price cuts for decades.

Kyrgyzstan tends to be dubbed the Switzerland of Central Asia, because its territory is largely covered by mountains (though that is where the similarity largely ends). The mountains are high. Jengish Chokusu (Victory Peak) has an altitude of 7,439 metres. Lots of snow falls in winter, which melts in the spring and large volumes of water flow down from the mountains in rivers. It’s also home to numerous mountain lakes, with Issyk Kul being the world’s second largest. Where there are slopes and a lot of water and natural water reservoirs, building hydroelectric power stations is the obvious thing to do. That was recognized in the Soviet era too, and Kyrgyzstan had plenty hydroelectric power stations producing cheap electricity when it embarked on independence in 1991. We might think how lucky they are.

And, at first glance, that’s indeed the case. Hydroelectric power accounts for more than 90% of Kyrgyz electricity production, and the cost of production is one of the lowest in the world. It could be used as the basis for developing whole energy-requiring industrial sectors in the country, and considerable revenues could be obtained from exporting electricity. Unfortunately this is where populism gets in the way.

As you can see from the figure above, even though the production of electricity is cheap, the population only has to pay half the cost price. That’s the way it’s been for years. (Another country with a low electricity cost price is Tajikistan, where the situation is eerily similar that in Kyrgyzstan.) The result is unsurprising: the state-owned energy sector does not have any money to maintain the necessary infrastructure. The hydroelectric power stations are falling apart and the entire distribution network is decaying, with the result that grid losses amount to one third of the electricity production, an alarming level of wastage. Of the four electricity distribution companies, one alone (Severelectro) reported an average of 15 power outages daily, rising to 20 during the severe winter. That’s particular troublesome, because the majority of the population heats with electricity thanks to the cheap price of electricity and high cost of imported hydrocarbons. In terms of quality of electricity supply, Kyrgyzstan is ranked 91st place of 104 countries studied in a survey conducted this year.

There is no money for development, though the country is currently producing only 10% of the hydroelectric power that could potentially be harnessed.

So what drives a government to keep such a crazy state of affairs going? Kyrgyzstan provides a striking illustration of that too. In January 2010 President Bakiyev doubled the retail price of electricity, increasing it to slightly above the cost price. Or we could say he introduced a market price. The aim was to generate funds for refurbishment and development.

By April revolution had broken out. The present was forced to stand down and the new government reduced the price of electricity again. Of course that was not the only reason for the unrest – Bakiyev was corrupt and fixed the elections, as is the custom in that neck of the woods, but the increase in utility prices likely played a part in the outbreak of the revolution to oust him.

We should avoid taking the Kyrgyz path.

Original date of Hungarian publication: 09 september 2013