(Adds Pentagon comment)
By Jessica Donati and Sarwar Amani
KABUL/KANDAHAR, Afghanistan, Aug 5 (Reuters) - When the United States stops funding power generation in Afghanistan's southern city of Kandahar next year, the lights are set to go out and factories will fall idle, playing into the hands of Taliban insurgents active in the area.
Bringing a stable source of electricity to Kandahar, the cradle of the hardline Islamist movement and once a base for its leader Mullah Omar, was a top U.S. "counter-insurgency priority" as Washington pursued its policy of winning "hearts and minds."
But regular power in the city is still years away, and when the United States finally ends subsidies - currently running at just over $1 million a month - in September 2015, Kandahar could lose around half its severely limited electricity supplies, Afghan power officials and U.S. inspectors say.
Major Brad Avots, a Pentagon spokesman, said the U.S. government had helped increase Afghans' access to regular electricity supplies five-fold since 2002.
He said the U.S. government was working on ways to help Afghans develop a sustainable power solution, in part by upgrading infrastructure while the country is "transitioning away from subsidies by charging consumers for the electricity they consume."
"The goal of both the Afghan and U.S. governments is to make electricity production in Kandahar - and elsewhere in Afghanistan - self-financing," he said.
The Taliban, meanwhile, controls about half the 12 megawatts (MW) of power supplied to Kandahar province from the Kajaki plant in neighbouring Helmand province, ensuring a stable supply of electricity in their strongholds, according to the head of state power firm Da Afghanistan Breshna Sherkat (DABS) in Kandahar.
"There are some 130 different factories operating in Kandahar whose electricity is maintained and paid for by the Americans," said Fuzl Haq, a businessman in Kandahar.
"If the Americans stop paying for the fuel to run these factories, some 6,000 workers will lose their jobs," Haq added, reflecting concerns of many locals in Afghanistan's second-largest city.
"These are all young people and they may join up with the Taliban or resort to crime in order to earn money."
Alex Bronstein-Moffly, a spokesman for the U.S. Special Inspector General for Afghanistan Reconstruction (SIGAR), said power shortages in insurgent heartlands would be a major setback 13 years after the Taliban was toppled in a U.S.-led war.
"If electrical service to Kandahar is compromised it could end up endangering counter-insurgency and economic gains made over the last few years," he said.
U.S. power subsidies were intended to fill in until the power grid reached Kandahar and a new turbine was installed at Kajaki dam, but both projects remain years away from completion, not least because of strong armed resistance from the Taliban in the region.
"It appears that the U.S. still has no realistic plan for helping the Afghan government develop a sustainable source of electricity," wrote John Sopko, a U.S. special inspector general, in a report published on Tuesday.
Winning over locals in the hot, dusty cluster of low-slung houses and markets has been a priority for the United States, which, like other foreign powers, is due to withdraw most of its troops from the war-torn country by the end of the year.
The Afghan government says it cannot afford to maintain Kandahar's power generators or pay for the fuel. Diesel supplies in the city are already being rationed and power outages will be inevitable, says the state-owned power company.
"We have no other way (of operating)," said DABS chief commercial officer Mirwais Alami in Kabul. "If businesses cannot compete with Kabul in Kandahar, they will collapse."
How to pay for Kandahar's power without U.S. or Afghan government funds is a major problem, with powerful tribal and political leaders already refusing to pay their electricity bills, according to DABS officials.
Revenue collection in the south has also been dented by the Taliban, who control areas along power lines.
"Taliban collect revenue from electricity in places under their control," said engineer Sayed Rasoul, the head of DABS in Kandahar.
The U.S. aid agency has just awarded a new $27 million, four-year project to improve electricity revenue collection and management in Kandahar. The cash cannot be used to pay for fuel. It says increasing tariffs was one way to keep Kandahar's two 10 MW generators running.
"USAID has worked with DABS to prepare users to pay for the more expensive power generated with diesel until DABS completes work on a new turbine at Kajaki and on the power transmission line," said Donald "Larry" Sampler, Assistant to the Administrator in the Office of Afghanistan and Pakistan Affairs (OAPA) in Washington.
But plans to increase tariffs as much as tenfold or more may be unrealistic in one of the world's poorest countries, where only 30 percent of people have access to electricity. (Additional reporting by Missy Ryan in Washington; Reporting by Jessica Donati; Editing by Michael Perry, Mike Collett-White and Lisa Shumaker)