ARMENIA AT AN ENERGY CROSSROADS

Ian McGinnity

1 April 2015

During the dark days of severe energy crisis in Armenia in the 1990s, an anecdote spread throughout the Armenian public:

-Did you hear that the Minister of Energy has now asked to be called the Minister of the Navy?

-No! Why? Armenia doesn’t have a navy!

-Yes, but Armenia doesn’t have energy either!

Economically blockaded by Turkey and embroiled in a bitter conflict with Azerbaijan over the Nagorno-Karabagh region, Armenia was cut off from all but one of its natural gas pipelines. The only active pipeline into Armenia, a lifeline that pumped Russian gas into Armenia through Georgia, was perniciously sabotaged with a frequency that erased any notion of reliability. Without access to natural gas, generation from Armenia’s gas-burning thermal plants, upon which the nation heavily relied for the majority of its electricity, effectively ceased.

As an immediate stop-gap measure, the Armenian government was forced to utilize its hydropower resources, the Sevan-Hrazdan Cascade, at Lake Sevan as its sole manner of electricity generation from 1992-1996. As a result, Lake Sevan’s water levels decreased by over a meter, aggravating a delicate ecological recovery from dangerous overuse of the Cascade during the Soviet era. [1]

Around 25 percent of the electricity produced during this period was siphoned illegally from the grid, further exacerbating the tenuous situation. [2] Faced with brutal winters, as little as 2 hours of electricity per day, and the collapse of centralized district heating, the majority of Armenians heated their households with wood-burning stoves, resulting in mass deforestation.

Confronted with no less than the total collapse of the energy system, the government reopened Unit 2 of the Metsamor nuclear power plant in 1995. The plant had been shut down in 1989 due to safety concerns after a 6.8 magnitude earthquake in 1988 - just 75 kilometers from the plant - leveled towns and villages and left as many as 30,000 dead. Reopening the nuclear power plant, a feat that had never before been attempted anywhere in the world, flooded the grid with electricity, returning to Armenians a sense of normalcy after years of war and want.

More than twenty years later, Armenia has evolved passed the severe systemic energy volatility that frequently plagues emerging countries. It has a developed system of energy generation, distribution, and regulation supported by extensive legislation and bolstered by funding and collaboration with international partners.

Interruptions in energy service are infrequent, and remuneration from end-users is at nearly 100 percent. In fact, the energy sector is one of the largest taxpaying industries in Armenia.

Today, nearly a third of Armenian electricity is produced by hydroelectric power plants, a third by the Metsamor nuclear plant, and another third by gas-burning thermal power plants (TPPs). While Armenia does have a small amount of endemic natural gas and oil resources, the high capital costs of extracting these caches renders such efforts fiscally unviable.

As such, Armenia imports the vast majority of the natural gas and oil it consumes from Russia, via Georgia through the Tbilisi-Mozdok and the North Caucasus-Transcaucasus pipelines. A smaller pipeline running from northern Iran to southern Armenia, the Meghri-Tabriz pipeline, gives Armenia access to Iranian natural gas.

However, 75 percent of this gas is generated into electricity at Yerevan Thermal Power Plant and exported back to Iran, leaving little for domestic consumption.

Despite Armenia’s progress, the country now faces challenging questions about its energy future. Over 40% of Armenia’s energy infrastructure is inefficient, outdated, and dilapidated. [3] The average age of electricity transmission infrastructure is 50 years. [4] Over 90% of Armenia’s overhead electric lines needs to be replaced. [5] The Yerevan and Hrazdan thermal power plants are aging and operate inefficiently, well below their original capacity.

While the government has planned to retire the inefficient units of these plants by 2017, doing so will require construction of new thermal plants or utilization of alternative energy resources in order to avoid a supply gap and maintain an adequate reserve capacity.

Metsamor is one of the oldest nuclear power plants in operation. Commissioned in 1976, it will be 50 years old by the time of its scheduled decommissioning in 2026. Until then, it will require at least $300 million dollars in repairs and maintenance, which will be financed by the Russian government.

The Armenian government is moving forward with plans to initiate construction of a new nuclear plant in 2018, the completion of which is to coincide with Metsamor’s decommissioning.

Financing such an endeavor will be difficult at best. A new plant will cost an estimated $6 billion, a sum over 60 percent of Armenia’s annual economic worth and one that would double Armenia’s national debt. [6]

As later posts will detail, taking on such massive debt could substantially and negatively affect Armenia’s economic outlook. It also leaves Armenia vulnerable to foreign influences, including Russia, which has in the past systematically leveraged Armenian debt to gain control of crucial Armenian energy and infrastructural assets. Renewable energy (RE) options, particularly geothermal and solar, promise substantial potential energy generation and increased energy independence for Armenia.

However, despite the creation of a core legislative framework for renewable such as the 2003 Law Energy Saving and Renewable Energy, there has historically been a lack of political will to provide financial incentives to RE investors and funds for public outreach and awareness programs.

This apathy may be waning. New, dynamic leadership in the Ministry of Energy has emerged, and there has been a palpable shift towards public engagement. The announcement of public financing for solar power projects in the form of competitive feed-in tariffs has likewise spurred cautious optimism.

It remains to be seen, however, whether this shift will maintain its current momentum long enough to significantly enhance private and public interest in renewable energy development.

Armenia is at an energy crossroads. While Armenia’s energy security has drastically improved in the past two decades, the country must now make critical decisions about how best to strengthen its energy security, diversify its energy resources, and maintain adequate capacity. These choices should take into full consideration all options available to Armenia, and they must utilize Armenia’s resources strategically, to Armenia’s own advantage.

The Armenian government must weigh the costs of new energy investment not only in dollars, but also in terms of long-term autonomy, security, and sustainability.

Decisions made now will impact Armenia’s domestic economic growth and security for decades to come. They will also largely determine how and to what extent Armenia operates on the international stage. With so much on the line, there is little margin for error.

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