ARMENIA'S ENERGY FUTURE: STAYING NUCLEAR?

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001039

SIPDIS

DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC, PASS TO USAID EGAT

E.O. 12958: DECL: 06/15/2015
TAGS: ENRG ECON EAID AM IR RU
SUBJECT: ARMENIA'S ENERGY FUTURE: STAYING NUCLEAR?

REF: 04 YEREVAN 382

Classified By: Amb. John Evans for reasons 1.4 (b/d).

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SUMMARY
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1. (C) In preparation for a June 22, 2005 donor conference on
the Armenia Nuclear Power Plant (ANPP) decommissioning and
replacement alternatives, Ministry of Energy officials
outlined for us Armenia's long-term energy strategy. They
made three main points:

-- There is no economic alternative to the continued
operation of the Armenia Nuclear Power Plant (ANPP) until
2016;

-- Gas-fueled thermal power and nuclear power are the only
viable base-load generation options to replace existing
capacity as it is retired;

-- Armenia must maintain a balanced mix of generation,
considering both the type of generation and the geographical
source of fuel.

Blessed with few energy resources and faced with aging
infrastructure, Armenia will struggle to replace the capacity
of its deteriorating Soviet infrastructure, maintain its
energy security, and keep energy prices reasonable. End
Summary.

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MINISTRY OF ENERGY: ANPP TO OPERATE UNTIL 2016
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2. (C) According to Deputy Minister of Energy, Areg Galstyan,
the GOAM plans to operate the Armenian Nuclear Power Plant
(ANPP) until at least 2016, although they have set no firm
decommissioning date. The economic consequences of closing
the ANPP sooner, said Galstyan, would be severe. The ANPP
has one working Soviet-era reactor that is Armenia's main
base-load electricity generator and supplies 30-40 percent of
Armenia's energy. Because its operating costs and tariff do
not include the initial building costs which were paid by the
Soviet government, or provide for decommissioning costs, it
produces Armenia's cheapest electricity. According to PA
Consulting, a USG-funded contractor that assists the
Ministry, the difference in electricity costs if Armenia
moved its nuclear generation to gas-fired thermal energy
would be more than USD 100 million per year, under Armenia's
current (Russian-subsidized) natural gas prices. PA
Consulting estimates that decommissioning the plant and
permanent fuel storage costs would cost an additional USD 800
million, more than Armenia's entire annual government budget.


3. (SBU) ANPP's VVER 230 (440 MW) reactor was closed for
safety concerns following the devastating 1988 earthquake,
but was restarted in 1995 amidst a severe energy shortage in
Armenia. The EU pressured the GOAM to shut it down for good
(the closure date was originally 2004),but Armenian
officials have since backed out of the deal and said that the
plant will operate until the country has alternative and
diverse energy generation capacity (reftel). Since 1995, the
European Union/TACIS and the USG, through the Department of
Energy, have provided comprehensive technical upgrades and
operational training to improve the near-term safety of the
plant, including measures to mitigate damage in case of an
earthquake. ANPP's main safety fault is still the lack of a
containment dome to reduce the spread of radiation in the
case of a disaster.

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MINISTRY: GAS AND NUCLEAR ARE ONLY OPTIONS
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4. (C) Looking towards the inevitable, if postponed, closure
of the ANPP, Galstyan told us that the Ministry considers
thermal and nuclear power the only viable base-load
generation options for Armenia. Although Galstyan has
actively pursued development of wind and hydro sources, he
points out that these are not reliable year-round and their
potential capacity cannot meet Armenia's consumption needs.
The Ministry's primary strategy is to develop new thermal
generation capacity. Galstyan told us that, along with the
ANPP, all existing thermal units will be more than 40 years
old by 2015, and will be facing retirement. The Ministry is
currently considering two projects to build new thermal power
plants, one 402 MW combined cycle plant funded by the Japan
Bank for International Cooperation and another project to
complete a fifth unit at the Hrazdan Thermal Power Plant.

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NEW NUCLEAR?
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5. (C) According to Galstyan, a new nuclear plant would be a
much more ambitious strategy for the cash-strapped Armenian
government, but was the only thing that could justify early
closure of the ANPP. He said the Ministry was looking into
"the feasibility of doing a feasibility study" of building a
new nuclear plant. Given Armenia's committed investment in
gas infrastructure (notably, the USD 170 million gas pipeline
to Iran and the two new thermal plants),a nuclear plant
would be economically feasible, said Galstyan, only if
Armenia could export significantly more electicity than it
currently sends to Iran and Georgia. "Of course you could
make a situation where it is feasible if you include Turkey,"
said Galstyan, shrugging. (Note: The 220 kV/300 MW line
connecting Armenia and Turkey is currently disconnected. End
Note.) Galstyan also claimed that, as a part of the
feasibility investigation, Armenia would look at an extension
package for the ANPP that allowed it to operate past 2016.
He added that he thinks the extension package is too
expensive to justify itself, but did not exclude the
possibility.


6. (SBU) PA Consulting, a U.S.-based energy consultant to the
GOAM, said that we should not dismiss Armenia as a candidate
for a nuclear plant. According to PA, Armenia does not now
nor would it likely in the future insist on control of the
fueling process. The GOAM says that it would welcome
international control and oversight over its nuclear fuel.

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ENERGY SECURITY A MUST
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7. (C) Besides replacement capacity, the GOAM insists that
any energy solution must guarantee Armenia's energy security
by maintaining diversity of sources. Were Armenia to shut
down the ANPP with its existing energy infrastructure, 80
percent of Armenia's electricity generation would rely for
fuel on a single poorly-maintained gas pipeline from Russia
running through Georgia, a situation the government
(understandably) finds untenable. The government has thus
made the construction of the Iran-Armenia gas pipeline a
priority to ease their vulnerability to regional disputes
(such as Russia not wanting to supply gas through Georgia) or
rapid changes in the price of gas.

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COMMENT: PUSHING GOAM TO CLOSE ANPP WILL TAKE CASH
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8. (C) Armenia's energy strategy has been consistent since
the February 2004 EU-Armenia Working Group on ANPP when the
Minister of Energy announced that the ANPP would not close as
planned (reftel). Focused on security and capacity
replacement, the Ministry will not ignore the forthcoming
rise in energy-related costs. Unlike the inherited Soviet
infrastructure, which operates at marginal costs, new thermal
or nuclear plants will have to include in their tariff the
costs of their entire lifecycle, from construction to
retirement. To compound these costs, gas from Russia is
likely to get more expensive. Armenia currently pays half
the price that Russia charges Europe. Gas delivered from
Iran will presumably be more costly, too, even if it is, as
the Ministry claims, to be paid back in electricity.
Meanwhile, the GOAM will have to finance the retirement of
existing infrastructure, not least the decommissioning of the
ANPP, which has not included its life-cycle costs into its
tariff. One constant in Armenia's energy options is that
energy costs are set to rise beyond what consumers can pay in
tariffs and the government will likely need to cover
long-deferred expenses. We expect that the government will
raise cost concerns with donors on June 22, especially to the
EU delegation who will presumably offer assistance in
exchange for a closure date for the ANPP, as they did last
February. When donors ask for change in Armenia's energy
strategy, expect the Minister to ask donors for financial
assistance in turn.
EVANS