(IMI) BRIEF OVERVIEW OF ARMENIA'S ENERGY

UNCLAS SECTION 01 OF 04 YEREVAN 000483

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TAGS: KTDB BBSR BEXP BTIO AM
SUBJECT: (IMI) BRIEF OVERVIEW OF ARMENIA'S ENERGY
SECTOR


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SUMMARY
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1. This cable gives an overview of Armenia's energy
sector. It describes recent industry developments as
well as provides key contacts. End Summary.


2. Armenia has no natural fossil fuel energy
resources, although some small foreign firms have
exploration licenses. Nevertheless, Armenia has
inherited surplus electricity generation capacity and
regularly exports electricity to Georgia and Iran.
Since 2002, the government of Armenia has privatized
the electricity distribution network and a large share
of Armenia's generation capacity. As part of the
privatization process, the Armenian government recently
dissolved ArmEnergo, once the state-owned single buyer
and seller of midstream electricity and de facto
regulator of the industry. Now generating companies
contract directly with the distributor, subject to the
regulatory oversight of the Public Services Regulatory
Commission.


3. Armenia's electricity generation infrastructure
comprises thermal, hydro, and nuclear power plants.
The country's installed generation capacity is 3,196
megawatts (MW). In 2004 Armenia produced 6 billion
kWhs of electricity.


4. The Armenian Nuclear Power Plant's (ANPP) capacity
is 408 MW: in 2004 it generated nearly 40 percent of
Armenia's total electricity production. The current
average annual tariff of electricity produced by ANPP
is USD 0.015 per kWh. The plant was shut down in 1989
due to seismic and safety fears following the
devastating 1988 earthquake. After some improvements
Unit 2 was reopened in 1995 and provides at least one-
third of Armenia's annual electric power. The U.S.
Government, the EU, the UK, France, and Russia are
financing different programs to increase ANPP's safety
level. Total foreign assistance to the plant is
approximately USD 200 million. In 2003, Russian energy
firm RAO-UES and Russian nuclear power holding company
RosEnergoAtom took over the ANPP's financial management
(through a subsidiary company Inter RAO-UES) in part to
guarantee repayment of the plant's arrears for past
deliveries of nuclear fuel. Pursuant to Armenia's
Nuclear Law, the Government of Armenia still owns the
plant and manages the plant's physical operation.


5. Armenia's thermal power plants have an installed
capacity of 1,756 MW. In 2004 the country's thermal
power plants generated 26 percent of Armenia's total
electricity production. There are three major thermal
plants:

-- Hrazdan Thermal Power Plant (HTPP),located in
Kotayk province, has an installed capacity of 1,100 MW.
The average tariff for the electricity produced by the
HTPP is USD 0.038 per KWH. The Armenian government
privatized Hrazdan TPP in a 2003 debt for equity swap
with Russian Federation. Russia's Federal Agency of
Federal Property Management established a locally
registered company, Hrazdan Energy Organization, to
manage the plant. The plant's incomplete Unit 5
remains the property of the Armenian Government. In
1993 EBRD lent the Armenian government USD 57.4 million
to partially fund its construction, but the unit
remains incomplete due to lack of financing.
Currently, the Government of Armenia is considering
proposals from foreign power companies to complete Unit
5, which needs investment of about USD 140 million.

-- Vanadzor TPP in Lori province has 96 MW installed
capacity. In 1999 the Government of Armenia sold the
Vanadzor TPP along with the adjacent Vanadzor Chemical
Plant to Russian company Zakneftegazstroy-Prometey,
which is owned by Moscow-based Diaspora Armenian Senik
Gevorgyan. Currently the TPP is in operable condition,
but rests idle because its operation is not cost
effective.

-- Yerevan Thermal Power Plant has capacity of 550 MW.
The average tariff for the electricity produced by the
Yerevan plant is USD 0.04 per KWH. The Ministry of
Energy manages the Yerevan TPP and there are no plans
to privatize the plant in the near future. The
Government of Japan, through the Japan Bank for
International Cooperation (JBIC),will lend the
Armenian government USD 165 million to build a new 208
MW unit at the Yerevan TPP. We expect that the
Armenian Government will announce a tender to select a
contractor to implement this project in early 2006.


5. Armenia's hydroelectric plants have an installed
capacity of 1,032 MW, and supplied 34 percent of
Armenia's electricity in 2004. Hydro Power capacities
include:

-- The Sevan-Hrazdan Cascade (556 MW) comprises six
hydro power plants along the Hrazdan River flowing from
Lake Sevan to Yerevan. The average tariff for the
electricity produced by the Sevan-Hrazdan Cascade is
USD 0.024 per kWh. The Armenian government sold the
plants to Russia's RAO-UES in 2003 in exchange the
latter's assumption of USD 43 million in energy
arrears. Germany's KfW (Kreditanstalt fuer
Wiederaufbau) has financed the refurbishment of one of
the six plants, the Kanaker HPP, and is planning to
participate in the upgrade generating facilities of the
final plant in the cascade, the Yerevan HPP.

-- The Vorotan Cascade (400 MW) includes three large
HPPs on the Vorotan River in Syunik province. The
Vorotan Cascade was one of the last facilities to be
built under the Soviet regime and has relatively modern
equipment. Armenia's Ministry of Energy manages
Vorotan Cascade's operations and has plans to privatize
the plants in the near future. The Government of
Armenia will determine the timeframe of the cascade's
privatization in 2006. The cascade's proximity to
large mining enterprises in the region makes it
attractive to potential investors. The average tariff
for the electricity produced by the Vorotan Cascade is
USD 0.024 per KWH.

-- Armenia's small HPPs with a total installed capacity
of 76 MW include Dzoraget HPP (26 MW) and more than 20
small HPPs. All of Armenia's small HPPs are
privatized. To encourage a rapid development of this
segment the Government of Armenia creates favorable
conditions by setting higher tariffs for electricity
obtained from small HPPs than from larger HPPs. The
maximum rate per one kWh the Regulatory Commission sets
is USD 0.054, including VAT.


6. Armenia privatized the Electricity Network of
Armenia (ElNetArm),its electricity distribution
network in 2002, selling it to U.K.-registered Midland
Resources. The company now manages the country's
entire electricity distribution network. In late 2004,
a Japanese development bank JBIC lent the distributor
USD 38 million to finance the rehabilitation of thirty-
three 110 kilovolt (kV) substations as well as the
procurement and installation of 150,000 electronic
power meters to measure household consumption.
ElNetArm recently developed a three-year business
development envisaging investments of USD 50 million.
The plan is subject to the approval of the Public
Services Regulatory Commission. According to local
press reports, Midland Resources is considering
proposals from several foreign companies to buy
Midland's share in ElNetArm. Any sale of ElNetArm
requires the approval of the Ministry of Energy and the
Public Services Regulatory Commission.


7. Armenia's high-voltage power transmission system
consists of 1,323 km of 220 kilovolt (kV) lines, 164 km
of 330 kV lines, and 3,146 km of 110 kV lines.
Armenia's high-voltage power lines are not subject to
privatization and are controlled by the Ministry of
Energy through the High-Voltage Electric Network Closed
Joint-Stock Company. As part of the Trans-Caucasian
Power Pool, Armenia is connected via operational
transmission lines with neighboring countries,
including with Georgia (two 110 kV lines) and Iran (one
220 kV line, the second high-voltage power line was
constructed in 2004, the third line's construction to
be started in 2005). Transmission lines with
Azerbaijan (one 330 kV line),Azerbaijan's exclave
territory Nakhichevan (a 220 kV line and two 110 kV
lines) and Turkey are out of use because of political
conflicts in the region. The transmission line with
Turkey is in operable condition while the lines with
Azerbaijan would need to be reconstructed. The German
KfW Development Bank and the World Bank provided loans
for the reconstruction of the network's substations
throughout the country.


8. The Ministry of Energy controls the Power System
Operator Joint-Stock Company that serves as the single
operator and dispatch center for Armenia's energy
system. The company is modernizing its communication
system with financial assistance from the Japanese
Government.


9. Armenia's energy-related legislation includes the
Energy Law, the Law on Foreign Investment, the Law on
Licensing, and the Law on the Public Services
Regulatory Body. The Law on Energy regulates
relationships between the government bodies, legal
entities operating in the sector under the Law and
consumers of electricity, thermal energy and natural
gas. The Law does not deal with the oil sector.


10. The energy sector's main regulatory body is the
Public Services Regulatory Commission. Among its
responsibilities are setting of the regulated tariffs
for electrical and thermal energy and natural gas,
transmission, distribution in the energy sector, system
operator, services provided in the energy market. To
start operations in the energy sector a legal entity
should get a license. Under the Energy law the Public
Services Regulatory Commission issues licenses for
generation, import, export, transmission and
distribution of electricity, heat, and the natural gas.


11. The Energy law is available at www.rcnm.am.
Armenia's energy-related legislation materials can also
be obtained from Irtek CJSC, a Yerevan-based legal
information center at:

36 Abovyan Street,
Yerevan 375009
Armenia
Tel: (374-1) 527-950
Fax: (374-1) 569-085
E-mail: info@irtek.am
Website: www.irtek.am

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KEY CONTACTS
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Ministry of Energy
2nd Government Building
Republic Square
Yerevan 375010
Tel: (374-1) 521-964
Fax: (374-1) 526-365
E-mail: minenergy@minenergy.am
Website: www.minenergy.am

Public Services Regulatory Commission
22 Saryan Street
Yerevan 375002
Tel: (374-1) 522-522
Fax: (374-1) 525-583
E-mail: rcnm@rcnm.am
Website: www.rcnm.am
Nuclear and Radiation Safety Center (Armenian Nuclear
Regulatory Authority) under the Ministry of Nature
Protection
4 Tigran Mets Street
Yerevan 375010
Tel: (374-1) 543-991
Fax: (374-1) 581-962
E-mail: info@anra.am
Website: www.anra.am

Electric Network of Armenia CJSC
Nork
127 Armenakyan Street
Yerevan 375047
Tel: (374-1) 542-163
Fax: (374-1) 543-683
E-mail: elnet@arminco.com

High-Voltage Electric Network CJSC
1 Zoravar Andraniki Street
Yerevan 375114
Tel: (374-1) 720-010
Fax: (374-1) 720-121
E-mail: hvn@arminco.com

Armenian Nuclear Power Plant CJSC
Metsamor
Armavir province 377766
Tel: (374-1) 288-250
Fax: (374-1) 281-825
E-mail: anpp@anpp.am
Website: www.anpp.am

Power System Operator CJSC
27 Abovyan Street
Yerevan 375009
Tel: (374-1) 592-960
Fax: (374-1) 524-725
E-mail: arm_eso@freenet.am

International Energy Corporation CJSC
10B Adontsi Street
Yerevan 375014
Tel: (374-1) 245-099
Fax: (374-1) 245-199
E-mail: mailmek@mek.am

Vorotan Cascade of Hydroelectric
Power Plants CJSC
2 Grigor Tatevatsi Street
Goris
Syunik province 377830
Tel: (374-84) 22-758
Fax: (374-84) 26-796

EVANS