ENERGY SECTOR OVERVIEW

UNCLAS SECTION 01 OF 03 YEREVAN 001694 SIPDIS DEPT FOR EUR/CARC, EUR/ACE, ISN/SC -PMETZ PLEASE PASS TO USAID - WHALL DOE FOR BMOFFIT SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON ENRG AM SUBJECT: ENERGY SECTOR OVERVIEW REF: A) 05 YEREVAN 1725 B) YEREVAN 98 C) YEREVAN 127 D) YEREVAN 631 E) YEREVAN 910 F) YEREVAN 1537 G) YEREVAN 1538 H) YEREVAN 1687 YEREVAN 00001694 001.2 OF 003 This cable is sensitive, but unclassified. Please protect accordingly. -------------- SUMMARY -------------- ¶1. (SBU) Since Armenia's severe energy crisis in the early 1990s, energy security and independence have been critical priorities for the government of Armenia (GOAM). This cable, drawn primarily from conversations with representatives from the Armenian Ministry of Energy and USAID energy project implementer PA Consulting, provides a general overview of Armenia's energy situation, available gas reserves, and Russia's increasingly prominent role in the sector. -------------- A BIT OF HISTORY -- THE DARK YEARS -------------- ¶2. (SBU) In 1989, following a devastating earthquake, the then-Soviet government decided to shut down both units of Armenia's nuclear power plant (ANPP) due to seismic and safety concerns. After the fall of the Soviet Union, a growing conflict between Armenia and Azerbaijan over Nagorno Karabakh led to a disruption of Russian gas exports to Armenia, which at that time transited Azerbaijan. These factors and severe problems with the Armenia electrical distribution network caused an energy crisis that left many Armenians with extremely limited access to heat and electricity from 1992-1995. During that period, Armenia's forests were devastated as families harvested all available sources of fuel to heat their homes. Many Armenians were forced to burn furniture and books in an effort to stay warm. Most Armenians in their late-twenties and thirties recall studying by candlelight with entire families living in a single room for warmth. Many recount stories of neighbors or family members who died in their homes from the extreme cold. ¶3. (SBU) In 1995, operations resumed at the ANPP. Around the same time, significant repairs to the electrical distribution network were completed and power was restored to the vast majority of Armenian consumers. The crisis was as much a result of poor distribution as limited electrical generation, (at the height of the crisis, generation at the Sevan Hydro Power Plant was increased virtually to the point of replacing ANPP production) but most Armenians associate the crisis with the ANPP's closure. -------------- CURRENT ELECTRICAL PRODUCTION -------------- ¶4. (SBU) Armenia has a relatively small power system with 800,000 customers (720,000 residential, 30,000 commercial and industrial and 50,000 other users, including government). In 2005, approximately 42 percent of local demand was met by nuclear power, 30 percent by hydro and 28 percent by thermal (natural gas) generation. Annual net generation in 2005 was 5,911 GWh. The majority of hydro production occurs in the spring and helps generate electricity for export to Iran as part of a long-standing power swap arrangement. (Armenian and Iranian energy consumption complement each other. Armenia's production is high and demand low during the temperate summer, when Iranian power consumption for air conditioning peaks, while Armenia's high wintertime energy needs for heating, coincides with Iran's mild winter temperatures.) Armenia's thermal power plants currently rely entirely on natural gas imported from Russia. ¶5. (SBU) In 2005, Armenia exported 656.2 million kWh to Georgia and 69.1 million kWh to Iran, (although the seasonal electricity exports to Iran are matched by imports, leaving an annual net balance of zero). Georgia has not purchased electricity from Armenia since April 2006 when new, higher prices were introduced for Russian natural gas. As a result of the gas price increase, the cost of electricity generated in Armenia grew from 3 cents per KW/h to 4.95 cents per KW/h. (NOTE: Thanks to an agreement with the Russians, the GOAM subsidizes domestically consumed electricity which costs approximately 3.3 cents per KW/h. END NOTE.) The price hike made Armenian-generated electricity more expensive for Georgia than Russian electricity. Reported increases in hydro production in Georgia due to heavy rainfall also may have diminished Georgian YEREVAN 00001694 002.2 OF 003 demand for Armenian electricity in 2006. -------------- ARMENIA'S HYDRO POWER RESOURCES -------------- ¶6. (SBU) Armenia has two major hydro power plant cascades and a number of smaller facilities. The Sevan-Hrazdan Cascade and Vorotan Cascade are the two largest facilities with installed capacities of 561 and 405 MW respectively. During the energy crisis in the 1990s, the Sevan-Hrazdan Cascade was the primary source of energy for a large portion of Armenia, severely taxing the environment around Lake Sevan. Currently, Sevan cascade operations are limited to "irrigation mode," but Lake Sevan represents a strategic energy reserve which could potentially be used in an extreme emergency, though the GOAM is very reluctant to consider this option because of the risk of environmental devastation. The Vorotan Cascade, comprised of three plants, is currently generating positive cash flows which could be reinvested into Armenia's energy infrastructure. There are about 41 small HPPs in Armenia which produce a modest 153 GWh annually. ¶7. (SBU) Armenia and Iran have agreed to construct a new hydro power plant on the Arax River. The plant includes two units, one on the Iranian side of the river and one on the Armenia, each with a capacity of 140 MW. Armenia will pay for its portion of the project, the total cost of which is USD 140 million, by transferring the electricity generated at its plant to Iran for the first 10-12 years of plant operations. Construction is due to begin in early ¶2007. -------------- THERMAL POWER AND USE OF NATURAL GAS -------------- ¶8. (SBU) Annual gas consumption in Armenia is estimated to be 1.7 billion cubic meters, of which the power sector uses 619 million cubic meters (MCM),winter consumption is approximately 2.7 to 2.8 MCM per day. Industry use 770 (MCM) and residential use accounts for 310 (MCM). Armenia currently imports its gas from Russia through an aging pipeline which crosses through Georgia. Armenia is finalizing construction of a gas pipeline with Iran, scheduled to become operational in late December 2006 (ref F). Given its modest size and the limitations of Armenia's current domestic infrastructure, however, this pipeline will not be sufficient to replace Russian gas imports. ¶9. (SBU) The majority of Armenia's thermal power comes from the Russian-owned Hrazdan Thermal Power Plant. Current sustainable capacity of the plant's four operational units is 400-450 MW, but plans to refurbish the largest unit at the plant, Hrazdan 5, could increase capacity by an additional 440 MW. In March 2005, the Japanese Bank for International Cooperation (JBIC) signed a loan agreement to support construction of a new unit at the currently inactive, dilapidated Yerevan Thermal Power Plant. The project will take two and a half years and is estimated to cost USD 160 million. The plant will have a capacity of 200 MW when the construction of a new combined cycle turbine unit is complete. -------------- PLANS TO INCREASE GAS STORAGE -------------- ¶10. (SBU) Armenia maintains a modest underground gas storage facility which proved invaluable when gas flows from Russia through Georgia were cut off in early 2006 (refs B and C). The facility is located 30 km north of Yerevan and consists of 27 man-made wells carved out of natural salt deposits, only 17 of which are currently operational. Salts accumulate in the pits in which the gas is stored and the pits periodically need to be rinsed clean to maintain their storage capacity. Current storage capacity is 110 MCM. At Armenia's current average winter daily consumption rate of 7 MCM, the reserve could provide approximately 15 days of gas at current consumption rates. In a real emergency, Armenia could try to remove all the gas from the pits (an additional 10-15 MCM) but in that case, the reserve pits would likely collapse from lack of internal pressure. Armenia could also limit consumption, as it did last year, to extend the life of the reserve. The GOAM plans to upgrade its storage capacity to 250-300 MCM. Gaz de France is currently conducting a feasibility study for the upgrade, estimated to cost USD 27 million. -------------- ANPP DECOMMISSIONING YEREVAN 00001694 003.2 OF 003 -------------- ¶11. (SBU) The Armenia Nuclear Power Plant (ANPP) has a working Soviet-made reactor that supplies 30-40 percent of Armenia's electricity (current capacity at the ANPP is approximately 400 MW). The reactor was closed for safety concerns following a devastating 1988 earthquake, but was restarted in 1995 in response to the Armenian energy crisis. In 2003, after difficulties procuring nuclear fuel due to past arrears, the GOAM granted Russian energy giant RAO-UES financial control of the plant for five-years, implying the plant would operate at least until 2008. ANPP lacks a containment dome and does not meet modern safety standards--though much work has been in recent years on incremental safety upgrades. The USG and other international donors have encouraged the GOAM to shut down ANPP as soon as possible and the GOAM has committed to decommissioning by 2016. The GOAM has stated repeatedly, however, that it is critical that an alternate source of energy be developed before the reactor can be closed. The USG has provided more than USD 35 million in assistance to upgrade the plant and plant procedures to ensure the safest possible operation until closure. ¶12. (SBU) The GOAM has determined that the least-cost replacement option for the ANPP would be construction of a new nuclear power plant (refs E and G). The project will cost at least USD 1 billion, and the GOAM is hoping to attract private investors to fund construction. While the capacity of any new plant has yet to be determined, the GOAM has proposed building a 1,000 MW plant which would allow it to become a significant electricity exporter for the region. -------------- LIMITED WIND AND SOLAR POWER -------------- ¶13. (SBU) In December 2005, the GOAM inaugurated its first wind power plant. The plant, paid for by the Iranian government, has a 2.6 MW capacity. The GOAM also recently announced that an Italian company has agreed to build a second wind power complex in Armenia with an estimated capacity of 90 MW. The project, estimated cost is USD 130-140 million, and construction is likely to start in Spring ¶2007. There have also been some modest efforts to use solar power in Armenia, but so far, they have had limited success. International investors, such as the American-backed Cascade Capital Company are working to expand solar and wind power production, but production is likely to remain relatively small-scale for the foreseeable future. -------------- RUSSIAN DOMINANCE IN ARMENIA'S ENERGY SECTOR -------------- ¶14. (SBU) Armenian Energy Minister Armen Movsisyan recently told reporters that Russia controls 80 percent of Armenia's energy assets. In June 2005 a subsidiary of RAO-UES purchased Armenia's single distribution company, Electricity Networks of Armenia (ENA) through an obscure deal, widely criticized by the international donor community (ref A). The GOAM transferred the four operational units at the Hrazdan Thermal Power Plant to Russia as part of a debt-for-equity swap in 2002 and sold the last, unfinished, fifth unit to Gazprom in April 2006. (refs D and F). The Sevan-Hrazdan Hydro Cascade was given to Russia in exchange for relief from accrued ANPP fuel debts. In addition to supplying fuel for ANPP, RAO-UES also has financial and managerial control of the plant (ref E). Gazprom recently acquired a 57 percent stake in ArmRosGasprom and appears likely to have control of the Iran-Armenia gas pipeline as well (ref F). GODFREY