Armenia’s energy sector: recent developments & outlook
Armenia’s energy sector has traditionally been characterised by a high import dependence, especially for natural gas and nuclear fuel from Russia. Thanks to a long-term contract with Gazprom, the country has not experienced significant impacts of global energy carrier volatility and high prices.
Nevertheless, the Armenian government is charting an ambitious course for the large-scale adoption of renewable energies and improvements in energy efficiency in order to decrease import dependence, cut costs, reduce emissions and improve electricity export potential. Priority is placed on solar energy, which has already seen a significant deployment. For energy saving and efficiency the government targets the residential, public schools and transport sector.
Overall, significant efforts are required to refurbish existing power plants, add new energy sources and expand the transmission capacity.
Sector overview
Armenia’s energy sector is powered mostly by natural gas, the country’s aging nuclear power plant and hydroelectricity, with natural gas acting as the primary energy carrier in total final consumption. Given the lack of domestic hydrocarbon production, and absence of refineries, Armenia’s energy mix is highly dependent on imports of natural gas and oil products.
A gas-for-electricity barter agreement of 3 kWh for 1 m³ of gas exists with Iran. Armenia imports Iranian gas and exports Armenian electricity back to Iran in return. However, all gas used for domestic consumption is imported from Russia via Gazprom Armenia, a vertically integrated monopoly, which holds the exclusive rights to import, transport and distribute gas to consumers, and owns all of the infrastructure.
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The imported gas from Russia is regulated by a long-term contract currently set at USD 165/tcm, a significant discount from potential market rates, but which can be renegotiated at Gazprom’s behest.
Armenia’s government envisages an increase in electricity exports, with hopes of boosting trade with Georgia and Iran, while possible connections also exist with Turkey, and plans indicate a desire to export electricity to the Eurasian Economic Union’s common electricity market after 2025.
Recent developments
The fallout of the war in Ukraine, as well as the general global economic downturn, both negatively affect the Armenian economy.
Nonetheless, the impact of volatility and high energy commodity prices has had limited effects on Armenia’s economy. The Public Services Regulatory Commission raised retail natural gas prices by 4% in early March, but the move was announced prior to the war. Crucially, Gazprom’s wholesale import gas tariff has remained unchanged. While some increases were registered in the costs of fuel products, the predominantly natural gas-power vehicle fleet has seen limited price impacts.
The aging nuclear power plant has also been a focal point of discussions. While the Armenian government signed a memorandum of understanding on nuclear power with the United States in May, by late June talks were held with Rosatom on the upkeep and increasing the lifetime of unit 2, and on the construction of a new nuclear power plant.
Outlook
Partially in response to the Russian war in Ukraine and with a strong focus on energy security, the government of Armenia published the Program on Energy Saving and Renewable Energy for 2022-2030 in late March, which outlines the government’s ambitions for reducing imports of fossil fuels and improving sector competitiveness.
Government estimates posit an increase of 51% in the final energy supply and a 49% increase in final energy consumption in 2030, vis-à-vis 2019. Priority is placed on solar energy, which has already seen significant deployment, with a target of 1,000 MW by 2030, contributing to 15% of all electricity production. In the last three years, the government has successfully tendered two projects for the construction and operation of solar PV plants: Masrik-1 (55 MW at 4.19 US cents per kWh) and Ayg-1 (200 MW at 2.9 US cents per kWh), the latter’s cost being comparable to the nuclear power plant. The government plans to tender out at least five more projects of 120 MW of PV solar, which has already attracted attention.
In addition, the government foresees the build-up of 300 MW of energy storage systems to ensure the reliability and balancing of the power system. Wind power development is also envisaged, but further studies are currently being conducted on wind potential, with the sector not yet being cost-competitive.
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On energy saving and efficiency, the government is primarily targeting the residential, transport and public schools sector which account for the majority of final energy consumption, with the view of promoting direct electrification, where possible, primarily stemming from low carbon electricity.
Plans also exist to harmonise tariff policies for natural gas and electricity, in line with the ongoing market liberalisation, and the issuance of green bonds to be used for energy efficiency and energy saving measures. Forecasts provided by the government estimate annual savings of 1.6% of GDP by 2030 on fossil fuel import costs alone.
Conclusion
Armenia’s energy sector is at a crossroads. While the government has ambitious plans to increase renewable capacity and increase energy efficiency, significant expenditure and effort will be required to refurbish existing power plants and the electricity grid, to add new energy sources and to expand domestic and cross-border transmission capacity.
Nonetheless, further analysis and techno-economic modelling is required to assess possible scenarios involving gas price shocks, cost optimal configurations and export potential, all of which have significant impacts on Armenia’s energy sector and upcoming plans.
