​Armenia 2022​: ​Energy Policy Review

Armenia’s energy system depends primarily on natural gas, nuclear and hydroelectricity. Natural gas is by far the largest contributor to total energy supply (TES), as well as the main energy carrier in total final consumption (TFC). Since the transport sector depends primarily on natural gas, the importance of oil in the economy is relatively low. Apart from several large hydroelectric plants, the contribution of renewables to the energy mix is modest, although current policies aim for a substantial increase, especially solar photovoltaic (PV). Domestic energy production comes mainly from Armenia’s one Soviet-era nuclear power plant (Armenian Nuclear Power Plant [ANPP]) and from hydroelectricity. Since Armenia does not produce fossil fuels, all of the natural gas and oil products used in the country have to be imported. 

The Armenian government approved the Energy Sector Development Strategic Programme (hereinafter “Energy Strategy”) in January 2021, setting the path for the sector’s transition through 2040. The publication and approval of this strategic document are welcomed and should form a useful basis for Armenia’s future energy legislation. The 2021 Strategy replaces the government’s previous energy policy document, which dates from 2015.

According to the 2021 Strategy, the government’s priorities in the energy sector through 2040 are:

• Maximum use of the country’s potential for renewable energy and energy efficiency;
• Extending the life of the ANPP beyond 2026, as well as construction of a new nuclear power plant to replace it;
• Construction of a “North-South Corridor” by increasing power transmission links between Armenia and Georgia and between Armenia and Iran; and
• Gradual liberalisation of the domestic electricity market.

Energy governance

The principal bodies involved in energy sector governance in Armenia include the Ministry of Territorial Administration and Infrastructure (MTAI), which is responsible for overall energy policy-making, the Ministry of Environment, the Public Service Regulatory Commission (PSRC) and the Committee on Nuclear Safety Regulation (ANRA). The Statistics Committee (ArmStat) is the main provider of energy-related data and statistics

In a recent government restructuring, the former Ministry of Energy Infrastructures and Natural Resources was integrated into the MTAI. The transfer and addition of the energy agenda to the already large portfolio of responsibilities of the MTAI risk placing existing resources under pressure and causing insufficient coordination among ministries and other governmental entities dealing with energy-related policies. This could negatively impact effective and timely implementation of several important programmes in the sector.

Regional market integration

Armenia has made considerable progress in enhancing regional market integration. The country has signed and ratified the Comprehensive and Enhanced Partnership Agreement (CEPA) with the EU that entered into force in March 2021 and includes a timetable for the approximation of Armenian laws and regulations to relevant EU laws over the next few years, and by 2029 at the latest. Armenia is also a member of the Eurasian Economic Union (EAEU), which aims to establish common EAEU gas and electricity markets by 2025. Implementing these ambitious objectives will require close cooperation and coordination between different institutions to achieve regulatory consistency and to eliminate potential contradictions and conflicts.

Liberalisation

Since the last IEA review in 2014/15, the government has taken decisive steps towards implementing a liberalised electricity market, with a launch in February 2022 (as this report was going to press) featuring a new wholesale market model, direct contracts, a balancing mechanism and long-term direct capacity contracts. Free and open trade, as well as cooperation among all energy market participants, as envisioned by these reforms, would help promote investments from the international community and strengthen regional integration.

Energy supply security

Armenia has a diverse generation mix that includes thermal, hydropower and nuclear. However, all of its thermal generation relies on gas, around 85% of which is imported from Russia. Furthermore, Armenia imports all of its nuclear fuel from Russia. Armenia therefore effectively relies on fuel imports from one country to produce nearly 70% of its electricity, raising concerns about the diversity of supply.

Energy data management and use

Armenia has adopted the international energy statistics methodology and standards and has released energy balances in the internationally comparable format since 2015. The cooperation of the national stakeholders to achieve this is to be commended. Unfortunately, however, compilation of the energy balance and GHG inventory does not receive funding from the state budget. Complementing and gradually replacing external funding with contributions from the state budget would ensure sustainability for these activities and help retain relevant trained human capacity.

Modelling

Modelling based on good-quality data is a key component of effective policy-making. Policies and measures contained within the Energy Strategy were based on modelling performed by a local research institute. However, staff turnover in this and other key research bodies is high, risking frequent institutional memory loss and lack of staff for establishing regular monitoring systems to follow up on policy developments. Moreover, modelling capabilities in the country rely heavily on financial and (in some cases) personnel support from international donors. These might tailor modelling assumptions and parameters to their own needs, making comparison among models difficult. Furthermore, economy-wide modelling has not been carried out, as significant energy users, such as industry and transport, have been omitted.

An improved approach could include enhancing the government’s own modelling capabilities and institutional learning capacity. The development of comprehensive energy system models demands sufficient and targeted allocations from the state budget, regardless of whether modelling is outsourced or capacities are developed within the ministry.

Exploration of modelling scenarios extending to 2050 and beyond will also be important for mapping pathways to reach Armenia’s climate goals under the Paris Agreement. Since the energy sector is the largest source of GHG emissions in Armenia, a resolute and consistent implementation of its National Programme on Energy Saving and Renewable Energy will prove essential for reaching its recently updated Nationally Determined Contributions (NDCs).

Armenia is moving from a regulated, single-buyer model to a competitive power market, with a launch date set for February 2022. The careful preparation of this work over many years is to be commended. As part of the first stage of market reforms, the government plans to improve protection mechanisms for vulnerable customers. This and other improvements to consumer protection, such as a complaints mechanism with legal recourse, will help enable consumers to participate fully in the new market structure. The government also plans to improve the efficiency of tariffs, which are set by the independent regulator.

Armenia is making progress in further diversifying its power generation mix, particularly by aiming to build significant solar PV capacity. Armenia’s 2021 Energy Strategy calls for up to 1 000 MW of solar PV capacity by 2030, at which point grid-connected solar is expected to account for 15% of generation. However, this will be a significant amount of intermittent capacity relative to the country’s current total capacity and demand, and integrating it will require the System Operator to be in a position to respond immediately to sudden surges and shortfalls in supply. A number of upgrades to the grid and related information and control systems have been made in recent years that will help address these challenges. However, additional investments may be necessary, including to help develop the necessary workforce skills to manage intermittent renewables and demand-side response.

Armenia is aiming to expand interconnections with Georgia and Iran. This highlights the need to develop new market rules to enable increased cross-border trading. Armenia is working on such arrangements within the context of its CEPA agreement with the EU, as well as within the EAEU Common Electricity Market, currently under development. Developing these two processes in parallel is likely to require careful coordination.

Since the late 1990s, the EU and several other international partners have strongly encouraged the closure of Armenia’s WWER-400 nuclear reactor, a type that the EU views as particularly dangerous, further noting that the plant is located only 30 km from Yerevan, the capital city of 1 million people. The review team commends Armenia’s efforts to continuously improve nuclear safety measures to meet International Atomic Energy Agency (IAEA) safety goals for existing NPPs and its long-term cooperation in this regard with the IAEA, EU, Russia and other international partners.

Armenia’s natural gas sector remains a vertically integrated monopoly, operated and owned by Gazprom Armenia, a fully owned subsidiary of Russia’s Gazprom. There is currently no competition nor third-party access in the sector. However, according to the 2021 Energy Strategy, the Armenian government intends to review all gas-sector legislation by 2024, and as part of this will begin to develop a new Gas Law in 2022.

Armenia, along with other members of the EAEU, is planning to launch a common EAEU gas market in 2025. An agreement signed by EAEU members in 2019 commits Armenia to introducing third-party access, among other reforms aimed at facilitating cross-border gas trade; a final agreement on this is expected to be signed in 2022.

Around 85% of Armenia’s gas supply is procured from Russia via pipelines passing through Georgia. The remainder is imported from Iran, though Iranian gas is currently used only for the production of electricity at one power plant in a gas-for-electricity swap. Gas for domestic consumption is therefore fully sourced from Russia.

Potential security risks related to heavy reliance on a single source should also be seen in the light of Armenia’s large dependence on natural gas, which accounts for the largest share of the country’s total primary energy supply. Both the residential and road transport sectors rely on natural gas as their main fuel, though Armenia’s Energy Strategy aims to increase the use of electric vehicles in the latter.

Current efforts to substantially increase the size of the Abovyan gas storage facility will help increase supply security, for example in the case of a disruption of supplies via Georgia. Nevertheless, this facility, like all other gas infrastructure in the country, remains under the control of Armenia’s main gas supplier.

Residential heating is now dominated by small, individual gas boilers. Since such boilers do not require a license, there are no centralised records about their installation or efficiency. Given the large share of gas consumption currently represented by domestic heating and the lack of information about equipment employed, including possibilities for improving its efficiency, the government may wish to undertake a strategic review of this important consuming sector.

Armenia has no known oil reserves, no oil production and no refineries. As a result, it imports all of its oil products, both motor fuels and lubricants. The import and sale of oil products are privatised, and prices are unregulated.

Oil accounted for only 16% of Armenia’s TES in 2020, one of the lowest shares in the world. The share of oil in TFC has been on a declining trend since the early 2000s. No oil is used in power production, while natural gas is the fuel of choice for road transport, mainly since it is significantly cheaper than gasoline and diesel. Most of the country’s vehicle fleet can run on either gasoline or natural gas, thereby enhancing the country’s energy security by providing flexibility in fuel use.

Although Armenia imports oil products from more than 40 countries, over half comes from just one country, Russia. Armenia currently has no known emergency stocks of crude or oil products, though importers and sellers reportedly maintain some commercial stocks. Given the small share of oil in the country’s total energy consumption, however, the lack of strategic oil stocks arguably is not as great a risk for energy security as it would be for other countries. Due to Armenia’s high dependence on natural gas, it is probably more important to prioritise storage of natural gas, as Armenia appears to be doing with current efforts to expand the Abovyan gas storage facility. 

The contribution of renewable energy sources (RES) to energy consumption in Armenia averaged about 11% during 2015-2020 (measured by the sustainable development goal indicator 7.2). This mostly consists of hydroelectricity.

Most of Armenia’s hydropower generation comes from two sets of large plants. However, the construction of small hydropower plants (SHPPs) has been significant over the past two decades, responding to attractive feed-in tariffs and other support. However, growth in SHPP construction has slowed in recent years, due to stricter siting rules established in response to growing concerns over ecological impacts.

Solar photovoltaic capacity is currently low but is expected to become the major source of new RES growth, due to support mechanisms but also to falling costs worldwide for solar PV equipment.

Although several prospective sites for wind farms have been identified, most are in remote, high-altitude locations, reducing their cost-competitiveness vis-à-vis other RES, particularly solar.

The 2021 Energy Strategy considers maximum use of the country’s renewable energy potential to be a key policy priority. The Armenian government expects solar PV capacity to reach 100 MW by 2024 and 1 000 MW by 2030, and at that point to account for at least 15% of total generation. Some increase in wind is also expected.

Experience elsewhere has shown that large increases in intermittent RES need to be accompanied by measures to ensure their technical and economic integration so that the system and market are able to efficiently respond to rapid increases and decreases in production. Such measures could include taking full advantage of smart metering to institute differentiated tariff levels that recognise the locational, temporal and technological value of decentralised renewable power installations, as well as reinforcements to networks and training of network personnel.

One of the main reasons the government is promoting renewable energy in its 2021 Energy Strategy is energy security. Renewables have the potential to reduce Armenia’s dependence on natural gas, all of which is imported, as well as dependence on the country’s Soviet-era nuclear power plant.

There are several potential medium-sized hydropower sites in the country that have been studied for several decades. Such plants might not only help reduce dependence on imported gas and nuclear energy, but also help integrate the expected large increase in variable renewables in the system.

Experience in other countries has shown that pumped storage can also be a useful mechanism for quickly responding to changes in the supply-demand balance that can occur as the system share of renewables increases. According to several past studies, there may be significant potential for developing additional pumped-storage capacity in the country.

The government of Armenia has repeatedly affirmed the importance of energy efficiency for its economic development. The first comprehensive legislation on energy efficiency was adopted in 2004 as part of a law on Energy Saving and Renewable Energy, followed in 2007 by a National Programme on Energy Savings and Renewable Energy. A National Energy Efficiency Action Plan (NEEAP) was adopted in 2010 and updated in 2017. Mandatory energy efficiency requirements for newly constructed residential multi-apartment buildings, mandatory energy audits for buildings constructed with state funds, and the definition of labelling requirements for energy-saving devices and equipment feature among the rules adopted as part of these plans and policies.

The government of Armenia is developing a new National Programme on Renewable Energy and Energy Efficiency, scheduled for adoption at the end of 2021. This will be based in part on an assessment of the level of implementation of the 2007 National Programme on Energy Efficiency and Renewable Energy.

Armenia has also started to implement the energy efficiency provisions of the EU-Armenia CEPA. This includes requirements to approximate key EU laws on energy efficiency, such as the Energy Efficiency Directive (EED) and the Energy Performance of Buildings Directive (EPBD). In parallel, Armenia is due to implement a range of separate standards for energy-using technologies as part of its membership of the EAEU.

Armenia faces constraints in terms of energy efficiency governance. The merging of the former Ministry of Energy into the new MTAI has resulted in a significant reduction in both administrative staff and capacity to support energy efficiency policies and measures. In addition, the Ministry of Urban Development, which is responsible for key energy efficiency measures, has been downgraded to a State Committee with reduced capacity and staff levels. Armenia also does not have a dedicated energy agency to coordinate energy efficiency policy development and implementation across relevant ministries and departments. Compounding capacity challenges are energy end-use data quality and availability issues that impact policy formulation, implementation and monitoring. There is also limited technical capacity to implement key legislative provisions.

Governance and capacity constraints are also expected to create challenges with respect to the simultaneous implementation of the CEPA and alignment with EAEU standards. While these standards are complementary, they constitute two separate reporting regimes and require dedicated resources for their effective administration. Nonetheless, Armenia has made progress in terms of aligning with EU legislation and norms, having already adopted more than 50% of the provisions of the EPBD, for example, at least in terms of approximating headline provisions of this directive into national law. Progress has also been made in the realm of appliances and equipment, with the adoption of the A-to-G labelling scheme in line with the EU Ecodesign Directive and Energy Labelling Directive for a range of energy-using devices such as refrigerators and washing machines. Based on training sessions and surveys conducted by the United Nations Development Programme (UNDP), Armenia is also making steady progress in phasing out inefficient technologies, notably with respect to lighting.

Despite progress on the efficiency of individual building technologies, significant potential remains in the buildings sector. As Armenia’s largest energy-consuming sector, buildings account for around 40% of electricity demand and over 25% of gas demand. Significant efficiency potential exists, particularly in home heating.

No energy efficiency policies currently exist in the industrial sector, such as minimum energy performance requirements for industrial motors or tax breaks to incentivise the adoption of energy management systems.

Except for tax breaks for electric vehicles, Armenia has not adopted any energy efficiency provisions in the transport sector, such as fuel economy standards for passenger vehicles. However, as part of the CEPA provisions, Armenia is expected to approximate EU standards for transport efficiency between 2026 and 2030.

Armenia demonstrated its commitment to fulfil its obligations to the Paris Climate Agreement by ratifying the treaty in February 2017. It also ratified the Doha Amendment to the Kyoto Protocol, thereby establishing the Protocol’s second commitment period. The acknowledgement of climate action as an important policy issue is also reflected in the creation of a Climate Change Policy Department within the Ministry of Environment, albeit with limited resources at the time of this review.

In April 2021, the Armenian government approved an updated NDC for 2021-2030, setting an economy-wide target for a 40% reduction of GHG emissions by 2030 (compared to the base year 1990). With this absolute emissions reduction target the government departed from the previous disputed concept of a per-capita carbon budget and aligned its NDC implementation period with that of most other countries, enhancing comparability and reporting transparency.

As a non-Annex I Party to the UN Framework Convention on Climate change (UNFCCC), Armenia submitted its Fourth National Communication (NC4) in 2020 and its Third Biennial Update Report (BUR3) in 2021. These provide improved transparency in Armenia’s national inventory of anthropogenic GHG emissions by sources, consistent with Intergovernmental Panel on Climate Change (IPCC) reporting guidelines. They also include assessments of the climate change mitigation potential in the energy sector based on official statistical data, highlighting the role of renewable energy and energy efficiency measures.

The latest data in the BUR3 show that the energy sector is by far the largest source of GHG emissions, with a total share of 67%. This includes fuel combustion in energy generation and transport. It further includes fugitive methane emissions from the natural gas system, which form 23% of energy sector emissions. Despite monitoring and response mechanisms in place, technical losses in the transmission and distribution systems, respectively, are reportedly 3.5% and 1.2%, resulting in a high share of methane emissions in the overall energy-related GHG emissions.

Assessments in the NC4 and BUR3 show that expansion of renewable energy resources and demand-side measures would have a significant impact on energy-related GHG mitigation.

Although emissions from the industrial sector currently trail those from the residential and transport sectors, industry’s share is projected to grow significantly over the coming decades. With the European Commission’s proposal to introduce a carbon border adjustment mechanism, the government of Armenia is assessing the implications for the country’s exporting industries and exploring policy options for a carbon-pricing or emissions trading system. Aside from facilitating future trade with the EU, the introduction of such a mechanism could prove a significant incentive for increased energy efficiency in energy-intensive industries.

The prevalence of ageing hydropower plants and the development of new SHPPs reportedly are affecting natural river flows and putting a strain on biodiversity. These problems may be amplified in the medium term, since climate change has started already to affect Armenia with a significant decrease in precipitation. The government acknowledges these issues and plans to address them in the revamp of the national water resources management strategy.

Armenian researchers in the energy sector, as in other sectors, face challenges that include low levels of state funding, lack of structures for cooperation among research institutes, universities and industry, and requirements for university professors to teach a large number of hours in order to receive a full salary. Despite the challenges, Armenia ranked 61st out of 131 countries in the 2020 Global Innovation Index.

The EU’s Horizon Europe Policy Support programme undertook a review of Armenia’s research sector in 2019. The main findings included a need to increase overall funding while prioritising the large number of subject areas covered, based on relevance for the country’s social and economic development, among other criteria. While various government policy documents suggest that energy is a priority area for the country’s development, this has yet to be fully translated into support for research in this area.

Given the lack of state funding, the main institutions involved in energy-related research and development in Armenia are primarily self-financed, with most funding coming from project-based contracts with international organisations. Such funding is helpful for supporting and building local expertise, including attracting young researchers to the field. However, donor support, if significantly greater than the government’s own funding contribution, risks research that focuses on donor priorities, and which may not be sustainable. Ideally, donor support should supplement a reliable baseload of government funding for research.