Back

Energy Security of Armenia and Perspectives of Development for Regional Cooperation

World Energy Complex: Role Distribution

During the last 10-15 years a specific hierarchy has been developed in world energy complex, which has indirectly influenced the terms of ensuring the energy security in the region, since apart from other circumstances the so called “Third world” countries have appeared on top of the oil supplying pyramid, which do not share the geo-political claims of the industrially advanced countries. These are both Iraq and Iran, and other countries. Us Energy Minister Spencer Abraham, too, has confirmed dependence of many developed countries from oil monopolies, when he addressed the leaders of the Oil exporting countries (OPEC) with a request to increase oil supplies to the international market to prevent a new inflation of oil prices. The status of the Caspian Sea still remains unresolved. Talks on the issue of Baku-Tbilisi-Jeyhan pipeline are still in progress. Cooperation in the frames of Black Sea economic collaboration gains momentum. All this is an indication of intensive efforts to find ways of providing regional energy security.

Armenia deprived oil or gas resources, is still pretending for a status of a self-sufficient energy country, first of all at the expense of the Nuclear Power Plant, producing 35% percent of the country’s energy, and large medium and small hydro-electric power plants, producing another 22% of the energy, as well as alternative sources of energy. This allows the country to cooperate with the neighboring countries on an equal basis. A special role in this is reserved to the highly qualified specialists of Armenia, who could have a significant contribution in the establishment and development, as well as provision of stable security for the energy system in regional countries.

Energy system of the country: Reality and perspectives of development

Armenia produces about 5,800.00 G/Wt hours of energy annually, which is about $155 million dollars worth, or 8% of the GDP. The energy system of the country provides for more than 30,000 jobs or about 14% of the total number of employed in industry. Some progress in reforming the energy system has been marked since the year of 1995. Since 1996 round-the-clock energy supply has been resumed in the country, gradually the financial discipline is also being restored. Payment are increasing, operational planning of the industry is being perfected. The ratio of the quasi-fiscal deficit has decreased from a 5% in 1997-98 to 0,4% in 2000. An important momentum in the regulation of the industry was the adoption of the 1997 Law of the Republic of Armenia “On Energy” and creation of Energy Regulatory Commission (now reorganized into Regulatory Commission on Natural Monopolies).

Armenia won’t suffer energy crisis in the foreseeable future. The sources of energy could be considered steady and reliable, especially after transmitting management of the Armenian Hydroelectric plant to the Russian Federation, on condition of timely supply of fuel for the nuclear power plant. Meanwhile for refurbishment of the distribution network, as well as for technical equipment of the whole system additional investments are needed.

At present Armenia produces 4,6% more energy than needed for its own use. The surplus of energy is mainly exported to Georgia. At summer time there is some energy sold also to Iran, which is compensated by supply of energy from Iran to our country in winter.

The average annual surplus of energy produced in Armenia is assessed 1,000 M/Wt. This means that annually we may export 7,000.00M/Wt hours of energy, which makes approximately $190 million US dollars (the mean price for one K/Wt is worth 2,8 US cents). This forms about 80% of the country’s commodity export.

Energy exporting capacity

Energy exporting potential of Armenia is in many ways dependent of the imported power carriers. Natural gas and nuclear fuel are brought in from Russia. It turns out that the annual cost of the mentioned export potential is $100 million dollars a year. Speaking about the perspectives for the development of regional cooperation in the sphere of energy it must be stated, that in case of replacing the Russian gas for Azerbaijani, Armenia will be saving about $25 million dollars a year. The figures will grow parallel to the effectiveness in using natural gas for utility and industrial purposes.

As a whole, it is expected that growing energy export accompanied by decreasing production costs, could provide about $120 million US dollars, which would cut the trade deficit in one fourth and will significantly reduce the foreign arrears of the country.

To realize its export potential Armenia will have to make significant progressive steps not only in regional cooperation, in internal and foreign policy areas, but also in the economy of the country itself. It must be remembered that the borders with Turkey and Azerbaijan are still closed, and the utilization of Armenian energy in Georgia is restricted to a narrow market and low purchasing capacity. All this, in turn, has a negative effect on the energy security in the region as a whole.

Realistic ways for regional cooperation

The region is in need of a common energy system. It is obvious that the system of communications with the neighboring countries is underdeveloped and mainly serves the local needs. Meanwhile, there is enough potential to utilize the system in realizing common regional projects, including creation of a common energy system in the region. At present, in addition to solving its own problems Armenia plays and active role in the region providing energy to Mountainous Karabagh, Georgia and Iran, increasing in fact, the volume of export with each year. It must be stated, that trading in energy produced by imported fuel in foreign markets is not limited to the existing frames. Possibilities of providing energy to two other neighboring countries – Azerbaijan (in particular, Nakhichevan) and Turkey, are also being considered. Perspectives of importing relatively cheaper energy from Turkmen through Iran, on transit barter are also being studied: Transit exchange Iran-Armenia-Georgia, Armenia-Georgia-Turkey. To that end reinforcement of exchange communications Armenia-Iran is being planned, with parallel development of inter-systemic transit – Center to South. The next possible direction is the Southern part of Georgia.

Possible variations of such ties: 1. Two-phase OHL 220kV from the Gyumri-2 substation in the direction of the substation in Akhiltsikha;
2.communication from the Gyumri-2 through OHL 400kV to transit 500/400kV through Azerbaijan-Georgia-Turkey to the substation of Akhiltsikha. It must be born in mind that in case of a political solution of the problem- restoration of Armenia-Turkey carrier lines of 220kV, the issue of supplying energy to Turkey technically might be resolved in relatively short period.
Despite the fact that the development of technically and economically effective carrier lines and servicing communications seems to be extremely important, many specialists consider creation of trans-regional high voltage power bridges cutting through the South Caucasus and directly connecting to Russia and other countries of the NIS and the Central East, technically is an extremely complicated matter and is not thoroughly studied from the economic point of view. At the same time with a display of good will and joint efforts of the South Caucasian countries the issue is quite resolvable in conformity with the international norms and standards.

Investments – indispensable requisites for regional cooperation

All possible ways for the development of regional cooperation in the sphere of energy are also dependent on investments for the implementation of technically and economically reasonable projects. In turn, private and international financial organizations able to make the necessary input come up with their requirements and terms for negotiations and signing agreements. One of the most important requirements in the world financial circles is privatization of the energy systems in regional countries, at least privatization of the distribution networks. In Armenia the privatization of power networks has been realized not only violating the requirements of the World Bank, and the Government, but also with utter neglect for pure logic and the laws of economics as science.

The consequences of privatizing the power networks

Usually it is the enterprises and institutions, the state management of which is ineffective or which are economically unviable or might lead to bankruptcy that are privatized. In case of our distribution networks it should be stated that privatizing was not the only method to raise the efficiency of management, since internal resources were not yet fully exhausted and used. In favor of the argument to privatize often the illegal sources of electricity and the so called “left” wiring were mentioned, however, as the reality came to prove that privatization was not the panacea against it. On the other hand, no consideration was made for such a powerful factor as the possibility of grassroots monitoring and control, with the participation of community, NGO and local government representatives. To uncover economic embezzlements the experience of foreign countries might have been used, i.e. remuneration and anonymity guaranteed to sources of information.

There are various forms and methods of economic management, as well as rational utilization of existing resources in world economy practices. All this allows providing smooth and flexible transformation from one form of ownership (public) to another (to private). In particular, the form of management by trustees, when agreement is signed not about the allocation of profits, but professional management of an industry, seems to be more acceptable. Another form of management is concession allowing to manage both property and production, as well as profits for a specific period of time, by the end of which the whole refurbished system is handed back to the government or upon the parties’ consent the agreement is extended. Such deals might be cut not only in regards with specific enterprises, but also relating a whole field of the economy, and sometimes even specific parts of a country. Such was the case with China, for instance, when party of its territory – Hong Kong – was first handed over to foreign investors on concession and by the end of the term in 1997 was returned to China. The possibility of creating joint enterprises with a mixed type of property (Private and public) should not be left out either. All this confirms the assumption that to boost the management of power distribution networks a better weight of transitory variation should have been worked out which wouldn’t have endangered the economic security of the country.
Meanwhile, as a result of the haphazard privatization of the power distribution nets they became the property of an unknown offshore company “Midland Resources Ltd. During the process even the World Bank requirements were violated – the company did not have any experience in energy production and the financial report was inadequate. As a result a controversial situation emerged: the government has practically sold the distribution network to a middleman who will find a specialized company for the management of the network, gaining commission, which will naturally raise the electricity prices (this can happen any moment, as the Midland Resources Ltd. finds it fit).

To avoid the above said situation it was necessary to meet the requirements of international organizations through partial privatization, which would exclude creation of a monopoly in the field, and secure the public’s controlling and the government’s regulatory functions over the resource. In turn, the gradual privatization of the distribution networks in conjunction with the above-mentioned measures would provide control over a strategic resource feeding the whole economy of the country. It would have also provided favorable circumstances to establish healthy competition. On the other hand, the stage-by-stage approach allows correcting the errors made during the initial stages through corresponding legislative acts and government resolutions. Based on this, not more than one fourth of each of the distribution nets (of the all the four nets) could have been privatized during the initial stage, a transparent and fair competition should have been secured, informing the community and specialists at large, with the goal of involving them in the process of working out and amending the package of terms and conditions. It would have been appropriate to secure participation of more than one pretender at the competition and disallow privatization with only one legal person or fictitious candidates participation. To avoid negative consequences it seems, the practice in other CIS countries in privatization of electric nets (for instance, the devastating consequences of AES Silk Road’s activities, after the nets in Kazakhstan and Georgia were privatized) could have been considered. Finally, constant and strict control was needed over timely implementation of investments, restructuring and refurbishment of the field with new technology. And in case of delinquencies corresponding fines and sanctions should have been imposed, up to the termination of the agreement.

Armenia can and must be an Energy Secured Country

Nevertheless, with enough political will and professional approach even in the present complex situation it is quite possible to create a healthy competition, raise the efficiency in the field, decrease the tariffs and eliminate corruption in energy production and distribution. To this end the servicing personnel must be curtailed in half (compared with 1980 the number of personnel has increased 3,5 times, when production of energy has decreased 2,5 times). This would have a positive effect on the expenses. Also, expenses on power production of secondary importance should be excluded from the tariffs. As a result the demand for consumer utilities – TV sets, automobiles, cell phones – will increase. Also a rigid oversight should be imposed on the use of grant and credit monies intended for the development of energy production. It should be stated that at the expense of grants and credit resources provided to the republic the installation of the SKAD and Urartu systems will be made possible. These systems are worked out by highly qualified specialists of Armenia and would allow raising the efficiency of operations and drop energy costs. According to specialist evaluations the republic possesses all conditions for the production of new meters instead of importing them from abroad, which will cut the costs and create new jobs.

However, all enumerated above – is just part of the energy industry. For the development of the fuel-energy system as a whole, the most urgent problem is formulation and implementation of a new energy policy, based on computation and assessment of fuel and energy resources in the Marzes (regions) of the country. The issue of the day is still construction of the pipeline through Iran, maximum utilization of water resources for creation of small size WPS providing 10-20 M/Wt energy. Among real basics for the development of energy industry (thermal) are; extraction of energy from recycled industrial waste, gradual transition to alternative sources of energy (sun, wind geothermal energy), stimulation of economy regime of energy use in industries. All that will create preconditions not only for the formation of a broad and universal fuel and power energy system in the country itself, but also might contribute to the creation of a common regional energy system.

Thus, there is all reason to state that despite energy difficulties peculiar for many countries in transition, as well as problems of a subjective nature, related to the fiasco of privatizing the distribution nets, the energy industry based on the existing resources and highly qualified specialists, comprises one of the competitive privileges of Armenia. At the same time solution of the above-mentioned issues and implementation of the proposed measures will significantly raise the efficiency of the industry, and will create the necessary requisites for the power security not only for the republic, but also for the region as a whole. Having in mind specifics of the energy industry and its role in the formation and development of national economies, it might be surmised that further development of our country’s energy industry will contribute to the establishment of mutually profitable cooperation in the region.

Tatul Manasserian

http://www.caucasusjournalists.net