major sectors of the economy : jewelry and diamond processing : manufacturing : information technology : natural resources : chemicals and pharmaceuticals : agriculture : food processing : tourism : construction and construction materials : energy : transport : telecommunications : water

Energy

Urgently needed reform of the energy sector is now under way. Not least due to low collection levels of payments for energy, the sector has required increasing levels of government support, and is suffering from severe underinvestment. Restructuring to upgrade the system, promote commercialization and increase competition is an imperative. The priorities are to address system malfunctions and invest in maintenance of circuits and equipment as well as technology replacement.
In September 1998 the government approved a revised reform program for the energy sector, which includes efficiency improvement measures, debt workouts and tariff increases. After a rate increase in January 1999, tariffs now cover operating costs. Despite very good collection rates, high commercial and technical losses on otherwise billable consumption have affected planned investment and maintenance and the ability to import fuel. The energy sector recorded an estimated net loss of US$ 62 million in 1999, equivalent to 3 per cent of GDP. In the next stage of reforms the government plans to privatize distribution companies in 2000, with majority stakes offered to strategic investors, and to develop a regulatory and licensing framework for a wholesale electricity market. The privatization of generation companies is scheduled for 2001.

Energy Generation

The closure of the Medzamor nuclear power plant is scheduled for 2004. Unit 2 of the Medzamor plant was put back into operation in late 1995 in the face of an acute energy crisis. However, serious concerns about the location of Medzamor on an earthquake fault make closure imperative. The EU has conducted negotiations with Armenia on possible financial assistance for the closure, but has yet to reach an agreement. According to the Energy Ministry, the capital investment needed to create substitutes for the energy generated by Medzamor may total about US$ 1.45 billion over 15 years including decommissioning.
The only indigenous source of energy is hydro-power, which accounts for about one third of the country's electricity generation. Nuclear power accounts for under 30 per cent, and thermal power for over 40 per cent. There is a chain of hydroelectric plants on the Hrazdan River, with plans to develop more. There are three operational thermal power plants (Yerevan, 550 megawatts - MW; Hrazdan oil and gas plant, 1, 110 MW; and Vanadzor, 96 MW). All three are in need of upgrading. The Yerevan plant is now being equipped with new cost-effective steam generators supplied by ABB (Sweden/Switzerland). In January 2000 Japan's Mitsubishi announced that it is considering financing the construction of a new thermal power plant, and possibly some new hydro-power plants as well.
In November 1999 the EBRD announced a tender to prepare a pre-privatization package for the Hrazdan power station (Units 1-5). According to preliminary data, the plant's value is estimated at US$ 100 million. Hrazdan, which has already benefited from EBRD financing for conservation measures in its Unit 5, is seen as an alternative source of energy enabling the early closure of the Medzamor nuclear plant. The privatization of other generation companies is scheduled for 2001.
Surplus electricity is exported to Georgia. Iran and Armenia have linked their electricity grids, allowing power sales in both directions, depending on seasonal demand.

Energy Distribution

Armenia's electricity distribution companies are slated for restructuring and privatization, with majority stakes to be offered to strategic investors. The EBRD, the World Bank and USAID are assisting with the process. The EBRD plans to provide equity capital upon privatization alongside a reputable strategic investor, and the World Bank is financing the privatization advisors to the government. Not only will privatization of the distribution companies significantly increase FDI in Armenia, but it will also make the energy sector much more attractive to foreign investors.
Four electricity distribution companies are included in the privatization list of 2000. Tenders for privatization of these companies has begun in June 1999. 15 international companies had applied for the tender. Only four companies have successfully passed the pre-qualification stage: ABB Energy Ventures Ltd., AES Silk Road(USA), Electricite De France, and Union Fenoza ACEX (Spain). Foreign investors will own 51 per cent of the whole package of each company. Up to 20 per cent will be directly sold to international financial corporations. Tariffs for electricity set after privatization will depend on sale terms. The privatization will help the country to address collection and theft issues, as well as to address investment needs in the energy sector. It is hoped that it will also help to introduce real cost based commercial prices and effect market competition. Further, it could provide reliable energy purchase agreements to the generation plants, thus reinforcing the possibility of attracting quality foreign investors for the privatization of energy generation.

Oil and Gas Supplies

Armenia is dependent on imports of refined oil products as it has no reserves or refineries of its own. For lack of pipelines, these are imported by road or rail, mostly from Georgia's Batumi refinery. Greek and US firms undertook some modest oil exploration in Armenia in the mid-1990s, but in April 1999 exploration activity ceased for lack of funds. Texaco (US) has recently opened an office in Yerevan and plans to distribute fuel and machine oils. It has also expressed interest in oil and gas prospecting.
Natural gas is imported from Turkmenistan through Russian and Georgian pipeline networks, occasionally disrupted by local unrest, accidents and non-payment of debts. The government is now planning to privatize the national gas grid and distribution company, Haygazard. Armenia is also exploring the option of using other gas suppliers, such as Iran. This would involve a US$ 120-150 million pipeline to link the Armenian and Iranian gas grids. Armenia has been seeking funding from the World Bank and the EBRD. Financing has not yet been secured and the project will be further delayed until an agreement is reached on Iranian gas prices. However, an international consortium is being founded to construct the pipeline, including Russia's Gazprom, the Armenian Energy Ministry, Gaz de France and the Iran National Gas Company, while Greek participation is also being considered. Of the 140-kilometer pipeline, 40 kilometers would be within Armenia, which would initially receive I billion cubic meters of gas per year from Iran, to rise later to 2.5 billion. Discussions have also been held with Ukraine on the possible extension of the pipeline through Ukraine and further into Western Europe.