US embassy cable - 04YEREVAN382

UNCLAS SECTION 01 OF 02 YEREVAN 000382 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EUR/CACEN AND NP/SC 
DOE FOR CHARLES WASHINGTON 
USAID FOR EE/W 
NRC FOR RAMSEY 
PLEASE PASS NNSA FOR DENNIS MEYERS PLEASE PASS USAID FOR 
ROBERT ICHORD 
 
E.O. 12958: N/A 
TAGS: ECON, ENRG, AM 
SUBJECT: ARMENIA WON'T COMMIT TO SHUTDOWN DATE FOR NUCLEAR 
POWER PLANT: EU PULLS MONEY OFF THE TABLE 
 
 
1. (U) SENSITIVE BUT UNCLASSIFIED. PROTECT ACCORDINGLY.  NOT 
FOR INTERNET DISTRIBUTION. 
 
-------- 
SUMMARY 
-------- 
 
2. (SBU) During the February 10 EU-Armenia working group on 
Armenia Nuclear Power Plant (ANPP), Armenia would not commit 
to a new closure date for the ANPP and the EU side refused 
to convene a donor's conference and withdrew its long- 
standing offer of 100 million euro grant towards replacement 
capacity.  Armen Movsisyan, the Minister of Energy, said 
that he would only consider a strategy for closing the plant 
that guaranteed some diversity of electricity supply for 
Armenia and did not result in a significant rise in 
electricity tariffs.  END SUMMARY. 
 
--------------------------------------------- -------------- 
ARMENIA IS WILLING TO OPERATE ANPP UNTIL 2015, MAYBE LONGER 
--------------------------------------------- -------------- 
 
3. (SBU) The European Commission's side, led by Hugues 
Mingarelli, Director of the Directorate for External 
Relations with Eastern Europe, sought to get a commitment on 
a new closure date for the ANPP and a plan for assistance in 
order to build replacement capacity for the plant.  The 
Armenian side, which comprised Armen Movsisyan, the Minister 
of Energy, Karen Chshmarityan, the Minister of Trade and 
Economic Development, and Ruben Shugaryan, Deputy Foreign 
Minister, had bigger ideas.  First, the Armenian side did 
not concede that the ANPP was inherently unsafe.  ANPP's 
head, Gagik Markosyan, gave a very detailed presentation on 
recent safety upgrades.  (Note:  US DOE programs in 
combination with those of the EU are responsible for nearly 
all the upgrades mentioned.  End Note.)  They said that the 
plant could be safely operated until 2015, and could be 
operated for longer with an extension upgrade common for 
similar plants. 
 
--------------------------- 
HAPPINESS IS MANY PIPELINES 
--------------------------- 
 
4. (SBU) While Minister Movsisyan was careful to avoid 
saying that this was their plan, all GOAM representatives 
expressed the view that any acceptable agreement to close 
the plant early must keep electricity prices stable and not 
reduce diversity in Armenia's energy sources.  The 
Armenian's were concerned by the findings of the EU 
consultant who said that Armenia has enough existing 
capacity to close the plant and not have shortages in the 
near term.  This was in part on the agreed grounds that this 
would then lead to 85 percent of their electricity supply 
depending on fuel for gas-fired generation plants supplied 
via the high-pressure pipeline through Georgia.  The parties 
agreed that the pipeline is in poor condition and needs 
investment of USD 140 million, most of which would be in 
Georgia.  While the GOAM did include among their strategic 
investments the proposal for a new combined cycle thermal 
plant proposed by the Japanese, they did not propose this to 
be considered for use of the EU funds to replace ANPP. 
Instead, they outlined a USD 800 million energy strategy 
that went far beyond the scope of just replacing ANPP's 
capacity. 
 
5. (U) Background.  Armenia produced 5,188 GWh of 
electricity last year, and consumption has remained 
generally constant since 1999 (normalized for last year's 
cold winter), although GNP has grown significantly. 
Forecasts do not, therefore, link GNP growth directly to 
growth in energy consumption.  Future electricity demand 
will increase, but probably modestly.  The current installed 
capacity of 3,157 MW, comprising nuclear (440 MW), hydro 
(961 MW) and gas-fired (1756 MW) generation units 
significantly exceeds the national peak demand, allowing 
Armenia to export energy.  In 2003, hydro accounted for 38 
percent of total generation, thermal plants for 27 percent 
and ANPP for 35 percent.  Were the ANPP to close tomorrow, 
installed capacity of the other generation plants could meet 
Armenia's electricity demand now and in the near future, but 
the energy would be much more expensive.  Closing the ANPP 
would raise variable costs by USD 30-45 million the first 
year and total costs by USD 80-90 million (or 80 percent) 
per year. 
----------- 
PIPE DREAMS 
----------- 
6. (SBU) In outlining Armenia's energy strategy, the 
Minister of Energy said Armenia's first energy priority was 
to build a pipeline with Iran, costing USD 120 million of 
Armenian investment.  (Note:  This issue, which we believe 
is not economically viable, will be addressed septel.  End 
Note.)  The strategy list also included a new 600 MW nuclear 
reactor and a USD 400 million project to develop wind energy 
resources among others, but the ministry did not propose any 
way to finance these alternative projects.  Comment:  While 
all these projects could plausibly meet Armenia's supply and 
diversity needs, none are financially feasible under current 
price regimes.  The Regulatory Commission announced a tariff 
of 7 cents/KWh for wind-generated electricity, more than 
twice the tariff from other sources.  Although the high 
tariff will encourage investment in small wind projects (40 
MW) currently on the table, the cost to consumers at this 
tariff would be prohibitive if wind-generated electricity 
accounted for a more substantial share of overall 
production.   While ultimately Armenia may find a way to 
finance one or more of these projects as a means to ensure 
diversity of energy supply, the government's plan also hints 
at a possible step backwards.  If it involves heavy 
government involvement in a new energy generation projects, 
it is at odds with the stated policy of moving to complete 
privatization and create a regulatory framework that allows 
private industry and the market to decide on the cheapest 
means of producing electricity.  End Comment. 
 
---------------------- 
EU MONEY OFF THE TABLE 
---------------------- 
 
7. (SBU) The EU noted that the Armenians clearly had now 
articulated energy security concerns that went well beyond 
their previous closure commitment and Mingarelli concluded 
that this meant that the EU would need to reflect on and 
review its previous commitment of support for replacement 
generation.  They would now place future plans for energy 
sector support (if any) in the context of overall 
development of the EU-Armenian relationship.  He indicated 
consideration of next steps would be placed in the broader 
context of the EU-Armenia Partnership and Cooperation 
Committee, which will next meet in June 2004.  Comment: 
Despite the withdrawal of the EU offer, the Armenians got 
what they wanted.  They now have no obligation to close the 
ANPP by any date certain.  They have reframed the issue of 
an early closure in terms of their overall energy 
diversification problem, raising the stakes to include a 
project that will maintain their current production 
diversity but would not be feasible with private investment 
alone.  In the scenario where large-scale international 
assistance is not forthcoming, they have bought themselves a 
decade to worry about diversity and security of energy 
supply in a post ANPP Armenia.  One key issue the GOAM is 
studiously avoiding is financing ANPP shutdown costs, a bill 
that will come due at a yet-to-be-determined but inevitable 
future date.  The EU's withdrawal has left an opportunity 
for the US to propose, alone or in concert with the EU, new 
solutions to Armenia's energy problem. 
ORDWAY