US embassy cable - 05YEREVAN1039

C O N F I D E N T I A L SECTION 01 OF 02 YEREVAN 001039 
 
SIPDIS 
 
DEPT FOR EUR/CACEN, EUR/ACE, EB/ESC, PASS TO USAID EGAT 
 
E.O. 12958: DECL: 06/15/2015 
TAGS: ENRG, ECON, EAID, AM, IR, RU 
SUBJECT: ARMENIA'S ENERGY FUTURE:  STAYING NUCLEAR? 
 
REF: 04 YEREVAN 382 
 
Classified By: Amb. John Evans for reasons 1.4 (b/d). 
 
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SUMMARY 
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1. (C) In preparation for a June 22, 2005 donor conference on 
the Armenia Nuclear Power Plant (ANPP) decommissioning and 
replacement alternatives, Ministry of Energy officials 
outlined for us Armenia's long-term energy strategy.  They 
made three main points: 
 
-- There is no economic alternative to the continued 
operation of the Armenia Nuclear Power Plant (ANPP) until 
2016; 
 
-- Gas-fueled thermal power and nuclear power are the only 
viable base-load generation options to replace existing 
capacity as it is retired; 
 
-- Armenia must maintain a balanced mix of generation, 
considering both the type of generation and the geographical 
source of fuel. 
 
Blessed with few energy resources and faced with aging 
infrastructure, Armenia will struggle to replace the capacity 
of its deteriorating Soviet infrastructure, maintain its 
energy security, and keep energy prices reasonable.  End 
Summary. 
 
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MINISTRY OF ENERGY:  ANPP TO OPERATE UNTIL 2016 
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2. (C) According to Deputy Minister of Energy, Areg Galstyan, 
the GOAM plans to operate the Armenian Nuclear Power Plant 
(ANPP) until at least 2016, although they have set no firm 
decommissioning date.  The economic consequences of closing 
the ANPP sooner, said Galstyan, would be severe.  The ANPP 
has one working Soviet-era reactor that is Armenia's main 
base-load electricity generator and supplies 30-40 percent of 
Armenia's energy.  Because its operating costs and tariff do 
not include the initial building costs which were paid by the 
Soviet government, or provide for decommissioning costs, it 
produces Armenia's cheapest electricity.  According to PA 
Consulting, a USG-funded contractor that assists the 
Ministry, the difference in electricity costs if Armenia 
moved its nuclear generation to gas-fired thermal energy 
would be more than USD 100 million per year, under Armenia's 
current (Russian-subsidized) natural gas prices.  PA 
Consulting estimates that decommissioning the plant and 
permanent fuel storage costs would cost an additional USD 800 
million, more than Armenia's entire annual government budget. 
 
3. (SBU) ANPP's VVER 230 (440 MW) reactor was closed for 
safety concerns following the devastating 1988 earthquake, 
but was restarted in 1995 amidst a severe energy shortage in 
Armenia.  The EU pressured the GOAM to shut it down for good 
(the closure date was originally 2004), but Armenian 
officials have since backed out of the deal and said that the 
plant will operate until the country has alternative and 
diverse energy generation capacity (reftel).  Since 1995, the 
European Union/TACIS and the USG, through the Department of 
Energy, have provided comprehensive technical upgrades and 
operational training to improve the near-term safety of the 
plant, including measures to mitigate damage in case of an 
earthquake.  ANPP's main safety fault is still the lack of a 
containment dome to reduce the spread of radiation in the 
case of a disaster. 
 
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MINISTRY: GAS AND NUCLEAR ARE ONLY OPTIONS 
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4. (C) Looking towards the inevitable, if postponed, closure 
of the ANPP, Galstyan told us that the Ministry considers 
thermal and nuclear power the only viable base-load 
generation options for Armenia.  Although Galstyan has 
actively pursued development of wind and hydro sources, he 
points out that these are not reliable year-round and their 
potential capacity cannot meet Armenia's consumption needs. 
The Ministry's primary strategy is to develop new thermal 
generation capacity.  Galstyan told us that, along with the 
ANPP, all existing thermal units will be more than 40 years 
old by 2015, and will be facing retirement.  The Ministry is 
currently considering two projects to build new thermal power 
plants, one 402 MW combined cycle plant funded by the Japan 
Bank for International Cooperation and another project to 
complete a fifth unit at the Hrazdan Thermal Power Plant. 
 
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NEW NUCLEAR? 
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5. (C) According to Galstyan, a new nuclear plant would be a 
much more ambitious strategy for the cash-strapped Armenian 
government, but was the only thing that could justify early 
closure of the ANPP.  He said the Ministry was looking into 
"the feasibility of doing a feasibility study" of building a 
new nuclear plant.  Given Armenia's committed investment in 
gas infrastructure (notably, the USD 170 million gas pipeline 
to Iran and the two new thermal plants), a nuclear plant 
would be economically feasible, said Galstyan, only if 
Armenia could export significantly more electicity than it 
currently sends to Iran and Georgia.  "Of course you could 
make a situation where it is feasible if you include Turkey," 
said Galstyan, shrugging.  (Note:  The 220 kV/300 MW line 
connecting Armenia and Turkey is currently disconnected.  End 
Note.)  Galstyan also claimed that, as a part of the 
feasibility investigation, Armenia would look at an extension 
package for the ANPP that allowed it to operate past 2016. 
He added that he thinks the extension package is too 
expensive to justify itself, but did not exclude the 
possibility. 
 
6. (SBU) PA Consulting, a U.S.-based energy consultant to the 
GOAM, said that we should not dismiss Armenia as a candidate 
for a nuclear plant.  According to PA, Armenia does not now 
nor would it likely in the future insist on control of the 
fueling process.  The GOAM says that it would welcome 
international control and oversight over its nuclear fuel. 
 
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ENERGY SECURITY A MUST 
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7. (C) Besides replacement capacity, the GOAM insists that 
any energy solution must guarantee Armenia's energy security 
by maintaining diversity of sources.  Were Armenia to shut 
down the ANPP with its existing energy infrastructure, 80 
percent of Armenia's electricity generation would rely for 
fuel on a single poorly-maintained gas pipeline from Russia 
running through Georgia, a situation the government 
(understandably) finds untenable.  The government has thus 
made the construction of the Iran-Armenia gas pipeline a 
priority to ease their vulnerability to regional disputes 
(such as Russia not wanting to supply gas through Georgia) or 
rapid changes in the price of gas. 
 
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COMMENT: PUSHING GOAM TO CLOSE ANPP WILL TAKE CASH 
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8. (C) Armenia's energy strategy has been consistent since 
the February 2004 EU-Armenia Working Group on ANPP when the 
Minister of Energy announced that the ANPP would not close as 
planned (reftel).  Focused on security and capacity 
replacement, the Ministry will not ignore the forthcoming 
rise in energy-related costs.  Unlike the inherited Soviet 
infrastructure, which operates at marginal costs, new thermal 
or nuclear plants will have to include in their tariff the 
costs of their entire lifecycle, from construction to 
retirement.  To compound these costs, gas from Russia is 
likely to get more expensive.  Armenia currently pays half 
the price that Russia charges Europe.  Gas delivered from 
Iran will presumably be more costly, too, even if it is, as 
the Ministry claims, to be paid back in electricity. 
Meanwhile, the GOAM will have to finance the retirement of 
existing infrastructure, not least the decommissioning of the 
ANPP, which has not included its life-cycle costs into its 
tariff.  One constant in Armenia's energy options is that 
energy costs are set to rise beyond what consumers can pay in 
tariffs and the government will likely need to cover 
long-deferred expenses.  We expect that the government will 
raise cost concerns with donors on June 22, especially to the 
EU delegation who will presumably offer assistance in 
exchange for a closure date for the ANPP, as they did last 
February.  When donors ask for change in Armenia's energy 
strategy, expect the Minister to ask donors for financial 
assistance in turn. 
EVANS