Saturday, June 27, 2015

Recent developments related to electric power in Armenia

It never ceases to amaze me how governments over and over fail to adequately communicate with their citizenry. A case in point is the recent decision by regulators in Armenia to allow ENA, the private electricity distribution network formed over a decade ago, to raise the peak tariff rate it charges consumers from about AMD 42 in 2014 to 48 per KWH in 2015, or from about USD 0.09 to 0.10 per KWH (with similar change to the off-peak rate).

Privately owned firms are free to set any price they want for their products. For privately owned public utilities, however, government regulators typically set rates so as to allow firms to realize a certain rate of return to recover their costs; public utilities, as natural monopolists, may otherwise charge much higher prices. For the electric grid in Armenia, the tariff rate has been fixed at 25 Drams for several years (pre and post privatization) until April of 2009 when it was raised by 20 percent to 30 Drams, which also happens to be the rate at which the Dram depreciated relative to the Dollar in the previous month. As the Dram continued to depreciate following the global Great Recession, regulators seem to have allowed the utility to charge higher tariff rates, albeit with a lag as the figure below shows.

Foreign investment in public utilities in Armenia, effectively electric and gas, took off in 2006, peaking in 2008 at USD 477 million in FDI; they dramatically declined to USD 7 million by 2013 (see here). When stated in USD, the tariff rates have changed little over this period. Raising tariff rates would be welcome by power providers as it will help them recover their costs. Of course consumers can get hurt by this, and it is no surprise that some strongly oppose raising rates. Unfortunately, and given the aging infrastructure, and in particular the nuclear power plant, tariff rates are likely to increase much more dramatically over the next decade to cover the cost of new investments. I am not sure that this is being communicated well to the public.

Electricity peak tariff rates in Armenia 

Reading resources:

Republic of Armenia : Power Sector Tariff Study (2013)

From Crisis to Stability in the Armenian Power Sector Lessons Learned from Armenia’s Energy Reform Experience (2006)

Also the following is useful:
Armenia Power Sector Policy Note (2014)

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