Alternative Energy & Power 2021

Last Updated July 20, 2021

Armenia

Law and Practice

Authors



AMERIA Legal and Tax Advisors is the oldest fully fledged business advisory team in Armenia. Located in Yerevan, and with a seasoned team of 15 individuals, Ameria provides comprehensive legal counselling on a diverse range of issues to both local and international entities and organisations, including major legal due diligence and M&A transactions in the mining sector. During the last decade, Ameria has been engaged in a number of major projects as a provider of legal support. The firm's lawyers have been instrumental in large-scale financing and M&A transactions in the Armenian energy sector related to the major historical production facilities, including a nuclear power plant, the Vorotan and Sevan cascade hydro power plants, the ArmPower thermal power plant, and new renewable energy projects such as the FRV Masrik project. Ameria's unique experience and knowledge has always added value to the successful completion of projects.

The Armenian energy market is a mix of private and state-owned enterprises bound into a strictly regulated system managed by the Public Services Regulatory Commission (PSRC). While the generation sector is mainly privately owned (although certain state-owned enterprises are still present) and the distribution network is operated by a single private entity, transmission networks, market and system operation and processes are conducted by state-owned enterprises. The system is unbundled but tightly regulated.

The main law governing the industry is the Law of the Republic of Armenia on the Energy Industry (the Energy Act) dated 07 March 2001, as amended. 

General ownership issues are governed under the Civil Code of the Republic of Armenia, dated 1998.

The Energy Act provides the basic principles of the state policies for the energy sector, as follows:

  • the enhancement of competition and efficient operation in the energy sector, and the creation of essential conditions for the development of a competitive environment;
  • regulation of energy sector operations;
  • separation of economic activity, government management, and regulatory functions;
  • protection of the rights of consumers and the economic entities in the energy sector, and the balancing of their interests;
  • efficient use of domestic energy resources and alternative sources of energy, and implementation of economic and legal mechanisms for that purpose;
  • encouragement of investments in the energy sector;
  • ensuring the transparency of licensed operations in the energy sector;
  • ensuring safety in the energy sector;
  • increasing the energy independence of the Republic, including ensuring the maximum utilisation of generating capacities and the differentiation of domestic and imported energy resources;
  • ensuring the protection of the environment;
  • encouraging scientific-technical progress and the integration of new energy-efficient and energy-saving technologies, as well as encouragement of personnel training and retraining;
  • encouraging the formation and development of energy markets;
  • separation of the generation, transmission, distribution and System Operator functions and the functions of service provision to the power market;
  • ensuring access to energy for socially vulnerable groups; and
  • ensuring non-discriminatory access to the network.

The Energy Act provides that regulation of the energy sector is part of state policy as a whole, aimed at balancing the interests of customers and licensees by defining and supervising the market rules for electricity, thermal energy and natural gas, the regulated tariffs and the licence conditions, as well as the creation of equitable conditions for licensees, and the promotion of the formation and development of a competitive market.

The basic principles of regulation are as follows:

  • regulation by an independent body, within the framework of the authorities specified by law;
  • transparent regulations for the public;
  • the elimination of discrimination against customers or any licensee;
  • balancing interests between consumers and the entities engaged in operations in the energy sector;
  • collegial decision making of the regulating body; and
  • restriction on the scope of regulation consistent with the development of a competitive market.

The methods of regulation are as follows:

  • licensing, the establishment of licence conditions and their supervision;
  • reporting to the regulatory body, the implementation of accounts and subaccounts for energy sector licensees in conformity with the National Chart of Accounts, and laws and legal acts related to accounting;
  • setting regulated tariffs;
  • the development of model contracts or mandatory terms for energy and/or natural gas supply (service provision) between licensees, as well as energy and/or natural gas supply (sale/purchase) to consumers, and the registration of contracts executed between licensees;
  • defining the market rules and regulations;
  • the development of legal acts and control over their implementation, by the regulatory body, within the framework of its authorities;
  • the development of service quality requirements; and
  • the study of investment programmes presented by licensees with the purpose of their full (or partial) inclusion in the tariff, or their rejection.

The principal players of the Armenian electric energy market are as follows:

  • Armenian Nuclear Power Plant CJSC, owned by the Republic of Armenia;
  • Hrazdan TPP OJSC (1st-4th power blocks), owned by Tashir Group, which is owned by Samvel Karapetian (private);
  • Gazprom Armenia CJSC (5th power block of Hrazdan TPP), owned by Gazprom Group (foreign state owned);
  • Yerevan TPP CJSC, owned by the Republic of Armenia (state owned);
  • Contour Global Hydro Cascade (Vorotan HPP Cascade), owned by US group ContourGlobal (private);
  • International Energy Corporation CJSC (Sevan-Hrazdan HPP Cascade), owned by Tashir Group, which is owned by Samvel Karapetian (private);
  • Small and medium HPPs, which are mainly privately owned;
  • Artsakhenergo CJSC, owned by United Energy Company (private);
  • 2 MW solar station near Shorzha (to be completed in 2020), owned by Das Enteria Solarkraftwerk (private);
  • 55 MW Masrik-1 solar station (to be completed in 2020), owned by FRV Group (private); and
  • 200 MW Ayg-1 solar station (projected) – bid by Masdar Armenia (private).

The following companies conduct centralised functions in the market (natural monopolies):

  • guaranteed retail supply and distribution – Electric Networks of Armenia CJSC (privately owned);
  • high voltage transmission and transit – High Voltage Networks CJSC (state owned);
  • system operation and co-ordination – Electric Energy System Operator CJSC (state owned); and
  • market operator – Settlement Center CJSC (state owned).

The general investment climate in Armenia is quite conducive to foreign investment, with no restrictions imposed on foreign direct investment (FDI) in the energy sector, and foreign investors treated the same as domestic investors. Foreign companies are allowed to hold a majority stake in energy projects. Foreign investors and foreign employees are also entitled to freely transfer their property, profits, revenues and other means legally gained as a result of investments, as payment for labour, or as compensation. In principle, the employment of foreign personnel is limited to the duration of their visa or work permit. However, an exemption from these requirements has recently been established for representatives of foreign investors and executives of companies with a foreign investment based in Armenia. Therefore, the legislative framework remains rather favourable to foreign investment. One of the main priorities of the Government Programme, adopted in February 2019, is to attract foreign direct investments.

The Energy Act (2001) enacted by the National Assembly of the Republic of Armenia is the primary source of regulation in the area. It provides that the transfer of a 25% share (stake) in an entity licensed to operate in the energy sector requires prior consent from the PSRC, as does the transfer of any share in such entity – irrespective of the percentage – if such share allows the entity holding it to determine the decision-making of a licensed entity, or the granting of another interest (including leasehold, pledge or trust) in such share. The transfer or granting of another interest (including leasehold, pledge or trust) in property (both real estate and equipment/machinery) that is necessary for licensed activity in the sector (property ensuring industrial capacity) also requires prior consent from the PSRC.

Supply co-ordination and operating functions are carried out by the licensed System Operator, which is Electric Energy System Operator CJSC, a state-owned company managed and administered by the Ministry of Territorial Administration and Infrastructure. Though the System Operator is a business organisation, it acts independently, strictly based on the law and PSRC regulations. The functions and powers of the System Operator include electricity supply adequacy, generation planning and development, and/or transmission system planning and development, operational and economical control of system technological processes, system operation (generation, import, export and transit), calculation of the settings for the control and protection devices of the power system that are integral to the system, and ensuring the interconnected operation of the system with other regional power systems.

The key material changes to law or regulations regarding the power industry are as follows.

  • On 4 June 2021, the Energy Act was amended by the Energy Act Amendment Act ՀՕ-261-Ն to provide for ensured take-off by the energy suppliers of the energy produced by renewable energy stations as well as autonomous stations at the tariff approved annually by the PRSC;.
  • PSRC Resolution N 180-Ն, dated 18 May 2021, on Approving the Rules of the Approval by the PSRC of Investment Programmes in the Energy Sector is to replace Resolution No 365-Ն, dated 14 July 2010. The resolution is to streamline and widen the scope of purposes and cases where investment into energy facilities and their operation is accounted into the tariffs so that investment is ultimately returned.
  • PSRC Resolution N 171-Ն, dated 12 May 2021, amending Resolution N 39-Ն, dated 27 February 2019, regulating the procedure for getting PSRC consent for granting a proprietary interest in equity or assets of an energy sector licensed entity. The amendments are making the recently adopted procedure clearer and more user friendly by clarifying the terms of actions, list of documents and applicant-regulator interactions paths.
  • PSRC Resolution N 21-Ն, dated 29 January 2021, on Amending Trade Rules for the Wholesale Market in Electricity of the Republic of Armenia adopted by PSRC Resolution N 522-Ն, dated 25 December 2019. This Resolution is to make a further step in defining, delimiting, integrating and streamlining procedures and participant statuses with respect to the operation of the compulsory take-off and free market segments of the Armenian energy market.
  • PSRC Resolution N 212-Ն, dated 17 June 2020, amending PSRC Resolution N 374-Ն, dated 01 November 2013, on Approving Energy Sector Licensing Procedure. The amendment, among other technical issues, addresses the specificities of recently introduced public-private partnership arrangements in the energy sector by facilitating the licensing procedures for such arrangements, among other improvements of the procedure.

In January 2021 a new long-term (up to 2040) strategic plan for the development of the energy sector in the Republic of Armenia was adopted by Government Resolution N 48-Լ, dated 14 January 2021, which sets out the ultimate outcomes the government intends to achieve in the energy sector by 2040. The document sets forth the government's long-term strategy in the sector with special emphasis on the following priorities:

  • maximising the use of renewable energy potential;
  • maximising energy saving capacity;
  • extending the term of operation of the Metsamor nuclear power plant beyond 2026 with the long-term goal of building a new nuclear power plant;
  • building high voltage transmission lines connecting the southern border with Iran to the northern border with Georgia; and
  • liberalisation of the energy market.

The electric power system in Armenia is characterised by the existence of various players in the market in terms of size and business model and ownership type. There are very few restrictions on foreign ownership, but a highly regulated framework for the conduct of business, which effectively renders any private arrangements between players nearly impossible. All agreements are to be entered into under standard terms approved by the PSRC, entering into such an agreement must be approved by PSRC, tariffs are to be approved by PSRC, supply and demand is co-ordinated by the System Operator, and payments are ensured by the market operator. However, recent developments and new regulations proposed to become effective in 2021 provide for a certain liberalisation of the market, where certain supply/demand-based non-regulated tariff trading will be allowed to occur if the basic needs of consumers and system reliability supplies are met for a given period.

Tariff setting (price regulation) in the Armenian market is strictly regulated, with the PSRC approving tariffs based on the law and its own regulations. The market is not competitive. Distributors are obliged to buy all the energy produced by small hydro plants and renewables, and are then bound to buy the rest of the available energy (capacity) according to price escalation (from cheap to expensive).

PSRC Resolution No 552 N, dated 25 December 2019, on Approving the Rules of the Wholesale Energy Market in 2021 is intended to liberalise the market to a certain extent, so that trading based on competitive offers among generators will be available after the minimal energy required to cover the basic needs of the country is sold under regulated tariffs.

For power plants with installed capacity exceeding 30 MW, tariffs are set for both capacity and energy supplied, so that a two-factor tariff system is in place. At the same time, solar power plants with installed capacity above 50 MW and wind power plants with capacity above 30 MW have their tariffs approved through negotiations based on private public partnership agreements, so their tariff structure may differ.

Tariffs are approved in accordance with PSRC Resolution No 359 dated 23 October 013 on Setting and Revising Tariffs for the Energy Market (Tariff Regulation).

Applications to Set or Review Tariffs

In order to set or review tariffs, the applicant shall submit to the PSRC, in accordance with the relevant calculations and justifications, two copies (or one copy for stations using small hydropower plants and other renewable energy sources) of the documents specified in Annex 1 of the Tariff Regulation. The company shall submit the application to the PSRC no later than 30 days after the publication of the announcement, in accordance with the procedure defined in Annex 3 of the Tariff Resolution. The company also places a public announcement regarding the submission of the application on the official website of the Public Notices of the Republic of Armenia.

After the application is submitted to the PSRC, the relevant subdivision of the PSRC checks the completeness of the application and the accuracy of the wording of the documents included in it.

The PSRC shall notify the applicant in writing of the results of the application verification no later than ten working days after the date of submission of the application to the PSRC.

The application will not be admitted for review if:

  • one of the documents defined in Annex 1 to the tariff rules is missing;
  • the documents included in the application do not comply with the requirements defined by this Law, or by other legal acts of the Republic of Armenia;
  • there are inaccuracies and inconsistencies in the submitted documents and information; or
  • the bidder has not completed the construction works.

In such cases, the applicant may submit a new application to the PSRC, after eliminating the identified deficiencies. In this case, the applicant has the right to refer to the documents submitted in the previous application, if the data presented in them has not been changed at the time of submitting the new application.

If the examination of the application results in a positive outcome, the PSRC shall accept the application for review.

Application Review

During the review of the application, the applicant may apply to the PSRC to withdraw the application. In this case, the applicant may re-apply to the PSRC with a new application, referring to the documents submitted by the previous application if necessary, if they have not been changed at the time of submission of the new application.

The PSRC will reject the proposal to set a tariff if the bidder has not completed the power plant construction works.

The PSRC shall set the tariff, review (reaffirm or amend) it and make a relevant decision within 80 working days of the submission of the application to the PSRC (or within 25 working days for small hydropower plants and other stations operating under renewable energy sources).

The PSRC may review the current tariff on its own initiative and set a new tariff, taking into account the results of the applicant’s business activity, investment programmes and fulfilment of the requirements for the quality of services provided to consumers.

If the PSRC undertakes a process of reviewing tariffs on its own initiative, it shall notify the entity in writing in advance, and may request the necessary information related to the licensed activity from the company.

The PSRC revises the tariff on its own initiative within the following timeframes:

  • within 80 working days after the day of notifying the entity in writing; or
  • within 25 working days after the date of notification in writing to the small hydroelectric power plants and other stations using renewable energy sources.

The export of electric energy is currently limited to export to Iran in exchange for natural gas. Exports previously occurred to Georgia, but these were terminated due to an absence of demand from the Georgian side. Interconnection points are the Georgian and Iranian borders. Import and export are currently not considered as separate licensed activities but come under the transmission licence.

The Armenian electricity market is made up of the following various sources (approximate percentages):

  • nuclear – 35%;
  • large hydro – 30%;
  • thermal (natural gas powered) – 25%;
  • small hydro – 7-8%; and
  • solar, wind, thermal biogas powered – 2-3%.

While small hydro is reaching its limits for ecological reasons, among others, the solar energy share is expected to show a stable increase in the coming years. Wind power stations proved not to be economically feasible for large-scale development due to climate conditions, though the overall total installed capacity for wind power plants is estimated to be around 450 MW (which, in principle, constitutes around 5–10% of current demands on the market).

Concentration limits are not regulated specifically for the energy market. Under the Economic Competition Protection Act 2001, the Commission for Protection of Economic Concentration (the SCPEC) has general power to refuse transactions that would result in a concentration of market shares in any relevant market if that concentration could result in the prevention of competition in the market. Through the refusal of ownership transfer-based national security considerations provision in the Energy Act, the PSRC may also indirectly control concentration. Otherwise, as the market is regulated and not competitive, there is not much room for the organic growth of market shares.

The SCPEC is the authority responsible for protecting competition in the market under the Competition Protection Act, which regulates issues common to the protection of economic competition, such as cartels, vertical agreements restricting competition, abuse of dominant position, merger/concentration control, anti-competitive behaviour, and IP-related issues. Note, however, that due to heavy regulation by the PSRC, such issues are barely possible in the energy market.

Although it is a party to numerous international climate change treaties, Armenia has no specific regulation for climate change issues specific to the energy sector.

Carbon emissions are mainly regulated through emission permissions and ecological taxes (which multiply several times compared to the base rate if quotas are exceeded).

There are no such regulations in place.

The Renewable Energy and Energy Saving Act enacted by the National Assembly of Armenia is a framework law setting out the foundations of the state policy for the growth of alternative energy resources.

General policy papers in the energy sector include the Concept Note on Ensuring the Energy Security of the Republic of Armenia, and the Republic of Armenia Development Strategy 2025. The Long-Term (up to 2036) Development Pathways for the Republic of Armenia Energy Sector also set out alternative energy targets over the mid and long-term.

Recent regulation on public-private partnerships in building solar power plants further enables and facilitates investment in alternative energy facilities.

PSRC Regulation No 396-N, dated 24 October 2018, on approving the procedure for determining the electricity tariff produced by power plants using renewable energy sources makes the process of determining feed-in tariffs produced from solar panel and wind turbine renewables more transparent and efficient, in order to encourage investment in the sector.

Regulation is also in place that promotes the installation and use of autonomous solar power plants by requiring the distributor to buy the excess energy of such autonomous stations, albeit at a 50% reduced tariff rate.

The Energy Act is the main source of regulation for the construction and operation of generation facilities.

Based on this Act, PSRC regulations set forth further details for putting constructed facilities into operation and connecting them to the grid.

The most important regulations are as follows:

  • the Rules of Licensing in the Energy Sector adopted under PSRC Resolution No 374, dated 01 November 2013, (Licensing Regulation);
  • various technical regulations that provide for minimal standards for various types of equipment used for generating power, and that production capacities shall comply with such technical regulations;
  • legislation relating to construction permits and various construction technical regulations whose principal source is the Building Construction Act 1998 and the Construction Permit Regulation (Resolution of the Cabinet of Ministers/Government/of the Republic of Armenia N, dated 19 March 2015; and
  • the Technical Safety Act 2005 and regulations enacted by the Ministry of Territorial Administration and Infrastructure, which provide for mandatory technical clearance of potentially dangerous facilities, including power generation facilities, before such facilities can be operated.

No initial environmental survey is necessary in order to start construction work, according to Armenian law. However, the project design documents required for obtaining construction permission shall indicate the environmental requirements and limitations regarding the subject matter object and the location of the construction. This means that such requirements and limitations shall be reviewed before drafting the project design documents, because failure to take them into account will result in refusal of approval to operate the constructed facilities.

The Law of the Republic of Armenia on Environmental Impact Assessment and Expert Examination requires environmental impact assessment application documents to be drafted and presented for sign-off by the Ministry of Nature Protection. In the energy sector, the law requires an environmental impact assessment to be conducted in the following cases.

  • Category A:
    1. nuclear power plants or other structures using nuclear reactors;
    2. installations for storage and the encapsulation of processed nuclear fuel;
    3. the production of nuclear fuel enrichment;
    4. thermal power plants;
    5. pipelines for oil or gas or other chemicals with lengths of 5 km or more;
    6. stations for the generation of hot water or steam with a capacity of 50 MW and above; and
    7. hydropower plants with a capacity of 10 MW and more.
  • Category B:
    1. hot water or steam producing plants, with 30 MW to 50 MW capacity; and
    2. hydropower plants with 10 MW to 30 MW capacity.
  • Category C: the following types of activities or production units in the energy sector, or all of their structures or infrastructure:
    1. the production of biogas or biogas energy with at least 1 MW capacity;
    2. hydropower plants with at least 1 MW to 10 MW capacity; and
    3. wind power plants.

Category C applications for clearance undergo only the initial stage of assessment (ie, based on the submitted project design and project operation documents), the Ministry of Nature Protection shall issue a conclusion (whether positive or negative) on whether the relevant activity complies with environmental requirements and is therefore permitted (while Category A and Category B are forwarded for professional expert opinions, based on which the Ministry signs off on the project or issues a refusal thereof). The resolution on whether to sign off or not shall be issued within 30 days of the submission for clearance.

A person intending to construct and/or operate an energy producing facility must acquire a licence from the PSRC for the construction and operation of such facility. In the case of renewables with capacity exceeding 50 MGW (solar) and 30 MGW, a licence will be issued in accordance with the public-private partnership (PPP) agreement entered into with the state.

Under the Licensing Regulation, the PSRC must consider an application for granting a licence and adopt the relevant decision (decree) within 80 days of the moment of submission by the applicant of all required documents in the case of renewables (or within 25 days in the case of small hydro as well as renewables). The Law restricts the possibility of holding multiple licences in order to avoid monopolistic or oligopolistic practices.

For licensing purposes, the following shall be submitted alongside the licence application:

  • a business plan in a form provided under the PSRC Regulation;
  • a copy of the state registration certificate evidencing the applicant's ownership or lease (use) rights over land and buildings to be used for the licensed activity;
  • an announcement on the official website of the Republic of Armenia in a form provided under the PSRC Regulation;
  • a guarantee in a form provided under the PSRC Regulation;
  • a water use permit for hydroelectric power plants, and for water use if required for the production of electricity (capacity) in other plants; and
  • an Initial Technical specification issued by the transmission licence holder, including information on the grid connection point.

The following are grounds to reject an application for a licence:

  • the submitted documents are not in compliance with law and regulations;
  • granting the licence may result in an infringement of the rights of third parties;
  • the licensed activity will have an adverse effect on the security and reliability of the system, natural recourses or consumers' interests;
  • the applicant has no right to engage in licensed activity (as a matter of law or court order);
  • Ministry of Territorial Administration and Infrastructure sign-off has not been received (discretion) for 30 MW+ power stations; or
  • some other grounds limited to particular cases/types of licences.

If the licence is for both construction and operation within the terms prescribed in the terms of the licence, then the licence project design documents for the power facility being constructed that have been cleared for safety, technical and environmental issues shall be submitted to the PSRC for approval, and the licensee will be able to complete construction and commissioning within the deadlines prescribed in the licence by submitting the following for PSRC approval:

  • completion and exploitation permission signed by the authorising entity;
  • ownership certificates for the constructed facility;
  • the energy facility exploitation clearance document;
  • details of the energy producing equipment; and
  • an application for tariff setting.

PSRC considers updated application to make necessary amendments to the licence terms and issue final licence. Terms of consideration by PSRC and grounds for rejection of the application are the same as above.

Licence terms are attached to the licence, essentially setting forth the obligations of the licensee and the terms of the licensed activity.

Licence terms usually reiterate rules that apply to the licensee anyway, as a matter of law and regulation. However, depending on the particular applicant and its situation, the licence terms may refer to other terms and obligations of the licensee, including by way of incorporation, by reference to the terms of the PPP agreement and other direct agreements signed with the state, and/or share/asset purchase agreements of the state whereby the assets/shares are sold by the state by way of privatisation/concession or direct sale. When a licence is granted for the construction/reconstruction of a facility, it will usually fix the deadlines and other conditions for construction and grid connection. Licences issued for both construction and operation will always contain some additional terms and deadlines for completion of the project, commissioning and technical test launches. Certain deadlines for construction are fixed in the law: two years for renewable capacities under 5 MW and three years for small hydro. Deadlines for non-renewable and renewable capacities above 30 MW are agreed in the licence terms.

A licence to operate a facility does not automatically carry in itself or imply any surface rights. On the contrary, the prior availability of such surface and natural resource use rights (like water use permits where necessary) is a precondition for granting energy licences. Surface rights are normally obtained by way of purchase, lease (normal lease or construction lease) or easement rights from private persons, the communities and/or the state.

At the same time, the Law of the Republic of Armenia on Mandatory Alienation of Property for Overriding Public Interest Purposes provides that if any project is approved by the Cabinet of Ministers or the government, or as a project of overriding public interest, the property holder may be forced to sell such property to the project-implementing entity at market price plus 15%.

In addition, the Energy Act provides that, where state-owned land is concerned, energy sector facility operators have priority to acquire rights over such state-owned lands for constructing and operating such facilities.

The process of voluntarily withdrawing a licence (decommissioning) is regulated exclusively by the Law on Licensing. An application of a licensee for voluntary termination of a licence (decommissioning) shall be considered by the licensing authority within 15 days of its receipt. If the application is not considered in substance within 20 days from the date of application, the application is considered satisfied and the licence is terminated. An application of a licensee for termination of the licence may be rejected on the grounds provided for by the laws and procedures of licensing (we have not found any). At the same time, the licensing authority may establish a longer deadline for the termination of the licence with respect to the term indicated in the application if it directly affects the state and public security, public order, health and morality, or the rights and freedoms, dignity and reputation of other persons.

If the termination of the licence directly affects state and public security, public order, public health and morality, rights and freedoms of other persons, or honour and reputation, the court order or decision of the licensing body should determine the guarantees of protection of the interests of third parties or the procedure for compensating the damage suffered by them, or eliminating such consequences as a result of the termination of the licensed activity.

Consequently, in order to terminate the licensed activity, an application for voluntary renunciation of the licence must be submitted. The form and content of such an application are not regulated; therefore, the application should be submitted in a free form, preferably with a brief justification of the reasons for the decommissioning.

If facilities are to be demolished, relevant demolition permits and cultivation requirements will be triggered.

The transmission grid is a natural monopoly covering the whole geographical area of the Republic of Armenia. State-owned company High Voltage Networks CJSC is operated and managed by the Ministry of Territorial Administration and Infrastructure, which is the owner and operator of the whole transmission grid. Unless new grid facilities are constructed and another company is licensed to operate them, or unless existing assets owned by High Voltage are transferred, it is not possible for a new entity to be licensed for the transmission of energy. So, in fact, High Voltage is a natural monopoly that holds a licence to construct and operate transmission facilities as a state enterprise. No special rules apply for the construction of transmission facilities (the general norms applicable to the construction process apply). Technical and safety regulations setting forth the standards for equipment and facilities and their installation are also applicable.

See 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities.

The general licensing procedure outlined in 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities is applicable.

Please see 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities.

Please see 4.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

Please see 5.1.1 Principal Laws Governing the Construction and Operation of Transmission Facilities.

The Energy Act, the Licensing Regulation, and PSRC Resolution No 552, dated 17 May 2017, on Interim Rules for Safety and Reliability Electric Energy Systems (Grid Rules) are the principal laws that govern the provision of transmission service and the regulation of transmission charges and terms of service. Individual licence terms contain additional requirements, which are also important sources of regulation that apply to the licensed entity individually.

The Energy Act provides the general framework within which the energy transmitter operates, including the requirements for licensing, the general scope of licensed activity, the basis for tariff formation, the basics of the market structure, the powers of the PSRC to regulate and oversee, certain conduct rules, and the principles of tariff setting.

The Licensing Regulation provides for the licensing procedure, and details of the licence and licence conditions.

The Grid Rules provide technical details and rules for the planning and operation of energy transmission facilities that apply to the transmitter and persons connected to the grid.

The Licence Rules may contain individual requirements specific to that type of licence or specific to the particular licensee. The High Voltage Licence, for example, contains the following specific obligations for the transmitter:

  • to provide system safety and reliable services for the whole market;
  • to ensure service for the transit of energy to third countries;
  • to participate in recovery and repair operations of systemic importance;
  • to ensure the right of entitled parties to connect to the grid as provided in the Grid Rules; and
  • to ensure permanent availability of equipment of systemic importance.

Transmission charges are fixed as transmission tariffs by the PSRC based on the rules of the Energy Act requiring substantiated costs, the depreciation/amortisation of assets and reasonable profit to be taken into account. Transmission charges are approved by the PSRC and may be periodically revised, either at the request of a licensed entity or on the initiative of the PSRC. The principles for setting non-discriminative rates are listed in the law among the general principles of sector regulation. The capital structure of a transmission entity, the rate of return on equity and the depreciation rate are determined pursuant to financial reporting principles (IFRS).

The tariff set by the PSRC resolutions is subject to claims for revision by the PSRC but can also be challenged in court on the basis that the PSRC failed to take the principles into account, or failed to observe the rules of tariff setting as set forth in the Energy Act.

The Grid Rules provide that producers of systemic importance (ie, producers of installed capacity in excess of 10 MW), entities licensed to distribute energy (currently only one) and qualified consumers (those consuming more than 1 million kW/hour) are entitled to connect to the high voltage grid operated by the transmitter.

The applicant shall ensure that its connected capacity to the transmission grid complies with the requirements of the Grid Rules and technical regulations.

To obtain technical specifications for connected capacity, the applicant shall submit a request to the transmitter.

To provide the technical specifications, the transmitter shall charge the applicant a service fee of AMD500,000 (including VAT of around EUR1,000), of which AMD250,000 (including VAT) shall be transferred to the System Operator (ie, the licensed entity responsible for co-ordination of the energy system constituents) within ten business days of receipt. The fee is not refundable.

Within 15 business days of receiving the application, the transmitter shall:

  • verify the compliance of the information received with the requirements of the Grid Rules and, where necessary, make adjustments with the applicant;
  • develop a draft of the technical specification based on the requirements of the technical regulations;
  • provide the System Operator with the verified information specified in the Grid Rules and the Draft Technical Specifications; and
  • submit to the System Operator a document certifying payment to the System Operator of the connection charges.

Within 15 business days of receiving the information required under these rules, the System Operator shall evaluate the impact of the connected power plant on the reliability and security of the power system and, together with the transmitter, study the elaborated technical specifications required for the connected power plant and transmission network, and submit the specifications of the agreed version to the transmitter.

Within ten business days of receiving the technical specifications agreed upon by the System Operator, the transmitter shall submit to the applicant the proposed technical specifications (by indicating the location of the connection point) and the initial amount of the connection charge calculated based on the costs incurred for the implementation of similar projects.

The connection charge shall amount to the cost of connecting the new capacity to the grid, the acquisition and installation of new capacities in the grid, the reconstruction of existing capacities, the metering device, and the equipment and software required for connection to the electrical grid system These rules and regulations apply to the sum of all services provided for connection, including design costs.

If the transmitter does not receive consent from the Applicant to the proposed technical specifications within six months of submitting the proposed technical specifications and connection charges, the application shall be considered to have failed.

Grid Connection Agreement

Within 15 days of receiving the consent of the applicant to the technical specifications and to the connection charges proposed by the transmitter under the Grid Rules, the transmitter shall enter into a grid accession agreement with the applicant. The Technical Conditions given by the transmitter are attached to the grid accession agreement and are an integral part thereof.

In the event of a change in the technical specifications, appropriate modifications shall be made to the agreement, and shall be settled in the event of disagreement by the applicant on the condition of reimbursement of the actual costs. Whenever necessary, any document agreed upon by the parties to the accession contract shall be amended in accordance with the procedure and timeframes specified in the accession agreement (unless otherwise specified by the accession contract).

Connection Permit

Thereafter, a connection permit shall be obtained by the applicant. In order to obtain a connection permit, the applicant shall apply to the transmitter at least 75 business days prior to the deadline stated in the connection agreement, by submitting a set of documents envisaged under the Grid rules.

Within 15 business days of receiving the request, the transmitter verify the compliance of the information submitted by the applicant and submit the connection action plan to the System Operator for approval.

The System Operator shall agree to the connection action plan within 15 working days of receiving the necessary information from the transmitter.

Upon receipt of the System Operator's consent, the transmitter shall provide the applicant with a connection permit within 15 business days, or report any discovered defects.

The applicant shall not be granted a connection permit unless the defects are corrected, and the connection agreement deadline specified in the connection agreement shall be deemed to have been extended by the time of delay for such correction.

Within 15 business days of receiving the connection permit, the applicant shall submit a written request to the transmitter and the System Operator indicating its preferred date of actual connection to the grid.

The Energy Act, the Licensing Regulation, and PSRC Resolution N 358, dated 27 December 2006, on Approving Rules for Supply and Use of Electric Energy Systems (Distribution Rules) are the principal laws that govern the construction and operation of electric distribution facilities. The Licensing Regulation provides for the licensing procedure and the details of the licensed activity. In order to become an electric energy distributor, an entity must obtain a licence from the PSRC. The PSRC is both the regulator and the supervisor of distribution activities. Distribution tariffs are set by the PSRC, based on the Energy Act.

No special rules apply to the construction of transmission facilities (the general norms applicable to the construction process apply). Technical and safety regulations setting forth the standards for equipment and facilities, as well as their installation, are applicable. The distributor cannot simultaneously own a power-producing licence and perform other roles in the energy market (except the role of guaranteed supply provider). The Distribution Grid Rules provide the technical procedure for connecting new facilities to the grid.

The distributor licence automatically provides the right to construct and operate electric distribution facilities. Please see 4.1 Principal Laws Governing the Construction and Operation of Generation Facilities and 4.2 Regulatory Process for Obtaining All Approvals to Construct and Operate Generation Facilities regarding the licence and facility construction procedure, bearing in mind that the distributor is, in fact, a natural monopoly (its licence term is indefinite), which means that under the current legal regime it is only theoretically possible that a second distributor will be licensed.

Licence terms impose certain obligations on Electric Networks of Armenia CJSC (ENA – the current exclusive distributor) as a condition of its service, with the most important terms being within the exclusive area (which is currently the whole of the Republic of Armenia). The rights and obligations of ENA (the current exclusive distributor) are as follows:

  • to distribute energy to all participants of the wholesale and retail energy markets (exclusive right);
  • to regulate the distribution grid (exclusive right);
  • to construct, extend and renovate, use, manage and maintain the distribution grid so that uninterrupted and continued supply is ensured;
  • to ensure access to the grid for any person pursuant to the market rules, and to connect new consumers to the grid on a non-discriminatory basis (exclusive right); and
  • to account for and measure the energy.

Please see 5.1.4 Proponent's Eminent Domain, Condemnation or Expropriation Rights.

The distribution grid operator (the current licensed entity) is a natural monopoly covering the whole geographical area of the Republic of Armenia. ENA is the owner and operator of the whole distribution grid. Although the Licensing Regulation does not rule out a scenario where various distributors can cover certain areas of the distribution network, unless new grid facilities are constructed or existing assets owned by ENA are transferred to a new applicant seeking a distribution licence it is not possible for a new entity to be licensed for the distribution of energy. ENA’s consent would need to be obtained, as its current distribution licence provides that it covers the whole territory of the Republic of Armenia. As a result, ENA is currently a natural monopoly and holds an exclusive licence to construct and operate distribution facilities.

The Energy Act, the Licensing Regulation, and PSRC Resolution N 358, dated 27 December 2006, on Approving Rules for Supply and Use of Electric Energy Systems are the principal laws that govern the provision of electric distribution services and the regulation of electric distribution system charges and terms of service, as well as PSRC resolution N 523, dated 25 December 2020, on Approval of Rules of Distribution in the Electric Energy Market (Distribution Grid Rules).

Individual licence terms contain additional requirements, which are also important sources of regulation applicable to the licensed entity individually.

The Energy Act provides a general framework under which the energy distributor operates, including the requirement for licensing, the general scope of the licensed activity, the basis for tariff formation, the basics of the market structure, the powers of the PSRC to regulate and oversee, and certain conduct rules.

The Distribution Grid Rules provide for technical details and rules for the operation and maintenance of energy distribution facilities, rules for connecting to the distribution grid, rules for metering, payment and settlement, dispute resolution, etc. Charges and tariffs of distribution services are set by the PSRC based on the principle and rules set out in the Energy Act and the licence.

Tariff Setting

Tariffs are set by the PSRC, based on the principles set out in the law and detailed in the licence terms. Based on those documents, the distributor's tariff formula shall reflect the following:

  • the cost of buying energy and transmission services;
  • operation and maintenance costs;
  • depreciation and amortisation;
  • non-performing indebtedness;
  • the rate of return on assets and the allowed profitability margin;
  • approved investment; and
  • other constituents and deductibles.

The tariff setting may be appealed as a matter of request for revision by the PSRC or judicially, but in the latter case only if there has been a failure to comply with the principles set out in the Energy Act or formula fixed in the licence (which is also subject to PSRC approval).

Terms of Service

Major terms of services are fixed in the Energy Act, the Licensing Act, and the licence terms. Detailed terms are fixed in the distribution rules, and include the following:

  • rules on contracting consumers;
  • rules on connections and disconnections;
  • rules on the connection of new facilities and consumers;
  • rules on metering;
  • rules on payment calculation;
  • rules on the settlement of accounts and the payment of bills;
  • rules on failure to pay;
  • fines and penalties; and
  • rules for buying energy from autonomous producers.

The terms of service cannot be challenged unless such terms are imposed in contravention of the Energy Act.

Distribution Grid Rules

The Distribution Grid Rules provide for the terms of connection of producers of non-systemic importance to the grid (producers of systemic importance connect to the transmission grid according to the Transmission Grid Rules).

A producer initiates its connection in accordance with the project (connection scheme), on the basis of the technical conditions provided by the distributor.

The technical conditions are set by the distributor on the principle of carrying out the work of connection (reconstruction) of a station (ie, construction of a new network and reconstruction, strengthening and expansion of the distribution grid) for the parties with minimal expense. If the distributor plans to expand its infrastructure, due to the need for further long-term development of the network, then the technical conditions are provided, taking into account the availability of new infrastructure. The planned works for the creation of such infrastructure are included in the distributor's Distribution Investment Programme, and the work is not included in the calculation of the connection fee. The technical conditions shall take into account the period of construction of the power plant specified in the producer's licence, and shall be extended in case of the extension of such term. In order to connect the plant to the distribution grid, a producer shall pay the distributor a connection fee equal to the sum of the costs required for such works for the construction of new capacity in the distribution grid and the reconstruction (including redesign) of existing facilities. The producer ensures that their plant (capacity) connected to the distribution grid complies with the requirements of these rules and technical regulations.

Reconstructed and newly constructed capacities in the distribution grid are the property of the distributor, and the installed metering equipment and the equipment necessary for connection to the automatic accounting system of the distribution grid are the property of the producer.

Connection Permits

In accordance with the technical conditions, the producer applies to the distributor at least 70 working days prior to the expiry of the technical conditions to obtain an actual connection permission (Connection Permit) for connection to the distribution network (including design-construction), presenting:

  • the application for a Connection Permit, which is an integral part of the Agreement;
  • in cases provided by the legislation, a copy of the conclusion on the operation of the electrical installation issued by the state authorised body carrying out technical control; and
  • the connection action plan.

Within ten business days of receiving the application, the distributor shall verify the compliance of the documents submitted by the producer with the requirements of the Distribution Grid Rules and the technical conditions. In the case of a station with installed capacity of more than 10 MW, the distributor shall seek the consent of the System Operator. The System Operator shall notify the distributor of its consent or any defects found within five working days of receiving the documents from the distributor. Within ten business days of receiving the application (and within five business days of receiving the position of the System Operator for 10 MGW+ producers), the distributor shall issue a Connection Permit to the producer (in case of a positive conclusion) or notify the identified deficiencies (in case of a negative conclusion).

Within five working days of receiving the Connection Permit, the producer shall submit a written application to the distributor, and also to the System Operator in the case of a 10 MW+ producer, indicating the preferred date of actual connection (voltage) of the station to the distribution grid.

If the producer's preferred day of actual connection (voltage) to the distribution grid is not acceptable by the System Operator in terms of power system reliability and safety, the System Operator shall negotiate with the producer within three working days to postpone the connection (voltage) day, which may not exceed ten working days from the producer's preferred date.

Changes in the technical conditions of the plant and technical dimensions may be made only by mutual agreement of the parties, except when such changes are necessary for compliance with the requirements of the laws or normative legal acts.

AMERIA Legal and Tax Advisors

2 Vazgen Sargsyan Street
0010
Yerevan
Armenia

+374 10 56 11 11

+374 10 51 31 33

legal@ameria.am www.amerialegal.am
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AMERIA Legal and Tax Advisors is the oldest fully fledged business advisory team in Armenia. Located in Yerevan, and with a seasoned team of 15 individuals, Ameria provides comprehensive legal counselling on a diverse range of issues to both local and international entities and organisations, including major legal due diligence and M&A transactions in the mining sector. During the last decade, Ameria has been engaged in a number of major projects as a provider of legal support. The firm's lawyers have been instrumental in large-scale financing and M&A transactions in the Armenian energy sector related to the major historical production facilities, including a nuclear power plant, the Vorotan and Sevan cascade hydro power plants, the ArmPower thermal power plant, and new renewable energy projects such as the FRV Masrik project. Ameria's unique experience and knowledge has always added value to the successful completion of projects.

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