Armenia_Road_Map_and_Action_Plan-Third_Party_Access,_Black_Sea_Regulatory_Initiative_July,_2016.pdf

ARMENIA ROADMAP AND

ACTION PLAN--THIRD PARTY

ACCESS

BLACK SEA REGULATORY INITIATIVE (BSRI)

July 2016 This publication was produced for review by the United States Agency for International Development.

Black Sea Regulatory Initiative: ARMENIA

ARMENIA ROAD MAP AND

ACTION PLAN--THIRD

PARTY ACCESS

BLACK SEA REGULATORY INITIATIVE

Project Title: Black Sea Regulatory Initiative (BSRI)

Sponsoring USAID Office: USAID Bureau for Europe and Eurasia

Cooperative Agreement #: REE-A-00-07-00050-00

Recipient: National Association of Regulatory Utility Commissioners

(NARUC)

Date of Publication: October 2016

This publication was made possible through support provided by the Energy and Infrastructure Division of the Bureau for Europe and Eurasia under the terms of its Cooperative Agreement with the National Association of Regulatory Utility Commissioners, No. # REE-A-00-07-00050-00. The opinions expressed herein are those of the author and do not necessarily reflect the views of the US Agency for International Development or National Association of Regulatory Utility Commissioners.

i

Table of Contents

I. Purpose

II. Overview of Current Electricity Market Structure

III. Country Priorities / Focal Areas

IV. Projects of Common Interest

V. Road Map and Action Plan for PSRC

Attachment A: Original Draft Rule Attachment B: Comments to Revised Draft Rule Attachment C: Revised Draft Rule with Track Changes Attachment D: List of PSRC “Market Rules” Attachment E: Croatian Market Rules Attachment F: Croatian Balancing Rules Attachment G: Croatian Balancing Methodology Attachment H: Table of Contents and Definitions of the Commercial Code of the Wholesale

Electricity Market of Romania ii

National Association of Regulatory Utility Commissioners (NARUC) 1101 Vermont Ave, NW, Suite 200

Washington, DC 20005 USA Tel: +1-202-898-2210 Fax: +1-202-898-2213 www.naruc.org

For questions regarding this publication, please contact Erin Hammel (ehammel@naruc.org) or Crissy Godfrey

(cgodfrey@naruc.org).

I. Purpose

The purpose of the technical assistance to be provided to the Public Service Regulatory Commission (“PSRC”) of Armenia was to work on three specific topics that would assist the PSRC in moving forward on the development of a competitive wholesale electricity market in Armenia. Prior to traveling to Armenia, a “needs” assessment was performed by the BSRI Consultant, by reviewing notes taken during the PSRC interviews, the presentations made by the PSRC at the first Black Sea Regulatory Initiative (“BSRI”) workshop in Tbilisi, the Potomac Economics Gap Analysis, the Engility Gap Analysis and other documents on Armenia’s electricity market. Based on that assessment, a number of “gaps” were identified which could be addressed during a one-week working session with the PSRC. Subsequently, in a meeting between the PSRC, Marina Vardanyan (Environmental Officer in the USAID Office of Environmental Growth in Yerevan) and Jamila Amodeo (Senior Energy & Environmental Advisor in USAID’s Washington, D.C. Bureau for Europe & Eurasia), the topic areas that were identified as of the highest priority by the PSRC were the following:

1. Drafting a Regulation to adopt Regulated Third Party Access to the Transmission Grid

Based on the needs assessment, it was clear that neither the Law nor any regulation issued by the PSRC guaranteed non-discriminatory open access to the transmission and distribution grids of Armenia. According to the e-mail received from Ms.

Amodeo, the PSRC had drafted a preliminary rule (“Open Access Rule”) and had questions which they wanted to discuss during the in-country assistance, in particular with regard to balancing.

Proposed Deliverable: A Draft Third Party Access Rule complying with international best practice to be adopted by the PSRC

2. Creation of “Electricity Market Rules”

According to both the BSRI interview responses from the PSRC and the Engility Gap Analysis, there is no single document called “Electricity Market Rules” that describes the current market model and lays out the roles and responsibilities of the market participants. Instead, there are a number of PSRC decisions and rules that, taken together, could be considered “Market Rules.” The PSRC let Ms.

Amodeo and Ms. Vardanyan know that they would provide a list of documents which they were willing to describe during the working meetings. They said they have a preliminary market design and would like to get the BSRI Consultant’s thoughts on it.

Proposed Deliverable: A Table of Contents with brief description of what Market Rules should contain

3. Role and Functions of Market Operator

Ms. Amodeo reported that the PSRC was thinking of turning the existing Settlement Center into a Market Operator and wanted the BSRI Consultant’s thoughts on this idea.

Proposed Deliverable: No deliverable due to time limitation of TDY.

During the meetings that were held in Yerevan, the third topic (Role and Function of Market Operator) was only touched on briefly by the PSRC; instead, the PSRC asked a lot of questions about cross-border capacity allocation and sought the BSRI consultant’s counsel on the international best practices related to cross-border capacity allocation methodologies. This was therefore the third topic that was the focus of discussions in Yerevan. The PSRC did not present their proposed market design model or ask questions related to the role of the Market Operator.

According to yje BSRI Consultant’s discussions with the Engility consultants (Abgar Budaghyan and Ruben Abrahamyan), the USAID Mission in Yerevan has only recently requested Engility’s help in drafting a Concept for a new competitive electricity market for Armenia (“Concept”). Any discussion of a proposed market design and the role of the market operator would therefore have been premature.

II. Overview of Current Electricity Market Structure

Armenia’s electricity market design is currently a “single buyer system,” with Electric Networks of Armenia (“ENA”), the Russian-owned distribution company, performing the functions of a single buyer/single seller, as well as being the distribution licensee.1 The state-owned transmission system company, High- Voltage Electric Networks CJSC (“HVEN”), is unbundled from generation and supply. Dispatch, system planning, and coordination with regional electric systems is performed by the Electric Power System Operator (“EPSO”), a State-owned entity. The generating sector is diversified and includes both private, as well as state-owned, generating plants. Electricity is supplied primarily by five single-plant generating companies—the state-owned Metsamor Nuclear Power Plant (“NPP”), the state-owned Hrazdan Thermal Power Plant (“Hrazdan TPP”) (which is scheduled for decommissioning in 2019), the Hrazdan 5 gas-fired plant owned by GazProm, the state-owned Yerevan combined cycle gas turbine (“CCGT”) plant, and the Vorotan Cascade, purchased by ContourGlobal in 2015. There are also a large number of small, privately-held hydropower plants (“SHPPs”). The CCGT plant is used primarily in the gas-for-electricity swap arrangement with Iran. The NPP, Hrazdan TPP and Vorotan Cascade are all old and in poor condition, requiring substantial investment to upgrade; however, the Vorotan Cascade is being upgraded by its new owner and the NPP is scheduled to be rehabilitated starting in 2017 to extend its operating life for another 10 years.

The electricity sector is regulated by the 2001 Energy Law (“Law”), which describes in extensive detail the functions of the PSRC. The PSRC sets wholesale

1 2001 Energy Law, Art. 38.

tariffs for sale by all of the generating plants to EVN, except for the tariffs charged by the Hrazdan 5 plant and the prices set for export. However, the Law permits exports “only when domestic market is fully supplied and the export of electricity will not impair the interests of domestic consumers.”2 The PSRC has interpreted this as meaning that only the highest-cost electricity can be exported, which allows only the Hrazdan 5 and the Hrazdan TPP (which is highly inefficient) to export power. While the PSRC has issued an Export Rule, that rule does not provide any guidance on how capacity on cross-border connections should be allocated in the event of congestion. At the moment, Armenia’s ability to export is limited to exports to Georgia over a 220 kV interconnection in island mode (Georgia and Armenia are not synchronously interconnected) and the electricity-for-gas swaps with Iran (with which it is synchronously interconnected).3 The issue of cross-border capacity allocation has therefore not been an issue until now.

However, Georgia is planning to construct a new 500 kV power line from its Marneuli substation to a new HVDC back-to-back (“B2B”) converter station at Ayrum, Armeni, about 2 km (approximately 1 mile) from the Georgian border.

Armenia is building a new 400 kV line from Ayrum to a new substation at Ddmashen, near Hrazdan. Construction of the new substations and the new 400 kV line is expected to be completed by 2018. The capacity of the Ayrum substation will be increased from 350 MW to 700 MW by 2021. The benefits from this “Caucasus Transmission Network” to both countries are potentially far-reaching. Armenia, which is experiencing significant increases in demand, particularly in the summer, will be able to export power to Georgia in the winter when Georgia is short of water to generate electricity, and will be able to import energy in the summer when Georgia has a significant surplus of hydropower. The PSRC realizes that the issue of prioritizing access on the new interconnection with Georgia in the event of congestion is therefore one that needs to be addressed before the construction projects are completed.

Until the PSRC decided to issue the Open Access Rule, which is one of the three topics covered by this report, no direct sales between generators and consumers were permitted and there was no competition among generators to supply either the single buyer or end-users. Neither was there a distribution tariff governing the transport of electricity over the low voltage lines; instead there were only tariffs that bundled supply and transport together and were differentiated by voltage levels. The PSRC has now issued a distribution tariff which will become effective August 1, 2016, since the proposed Open Access Rule will require the access to, and use of, both the transmission and distribution systems for the sale of electricity at unregulated tariffs.

There is currently no Grid Code (although the PSRC and Deputy Minister Galstyan stated that one is being drafted) and no set of what are customarily known as “Market Rules.” Instead the PSRC has issued a series of rules governing certain activities, such as emergency situations, but which do not qualify as

2 Law, Art. 33(1) 3 The interties with Azerbaijan and Turkey were severed after the 1992-1994 war over Nagorno-Karabakh, an enclave in southwestern Azerbaijan.

“Market Rules” as the term is customarily used. Other than parsing the Law and reviewing the various reports written by consultants, there is no document or rule that describes the role of market participants or the functioning of the electricity market. Drafting a comprehensive set of Market Rules, modeled on those used elsewhere, has thus now emerged as an issue for the PSRC. However, as noted above, the design of the market to be described in those rules has not yet been determined.4

III. Country Priorities / Focal Areas

What the PSRC and Armenia want for its electricity market in the near and medium terms is not entirely clear. The PSRC’s moves towards opening the electricity market have been very tentative and have been restrained by the fear of raising tariffs and causing the kind of social unrest that occurred during the summer of 2015. On the other hand, Armenia is moving forward fairly aggressively in building a new 400 kV line and B2B converter station with Georgia, even though consultants hired by USAID have advised that the B2B converter station could be built on the existing 220 kV line at a much lower cost.

However, in the meeting with Deputy Minister Galstyan, he stated that construction on the 400 kV line had already begun. He made it clear that the purpose of the new line would be to export power and that such exports justified construction of a much larger capacity cross-border line. He intimated that the cost of the line would be recovered through such exports. He stated that it was therefore important that Armenia comply with international best practices, as represented by the European Union (“EU”) model, and that Armenia create a regional electricity market with Georgia by 2018.

In response, the BSRI consultant noted that, based on her previous work in Armenia in 2013, she understood that Armenia had been able to negotiate generous time frames for compliance with the EU regulatory framework under the proposed Deep and Comprehensive Free Trade Agreement and Association Agreement with the EU. Deputy Minister Galstyan agreed but one of his colleagues commented that those agreements had not yet been executed.

In summary, the path which Armenia and the PSRC wish to follow regarding a competitive electricity market is unclear at the present time. The recommendations made to the PSRC and summarized in this report regarding the three areas focus areas must therefore be based on what is reasonably feasible based on the facts known today.

4 Because a new Grid Code is currently being drafted, the PSRC did not raise the issue of what Grid Codes should contain. However, as noted in Section 6 (“Grid Access and Integration”) ¶16 of the Guidelines, a Grid Code should include technical standards for the connection of renewable energy producers. Those technical standards should be transparent, easily available for investors and should strike the right balance between system reliability and simplicity to promote the penetration of renewable energy.

1. Regulation to Adopt Regulated Third Party Access to Grid

Prior to arriving in Yerevan, the BSRI Consultant received an English translation of the PSRC’s proposed Open Access Rule regarding third party access to the distribution grid.5 The BSRI Consultant drafted comments on the proposed rule, the purpose of which was to point out that the rule was related more to the first opening of the electricity market to competition than to open access of the grid.

During the one week of meetings, the BSRI Consultant drafted two sets of amendments to that Open Access Rule, intended to bring the proposed rule into alignment with international best practices. The BSRI Consultant also proposed that it be called a “transitional” rule to indicate that it would likely change in the future, when a new Concept for the Armenian electricity market was adopted.

The PSRC staff orally accepted many of the proposed changes, including amending the title to reflect the substance of the Open Access Rule but did not accept all the changes.

The most significant change that was not accepted by the PSRC was the role of the “single buyer.” The PSRC proposed that the balance responsible party (“BRP”) should be the single buyer (the electric distribution company) because balancing is done on a monthly basis (as is currently the case in Georgia). The BSRI Consultant instead proposed that generators and importers be the BRPs instead of the “single buyer.” The BSRI Consultant explained that balancing would have to be done at least on a daily basis in the future if Armenia wants to trade with Georgia because Georgia has already moved from monthly to daily balancing for trades made on the B2B interconnector with Turkey. Georgia will be moving to daily balancing in the future on its other interconnections as well, if it is accepted as an observer by ENTSO-E. Armenia will therefore have to change its balancing system from monthly to daily (and hourly) in the future if it wants to trade with Georgia over the new B2B interconnection. Ultimately, she agreed to leave the distribution company as the BRP because this rule is “transitional” only and because the rule does specify how to calculate the payments to be made for imbalances. Specifying the methodology that will be used to calculate imbalances therefore provides some transparency. To ensure further transparency and appropriate accounting for imbalances and payments, the PSRC should also require the single buyer to use the Uniform System of Accounts. The PSRC has approved the use of internationally accepted accounting standards but has not yet required licensees to implement such accounting practices. While this additional requirement was not discussed during the meetings with the PSRC, they are included in the attached Roadmap. The PSRC promised to provide the BSRI Consultant with a revised draft of the rule, based on the discussions held in Yerevan (“Revised Draft Rule”).

Their revisions were provided the day after the BSRI Consultant’s departure and were translated the following week. The BSRI Consultant reviewed the Revised Draft Rule and provided further comments and further revisions.6 The further

5 A copy of that Original Draft Rule is appended as Attachment A.

6 Those comments and track changes to the Revised Draft Rule are appended at Attachments B and C.

comments are intended to clarify the workings of the Revised Draft Rule and to understand some issues that are not entirely clear. They included: (1) how amounts sold by the Qualified Supplier to the Qualified Consumer will be calculated; (2) how imbalances will be calculated; (3) what methodology would be used to calculate payments for imbalances; and (4) the fact that the power purchase agreement between the Qualified Supplier and Qualified Consumer appears to play no role in these calculations. The BSRI Consultant agreed via e-mail to answer any questions the PSRC might have regarding her comments and revisions and to assist the PSRC further if requested.

While competition under the Revised Draft Rule will be limited because of the constraints that the rule places on who can be a Qualified Supplier and who can be a Qualified Buyer, the Revised Draft Rule nonetheless contains key definitions modeled on past and current international best practice and represents a break from the supply monopoly held by the Single Buyer. The new definitions include Qualified Supplier, Qualified Consumer, Third Party Access, Settlement Period, Transmission Provider, and others. The Revised Draft Rule states clearly that it is “transitional” only and is therefore a step to be commended. As noted above, a Concept is being drafted for a complete market opening with bilateral agreements and a balancing market which is hoped to be in place by 2018; the rule is thus “transitional” only.

Recommendation: It is recommended that a final Rule be adopted by the PSRC which meets international best practices as the first transitional step in opening the electricity market of Armenia to competition. Because of the danger that the transitional Rule could prove to be more than a “stop gap” measure and may end up proving a barrier to full market opening, it is also recommended that the “transitional” period during which the Rule is in effect not exceed two years (similar to the “transition period” used in Croatia). Following the transition period, a more internationally recognized market design should be phased in, consistent with the BSRI Regulatory Wholesale Market Guidelines for Black Sea Electricity Market Integration (“Guidelines”) and the Concept to be developed later this year.

2. Development of Market Rules

Prior to arriving in Yerevan, NARUC was provided with a list of 13 documents in Armenian of rules and procedures which the PSRC considered to be equivalent to “Market Rules”, when taken as a whole.7 Due to the number of documents in the list, it was only possible to obtain translations of a small selection; however, based on the names of the remaining documents and the English version of the rules translated, it soon became apparent that less than half of the documents qualified as “Market Rules,” as that term is customarily used. Several dealt with tariff levels, others dealt with technical equipment (which seemed more appropriately included in a Grid Code), while yet another deals with “payments from a special use account.” The BSRI Consultant therefore drafted a memorandum outlining what

7 That list is appended as Attachment D.

subjects are customarily covered by “Market Rules” and orally identified which of the rules on the list would qualify. The PSRC agreed with that assessment.

Given the very early stage of market developments in Armenia, the BSRI consultant provided the PSRC working group with hard copies of Market Rules that had been issued by regulatory authorities from the Energy Community, some before they joined the EU and, in all but one case, before the issuance of the Third Energy Package by the EU.8 The Market Rules that seemed most applicable to a “transition” type of market are the December 2006 Croatian Market Rules.9 These Electricity Market Rules (“Croatian Market Rules”) describe a market operated by the Croatian Energy Market Operator, relations between the Market Operator and market participants, the Transmission system Operator (“TSO”), and the Distribution System Operator, and the roles of each of the market participants. As in the Revised Draft Rule proposed by the PSRC, the Croatian Market Rules included “eligible customers” and “incentivized eligible producers.”

The “incentivized eligible producers” included cogeneration plants, as is also the case in the proposed PSRC Rule. The Croatian Market Rules also describe the agreements needed for data management and contracts registration, including (as is true of the PSRC rule) contracts for providing system services (the term previously used for “ancillary services”), balancing services and network losses.

The Croatian Market Rules required an agreement between all market participants and the Market Operator, while the proposed PSRC Revised Draft Rule requires an agreement between the Qualified Consumer and the Distributor (the “single buyer” acting as the Balance Responsible Party) for balancing services and individual agreements for services with the TSO for transmission services, with the Settlement Center for metering services and with the distributor for distribution services.

In conjunction with the issuance of the 2006 Market Rules, Croatia‘s regulatory authority also issued “Rules on Balancing the Electric Power System”10 (“Croatian Balancing Rules”) and “Methodology on Providing Balancing Energy Services in the Power System” (“Croatian Balancing Methodology”)11 During a two-year “transition period,” balancing services were provided by the “provider of electricity generation public service,12 which acted as the “Balance Responsible Party (“BRP”). That BRP is similar to the Distributor in Armenia, whose function is also to supply consumers at regulated tariffs, even though it is a “single buyer” and not a producer; however, it also acts as the Armenian BRP during an, as yet undefined, transition period.

8 These Market Rules—from Romania (Table of Contents and Definitions only due to the length of the Romanian “Commercial Code of the Wholesale Electricity Market”); Bosnia and Herzegovina; Croatia; and Bulgaria--are no longer available electronically because all have been superseded by Market Rules that are compliant with the Third Energy Package. Only the Bulgarian Market Rules, dating from May 2014, were issued after the Third Energy Package became effective.

9 A copy of the Croatian Market Rules is appended as Attachment E.

10 A copy of the Croatian Balancing Rules is appended as Attachment F.

11 A copy of the Croatian Balancing Methodology is appended as Attachment G.

12 Croatia Balancing Rules, Article 28 (1); Balancing Energy Methodology, Article 9 (1)

The similarities between the “transitional” market design in Croatia in 2006 and what is proposed as a “transitional” market opening in Armenia are close enough to warrant using the Croatian Market Rules, the Croatian Balancing Rules, and the Croatian Balancing Methodology as an initial model, even though Armenia has not yet created some of the institutions (such as the Market Operator) or the market structure (Day-Ahead Planning Market) that already existed when the Croatian regulatory authority published its Market Rules. But since a Concept for a new Armenia electricity market is currently being drafted, creating Market Rules in parallel with the new Concept is not premature. As stated by Deputy Minister Galstyan, the Government of Armenia’s (“GoA”) intent is to comply with the EU model by 2018 and, according to discussions the BSRI Consultant held with the Engility team in Yerevan, the Concept will contain all of the necessary elements (freely negotiated bilateral contracts between producers and consumers, Day- Ahead Market, Balancing Market, Market Operator, etc.) for the introduction of a competitive wholesale electricity market. The Revised Draft Rule described above already contains some key definitions and has begun the process of market opening.

Recommendation: It is recommended that PSRC should begin drafting market rules, balancing rules, and a methodology for pricing balancing energy consistent with international best practices, for a transitional period, pending the phase-in of a new Market Design consistent with the Guidelines and the EU’s Third Energy Package. Those transitional Market Rules can be modeled on rules that were in effect in Central and Eastern Europe before those countries became EU members.

The transitional Market Rules can reference the market players that will come into existence at some future time and indicate that certain procedures will take effect with the effective date of Armenia’s new electricity market design.

3. Cross-Border Capacity Allocation Methodology

Discussions with the PSRC working group several times touched on how the capacity over the new 400 kV transmission line and converter station should be allocated in the event of congestion. At the current time, Armenia does not publish available transfer capacity (“ATC”) or net transfer capacity (“NTC”) on the existing 220 kV line with Georgia or on the interconnection with another neighboring country. The response received from the PSRC during the gap analysis phase of this BSRI regarding publication of ATCs and NTCs was “Information on cross-border transfer does not represent a commercial secret, and it is made available upon request.”

This topic was also raised by Deputy Minister Galstyan, who outlined several hypothetical scenarios for the use of the new 400 kV line and converter station with Georgia. Under one scenario, the likely user of the new interconnection would be a power plant in a third country wanting to transit through Georgia to sell to a large consumer in Armenia (e.g. a sugar plant); under another scenario the Armenian nuclear power plant could enter into a 15 or 20-year period Power Purchase Agreement (“PPA”) with a buyer in a third country and would want assurances that it could have the necessary capacity for that 15 or 20-year period.

There are a number of different ways in which capacity is currently allocated on cross-border interconnections in the EU—as shown on a Power Point presentation by Dr. Peter Kaderjak during the second BSRI workshop. They include:

Pure NTC calculation by each TSO on a border based on the TSO’s network information (“BIL”), with the lower of the two calculations being used as the NTC;

Partially coordinated NTC calculations (“PC”), under which capacity calculated on a given border is partly dependent on the capacity calculated on at least one other border and TSOs calculate NTC values together on at least one border;

Fully coordinated NTC calculation (“FC”), under which all relevant TSOs in a region calculate NTC values together; and

Flow-based capacity calculation (“FB”), which, in conjunction with market coupling, results in maximizing exchanges between bidding zones.

One of the earliest codes adopted by EU’s Agency for the Coordination of Energy Regulators (“ACER”) was the Network Code on Capacity Allocation & Congestion Management.”13 Under that code, the target model for capacity allocation on cross-border interconnections is the FB methodology; however, at the present time the capacity on all but two of the EU border connections is calculated using either the BIL or the PC methodologies, with only two using the FC methodology and none using the FB methodology.

The Guidelines seek to introduce “market coupling” to the maximum extent possible in the BSRI region.14 “Market Coupling” is defined by the Guidelines as the “coordination of day-ahead schedules between one or more TSOs in order to schedule the most efficient combination of resources.”15 In the short-term, the Guidelines propose that cross-border capacity in the event of congestion should be allocated by coordinated bilateral auctions conducted on a yearly, monthly (and possibly weekly and daily) basis using the PC methodology, meaning capacity calculation on a given border considers at least two borders.16 Given Armenia’s geographic and political constraints, market coupling between more than two countries would theoretically require coordinating capacity on its borders with Georgia and Iran, the only two countries with which it has diplomatic relations.

Since market coupling between Armenia, Georgia and Iran are not be politically acceptable to the U.S., the recommendations in this report are confined to coordinated auctions between Georgia and Armenia using the BIL method.

Other key principles found in the Guidelines can, and should, be used by both Armenia and Georgia in allocating the capacity across the new 400 kV line. They include (in modified form):17

13 https://www.entsoe.eu/major-projects/network-code-development/updates-milestones/Pages/default.aspx 14 Guidelines, Executive Summary, “Balancing and Ancillary Services Recommendations” 15 Id. at Section 2.3.2 16 Id. at Section 2.2.2.1 17 Id. at Section 2,2,2 (“Congestion Management”)

Obliging TSOs in both countries to create and publish on their websites a data transparency page, consistent with the requirements laid out in Regulation (EC) No. 714/2009, in a user-friendly format that contains relevant information on Total Transfer Capacity, Transmission Reliability Margin, NTC, AAC and ATC (see e.g. http://mavir.hu/web/mavir-en/transparency).

Starting with yearly and monthly auctions;

Using marginal cost pricing;

Requiring the TSOs of both countries to agree (with regulator oversight) on the NTC to be allocated for the relevant time periods and directions;

In case of different estimates, using the smaller NTC value for the auction;

Deciding which of the two TSOs administers the auction;

Allocating the capacity at zero cost when demanded capacity is below

ATC (and there is thus no congestion pricing needed);

Publishing auction results and prices immediately by both of the TSOs;

Entering into an agreement on sharing auction revenues (and if no agreement can be reached on sharing, the default position is a 50-50 split);

Making the maximum capacity of the interconnections available to market participants;

Capacities contracted for long term contracts should be included in AAC and made transparent;

Compensating market participants who have been allocated capacity in the event of curtailment;

Applying the “ use-it-or-lose-it / use-it-or-sell-it” principle;

Allowing the use of a secondary market for the sale of unused capacity, but ensuring that TSOs are informed about the actual use of capacities sold on the secondary market;

Requiring TSOs to net power flows in opposite direction; and Using the revenues from the congestion management auctions in a neutral manner.

Due to the lack of time, it was not possible to discuss this level of congestion management detail with the PSRC during the meetings in Yerevan; instead the discussions were confined to the broad principles of market-based capacity allocation methods (as opposed to other methods such as “first come-first served”), and the definitions for various terms involved in cross-border capacity allocation, such as ATC, NTC and AAC, found in other countries’ market rules, including those of Romania,18 and in the Guidelines.19 It is likely, however, that these requirements will be raised by Georgia when construction of the new line is fully underway because of its own upcoming obligations under the Energy Community Treaty.

18 A copy of the Table of Contents and Definitions of The Commercial Code of the Wholesale Electricity Market of Romania was provided to the PSRC working group, as it illustrated a number of terms being discussed. A copy is appended as Attachment H.

19 Id. at Section 2.3.2. Reference was also made to the June 13, 2016 presentation of Dr. Peter Kaderjak (“Introducing the Electric Wholesale Markets Guidelines: Cross-Border Trade”) at the second BSRI workshop.

Recommendation: It is recommended that the PSRC begin discussions with Georgia’s regulator regarding the drafting a Capacity Allocation and Congestion Management Rule that is consistent with the parallel rule being drafted in Georgia.

The rules for coordinated auctions of cross-border capacity in each country should be consistent with the international best practices outlined above. Initially the Armenian rule may only apply to the coordinated allocation of capacity on the new 400 kV cross-border line to Georgia, but in the future could also apply to the existing 220 kV line to Georgia.

IV. Projects of Common Interest

The project of common interest to the countries that are part of the BSRI project is the cross-border 400 kV line proposed (or already under construction) to Georgia, with a B2B converter station. Since Georgia has plans to join the Energy Community, and is also negotiating to become an observer to the European Network of Transmission System Operators for Electricity (“ENTSO-E”), Georgia will have to commit to using the EU-mandated methodologies for allocating capacity on the new cross-border facility in the event of congestion as a condition of becoming a Contracting Party to the Energy Community. As described more fully above, it is therefore possible that Georgia will apply pressure on Armenia to adopt the same methodologies. The GoA has also expressed an interest in complying with EU practice in the future and the new line may therefore be the perfect project on which to introduce EU-compliant coordinated capacity allocation methodologies on both sides of the border with Georgia.

V. Road Map and Action Plan for PSRC

ACTIONS THAT CAN BE UNDERTAKEN IMMEDIATELY (BEGIN 2016)

1. Transitional Rule on Access Rights

Action/Event Legislative Authority

Entity Responsible

When Notes and Comments

Issue new Rule for Transitional Rights to Enter Network for Qualified Suppliers and Qualified Consumers (“Transitional Rule”) to be in effect for a maximum period of two years containing definitions for:

“Third Party Access” “Qualified Supplier” “Qualified Consumer” “Balance Responsible Party” “Power Purchase Agreement” “Imbalance” “Delivery Point”

In addition, the transitional Balance Responsible Party (the electric distribution company) should be required by the PSRC to implement the Uniform System of Accounts to provide further transparency and appropriate accounting of imbalance payments received.

Article 17 of 2001 Law on Energy

PSRC Immediately The Rule is the first small opening of the electricity market, allowing Qualified Consumers to buy electricity from an entity other than the Single Buyer. The danger of introducing this Rule before a Concept for a new electricity market has been developed is that the Rule could push back consideration and adoption of the Concept. To militate against this danger, the Rule should have an automatic termination date of two years.

In addition, the Rule should require that the Balance Responsible Party (the distribution company for the transition period) should use the Uniform System of Accounts to account for the receipt of imbalance payments , thereby ensuring greater transparency and proper accounting for such payments

Draft Rule and Comments provided in Appendix B & C

Action/Event Legislative Authority

Entity Responsible

When Notes and Comments

Draft a Concept for a new electricity market in Armenia (“Concept”) that includes:

Unbundling of supply and electricity transport

Day-Ahead and Intra-Day Market

Market Operator Balancing Market Ancillary Services Market Non-discriminatory cross-border access Data transparency requirements

Not required MENR

PSRC

Immediately Engility’s Ruben Abrahamyan has been asked by the Yerevan USAID Mission to draft a Concept for a new Electricity Market in Armenia, based on his knowledge of the Georgian electricity market. A Working Group, consisting of experts from the PSRC, MENR, ENA, HVEN, EPSO, privately-owned and State-owned generators, the distribution company, and international donors, should be established to work on the new electricity market design.

2. Begin Creating Market Rules

Authority

Entity Responsible

When Notes and Comments

Draft a body of rules to be called ”Transitional Market Rules” governing the proposed transition from a “single buyer” model to implementation of a competitive wholesale electricity, to include:

The structure of the wholesale electricity market

Roles of market participants, including the Market Operator

Relationships between market participants

Operation of the bilateral contracts market

Operation of the Day-Ahead Market

Operation of the Balancing Market Scheduling Provision of Ancillary Services Allocation of transfer capacity Metering Rules Rules for calculation of Imbalances Settlement Rules

Article 17 (6) of the 2001 Law on Energy

PSRC in cooperation with the GoA

1st Q 2017 There is at present no body of rules that, taken together, constitute “Market Rules.” A first step therefore is to draft Market Rules describing the roles of participants in the existing “Single Buyer” model, but include definitions for the new market players (such as the Market Operator) and the new market design which will be created once the Concept is introduced into law and to indicate that the Market Rules are transitional and will be amended once the new Market Design takes effect. Transitional Market rules can be modeled on market rules that were in effect in Central or Eastern Europe during a similar transition period, during which the new market design is phased in.

See Attachment D for a List of Market Rules

3. Draft Rule for Allocation of Capacity and Congestion Management

Authority

Entity Responsible

When Notes and Comments

Draft Rule to govern the allocation of capacity and congestion management on all cross-border interconnections, starting with the new 400 kV line and converter station. That rule should contain the elements noted above on p.

9 of this report

Article 17(6) of 2001 Law on Energy

PSRC 4th Q 2016

Finalize & publish Grid Code consistent with Section 6 (“Grid Access and Integration”) ¶16 of the Guidelines. The Grid Code should include technical standards for the connection of renewable energy producers.

Those technical standards should be transparent, easily available for investors and should strike the right balance between system reliability and simplicity to promote the penetration of renewable energy.

Article 37 of the 2001 Law on Energy

MENR, TSO and

PSRC

4th Q 2016 Deputy Minister Galstyan said a Grid Code is in the process of being drafted so another version may soon be ready.

ACTIONS THAT CAN BE UNDERTAKEN IN THE INTERMEDIATE TERM (2017-2018)

Authority

Entity Responsible

When Notes and Comments

Negotiate agreement with Georgia on the use of the cross-border interconnection similar to the agreement negotiated between Georgia and Turkey for their B2B converter station and 400kV transmission line

MENR and TSO Once construction on the new lines and substations has reached point of no return

Because Georgia is trying to become an Observer to ENTSO-E and a Contracting Party to the energy Treaty, any agreement will have to comply with international best practices (including the applicable ENTSO- E Code Capacity Allocation & Congestion Management).

Begin drafting amendments to the existing Energy Law of 2001 or draft a new Energy Law to reflect the Concept for a new electricity market in Armenia; such introduction can be phased in over a period of years as was done elsewhere in Europe to mitigate against any impact on consumers

MENR

Following agreement and approval of the Concept

International advisors should be engaged to support the drafting committee.

All relevant stakeholders should be consulted and their input should be obtained.

Public hearing should be held to educate consumers.

Develop public outreach campaign Not required

MENR

ENA

Following agreement and approval of the Concept

Public outreach is a critical component of this process; due to the demonstrations held in Yerevan last summer because of rising electricity prices, the public needs to be informed and made to understand that the new market design will decrease electricity prices as inefficiencies are flushed out of the system and competition is introduced

ACTIONS TO BE TAKEN IN THE LONG TERM

Action/Event Legislative Authority

Entity Responsible

When Notes and Comments

Enact new law or amendments to existing 2001 Energy Law

Constitution of Armenia

Parliament Following approval of the draft law or draft amendments by relevant stakeholders

Engility’s local experts and international experts will be starting the process this year but it is unlikely that a new law will be enacted before 2018.

Draft and publish implementing rules and regulations

New law PSRC Not likely before 2019

Launch new wholesale electricity market New law PSRC Not likely before 2020

ATTACHMENTS

Attachment A: Original Draft Rule Attachment B: Comments to Revised Draft Rule Attachment C: Revised Draft Rule with Track Changes Attachment D: List of PSRC “Market Rules” Attachment E: Croatian Market Rules Attachment F: Croatian Balancing Rules Attachment G: Croatian Balancing Methodology Attachment H: Table of Contents and Definitions of the Commercial Code of the

Wholesale Electricity Market of Romania