Deloitte & Touche says rise of electricity in Armenia is justified
Deloitte & Touche, a leading U.S. financial services firm, hired by the Armenian government to determine whether the recent rise in electricity prices in Armenia, which sparked street protests, was economically justified, presented today the report on the first stage of consulting services, saying that after analyzing the current situation in Armenia they found the country’s sole energy supplier appearing on the brink of default, largely due to a gap between the system operator’s forecasting and the load factor.
“Power generating companies had been affected by the financial deficit in the Electric Networks of Armenia (ENA), which in the short term would threaten the country’s energy stability. Under such conditions, Public Services Regulatory Commission’s (PSRC) decision to increase tariffs, aimed at the stabilization of the situation and conservation of reliable power supply to consumers, is, from our perspective, justified,” the firm said in a statement.
The statement said in the last 15 years electricity prices for end consumers were raised four times- by 24% in 2009 and then three times in 2013-2015. This cumulative growth rate (70%) over the last three years outstripped the inflation rate four times, it says.
According to the statement, payroll costs, as well as maintenance of networks’ operation, depreciation and the necessary profit in the last five years (they consume 23% of tariffs), increased by 13%, twice lagging behind inflation.
The statement says also that the average high tariffs for consumers in Armenia are largely due to the historical structure of the generating companies, the lack of cross-subsidization between different consumer groups and the use of part of proceeds from tariffs to increase wages for all without exception.
Deloitte & Touche experts say the mistakes made over the last three years led to overestimated forecasts for cheap energy production by hydroelectric power against the background of declining levels of water in reservoirs after rainless and hot summers in 2009-2012.
The statement says this forced the Electricity Networks of Armenia to buy the shortfall amounts of electricity from the Hrazdan thermal power plant at a price 3-5 times higher than the price of electricity generated by large hydroelectric power stations.
According to the statement, because of erroneous load forecasts for 2012-2015 and prolonged repair of the nuclear power plant the Electricity Networks of Armenia received less 37 billion drams of tariff margins. In 2013, the regulator decided to compensate the shortfalls by equal parts over the next three years allowing the rise of electricity by 10% (6.5 drams/KWh) in 2012 and by another 33% in 2014-2015 (3.1 drams / kWh.)
The statement says also that the regulator has the chance to restrain the growth of electricity rates in 2016-2017 by distributing the repair program of the NPP for two tariff years and increase the loading of Hrazdan-5 thermal power plant’s unit.
At the same time, the statement says in order to stabilize the situation in the long term, the regulator must determine the internal reserves of cost savings for operating facilities, while the relevant government bodies must clearly prioritize the development of the industry, especially the construction of new facilities.
At the same time, experts note that if the regulator compensated for only a third of the additional costs incurred by Electricity Networks of Armenia for the purchase of electricity (which was in tune with then methodology), it would keep the tariff at 33.9 drams / kWh. However, such a decision would put the energy system of Armenia to the brink of financial crisis, because the large debts to the banks would make the operator to declare a default.-0-