Unlocking Armenia’s Energy Future

January, 2010 - “Energy is the key to life,” insists Tigran Parvanyan, IFC Project Manager for the Armenia Sustainable Energy Finance Project based in Yerevan.

Parvanyan remembers the consequences of the energy shortage during the period in the 1990s, which he, like many Armenians, still refers to as “the crisis,” despite the global economic events of recent years. Schools lacking heat and electricity closed for the entire winter as well as summer – not much fun for kids when there was no heat or electricity at home. There was broader impact, too. In 1993 electricity supplies to industry were cut to a third of those of the previous year, severely hampering the country’s economic development.

Despite the resumption of 24/7 energy supplies in 1996, the energy issue still looms large in the lives of Armenians. Their Minister of Energy, Armen Movsissyan, says, “Our quality of life and economic security are dependent on a stable and secure supply of affordable energy”. He adds that the government expects that “renewable energy will come to play the same prominent role of supply in Armenia as in many EU countries”.

Armenia, with help from IFC and Ameriabank, is showing how renewables can play a bigger role in providing energy security.

Small is Beautiful
In January, IFC provided a $15 million loan to Ameriabank to help finance small-scale renewable energy projects. The bank is providing long-term financing at affordable rates to clients building small hydropower plants (SHPPs).

Hydropower is not new to Armenia – in fact it already contributes 30 percent of the country’s energy. But most of that comes from large hydropower projects which in some cases have too many negative effects to be considered environmentally sustainable and which, in any case, are reaching the end of their lives. The average life span for a hydropower turbine is 30-35 years, yet 50 percent of Armenia’s large scale plants are over 50 years old, with one approaching its centenary.

A few years ago something interesting happened in the hydropower market: someone made money from an SHPP. This sparked what Parvanyan refers to a “boom in small hydropower plants”. “Word of mouth is very important in a small country like Armenia. When people started to run small hydropower plants and make money, everyone took notice,” he says.

But interest isn’t enough; you also need financing to build and operate a power plant. Average payback periods for an SHPP were typically longer than the commercial financing available in the market. While some longer term financing was available, it wasn’t sufficient to meet market demand.

IFC and Ameriabank are working to change that by increasing the availability of affordable and long term funding and improving the way banking services are provided to renewable energy projects.

From Nice Words to Good Business
Perhaps because of its past energy woes, Armenia is being pro-active about supporting the development of renewable energy. The government has reformed regulation to support SHPPs, including guaranteeing the purchase of output from renewable energy sources. But Parvanyan believes the most important change occurred in the private sector. “In Armenia, renewable energy has become good business. When you can prove that there’s a business case and people see it as an opportunity rather than just nice words from an international organization, then it really takes off.”

IFC’s work with Ameriabank aims to prove that financing renewable energy is also good business. “The key to unlocking Armenia’s hydropower potential is to demonstrate that smaller projects can be sustainably financed by the private sector,” says Thomas Lubeck, IFC Regional Head, Caucasus.

IFC’s financing should enable the construction of SHPPs with an installed capacity of about 20MW and construction cost of at least $20 million. This could be just the start of opening a sector that could contribute 300 MW to the energy supply and help Armenia move away from non-renewable energy sources and nuclear power.

IFC is working with Ameriabank to develop the SHPP financing product and promote best practice in the financial, structural, and environmental aspects of projects. IFC training has helped the bank increase its knowledge of renewable energy financing and carbon finance – a potential new business line.

Projects financed by Ameriabank are expected to reduce CO2 emissions by around 30,000 tons a year. “By helping Armenia shift to renewables and supporting environmentally sound projects we are achieving the broader goal of addressing climate change and meeting the challenges of Copenhagen," says Lubeck.