Armenia remains a country with great dependence on the imports of the energy resources. In 2021, 81.2% of the total energy supply (TES) was imported. Natural gas predominates TES, followed by nuclear anergy. Gas imports come mostly from the Russian Federation ― nearly 87.5% in 2022 and the rest from Iran in exchange for electricity exports.
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
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Armenia
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
The energy sector is by far the biggest source of greenhouse gas (GHG) emissions in the country. In 2019, its share of total GHG emissions was 64 % (7,138.5Gg CO2eq). Over 81.9% of CO2 emissions from fuel combustion in 2019 originated from natural gas. This is due to a very high gas deliverability level in the country (96%), its common use for heating and cooking, being less expensive than electricity, as well as its widespread use in transport on account of its affordability compared to gasoline.
The main power generation capacities in Armenia are nuclear power plant (32.0% of generation), natural gas-fired thermal power plants (43.5% of generation), hydropower plants (HPPs) (21.8% of generation) while wind and solar power plants accounted for 2.7% of TES in 2022. Renewable energy mainly consists of hydropower (small to large HPPs) but solar energy is experiencing rapid growth in recent years.
The government has intended to increase the share of solar energy to at least 15% of electricity production or 1.8 billion kWh, by 2030. To this end, solar power plants with the capacity of about 1 000 MW, including autonomous ones, are planned to be constructed.
Armenia has interconnections with neighbouring countries – Iran and Georgia, allowing for power exchange in both directions. It exports electricity to Iran in exchange for natural gas deliveries.
Energy prices and taxes
Armenia’s energy sector is a well-known example of a drastic tariff reform following the collapse of the Soviet Union and the ensuing energy crisis of the early 1990s.
The Public Services Regulatory Commission (PSRC) of Armenia, an independent regulator, regulates producer, consumer as well as transmission and distribution prices for natural gas and electricity. With the entirety of electricity and natural gas consumers having meters installed, there is no connection to the grid without a meter.
Consumer prices for natural gas are set higher than import prices. Large consumers pay less than smaller ones, reflecting Armenia’s commitment to abandon subsidisation of natural gas consumption. PSRC usually sets natural gas tariffs for monthly consumption up to and above 10 000 m3. From 1 April 2022, PSRC diversified tariffs for agriculture: canned food, drinks, dairy products and greenhouses and socially vulnerable families.
Consumer electricity prices are higher for end-consumer groups with lower voltage connections, and lower for consumers with higher voltage connections. Household consumers pay the highest price. This price structure reflects the increasing cost of distribution at lower voltages (due to losses). Thus, there are no cross-subsidies from industrial to household consumers in Armenia.
Since 1 February 2022, based on PSRC decision for the residential consumers (and others with 0.38 kV voltage connection) the tariff is higher for end consumers with higher consumption. Consumers with monthly electricity consumption up to 200 kWh are paying 46.48 AMD/kWh (daytime tariff), while up to 400 kWh/month: 48.48 AMD/kWh and if more than 400 kWh/month: 53.48 AMD/kWh (the night time tariffs in all cases are 10 AMD/kWh lower). The vulnerable families (annual electricity consumption up to 600 kWh/annual) are paying 29.99 AMD/kWh (daytime tariff). All mentioned diversified tariffs are set by PSRC and Government has no influence and any participation to the process.
Gasoline and diesel prices in Armenia are not regulated. However, the State Commission for the Protection of Economic Competition (SCPEC) monitors gasoline and diesel prices and ensures that there should be no cartel pricing and super profits in any market segment.
Figure 2. Total tax rebates and support for fossil fuels in Armenia
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
Current analysis reveals very limited subsidies in Armenia, which do not appear to create significant distortions in energy consumer choices. The identified subsidies belong to two categories: support to vulnerable groups in the form of direct budget transfers (but provided to the utilities selling at a loss rather than to consumers themselves), and government revenue foregone from under-taxing fuels. The beneficiaries of all these subsidies are consumers. The government of Armenia foregoes revenue by under-taxing certain fossil fuels: an exemption for imported diesel (from VAT at the flat rate of 20% for all products) was the largest fossil-fuel subsidy in Armenia during the period 2010-17, and excise tax exemption for imported natural gas as well as for compressed natural gas (2010-16).
The VAT exemption for diesel was eliminated under the new Tax Code taking effect on 1 January 2018 (after the first OECD FFS report was presented to government officials in 2016). However, to mitigate the impact of increased diesel price for agriculture, the excise tax was reduced from the current AMD 35 000/tonne to AMD 13 000/tonne.
Since May 2016, excise tax has also been levied on compressed natural gas (CNG), an important transport fuel in Armenia. The legislation on excise tax was amended in October 2015. The excise tax on CNG is paid by firms that serve vehicles by filling engines with CNG, at a rate of AMD 8 330 (since May 2016) and AMD 25 000 (since January 2018) per 1 000 m3. Most recently (1 January 2020), this rate was changed to AMD 34 000 per tonne. However, this is not a real increase of the rate, it is a conversion of the measure unit which was changed from AMD per 1 000 m3 to AMD per tonne.
The fiscal cost of support measures for fossil fuels in Armenia was estimated at AMD 2.63 billion in 2022 (Table 1). One hundred per cent (100%) was directed at end user beneficiaries, as opposed to % directed to firms. Support was mainly given out in the form of tax expenditures (AMD 2.15 billion) accounting for 81% of the total fiscal cost of support measures. Direct transfers amounted to AMD 0.49 billion.
The fiscal cost of support measures for fossil fuels has decreased by 75% since 2017. Since last year, tax expenditures have increased by 7%, from AMD 2.02 billion to AMD 2.15 billion and direct transfers increased by 1%, from AMD 0.46 billion to AMD 0.49 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Tax expenditures |
10.306 |
1.779 |
1.838 |
1.874 |
2.018 |
2.146 |
|
Direct transfers |
0.351 |
0.331 |
0.277 |
3.842 |
0.459 |
0.488 |
|
Total |
10.657 |
2.110 |
2.115 |
5.716 |
2.477 |
2.633 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
|
|||
|
Excise tax exemption of imported natural gas |
2.146 |
1.787 |
0.359 |
|
|
Direct transfers |
||||
|
Partial compensation of electricity and gas consumption costs for border communities |
0.488 |
0.351 |
0.137 |
|
|
Compensation to Electric Networks of Armenia for supplying electricity to households and small business at regulated tariff Compensation to Gazprom-Armenia for natural gas supplied to low-income households Financial support to residential natural gas and electricity consumers to mitigate COVID-19 impacts |
0.000 |
0.000 |
0.000 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3. Description of selected support measures for fossil fuels
|
Excise tax exemption of imported natural gas |
The whole natural gas in Armenia is imported. Natural gas in is exempted from the excise tax, usually applied to other fossil fuels. The revenue forgone of this measure is calculated by applying the benchmark rate – i.e. the rate applied to petroleum gases and other gaseous hydrocarbons (excluding natural gas not considered compressed) – to the volume of natural gas imported to Armenia each year. This rate is set at AMD 1 000 per tonne. |
|
Partial compensation of electricity and gas consumption costs for border communities |
Armenian people living in border communities are a defenceless part of the population due to military operations on the border. The government seeks to protect them from the increases in electricity and natural gas prices. The government of the Republic of Armenia compensates at least 50% of electricity and natural gas fees to border community households, which contributes to poverty reduction in rural areas. The list of border community households is approved by the Ministry of Labour and Social Affairs and the Ministry of Territorial Administration and Development. After the Second Nagorno-Karabakh War in 2020, according to the RA respective Government Decisions in 2021 the list of border communities was supplemented with 39 more settlements of Gegharkunik and Syunik regions, the total number of settlements became 81. According to the Government decision, the following types of social support for energy are implemented: a) compensation in the amount of 50 % of the natural gas tariff for consumers used up to 360 m3 annual, b) compensation of 50% of the electricity tariff consumed up to 1 440 kWh annual, c) moreover, in case the families considered to be eligible and non-consumers of natural gas, but consumers of electricity compensation of the electricity tariff in the amount of an additional amount corresponding to the cost of up to 180 meters of natural gas per year is provided. |
|
Compensation to Electric Networks of Armenia for supplying electricity to households and small business at regulated tariff Compensation to Gazprom-Armenia for natural gas supplied to low-income households Financial support to residential natural gas and electricity consumers to mitigate COVID-19 impacts |
Low-income families (that consumed less than 600 cubic meters of natural gas per year) were charged a reduced gas tariff. The list of households eligible for the reduced tariff was approved by the government. While low-income families in Armenia paid only AMD 100 per 1 cubic meter of natural gas the full tariff was set at AMD 132 per cubic meter since 1st April 2010 and was increased to AMD 156 per cubic meter since 7th of July 2013. The government compensated Gazprom-Armenia for the difference between the cost of gas and regulated tariffs for low-income families during 2011-2014 via direct budgetary transfers to the company on a monthly basis. The allocation came from the state budget under approval of the Ministry of Energy and Natural Resources, which calculated the monthly compensation amounts based on cost estimates from Gazprom-Armenia. The single electricity distribution company in Armenia, Electric Networks of Armenia (ENA), formally requested the Public Services Regulatory Commission (PSRC) to increase the price of electricity by 40% (AMD 17.08 including VAT for households). This price increase triggered large-scale protests. Protesters were blocking the main avenue in the capital, Yerevan. However, the PSRC decided to raise the electricity tariff for households by AMD 6.93 per kilowatt-hour (16.5%). The decision came into force on 1 August 2015. To compensate the losses incurred by ENA for selling electricity to low-income households (that consume less than 250 kWh of electricity per month) and small businesses consuming up to 500 kWh per month at this regulated tariff, the government provided budgetary transfers to the company on a monthly basis. The allocation was provided from the state budget under the approval of the Ministry of Energy and Natural Resources, which calculated the monthly compensation amounts based on cost estimates from ENA. This measure was effective for two years – 2015 and 2016. To address the social impact of the COVID-19, the government provided a lump-sum financial assistance to residential consumers to cover 30%-50% of natural gas and electricity cost consumed in February 2020. The share of compensation depends on the consumption amount and gasification of settlements. Transfers were made to utility providers – CJSC “Electric Networks of Armenia” and “Gazprom Armenia” CJSC – to settle the overdue debt of the eligible customers or as an advance payment. |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.