ARMENIA ENERGY STORAGE PROGRAM Summary of Economic, Financial, and Regulatory Analyses September 2023 of Energy Storage Development in Armenia Rationale Why should Armenia start thinking about battery storage now? As Armenia works towards the In the short term, the Government’s ambitious While the need for battery Government of Armenia should renewable energy targets and storage is relatively low in the focus on laying the the share of variable short term, the power sector groundwork to enable the renewable generation context might be significantly later development of battery increases, the country might different later in the decade, storage in the country, by need to install battery storage also depending on the developing a sound legal and systems to ensure the Government’s decisions on regulatory framework and reliable and smooth power interconnections supporting the first pilot operation of its power system storage projects 2 Global context Battery storage is gaining momentum across the world for a range of applications Utility-scale storage in California Behind-the-meter (BTM) storage in Germany Rural mini-grid storage in Africa • According to the American Clean Power Association, • BTM batteries are small-scale batteries (3 kW-5 • It is becoming clear that building grid-connected California had only 256 MW of utility-scale batteries MW) installed at the residential or commercial power plants will not be sufficient to achieve before 2020, but had reached 2.1 GW by the end of customer level (typically in conjunction with a solar universal access by 2030 in Africa (SDG7) 2021 — an 8x increase PV system), to provide peak shaving, self- • Solar-battery minigrids hold great potential to boost • Recently, more than 90% of utility-scale solar consumption optimization, and backup power electricity access in rural Africa, as they are a fast projects that have applied for interconnection in • 40% of recent rooftop solar PV systems in and cost-effective way to deliver electricity access California have a battery component Germany have been installed with BTM batteries to remote and rural areas • California has always been a pioneer of policies • In 2023, Germany is forecast to pass the mark of 1 • For example, in Mali two solar PV installations with a and regulations to drive the move to renewable million residential BTM batteries installed, with a capacity of 1.3 MW (each) of solar and 1.5-2 MWh energy and electrification, and these policies are 59% increase vs. 2022 battery storage are being built to provide electricity regularly imitated elsewhere • A clear regulatory framework (with the elimination to 24 villages, as part of a larger plan to electrify 70 • The deployment of storage is supported by of double taxation and the exemption from certain villages Investment Tax Credits of up to 30% grid access fees) is fueling this growth 3 Summary of Analytical Approach Two studies were carried out to support the Government of Armenia’s energy storage program • This report analyzed the economic and financial viability of battery storage solutions to ensure the reliable and smooth operation of Armenia’s power system in the context of an increasing share of variable renewable energy sources in the “Energy grid Modeling and • Several battery variants (ranging from 5 MW to 100 MW, and from 1 to 4 hours A Economic/ of duration) were assessed under three scenarios corresponding to different Financial evolutions of the Armenian power sector and two cases related to different Analyses� study levels of exchanges with neighboring countries • The financial analysis was carried out for four possible business models that could be used for the development of energy storage projects in Armenia “Legal and • Building on the results of the earlier report that analyzed the economic and Regulatory financial viability of battery storage solutions in Armenia, this report focused on B Review and assessing the country’s legal and regulatory framework to identify challenges Roadmap for to the deployment of energy storage and recommend options for necessary Reforms� study reforms that are tailored to the various possible energy storage business models 4 Summary of Key Findings and Recommendations Battery storage can provide economic benefits, but regulatory reforms are required to support its development A “Energy Modeling and Economic/Financial Analyses� study B “Legal and Regulatory Review and Roadmap for Reforms� study The economic analysis suggests that a 30MW/120MWh battery would be the Armenia’s energy sector institutional framework consists of state bodies most adequate battery size among the ones considered and would bring net responsible for policymaking and regulation; state-owned enterprises 1 economic benefits in the case of limited power exchanges with 1 responsible for power generation, and system, market, and transmission neighbors. network operation; and a state-owned fund responsible for facilitating investments. In the case where battery storage is investor-owned, a 30MW/120MWh Regulatory gaps in the areas of storage definitions in laws, permitting, battery would also be financially viable for all analyzed scenarios and 2 safety and security standards, wholesale electricity market barriers, and 2 cases. This battery variant could be considered also for the TSO ownership capacity mechanisms need to be addressed to support development of the model, especially in especially in the case of limited power exchanges with battery storage. neighbors. The widest gaps are related to the investor-owned business model, while The economic and financial viability of battery storage projects in Armenia only a few regulations need to be developed in the TSO-owned business 3 3 strongly depends on the level of system connection with neighboring model and the hybrid business model in which storage is attached to a VRE countries. plant. Recommendations • The economic/financial analyses study should be complemented with project-specific analyses with additional granularity on the RE development scenarios, when an actual battery storage project is proposed and when decisions are made on interconnections with neighboring countries (as the potential for regional power trade to balance variable RE should be considering together with domestic storage). • To facilitate investments into the battery storage sector, amendments to relevant laws should be made over the first ~1.5 years of the regulatory reform process, followed by amendments to a range of relevant PSRC decisions during the following six months. • Instead of just seeking financing, the Government should engage the private sector early on in business model design to get feedback on revenue scenarios, risk allocation, and policy incentives that make projects bankable 5 Table of Contents • Energy Modeling and Economic/Financial Analyses • Legal and Regulatory Review and Roadmap for Reforms • Annexes 6 Key Findings and Recommendations Armenia Energy Storage Program: Energy Modeling and Economic/Financial Analyses Summary of key findings Recommendations and Next Steps Objective The economic analysis suggests that a 30MW/120MWh battery would be the most adequate battery size among the ones • This study should be The objective of this complemented with project- considered and would bring net economic benefits in the case study is to analyze the 1 specific analyses when an of limited power exchanges with neighbors, where additional economic and financial actual battery storage project is flexibility would be needed to support the integration of wind and viability of several proposed (given that the benefits solar capacities. battery storage options are site-specific) and when under different scenarios decisions are made on of the Armenian power In the case where battery storage is investor-owned, a interconnections with system and different 30MW/120MWh battery would also be financially viable for all neighboring countries levels of interconnection analyzed scenarios and cases, which makes it an attractive with neighboring 2 • Subsequent analyses should options for the private sector. This battery variant could be countries, in order to consider different types and considered also for the TSO ownership model, especially in ensure the reliable and sizes of battery storage solutions, especially in the case of limited power exchanges with neighbors. potential future evolutions of smooth operation of the power system in the energy storage (e.g., context of an increasing The economic and financial viability of battery storage projects technological advances, changes share of variable in Armenia strongly depends on the level of system in regulations), and other effects connection with neighboring countries: in more isolated and (e.g., availability of balancing renewable energy 3 sources in the grid less flexible operating circumstances of the Armenian power services from neighboring system, batteries could play a more important role and be a more countries) viable option. 7 Research considerations The study analyzed the viability of four battery storage variants under three scenarios and two operating cases Battery Storage Variants Power System Scenarios Operating Cases 5 MW / 5 MWh Case A (flexible exchanges) Power capacity: 5 MW Scenario based on the Exchanges with Georgia with the Storage duration: 1 hour expected development of the Reference realization of only one phase of the Armenian power system till Scenario Armenia-Georgia back-to-back 2040 determined in the latest project (350 MW) and hourly 15 MW / 15 MWh least-cost development plan optimized export to Iran with a Power capacity: 15 MW predetermined annual total of 1.2 Scenario based on Reference TWh based on the “Electricity for Storage duration: 1 hour High VRES with assumed faster VRES gas� program with Iran X Scenario (solar and wind capacity) X Case B (exchanges as today) 30 MW / 120 MWh development Power capacity: 30 MW No interconnection with Georgia Storage duration: 4 hours High VRES (based on considerations given in Scenario based on the High Scenario the latest least-cost development VRES Scenario, but without a 100 MW / 400 MWh without new plan) and export to Iran simulated new nuclear unit in 2040 nuclear unit with fixed and predetermined Power capacity: 100 MW hourly profiles Storage duration: 4 hours 8 Economic analysis results Market simulations indicate that a 30MW / 120MWh battery storage variant is best suited for Armenia Results from Economic Analysis NPVe Battery Battery Key messages 30MW / 120MWh 100MW / 400MWh Net Case A - flexible exchanges with -0.02 M$ -74 M$ Present neighbours Value REFERENCE Scenario Case B - exchanges Results of the economic analysis suggest that the realization of a with neighbours as 16 M$ 2 M$ 30MW/120MWh battery would bring sufficient economic today 1 The value of Case A - flexible benefits in the case with more limited power exchanges with all future exchanges with -9 M$ -54 M$ neighbours neighbors (case B) cash flows HIGH RES Scenario Case B - exchanges over the with neighbours as 11 M$ 10 M$ entire life of today an Case A - flexible Results for case A are less positive, but the battery could still investment HIGH RES Scenario, NO exchanges with -0.4 M$ -38 M$ support exchanges with neighbors (e.g., by improving the net neighbours 2 discounted to new nuclear unit in Case B - exchanges transfer capacity of transmission lines) and provide additional 2040 the present. with neighbours as today 60 M$ See note * 91 M$ benefits that are not quantified in this study Battery Battery IRRe Internal 30MW / 120MWh 100MW / 400MWh Case A - flexible A 100MW/400MWh battery seems to be oversized for the Rate of exchanges with -2.1% -7.2% neighbours current Armenian power system and this battery solution Return REFERENCE Scenario Case B - exchanges 3 would not be able to release its full potential, at least not before with neighbours as 12.1% 6.3% A discount today 2040. In the Reference and the High RES scenarios, results are rate that Case A - flexible exchanges with 0.92% -2.4% barely above the breakeven point of 6% makes the neighbours HIGH RES Scenario NPV of all Case B - exchanges cash flows with neighbours as today 10.8% 7.2% The economic analysis was not carried out for the smaller equal to zero Case A - flexible battery variants (1 hour), as they are too small to be modeled in a exchanges with 5.8% 0.9% 4 discounted HIGH RES Scenario, NO neighbours from the point of view of the whole power system and their new nuclear unit in cash flow 2040 Case B - exchanges overall contribution to the system is negligible with neighbours as 20.0% 13.9% analysis. today See note * * Note: In this scenario, the power system adequacy risks are found to be unrealistically high. This suggests that additional generation capacity or stronger interconnections would need to be implemented, and this might alter the economic benefits 9 of battery storage Financial analysis results A 30MW/120 MWh battery would be the most profitable variant for private players to invest in Business model description Financial analysis results Key takeaways Investor-owned Battery storage considered as a • 30MW/120MWh • The financial viability of battery storage in case B (limited exchanges) is much storage with pure commercial asset, owned and operated battery is a better than in case A (flexible exchanges), especially for larger batteries market by an investor who aims maximize viable option • The 30MW/120MWh battery shows positive NPV and IRR in all scenarios and all remuneration revenues from the wholesale, ancillary regardless of the cases, suggesting that this would be the most profitable variant for private investors (IOPMR) services, and balancing energy markets scenario/case Similar to the previous business model, • The use of this business model does not seem justified for battery storage in Investor-owned • Capacity but with battery storage receiving an Armenia, since: storage with mechanism is additional revenue stream in the form – In case A (flexible exchanges), adequacy risks are limited and storage does support scheme unnecessary of capacity payment, which contributes not play a significant role in mitigating them based on capacity based on results to solving system adequacy issues or – In case B (limited exchanges), larger battery storage variants show good payments (IOCM) of the analyses shortage of balancing reserves financial results and would not need public support anyway • Financial analysis indicates that this model would make most sense for case B Battery storage treated as a network (limited exchanges) and for the 30MW/120MWh battery variant, which shows the • TSO investment TSO ownership asset and owned and operated by a best results viable only in (TSO) network operator, which recovers the • For this battery and case, the NPV would be US$7 million, with an IRR is 34%, case B cost through tariffs set by the regulator which is far above the discount rate • Tariff increase would be limited, between 0.09 and 0.75 $/MWh Battery storage used by the owner of a • Assuming that a 200MW investor-owned solar PV plant is combined with battery Investor-owned VRE plant as an option to maximize storage, neither of the 4-hour battery variants analyzed (30MW and 100MW) is hybrid solution of • Unviable revenues by minimizing VRE financially viable, with with NPV and IRR being negative in all cases energy storage and business model curtailment and shifting power • As a result, it would be unprofitable for the owner of a solar PV plant to combine it VRE plant (IOHS) dispatch to hours with higher prices with battery storage Detailed results presented in the Annex 10 Impact of exchanges with neighboring countries The level of system connection with neighboring countries significantly impacts the viability of battery storage More limited interconnections drive higher levels of curtailment… … which makes the case for battery storage stronger • The level of Armenian system connection with neighboring countries • In more isolated and less flexible operating circumstances of the has a strong impact on generation adequacy and the utilization Armenian power system (case B), batteries offer positive NPVs of the increased levels of VRES generation. through both economic and financial analysis. • Both VRES curtailment and adequacy issues are significantly • Under each of the different scenarios considered (Reference, high higher in the case of limited exchanges with neighbors and the RES, and high RES with no nuclear unit), battery storage operations of an almost isolated system consistently offers positive economic NPV under case B. Example: economic (NPVe) and financial (NPVf) NPVs for the High Power system and market indicators RES Scenario with no NUCLEAR unit Case B – 30MW / 100MW / Case A – flexible 120MWh 400MWh exchanges with High RES Scenario, no exchanges with neighbors as Case A – flexible NUCLEAR unit neighbors 8 -16 today NPVf exchanges with neighbors 2040 2040 (M$) Case B – exchanges with 34 60 Total VRES generation (GWh) 4,371 4,371 neighbors as today VRES curtailment (GWh) 148 617 Case A – flexible -0.4 -38 NPVe exchanges with neighbors Level of curtailment (%) 3.4% 14.1% (M$) Case B – exchanges with Energy Not Served (GWh) 17 196 60 91 neighbors as today Additional analyses of the economic viability of battery storage would be needed once decisions concerning the realization of the interconnection projects with neighboring countries will become clearer 11 Table of Contents • Energy Modeling and Economic/Financial Analyses • Legal and Regulatory Review and Roadmap for Reforms • Annexes 12 Key Findings and Recommendations Armenia Energy Storage Program: Legal and Regulatory Review and Roadmap of Reforms Summary of key findings Recommendations and Armenia’s institutional framework in the energy sector consists of Next Steps Objective key state bodies responsible for developing policies for and regulating the sector; state-owned enterprises responsible for power The objective of this 1 To facilitate investments into generation, system operation, market operation, and report is to assess transmission network operation; and a state-owned fund the battery storage sector, Armenia’s legal and responsible for facilitating investments. amendments will need to be regulatory framework made to RA laws over the for energy storage and first ~1.5 years of the provide regulatory reform process, recommendations for Regulatory gaps in the areas of storage definitions in laws, followed by amendments to reforms that would be permitting, safety and security standards, wholesale electricity a range of relevant PSRC needed to successfully 2 market barriers, and capacity mechanisms exist and need to be decisions during the implement energy storage addressed to support development of and investment in Armenia’s following six months. projects in Armenia. battery storage sector. The report also provides The Government should recommendations on prioritize no-regret policy amendments to key and regulatory reforms The widest gaps are related to the investor-owned business model, pieces of energy that do no need to be tied to while only a few regulations need to be developed in the TSO- legislation 3 specific projects. owned business model and the hybrid business model in which storage is attached to a VRE plant. 13 Institutional Framework Armenia’s energy sector is governed by state bodies, state-owned enterprises, and a state-owned fund Institution Description Selected batter storage-related functions Ministry of Territorial • Implements the state policy in the field of energy within • Develops investment plans for state- The authorized body of the government in the Administration and its mandate. owned enterprises energy sector Infrastructures (MTAI) • Supports the state regulation in the field of energy • Defines electric energy tariffs. • Defines the mandatory conditions or Public Services Independent body regulating electricity, • Provides licenses in the field of energy. samples of contracts concluded between Regulatory natural gas, water, and telecommunications • Approves the rules of the electricity market; energy licensees. Commission (PSRC) industries “Power System A 100% state-owned TSO, responsible for the • Short-term planning and regulation in the power system • Planning of electricity transmission Operator� CJSC operational management of the power system. • Operational management of the electric power system network development. A 100% state-owned company, responsible to • Recordkeeping of contracts concluded between • Organization of electricity market activity. “Settlement Center� make power and energy calculations in participants of the wholesale electricity market and for • Registration of electricity market CJSC wholesale electricity market. the import or export of electric energy (capacity). participants. “High Voltage Electric A 100% state-owned company. Owns and • RA electrical energy (power) transmission. • Expansion and development of Networks� CJSC operates the transmission network • Transmission network maintenance and operation. transmission network. "Armenian Nuclear A 100% state-owned company that generate • Electricity /power/ production. • Export of produced electricity/capacity Power Plant" CJSC electricity under a generation license. belonging to the company. A 100% state-owned company and sole • Production, delivery, and sale of electric energy. • Provides the service of BSP in the WEM “Yerevan TPP» CJSC balancing service provider of WEM. • Production, transportation, and sale of thermal energy • Support for the creation of new productions and the • Implementation of other measures to Armenia Renewable A state-linked autonomous legal entity that organization of services promoting the development of increase national energy security; Resources and facilitates investments in energy efficiency and renewable energy; • Responsible for the legal and regulatory Energy Efficiency renewable energy in Armenia. • Organization of implementation of credit and grant review for the Armenia Energy Storage Fund (R2E2) programs in the field of renewable energy; Program. 14 Regulatory gap and recommended actions (1/3) Define storage in laws, optimize the permitting process, and establish safety and security standards Importance Armenia context Actions Defining storage as a unique entity in the electricity sector is essential to prevent  Define the activity of electricity storage as a type of regulatory discrimination. Market access activity subject to licensing (or notification) in the Most key pieces of energy legislation do not make Storage rules, initially designed for other actors, field of energy. specific references to electricity storage and do not definitions could unintentionally disadvantage provide any status to entities engaged in electricity in laws storage. Clear legal definitions for storage Germany gave energy storage its legal definition in storage, and particularly battery energy storage. 2022, defining it as an asset where “the final use of within national laws can boost investment security, supporting energy system electrical energy is postponed to a later point in time deployment. than when it was generated� Permitting regulations for storage facilities Legal acts establishing permits in Armenia do not address should account for their technical features the activity of electricity storage. Organizations operating and potential environmental, safety, fire, in the field of energy must also obtain the following  Review and optimize the permitting process public health, and landscape impacts. permits, among others.  Promote efficient coordination among all relevant While the absence of tailored rules isn't • License for relevant activities in the field of energy administrative bodies. Permits necessarily a primary obstacle to storage • Positive conclusion of the environmental impact  Establish reasonable timeframes for the permitting development, it can impede the permitting assessment of the project detailed design process process, while facilitating timely and process. Challenges may arise from the • Positive conclusion of the technical examination of the meaningful public input. inappropriateness of the standard legal project detailed design and construction permit framework for storage projects and the Legislation governing these permits do not make any absence of specific provisions. reference to electricity storage, and particularly BESS. Adherence to safety and security standards, can impact the economic and technical Mandatory rules for the design, implementation, and feasibility of battery storage. It's essential operation of urban planning objects, buildings, and Safety and  Develop safety and security normative-technical to establish safety and security standards for constructions in Armenia are defined by the system of security documents regulating the design, installation, storage installation companies that urban planning normative-technical documents. In standards operation and maintenance of BESS. accurately assess risks without impeding Armenia, no normative-technical document regulates the adoption of storage solutions. BESS's design, installation, operation, and maintenance. 15 Regulatory gap and recommended actions (2/3) Address key barriers in the wholesale electricity market and gaps related to capacity mechanisms Importance Armenia context Actions  Define the status of companies engaged in The WEM rules do not in any way regard the entities electricity storage as participants in WEM Market barriers for storage can be engaged in the activity of electricity storage and do not  Define the rights and responsibilities of the categorized as entry barriers and give them any status (WEM participant, trade participant companies engaged in the activity of electricity participation barriers. Entry barriers include or service provider). storage as participants of the wholesale market. Wholesale issues like undefined storage market  Make any other amendments to bring the PSRC electricity rules or excessive pre-qualification Under the current market model, a storage plant decisions into compliance with the requirements of market requirements, while participation barriers (Investor-owned storage) can receive the status of BPP, the amended laws and adopt new normative legal (WEM) involve inappropriate market design being included in the balancing group of the BSP, and acts necessary for the implementation of the barriers parameters, such as minimum bid sizes. provide only a secondary reserve; or receive the status of amended laws Specific market designs may feature only market trade participant (as producer and supplier) and one type of barrier, but they ultimately carry out electricity trading in the direct contract market California developed regulations to allow utility-scale hinder storage deployment. and day-ahead market components of the wholesale batteries to participate in the wholesale electricity market. electricity market. Today, batteries provide over half of the California ISO’s regulation up and regulation down requirements  Define capacity payments  Define the transparent and non-discriminatory Capacity mechanisms are measures taken access of the capacity mechanism for those in support of medium- and long-term RA legislation on electric energy does not contain participants of the wholesale market whose Capacity electricity supply security. They enable provisions on Capacity Mechanism. As a result, the use of technical capabilities allow to provide such a mechanism power plants to be available for generating Capacity Mechanism is not regulated in RA. service in accordance with the network rules. electricity when needed in exchange for  Make associated amendments to the secondary payments. legislation. California’s ISO and other ISOs around the world allow the participation of storage units in their Capacity Remuneration Mechanisms (CRMs), although their participation can be more or less economically viable depending on the concrete rules 16 Regulatory gap and recommended actions (3/3) Existing rules in Armenia already address the issues of double tariffs and double taxation for storage Importance Armenia context Actions End-users pay grid charges based on the amount of electricity taken off from the grid In Armenia, end-users pay grid charges on the bases of Double and/or based on their connection capacity or the amount of electricity taken off from the grid application peak capacity taken off from the grid. (AMD/MWh). Armenia does not apply injection charges of grid Energy storage can physically be for generators and thus the problem of double application NA tariffs for considered as both producer and of grid tariffs does not exist in RA. storage consumer, and therefore both type of grid units charges could apply. This distortion can be a major barrier to the development of storage. The elimination of the double application of grid tariffs and taxes was a crucial action to enable the development of energy storage in Germany and California Storage plants that are directly connected to The end-user pays VAT on the bases of the amount of the grid, may be considered as both electricity taken off from the grid (AMD/MWh) when it producer (injection) and consumer comes to VAT. As a result, discharged energy will be (offtake). If storage is considered an energy taxed at two points (once when energy is off taken by Double consumer for taxation purposes, energy storage and once again when finally consumed by the application offtake by storage will constitute a taxable NA end-user). However, the problem of double taxation does of taxes event. Subsequently, the discharge energy not arise, because energy storage company will reduce will be taxed once again when finally the VAT to be paid to the state budget by the amount of consumed by the end-user. This can have a VAT already paid when energy was off taken. Hence the negative impact on investment and use of issue of double taxation will not arise. storage. 17 Reform roadmap (1/2) Key primary legislation amendments should be the focus during 2024 and first half of 2025 Timeline Business Area Milestones Number of Months Year model* 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Primary Legislation IOPMR; Law on Energy (N148 of 07․03․2001) IOCM; TSO Storage Law on Renewable Energy and Energy IOPMR; definitions Efficiency (N122 of 09․11․2004) IOCM in laws The draft law on Electricity produced by IOPMR; USAID (May 16, 2023) IOCM 2024- The draft law on Renewable Energy 2025 WEM IOPMR; and Energy Efficiency produced by barriers IOCM USAID (May 31, 2023) Law on Licensing IOPMR; (N193 of 30․05․2001) IOCM Permits Law on Environmental Impact IOPMR; Assessment IOCM; TSO; (N110 of 21․06․2014) IOHS *Note: The 4 business model options include: (i) investor-owned storage with pure market remuneration (IOPMR), (ii) investor-owned storage with support scheme based on capacity payments (IOCM), (iii) TSO ownership (TSO), and (iv) 18 investor-owned hybrid solution of energy storage and VRE plant (IOHS) Reform roadmap (2/2) Amendments to relevant PSRC decisions should be made in the second half of 2025 Timeline Business Area Milestones Number of Months Year Model* 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Secondary Legislation PSRC Decision on approving the procedure for licensing activities in the IOPMR; Permits field of energy and revoking a number IOCM of decisions (N 374 of 01․11․2013) PSRC Decision on approving the trading rules of the RA electricity wholesale market and revoking RA IOPMR; PSRC decision N 344 of August 9, IOCM 2017 (N 516 of 25․12․2019) PSRC Decision on approving the RA WEM electricity market transmission network IOPMR; 2025 barriers rules and revoking RA PSRC decision IOCM No. 161 of May 17, 2017 (N 522 of 25․12․2019) PSRC Decision on approving the RA electricity market distribution network IOPMR; rules and revoking a number of IOCM decisions of the RA PSRC (N 523 of 25․12․2019) Safety and Security Standards Safety and IOPMR; /Development of normative-technical security IOCM; TSO; documents regulating BESS design, standards IOHS installation, operation and maintenance *Note: The 4 business model options include: (i) investor-owned storage with pure market remuneration (IOPMR), (ii) investor-owned storage with support scheme based on capacity payments (IOCM), (iii) TSO ownership (TSO), and (iv) 19 investor-owned hybrid solution of energy storage and VRE plant (IOHS) End of Report Table of Contents • Energy Modeling and Economic/Financial Analyses • Legal and Regulatory Review and Roadmap for Reforms • Annexes ‒ Economic/Financial Analyses ‒ Legal and Regulatory Review 21 Table of Contents • Energy Modeling and Economic/Financial Analyses • Legal and Regulatory Review and Roadmap for Reforms • Annexes ‒ Economic/Financial Analyses ‒ Legal and Regulatory Review 22 Economic analysis: methodology and assumptions Key economic benefits and costs were considered to evaluate net economic benefits Benefits Costs Capital expenditure Calculated as the sum of the changes in Battery storage variant CAPEX (M$) Social Economic Consumer and Producer Surpluses and Welfare Congestion Rents for different energy 30 / 120 29.220 storage variants. 100 / 400 97.400 The monetized value of the improvement in Operating expenditure security of supply. Calculated by Monetization of Battery storage variant OPEX (M$/year) multiplying ENS (amount of energy Energy Not Served demand not supplied due to insufficient 30 / 120 (ENS) 0.731 resources) by Value of Lost Load (sum of costs associated with unserved energy) 100 / 400 2.435 Assumptions the change in CO2 emission due to a new Societal benefit from project. The indicator consists of two reduction in CO2 Discount rate: 6% components: the pure CO2 emission in emissions tons and corresponding costs in $/year. Economic lifetime: 15 years 23 Financial analysis: methodology and assumptions Financial analysis was conducted for four business models taking into account four revenue sources Business Models Revenue Sources Battery storage is considered as a commercial asset, owned and operated by the investor who aims to operate the storage in a manner Energy Represents the revenues which can be Investor-owned to maximize the revenues from the wholesale, ancillary services and arbitrage generated by energy storage operation storage with pure balancing energy markets. In this business model, the battery storage revenues on the wholesale market. market remuneration is competing with other portfolios like power plants and export/imports. This model is assessed in the case that adequacy issues are Balancing Represents the revenues gained from detected in Armenia without new storage projects. In addition to the reserve Investor-owned provision of the reserve related above-described model, here the energy storage obtains an provision storage with support ancillary services. additional revenue stream in the form of capacity payment based on revenues scheme based on the available capacity which contributes to solving adequacy issue or capacity payments shortage of balancing reserve. Revenues Represents the difference between The storage project in this model is treated as a part of network asset, from revenues obtained from balancing which is constructed, owned and operated by a network operator. balancing energy provision and costs from TSO ownership Energy storage is used outside the wholesale market and could be energy balancing energy provision. used for network services only. provision In this case battery energy storage provides an option for the owner Investor-owned hybrid to maximize revenues by minimizing VRE curtailment. Through Represents the state aid provided for solution of energy energy storage charging, revenue can be maximized by shifting Capacity the rights to utilize the battery storage storage and VRE plant power dispatch to hours with higher prices and reducing balancing payment plant’s available capacity. costs. 24 Financial analysis results Investor-owned storage model: 30MW/120MWh battery is the only one that is profitable across all scenarios/cases Results from Financial Analysis NPVf Battery 5MW / 5MWh Battery 15MW / 15MWh Battery 30MW / 120MWh Battery 100MW / 400MWh Key messages Net Case A - flexible exchanges with -0.4 M$ -1.3 M$ 0.6 M$ -34 M$ Present neighbours REFERENCE Scenario Value Case B - exchanges The financial viability of battery storage in case B with neighbours as -0.1 M$ -0.3 M$ 14 M$ 6 M$ today 1 (limited exchanges) is much better than in case A The value of Case A - flexible all future exchanges with -0.04 M$ -0.2 M$ 8 M$ -13 M$ (flexible exchanges), especially for larger batteries neighbours cash flows HIGH RES Scenario Case B - exchanges over the with neighbours as 0.1 M$ 0.2 M$ 19 M$ 25 M$ entire life of today an Case A - flexible exchanges with -0.04 M$ -0.2 M$ 8 M$ -16 M$ investment HIGH RES Scenario, discounted to NO new nuclear unit neighbours Case B - exchanges The 30MW/120MWh battery shows positive NPV and in 2040 the present. with neighbours as 0.1 M$ 0.2 M$ See note * 34 M$ 60 M$ IRR in all scenarios and all cases (ranging from today Battery Battery Battery Battery 2 US$0.6 million to US$19 million, and from 10% to 41% IRRf Internal Case A - flexible 5MW / 5MWh 15MW / 15MWh 30MW / 120MWh 100MW / 400MWh respectively), suggesting that this would be the most Rate of exchanges with -11.6% -12.2% 10.4% -12.1% profitable variant for private investors neighbours Return REFERENCE Scenario Case B - exchanges with neighbours as 6,0% 5.5% 34.5% 12.2% today A discount Case A - flexible rate that exchanges with 8,0% 7.3% 21.8% 3.7% makes the neighbours NPV of all HIGH RES Scenario Case B - exchanges The two 1-hour batteries show positive results only in cash flows with neighbours as 12.4% 11.7% 40.8% 20.3% case B in the High RES scenario, but even in this case equal to zero today 3 Case A - flexible the benefits are low, due to the fact that they can only in a exchanges with 8,0% 7.3% 22.0% 2.1% discounted HIGH RES Scenario, neighbours provide balancing services (and not arbitrage) NO new nuclear unit cash flow Case B - exchanges in 2040 with neighbours as 12.4% 11.7% 45.3% 26.7% analysis. today See note * * Note: In this scenario, the power system adequacy risks are found to be unrealistically high. This suggests that additional generation capacity or stronger interconnections would need to be implemented, and this might alter the economic benefits 25 of battery storage Financial analysis results Comparison of revenues of different battery storage variants in the investor-owned storage model Range of monetized market indicators of analyzed battery storages across all scenarios and cases between 2025 and 2040 Battery Battery Battery Battery 5MW / 5MWh 15MW / 15MWh 30MW / 120MWh 100MW / 400MWh Min Max Min Max Min Max Min Max Financial revenue from arbitrage (M$) n.a. n.a. n.a. n.a. 0.1 3.6 0.2 11.2 Reserve provision revenue (M$) 0.07 0.28 0.21 0.83 1.0 3.3 1.7 9.7 Balancing energy revenue (M$) 0.03 0.07 0.08 0.15 0.3 1.7 0.5 3.1 Total financial revenue (M$) 0.10 0.31 0.29 0.93 1.7 7.8 2.5 22.9 • For the two 1-hour battery storage variants, revenues from arbitrage are negligible and have not been considered due to their limited energy capacity. Revenues from arbitrage • Limited energy storage capacity of just one hour does not provide enough time for any significant activity in the wholesale market. As a result, only the larger 4-hour battery variants generate financial revenue from arbitrage. • The key benefits provided by the smaller 1-hour battery storage variants are revenues from reserve provisions and Reserve provision and balancing energy; however, the limited size of these battery storage variants (5MW and 15MW) act as constraints to balancing energy revenues these revenue sources compared to the larger 4-hour battery storage variants (30MW and 100MW). 26 Table of Contents • Energy Modeling and Economic/Financial Analyses • Legal and Regulatory Review and Roadmap for Reforms • Annexes ‒ Economic/Financial Analyses ‒ Legal and Regulatory Review 27 Detailed recommendations for regulatory reform (1/3) Milestones Action items/Recommendations Define the activity of electricity storage as a type of activity subject to licensing (or notification) in the field of energy. Define the rights and responsibilities of entities engaged in energy storage activity. Law on Energy Grant the non-discriminatory electricity market participant status to entities engaged in energy storage activity. (N148 of 07․03․2001) To ensure non-discriminatory and transparent dispatching, access to balancing services, and to the grid. To ensure that storage can be dispatched and can set the wholesale market clearing price as both a seller and buyer consistent with existing market rules; To ensure storage is eligible to provide all capacity, energy, and ancillary services that it is technically capable of providing in the WEM. Law on Renewable Energy and Energy Efficiency (N122 of 09․11․2004) It is proposed to make the following additions in the paragraph 1 of the law: “The Transmitter has the right to own, develop, manage or operate energy storage facilities, where they are fully integrated network components and are used exclusively to ensure the reliability and security of the transmission network.� It is proposed to make the following additions in the draft law: - To define in the draft law all types of activities in the field of electricity presented in part 1 of Article 18, so that it is clear what is meant by electricity production, supply, etc. - In the draft law, define the term “Electricity storage� as follows: “means, in the electricity system, deferring the final use of electricity to a The draft law on Electricity moment later than when it was generated, or the conversion of electrical energy into a form of energy which can be stored, the storing of such produced by USAID (May 16, 2023) energy, and the subsequent reconversion of such energy into electrical energy or use as another energy carrier.� - Define the term "Renewable energy generation" in the draft law as follows: “means energy generation from renewable, non-fossil sources (wind, solar hydro, geothermal, biomass, biogas and other) applicable for the generation of electric and/or thermal energy and energy storage.� - In the Article 35 of the draft law it is proposed to make the following additions: “Those participants of the wholesale market whose technical capabilities meet the requirements set by the transmission network rules have the opportunity to provide balancing service.� 28 Detailed recommendations for regulatory reform (2/3) Milestones Action items/Recommendations In the Article 41 of the draft law it is proposed to make the following additions: The draft law on Renewable Energy - “In addition to the rights reserved to the producer under Article 26 of the law on Electricity, the storage plant also has the right to purchase and Energy Efficiency produced by electricity in the wholesale electricity market.� USAID (May 31, 2023) - “Transmission System Operator shall ensure that storage plant is eligible to provide all capacity, energy, and ancillary services that it is technically capable of providing in the wholesale market.� Law on Licensing Define the activity of electricity storage as an activity subject to licensing in the field of energy in compliance with the requirements of the (N193 of 30․05․2001) amended laws (as provided above). PSRC Decision on approving the procedure for licensing activities in the field of energy and revoking a Make amendments to bring the PSRC decisions into compliance with the requirements of the amended laws (as provided above). number of decisions (N 374 of 01․11․2013) Law on Environmental Impact Assessment Classify the activity according to the appropriate category, taking into account the impact of the activity on the environment. When classifying, it is necessary to take into account the technology, power, and the area occupied by the plant. (N110 of 21․06․2014) 29 Detailed recommendations for regulatory reform (3/3) Milestones Action items/Recommendations Safety and Security Standards /Development of normative- Develop safety and security normative-technical documents regulating the design, installation, operation and maintenance of BESS. Standards technical documents regulating should be based on the real risks and avoid jeopardizing the uptake of storage. BESS design, installation, operation and maintenance PSRC Decision on approving the trading rules of the RA electricity wholesale market and revoking RA PSRC decision N 344 of August 9, 2017 (N 516 of 25․12․2019) PSRC Decision on approving the Define the status of companies engaged in electricity storage as participants in the wholesale electricity market. RA electricity market transmission Define the rights and responsibilities of the companies engaged in the activity of electricity storage as a participant of the wholesale electricity network rules and revoking RA market that will enable the operation of energy storage battery systems as a wholesale trade participant in the electricity market and balancing PSRC decision No. 161 of May 17, service provider (including secondary reserve). 2017 Make any other amendments to bring the PSRC decisions into compliance with the requirements of the amended laws (as provided above), as (N 522 of 25․12․2019) well as to adopt new normative legal acts necessary for the implementation of the amended laws. PSRC Decision on approving the RA electricity market distribution network rules and revoking a number of decisions of the RA PSRC (N 523 of 25․12․2019) 30