Recommendations on the Mechanisms for the Wholesale Electricity Market Participants Payments Guarantee

The program intends to facilitate Armenian regulatory practices and harmonize them with best international practices and EU directives. The Recommendations on the Mechanisms for the Wholesale Electricity Market (WEM) Participants Payments Guarantee has been prepared under the MLET Program. The report reviews international practices on the application of payments guarantee mechanisms for WEM Participants and presents three alternative tools comparable to the Bank Guarantee. These alternative mechanisms are the Establishment/Operation of Clearing Center, Application of Escrow Account, and Issuance of Stand-by Letter of Credit. The Clearing Center is a separate, independent institution that facilitates exchange of payments and regulates transactions in the market for counterparty risks. It performs post-trade and prepaid transactions in compliance with relevant market rules, even where a WEM Participant becomes insolvent. The Clearing Center protects WEM Participants from the risk of non-fulfillment of partnership obligations by serving as an indirect guarantor and administering funds effectively. The main functions of the Clearing Center include automatic implementation of financial settlement/payments of a transaction, ensuring daily distribution of financial settlements, and examination of transactions conducted on the previous day. The Clearing Center makes payments for transactions through one or more banks, which may pose an insolvency risk of the bank conducting transactions. Electricity trade is carried out between WEM Participants by the supply of electricity and financial compensation in accordance with signed Transactions based on WEM contract. Each WEM Participant that conducts a transaction executes an agreement with both the opposite party and the Clearing Center. The Clearing Center ensures payments and settlement within the scope of transactions, resetting all types of trading transactions to zero in case of non-payment. The Clearing Center stands between two parties conducting a transaction as a third party guaranteeing the transaction by reducing the risk of one or more clearing members that fail to meet commercial obligations. The guarantee provided by the Clearing Center is based on its strong financial position and the availability of an automated management system. The Clearing Guarantee Fund is formed from membership fees determined by the Clearing Center, which serves as a group guarantee for transactions carried out in the WEM. The Clearing Center applies two types of clearing security as a mechanism for ensuring the fulfillment of obligations. The Clearing Guarantee Fund membership fee can be paid in cash or securities, depending on the category of the WEM Participant. The Clearing Center's membership fee is determined by the category of the WEM Participant, who is the Clearing member. The report compares the alternative mechanisms to the Bank Guarantee based on parameters such as equivalence of risk reduction, applicability, and feasibility. Considering the comparison of the alternative mechanisms and consultations conducted with RoA commercial banks and the Electricity Market Operator, it is recommended to apply the Bank Guarantee as the mechanism to guarantee WEM Participants' payments obligations. The Draft Form of the Bank Guarantee to be submitted by RoA commercial banks to guarantee payments of WEM Participants is presented in Annex 1.