Review of the Electricity Market Rules, and Market Monitoring Solutions

The program intends to promote cross-border trade with Georgia and facilitate Armenian regulatory practices, as well as harmonization with best international practices and EU directives. The Armenia Wholesale Electricity Market (WEM) Rules, prepared by the USAID MLET program, reform the energy sector by creating five different segments of the electricity market. These segments include regulated and non-regulated long-term contracts, regulated and non-regulated bilateral contracts, the Day Ahead Market (DAM), and the Balancing Market. The ultimate aim of the new electricity market design is to introduce structure upon which the electricity sector in Armenia can operate under increasing competition in the future. A key feature of the new rules is to strengthen the national regulator to oversee major aspects of the industry. This includes oversight and monitoring of the markets, the Electricity Market Operator (EMO), Electricity System Operator (ESO), Transmission Owner (TO), and Distribution System Operator (Distributor). The National Regulatory Authority (NRA) should have direct monitoring functions, constituting data collection procedures and key performance indicators, which the NRA should be able to make use of in an independent, spontaneous, and/or organized manner. The NRA should also have direct monitoring functions, constituting a similar process in which ESO and EMO should report to the NRA. Data collection and data publication (transparency) should be independently set up to work in an automated manner. While price regulation will continue to be prevalent in all segments of the industry, including significant regulation in the wholesale supply sector, the rules make a first step toward relying on competition to establish efficient operations and investment in the industry. Regulated prices in the Market Rules and Energy Law will be a critical driver in the outcomes of the reformed markets, determining the extent to which the sector will rely on more efficient, market-oriented structures. At this stage, the DAM is basically a deviations market for the bulk of the bilateral contracts (mostly long-term and regulated segments). It is not expected that the DAM will have significant liquidity, and the prices regulated generators may thereby expect to derive should not correspond to a considerable part of their revenue requirement. Manipulation in the DAM will be of utmost concern, and along with the administrative maximum price in the DAM and of the balancing market, monitoring for physical withholding of scheduled power is critical. The balancing market and the bilateral contracts market will also require monitoring and outcome and performance metrics. The independence and empowerment of a National Regulatory Agency is a key component of effective market reform. Such practices have been adopted in the EU and in the US and have been successful in leading effective reform. The EU requires each member state to designate a single NRA and that the NRA must be independent from the government and from any private entities. The responsibilities under EU directives include ensuring the compliance of transmission system operators and distribution system operators and, where relevant, system owners, as well as the compliance of any electricity undertakings and other market participants, with their obligations under this Directive, Regulation (EU) 2019/943, the network codes, and the guidelines adopted pursuant to Articles 59, 60, and 61 of Regulation (EU) 2019/943, and other relevant Union law, including as regards cross-border issues, as well as with ACER's decisions. The NRA should also approve products and procurement processes for non-frequency ancillary services, monitor investment plans of the transmission system operators, and provide an assessment of the investment plans of the transmission system operators as regards their consistency with the Union-wide network development plan. The assessment may include recommendations to amend those investment plans. The NRA should also monitor and assess the performance of transmission system operators and distribution system operators in relation to the development of a smart grid that promotes energy efficiency and the integration of energy from renewable sources, based on a limited set of indicators, and publish a national report every two years.