Georgia is getting ready to reform its gas market by putting in new energy legislation. The demand for natural gas is increasing each year and Georgia’s gas contracts are expiring. Geopolitics make Georgia’s energy security even more vulnerable, given that the country doesn’t have enough local gas resources to satisfy its needs. Currently, only a few companies operate in the Georgian gas market.
However, Georgia’s approach to gas market regulation is set to change, as the country is teaming up with the EU4Energy Governance project to put in a new legal framework stemming from the EU’s Third Energy Package. Changes are aimed at opening up the monopolistic natural gas market, attracting investments and increasing gas supply security in the country.
EU4Energy Governance is a technical assistance project funded by the EU under the EU4Energy Initiative. It helps policymakers in the Eastern Partnership countries build regulations and further identify investment opportunities. Besides Georgia, other Eastern Partnership countries such as the Republic of Moldova and Ukraine will also benefit from the initiative. Regional activities of the project implemented by the Energy Community Secretariat also involve Armenia, Azerbaijan and Belarus.
The final deadline for adopting the gas-related EU acquis in full is due by the end of 2020. The new Energy Law is to be submitted to the Georgian parliament by the end of 2018.
Challenges facing the Georgian gas market
Azerbaijan remains the main supplier of natural gas to Georgia. Currently, the whole market is monopolised by its gas giant Socar. Georgia is also a gas transit country from Russia to Armenia, meaning it receives transit fees. Georgia also benefits from the transit of natural gas through the South Caucasus Pipeline. At the same time, however, domestic gas production remains insignificant.
The natural gas market of Georgia is a market of direct contracts. Currently, Socar companies dominate both the wholesale and retail markets. According to a report by the Georgian National Energy and Water Supply Regulatory Commission, three suppliers delivered natural gas to satisfy Georgia’s gas demand in 2017. The evaluation of the level of competition indicates that the market is highly saturated, which is characteristic of countries with developing markets.
As for the retail market, the two main suppliers delivering natural gas to retail customers are Socar Georgia and KazTransGas Tbilisi. Given that the distribution licensees are not prohibited to carry out supply activities, they are also suppliers in the relevant distribution area.
The natural gas remains one of the most significant energy sources in the country. In 2017, the demand for gas increased by 3.6% compared to the year before. In addition, consumption is characterised by seasonality, whereas 72% of total annual consumption occurs in the winter.
Teimuraz Gochitashvili is the head of the Strategic Planning Department at the Georgian Oil and Gas Corporation, a state-owned company. He outlines some of the challenges the Georgian gas market faces, such as high market concentration, monopolisation, supply deficit, expiration of long-term contracts and delays in supplies.
‘Gas consumption is increasing annually and according to our prognosis, it may reach up to 3.5 billion CBM by 2030, while our long-term contracts are expiring. Finding replacements is a challenge,’ says Gochitashvili.
How will Georgia address its challenges?
To address the issues, Georgia plans to adopt a new Natural Gas Market Concept Design. It aims to bring competition into the Georgian gas market and ensure gas supply security in compliance with EU standards. The Georgian government plans to implement the basic rules of domestic gas market management under the requirements of its Association Agreement with the EU and Energy Community law, according to the 2017-2026 Energy Sector Development Strategy of Georgia.
On 4 to 5 October, the Energy Community Secretariat, an international organisation located in Vienna and a leader of the EU4Energy Governance Programme supported by the EU, hosted high-level policy talks on the natural gas market design in Georgia, bringing together field experts and authorities to discuss upcoming market changes.
‘We want to implement state-of-the-art, tailor-made natural gas market rules in Georgia, which will provide an open market for competition and deliver both lower concentration and security of supply,’ says Predrag Grujičić, the head of the Gas Unit at the Energy Community Secretariat.
Irakli Galdava, the head of the Natural Gas Sector Department at the Georgian National Energy and Water Supply Regulatory Commission also thinks it is necessary to bring competition to the Georgian natural gas market. ‘We need competition. Opening the market, non-discriminatory third party access and transparency is needed to invite suppliers on and create competition. They will purchase gas from different sources and we will no longer depend on single long-term contracts,’ says Galdava.
How does Georgia diversify its gas market?
When asked about how the new legislation will make the Georgian market more attractive, Andrius Šimkus, an Energy Community gas expert and author of Georgia’s new Draft Energy Law, says that a possible tool might be a ‘gas release programme’. This would mean that some, or – if the Georgian authorities decide so – all gas imported to the country may have to be sold on the gas exchange. ‘This means importers will not be allowed to serve final customers but will be required to offer the gas for sale on the gas exchange,’ explains Šimkus.
Yet another element to it, Šimkus says, is the so-called unbundling, or separation, of market players. ‘It means that Socar will not be able to have the same company for distribution and for supply. It will have to split, to ensure independence of the distributor from any commercial interests of supply, and to guarantee that each potential supplier can access the distribution system,’ says Šimkus.
Where should Georgia look for its gas?
Teimuraz Gochitashvili thinks that in the near future, Georgia’s key gas providers will remain Azerbaijan and Russia, given that there are ‘no technological nor commercial preconditions to receive gas from other sources’.
On the other hand, he says theoretically, there is a chance that Georgia could get its gas from Turkmenistan – and that might become more likely if the Trans-Caspian Gas Pipeline is built. The Trans-Caspian Gas Pipeline is a proposed subsea pipeline between Turkmenistan and Azerbaijan. ‘If Azerbaijan and Turkmenistan agree on the pipeline, then Georgia’s chance to receive gas from Turkmenistan becomes quite real,’ says Gochitashvili.
How will new legislation affect gas prices?
It is not yet certain whether the new legislation may initially increase gas prices. After all, one of the purposes of the EU4Energy reforms is to establish market conditions for energy supply.
Irakli Galdava explains how the new regulations approach the determination of gas prices for a vulnerable population.
He says that in the transitional period, it is possible that the prices for the population and small commercial actors would be regulated to ensure energy security and for other reasons, but that the need for this must be supported with evidence.
‘We do not expect big fluctuations. It’s very early to talk about whether the prices will increase or not. The commission will determine single prices for all consumers and then the government will have to decide which segment it is going to help out,’ says Galdava.
He says that the government should not subsidise gas for all customers, but probably for those who are in need.
Andrius Šimkus says that to address the issue, some temporary derogations from internal market rules are possible, but only if justified as being truly necessary, proportionate and non-discriminatory.
For that, a mechanism of public service obligations is envisaged by EU law, which obliges gas companies to provide a service of general interest to vulnerable customers. This could provide a transitory solution for Georgia. ‘This is possible and this is one of the significant steps towards eventually opening the natural gas market,’ says Šimkus.
Predrag Grujičić says that Georgia’s current approach to subsidising makes the country and its investments suffer. ‘Maybe you are consuming gas inefficiently? Maybe the wrong people get subsidised and the right people don’t receive the support they need?’ says Grujičić.
Peter Pozsgai says that the focus of the assessment should be the societal benefit of the market opening.
‘We speak about tariffs and market opening, but what people see is their bills and their retail prices. The government has wide scope to make these prices, higher or lower at retail level by adding or removing taxes and levies. If you have very low prices, somebody else is paying for this. If the population has cheap gas, another sector such as industry is probably paying the high prices. The focus of the assessment should be the societal benefit of the market opening,’ says Pozsgai.
The assistance offered in this regard by the EU and the Energy Community under the EU4Energy Government Project will help Georgia to establish a well-functioning gas market with clear rules and regulations that ensure both competition and legal certainty. With such rules and regulations in place, consumers, businesses and industry can expect not only lower energy bills, but also improved reliability and safety of energy supply and improved quality of service.
Author: Dato Perulava