IEA (2020), Georgia 2020, IEA, Paris https://www.iea.org/reports/georgia-2020, License: CC BY 4.0
About this report
Since the 2015 review, Georgia has made solid progress in improving both the security and sustainability of its energy supply. The country entered into the EU-Georgia Association Agreement in 2016 and become a Contracting party of the Energy Community Treaty in 2017. Since then, it has made significant legal and institutional reforms demonstrating the government’s commitment to align its energy sector with EU regulations for electricity and gas markets, security of supply, renewable energy, energy efficiency and statistics. The energy sector has been instrumental in establishing Georgia’s overall economic policy focused on creating a liberalised environment through minimal state interference, deregulation, privatisation, reduced and simplified licensing and taxation, and free trade, earning the country the reputation of a “star reformer”. Taking advantage of its favourable geographical situation, Georgia plays an important role in the regional trade of electricity, oil and natural gas.
Nevertheless, Georgia is still confronted with many challenges in its transition to a more secure, sustainable and affordable energy future. The government recognises most of them and is considering various measures to address them. There is room for the further strengthening of the country’s long-term energy strategy, raising institutional capacity and improving coordination between stakeholders to develop policies based on solid analysis of supply-demand trends and alternative scenario models. More efforts could be made to develop effective secondary legislation to accelerate the implementation of the EU energy acquis, and to gradually phase out implicit subsidies and cross-subsidies in the electricity and gas sectors. In this report, the IEA provides recommendations for further improvements of Georgia’s policies to help the country guide the transformation of its energy sector.
Georgia has made solid progress in the past decade, both in improving the security of its energy supply and in transitioning to a cleaner, more sustainable energy system. The energy sector has been instrumental in establishing Georgia’s overall economic policy focused on creating a liberalised economic environment through minimal state interference, deregulation, privatisation, reduced and simplified licensing and taxation, and free trade. All this has earned Georgia the reputation of being a “star reformer” and raised its governance and investment-climate ratings internationally.
The country’s electricity sector has evolved from being based on a single-buyer model in the late 1990s – characterised by frequent blackouts, inefficiency and non-payments – to an increasingly competitive model that incorporates private assets and enables greater system stability. Ongoing reforms aim to unbundle the electricity sector and enhance competition and security of supply in accordance with the EU energy acquis. Significant private investments have been obtained for the construction of new hydropower plants (HPPs), stimulated by Georgian power purchase agreements (PPAs) and attractive Turkish market prices for Georgian electricity exports. The recent construction of combined-cycle gas turbine (CCGT) plants has made gas use more efficient and helped to compensate for the seasonality of hydro-based generation. Considerable investments in cross-border infrastructure have boosted regional trade, optimising the use of regional resources and improving security of supply. Furthermore, the introduction of incentive regulations has reduced network losses.
Regarding fossil fuels, low entrance barriers have made Georgia’s oil product market quite competitive, and supply diversification is robust. Domestic crude oil and gas production have been declining, but the government is taking measures to keep the investment climate attractive to encourage further hydrocarbon exploration and production. Similar to the electricity sector, investments in oil and gas transportation infrastructure have strengthened Georgia’s standing as a transit country and a regional energy platform.
The Georgian government has also made efforts to develop national strategies, policies and measures to combat climate change, adapt the national economy to climate variations, and protect the environment. Thanks to the large share of hydropower in the country’s energy mix, Georgia’s CO2 intensity (fuel combustion emissions per unit of gross domestic product [GDP]) is below the world average. As a member of the European Energy Community (EnC), Georgia is working to align its legislation with the EU energy acquis, particularly to promote energy efficiency (EE) and renewable energy (RE). Laws, draft laws, action plans and some regulatory documents have been developed with donor support but some of them had not been approved as of late 2019. However, the regulator, municipalities and some businesses have implemented several praiseworthy initiatives without waiting for formal adoption of the EE and RE legal and regulatory frameworks. One example is the successful launch of a net-metering programme that has spurred small business and household investments in distributed rooftop photovoltaic (PV) systems. Another commendable trend is the growing use of electric vehicles, supported by national and municipal measures as well as by municipal initiatives to improve public transportation.
Although Georgia is still confronted with many challenges in its transition to a more secure, sustainable and affordable energy future, the government recognises most of them and is considering various measures to address them.
Strategic policy making
The Main Directions of State Policy in the Energy Sector, approved in 2015, outline general energy policy directions but provide neither the rationale for these strategic priorities nor guidance on strategy development. Although the more detailed Energy Strategy of Georgia 2020-2030 was approved by ministerial order in October 2019, the absence of a comprehensive energy strategy has affected all aspects of the energy sector and hampered its development. Ad-hoc policy decisions have not been based on sound information or analysis, undermining the energy sector’s investment climate.
The 2019 strategy is a commendable effort to make investors and stakeholders aware of the government’s intentions and signal its commitment to energy sector reforms, as well as guide development of a market model and secondary legislation to improve market attractiveness for long-term investment. The strategy can, however, be improved: the government should complement the existing document with a long-term action plan that encompasses a wider vision and strategic milestones based on modelling.
Solid analysis of various scenarios based on reliable data is the foundation of sound policy making. The coverage, quality and availability of energy statistics in Georgia have increased notably since the last IEA review in 2015, and the government is encouraged to continue trying to maximise the use of energy data for policy development and tracking progress. Energy efficiency indicators would be particularly useful for demand-side management and long-term energy policy planning, but the existing activity data for developing the indicators are scattered. Consolidating the data as much as possible would allow for the identification of key gaps and creation of a single dataset.
Relevant government institutions are working together to ensure that the energy strategy is consistent with the country’s climate change and sustainable development strategies, as well as with its economic, environmental and social policies. However, more could be done to enhance the links between the energy and the research, development and demonstration (RD&D) policies. The Georgian government should therefore continue (and strengthen) its work on RD&D support, including fundamental research on energy technologies and market deployment of innovative solutions. The current Innovation Strategy should be updated with a limited set of priorities organised within thematic areas, and energy-related RD&D should be consistent with the priorities of the national Energy Strategy.
A complete system of data collection, processing, modelling, alternative scenario development, policy analysis and decision-making needs to be developed to enable the government to make sound policy decisions. The National Statistics Office of Georgia (Geostat) is doing commendable improvements in collecting energy supply and demand data, including the development of energy efficiency indicators. These efforts should be continued. In addition, the government should consider creating an analytical entity to bring together qualified national experts and specialists to kick-start the process of sound modelling and analysis to inform policy making.
It is also important to have a strong executive body responsible for developing and implementing the energy sector strategy. Georgia had a separate Ministry of Energy until recently, but it was merged into the Ministry of Economy and Sustainable Development (MoESD) in November 2017. Although this new ministry is better positioned to co‑ordinate energy, environmental and climate-change policies with more demand-side attention, abolishing the Ministry of Energy has weakened policy making in the energy sphere and may have delayed the reform Georgia committed to as an EnC member. It is important that the MoESD place the energy sector among its highest priorities, and ensure that the department dealing with the energy sector is sufficiently staffed and has the institutional and human-resource capacities to make strategic decisions on the future of the energy market, and to develop and implement energy policies.
The national energy regulator’s independence and authority are integral to the successful implementation of energy sector reforms. The Georgian National Energy and Water Supply Regulatory Commission (GNERC) is considered to be competent and independent, and it operates professionally and transparently. It is important that GNERC maintain the authority necessary to make key electricity and gas sector decisions to enable competition as well as improve service quality and consumer protection while ensuring security of supply.
Georgia’s steadily growing electricity demand is currently being met by domestic hydropower generation (abundant in summer but reduced in winter), supplemented by imports and thermal generation. However, the supply-demand gap is growing: Georgia has been a net electricity importer for the last several years, and in 2019 imports were needed to meet domestic demand even in the summer. Implicit gas subsidies for thermal generation create downwards pressure on end-user tariffs, which does not encourage energy-saving. Plus, the emergence of a new consumer group – cryptocurrency miners attracted by relatively low electricity prices – has made it even more challenging to meet the country’s demand during supply-constrained periods.
On the supply side, Georgia has a large portfolio of power plants at various stages of development with identified developers and investors. New HPPs and RE projects are on hold in anticipation of a new market model and support scheme, and the completion of existing HPP projects (about 150) is also being hampered by various barriers, including local opposition and a dim market outlook. The government needs to develop and communicate a sound, clear and comprehensive strategy for the electricity sector, and adopt a new electricity market model as soon as possible. A thorough inventory, as well as monitoring and oversight of existing projects, is also recommended.
In the gas sector, the current market structure and legal framework contradict the principles of the EU energy acquis and provide neither proper regulation nor true competition, which raises energy security concerns. Non-transparent governmental agreements with the two suppliers – Azerbaijan’s SOCAR and the Russian Federation’s (hererinfater “Russia”) Gazprom Export – and the absence of a competition mechanism have left the market segmented and largely monopolistic, which gives these companies considerable market leverage. The regulation allowing distribution companies to supply gas to non-residential consumers at non-regulated prices puts the consumer at the mercy of powerful monopolistic suppliers.
Furthermore, the government’s undisclosed long-term agreement with SOCAR undermines prospects of unbundling and market competition. The government is therefore encouraged to renegotiate the agreement in view of the expected gas sector reforms to make the sector more transparent. The lack of supply diversity, SOCAR’s dominance of the gas supply chain, and the absence of competition could be a threat to energy security and affordability, as well as to Georgia’s economic competitiveness. The government would benefit significantly from putting strong checks and balances in place to manage the risks of the current situation. As the planned gas storage facility would reinforce energy security, its construction should be accelerated.
In the oil sector, an impending task for the government is to fulfil the requirements of the EU acquis for oil, i.e. the obligation to maintain minimum stocks of crude and/or petroleum products. The implementation deadline of 1 January 2023 may be challenging to meet, as Georgia’s draft Law on Emergency Stocks, prepared in 2017, is still being discussed with sector stakeholders. The new draft law should address several issues, including available facilities and compliance costs, and especially the impact of the obligations on small importers and their effect on pricing.
The suspension of coal production at the Mindeli and Dzidziguri coal mines following a lethal accident is necessary until security issues have been resolved. Plans to build a 300‑megawatt (MW) power plant together with a coal mine are driven by the attractiveness of greater energy security and economic development, but the downside risks – both environmental and economic – are considerable. The government must therefore ensure that investment is adequate for the mine to meet world-class standards for productivity and safety, and for power plant efficiency and pollution control, if the project goes ahead. If these conditions cannot be guaranteed, it would be better to cancel the project to avoid environmental and safety problems.
Energy transition: Alignment with the EU acquis
According to the Protocol on the Accession of Georgia to the Energy Community Treaty, Georgia has committed to implement several EU directives and regulations on electricity and gas markets, security of supply, renewable energy, energy efficiency and statistics. The government of Georgia, supported by donors and international financial institutions, has developed several draft laws to comply with these obligations and has made progress in developing the necessary secondary legislation.
These are very commendable developments, and they demonstrate the government’s commitment to align its energy sector with EU regulations. The draft laws are mostly framework laws, and the key regulatory and organisational/technical decisions, including those on a new electricity market model, support scheme(s) for renewables and the future of Georgia’s gas market, will be addressed in secondary legislation. The government is therefore urged to continue its high-standard work with all stakeholders to make these decisions as soon as possible, in full compliance with the EU energy acquis, to provide certainty and visibility to investors and market participants.
Energy, climate change and the environment
The government of Georgia recognises that climate change severely threatens Georgia’s (and the world’s) sustainable development, and that it may adversely affect various sectors of the economy, including the energy sector. Because climate change is modifying the hydrology of Georgian rivers and altering water availability for hydropower generation, the Georgian Energy Strategy rightly targets electricity generation diversification (by developing other renewable sources such as wind and solar) as well as increased trade with neighbouring countries to optimise the region’s use of natural resources. More efforts could be made to: i) assess all possible impacts of climate change (i.e. of rising sea levels, weather extremes, changing hydrology, etc.) on the country’s energy infrastructure, including hydropower plants and electricity and gas transmission and distribution systems; and ii) develop adaptation strategies to minimise possible negative effects.
The key climate change mitigation measures the Georgian government envisages are increased energy efficiency, renewable energy deployment and sustainable forest management. The establishment of a legal and regulatory framework to transpose the existing EU acquis on EE and RE is ongoing, as is forest reform, but this process should be accelerated.
Because establishing energy efficiency policy is challenging due to its cross-cutting nature and the large number of participants involved, the government could consider creating a separate body with the mission of improving energy efficiency across all sectors of the economy. Such a targeted, dedicated institution with clear competences and responsibilities could facilitate and streamline the implementation of Georgia’s EE objectives.
To support RE development, Georgia aims to introduce market-based schemes compatible with the EU acquis to ensure the smooth integration of RE generators into the future power market. But even during the transition period, before the electricity market is fully functional, competitive and transparent mechanisms – such as auctions for procuring RE capacity – could be put in place. Another short-term action to consider is streamlining the permitting and licensing procedures for hydropower and other RE projects, for example by establishing a one-stop shop.
Concerning opposition to new HPPs, adequate measures should be taken to ensure that they comply with the highest technical, environmental and social quality standards. Adoption of the Environmental Assessment Code is a positive development, but implementation of the Code should be properly enforced. The legal and regulatory framework for social, environmental and economic impacts of energy projects should also be further developed, particularly to address the resettlement of local populations and measures to ensure higher-quality environmental and social impact assessments. Adhering to stringent safety standards for power plant construction could reduce local opposition to new projects, as could public awareness-raising on various issues related to hydropower, including the need to meet growing energy demand in a climate-friendly way.
In the area of air quality, the government plans to take appropriate measures, such as introducing best available technologies (BATs); amending the national legislation to transpose EU standards; and establishing a framework for regulating air emissions from various sectors. Adequate attention and resources should be allocated to implementing these plans, and the government should also enhance efforts to continue improving the quality and reliability of data on air quality.
An issue that requires urgent attention at the highest policy level is the long-standing unsustainable use of biomass. Although access to gas is becoming increasingly widespread in rural areas, people continue to use wood for heating because it is more affordable. Illegal biomass use has consequently devastated Georgia’s forests, especially around towns and villages and in the vicinity of forest roads. The disappearance of biomass resources results in biodiversity loss, landslides and land erosion, flash floods and greater energy poverty.
The government should therefore reinforce efforts to ensure that the current unsustainable use of biomass be replaced by more sustainable alternative solutions. First, the ongoing forestry reform should be accelerated to implement robust forest resource management as soon as possible. Second, the use of waste and residue resources should be supported, for example by developing logistical solutions and targeted state support mechanisms within defined areas for small businesses. Third, more efficient stoves should be introduced along with other energy efficiency measures to reduce consumption.
Consumer protection and service quality
One of the objectives of the national energy policy is to improve service quality and the protection of consumer interests. To this end, Georgia’s energy regulator (GNERC) is to be applauded for having introduced successful incentive regulation approaches to reduce network losses, thereby improving electricity and gas supply quality. GNERC continuously monitors the supply reliability through relevant indicators. GNERC has also established various praiseworthy mechanisms for customer protection.
To provide affordable energy to households, the government’s policy is to take advantage of the relatively inexpensive natural gas Georgia has access to as a transit country, and to supply this “social” gas to the residential sector and thermal power plants (TPPs) at considerably less than the market price. Although the government does not cover the gap between the market price and subsidised tariffs directly from the state budget, these implicit subsidies are a significant loss of potential budget revenues. According to the price-gap approach, gas subsidies amounted to 1.1% of GDP for the residential sector and 0.5% for electricity in 2017 – equal to 6.7% of budget spending that year. These price subsidies are the primary barrier to the effective development of electricity and gas markets as well as energy efficiency and renewable energy.
Although politically challenging, the benefits of phasing out subsidies and redirecting scarce budget resources towards energy efficiency improvements would be manifold: higher macroeconomic stability; greater energy security; increased economic effectiveness; a cleaner environment, and more equitable social assistance. What is more, energy price subsidies are regressive: wealthier people living in larger apartments and owning more appliances benefit more from the subsidies than less affluent citizens do. There is no economic rationale for retaining subsidies if they are not serving their main purpose – protection of the poor. Targeted social assistance measures should therefore accompany a careful, gradual approach to phase out the subsidies.
The current gas policy also leaves non-residential consumers unprotected from market monopoly. The absence of competition and/or price regulation in the commercial segment of the gas market means there is no downward pressure on the gas prices industries and commercial enterprises must pay. This may be reducing the competitiveness of the Georgian economy, which could lead to lower wages and/or growing unemployment and result in social unrest. The gradual phase-out of subsidies and cross-subsidies in the gas and electricity sectors – as greater competition is introduced and/or regulations are strengthened – is therefore a much healthier way to protect a vulnerable population while boosting economic development. The phasing out of subsidies should be accompanied by targeted financial support to protect the most risk-exposed customers.