State of Compliance
Pursuant to the Protocol on the Accession of Georgia to the Energy Community Treaty, as signed on 14 October 2016, Georgia is obliged to transpose and implement the Energy Community gas acquis by 31 December 2020. The country’s gas sector is currently governed by the Law on Electricity and Natural Gas, which was adopted in 1999 and, despite later amendments, remains non-compliant with the Third Energy Package. The new Law on Energy and Water Supplies (“new Law”), as drafted with the Secretariat’s assistance, remains under discussion in the Parliament of Georgia.
The Georgian legislation currently in force does not require unbundling of vertically integrated gas undertakings. The legal basis for unbundling shall be established by the new Law.
The Georgian Gas Transportation Company (GGTC) is currently the only entity authorised by the national regulatory authority GNERC for gas transmission activities. GGTC operates the entire domestic gas transmission network owned by Georgian Oil and Gas Corporation (GOGC), a gas market incumbent also engaged in production and supply. Both GGTC and GOGC are fully state-owned. GGTC, is already legally and to a large extent functionally independent from GOGC.
The South Caucasus Pipeline (SCP), which crosses Georgia from Azerbaijan to Turkey, is not part of the domestic transmission system and is owned by a consortium led by BP and Azerbaijan’s SOCAR. BP also acts as the pipeline’s technical operator. SCP functions on the basis of an Intergovernmental Agreement and corresponding contracts and is exempt from the application of the national regulatory framework. The Accession Protocol exempts SCP from the implementation of Directive 2009/73/EC and Regulation (EC) No 715/2009 until 31 August 2026, the date of expiration of the Energy Community Treaty. Based on this exemption, the SCP’s operator is also released from the unbundling obligation.
Out of 25 gas distribution companies licensed by GNERC, only three – SOCAR Georgia Gas, KazTransGas Tbilisi and Sakorgas – exceed the threshold of 100.000 connected customers and are subject to mandatory legal and functional unbundling. All three companies are vertically integrated and are engaged in gas supply activities as well as in operation of gas distribution networks.
Third Party Access
Third Party Access
Transparent, objective and non-discriminatory third party access to gas networks is yet to be established and enforced in Georgia in accordance with the requirements of the gas acquis.
Pursuant to the current Law on Electricity and Natural Gas, GNERC is in charge of setting gas transmission and distribution tariffs under its adopted methodology. The existing methodologies and GNERC’s tariff setting practices shall be reviewed to ensure their compliance with the Third Energy Package. In 2019, the Secretariat provided GNERC with a draft transmission tariff methodology in line with the Third Package and Commission Regulation (EU) 2017/460 establishing a network code on harmonised transmission tariff structures for gas.
The Law on Electricity and Natural Gas refers to the network owner’s obligation to allow the use of its network by entities delivering gas to other connected networks. This right of use, however, is granted pursuant to the Civil Code and is not arranged in line with the mandatory requirements for third party access services, capacity allocation, congestion management and transparency stemming from the gas acquis. The combined gas transmission and distribution network code adopted by GNERC on 31 August 2018 contains provisions on nomination and re-nomination of gas deliveries, however, the code does not provide third party access rules fully pursuant to the Third Energy Package.
Cross-border gas entry and exit capacities are shared between market incumbents in charge of gas transit through export or import to Georgia based on Intergovernmental Agreements and corresponding long-term contracts. However, based on the Accession Protocol, third party access rules will not apply with regard to exempted gas transit pipelines (SCP and the North South Gas Pipeline (NSGP) – until 31 August 2026) as well as to cross-border exchanges in gas between Georgia and countries which are not Energy Community Contracting Parties or EU Members States, i.e. all of Georgia’s neighbouring countries at present.
Third party access rules will be therefore applicable only on internal connection points at domestic gas transmission and distribution networks. Capacities at internal connection points are shared between gas importers such as GOGC and SOCAR. There is no competitive allocation procedure applicable in order to ensure the possibility for open and transparent booking of these capacities by any other interested system user.
The Republic of Azerbaijan remains the main supplier of natural gas to Georgia. Through different long-term contracts, i.e. for commercial and social purposes, Georgia receives 61.3% of its needs directly from Azerbaijan. Additional Azeri gas is delivered to Georgia from the South Caucasus Pipeline (SCP). At the same time, Georgia transits natural gas from Russia to Armenia. In 2018, 99.8% of the Georgian natural gas demand was satisfied through import. Domestic production remains marginal.
In 2018, seven suppliers supplied natural gas on the wholesale market, which – at this level of trading – remains highly concentrated. The share of the three largest suppliers, GOGC, Socar Georgia Gas and Socar Gas Export-Import, amounted to 92% of the Georgian wholesale market.
Like in previous years, the structure of the natural gas market of Georgia remains unchanged. The companies affiliated with Socar (Socar Georgia Gas, Socar Gas Export-Import) and GOGC hold dominant positions in the wholesale and retail markets.
Having exclusive rights granted to incumbents with regard to the acquisition of gas from external suppliers and its imports to Georgia as well as absence of effective third party access to cross-border capacities discourages newcomers to the market and eliminates its competitive development. Existing Intergovernmental Agreements and long-term contracts guarantee the availability and affordability of gas for Georgia but, at the same time, they restrict market liquidity and limit its potential for diversification.
On Georgia’s wholesale market, all imported and domestically produced gas is traded based on bilateral long-term contracts. There is no virtual trading point, neither functional nor defined, in the transmission system. The reform of the wholesale gas market should continue after the adoption of the Gas Market Concept Design and other necessary regulatory acts.
Certain provisions related to balancing, including responsibilities of the transmission system operator and balancing groups, were introduced by the combined gas transmission and distribution network code. However, general rules on balancing are still to be adopted via the new Law on Energy. Additional elements required by Regulation (EC) No 715/2009, such as incentives of network users to balance their input and off-take of gas and apply cost-reflective imbalance charges, should still be introduced in Georgian legislation.
As required under the Accession Protocol, all non-household customers in Georgia have become eligible and therefore allowed to freely choose and switch their gas supplier from 31 December 2018. All remaining customers, including households, shall become eligible from 31 December 2019. The customers’ eligibility right is already de jure granted under the current legislation but is not used in practice due to market dominance, lack of alternative suppliers and absence of effective supplier switching mechanisms.
The retail gas market in Georgia is highly concentrated. In 2018, the market share of the two largest distributors and suppliers – SOCAR Georgia Gas and KazTransGas Tbilisi – equalled to 74% of total annual gas supplies to final customers. Long-term contractual relationship and, in SOCAR’s case, also corporate interdependence between incumbent importers and suppliers practically intercept the entire gas supply chain in the country and undermine the possible emergence of competition.
Despite partial deregulation of gas supply prices in Georgia, household customers and thermal power plants (TPPs) are considered as a so-called social sector eligible for gas supplies under exclusive regulated conditions. The social sector is in particular entitled to receive cheaper gas imported through SCP and NSGP, whereas all other customers are exposed to non-regulated market prices. In 2018, the social segment (households and TPPs) consumed 61% of total national gas demand. This practice must be justified as a public service obligation in compliance with Directive 2009/73/EC and monitored as regards its competitive effect, as it covers the major share of the retail market.
Legal measures on customer protection, including protection of vulnerable customers, gas supply of last resort as well as security of gas supply standards and guarantees for protected customers are yet to be established and enforced in compliance with the gas acquis.
Georgia, considering its marginal domestic gas production, will remain a net importer of gas. Currently, the country has well-developed cross-border connections with all neighbouring gas systems and provides so far the only possible onshore route for transit of Azeri and Russian gas to Turkey and Armenia respectively. This strategic role of Georgia may be further exploited for opening and integration of its internal gas market, thus attaining more diversified external sources, more flexible peak supply solutions and more competition both at wholesale and retail levels.