State of Compliance
Pursuant to the Protocol on the Accession of Georgia to the Energy Community Treaty, as signed on 14 October 2016, Georgia has committed 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. Absence of compliant primary legislation leads to the lack of a comprehensive legal framework necessary for proper implementation of Third Energy Package rules. The new Law on Energy, as drafted with the Secretariat’s assistance, remains under discussion at ministerial level and is expected to be submitted for adoption later in 2018.
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 on Energy.
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, already legally and to a large extent functionally independent from GOGC, is initially envisaged for unbundling under the independent system operator (ISO) model. The unbundling process is yet to be launched after adoption of the new Law on Energy.
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 basically exempt from application of the national regulatory framework. Based on the Accession Protocol, SCP will also remain exempt from the implementation of Directive 2009/73/EC and Regulation (EC) 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 26 gas distribution companies licensed by GNERC, only three – SOCAR Georgia Gas, KazTransGas Tbilisi and Sakorggazi – 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. Independence of distribution system operators will have to be ensured in accordance with the rules to be established by the new Law on Energy.
Third Party Access
Third Party Access
A comprehensive system of 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. However, it is not yet required to establish an entry/exit transmission tariff methodology in line with Regulation (EC) 715/2019. The existing methodologies and GNERC’s tariff setting practices will have to be reviewed following the adoption of the new Law on Energy so as to ensure their compliance with the Third Energy Package.
The Law on Electricity and Natural Gas also 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. GNERC informed the Secretariat about the progress in preparation of new gas transmission and distribution network codes, but it is still not clear to what extent third party access rules will be transposed without a primary legal basis.
In practice, gas system entry and exit capacities are shared between market incumbents in charge of gas transit through or import to Georgia based on Intergovernmental Agreements and corresponding long-term contracts. Access to entry/exit points is therefore restricted and not granted to any other third party. Capacities at internal connection points are also shared between gas importers and there is no allocation procedure applicable so as to ensure the possibility for open and transparent booking of these capacities by any other interested system user.
Even after the new Law on Energy is adopted, 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 Georgia’s neighbours for the moment. These rules will be therefore applicable only with regard to internal connection points at domestic gas transmission and distribution networks.
The wholesale gas market in Georgia remains highly concentrated, where GOGC and the SOCAR group are dominant importers and wholesalers together satisfying close to 85% of total annual gas demand in the country. In 2016, the SOCAR group alone covered 52,4% of final consumption through gas imports from Azerbaijan. The latter is also the main external gas source for Georgia (covering over 90% of overall annual demand) with additional imports from Russia and Armenia as well as marginal domestic production (6 mcm in 2016).
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 the market liquidity and limit its potential for diversification. Future modelling of the gas market of Georgia, including measures to possibly enhance competition, shall be envisaged in the Gas Market Concept Design under preparation by the Ministry of Economy and Sustainable Development with the Secretariat’s assistance.
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. Reform of the wholesale gas market shall follow after adoption of the Gas Market Concept Design and other necessary regulatory acts, and, in particular, revised bilateral market instruments shall be launched by 31 December 2020. Establishment of the organised gas market in Georgia, including gas exchange, is not expected for several additional years due to the lack of liquidity.
Balancing rules, including requirements for balancing groups, balancing responsibility and imbalance charges as established by Regulation (EC) 715/2009, are not yet transposed by Georgian law. The respective provisions will have to be introduced in the Gas Transmission Network Code and the Gas Market Rules under development by GNERC in accordance with the new Law on Energy.
As required under the Accession Protocol, all non-household customers in Georgia shall become eligible and therefore allowed to freely choose and switch their gas supplier from 31 December 2018, and all remaining customers, including households, from 31 December 2019. The customers’ eligibility right is already de jure granted under the current legislation but is underused in practice due to market dominance, lack of alternative suppliers and absence of effective supplier switching mechanisms. Considering that full transposition and implementation of Third Energy Package rules in Georgia is due by 31 December 2020 only, the complete realisation of the eligibility right will become possible only after all necessary regulatory instruments are in place.
The retail gas market in Georgia is highly concentrated. In 2016, the market share of the two largest distributors and suppliers – SOCAR Georgia Gas and KazTransGas Tbilisi – equalled to 84% 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 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 2016, the social segment consumed 59% of total national gas demand. From the perspective of Energy Community law, exclusive gas supply conditions to the social sector constitute a deviation from market-based supply, which has to be justified as a public service obligation in compliance with Directive 2009/73/EC and screened as regards its competitive effect covering 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.
Potential gas infrastructure developments, such as the Trans Caspian Pipeline and White Stream, may bring additional diversification to the Georgian gas market and also establish the country’s role as a transit route for Caspian gas to the EU.
The envisaged construction of the underground gas storage facility will significantly contribute to Georgia’s flexibility in responding to gas consumption extremes and increasing the overall energy security of the country. Without any regulation of gas storage activities currently in place, however, it is of primary importance to establish the compliant legal framework for the storage facility at the project’s initial stage, irrespective of the deadline of 31 December 2020 introduced by the Accession Protocol, and to ensure full transparency of the access to and use of the storage facility.
Georgia’s Gas Emergency Plan in accordance with Energy Community law is yet to be developed, taking into account specific situation of the country being isolated from any other Energy Community Contracting Party or EU Member State. It is understood that Georgia’s cross-border relations, including bilateral or regional gas emergency responsiveness, will remain based on Intergovernmental Agreements with neighbouring countries and cross-border transmission cooperation.