During the Russia-Ukraine the EU has become a clear example of how substantial reliance on a single country to satisfy energy needs can threaten nations’ economic development, and how challenging the task of achieving energy security is while substantially depending on a single country in key energy products.

Even though since the 2006 sabotage of the Mozdok-Tbilisi pipeline and related electricity blackouts, Georgia has been trying to avoid having Russia as the main energy provider. As we discussed in the previous blog, some dependence on the Russian energy system still remains. Thus, it is important to start discussions about how to minimize this dependence and increase the energy security of the country.

THE ELECTRICITY SECTOR

Over the last decade (2011-2021), Russian electricity imports to Georgia reached a maximum of 9% of the total consumption in 2021 when the Enguri HPP was closed for rehabilitation. 80% of these imports went to Abkhazia. Even though the dependence rate might not seem alarming at first glance, there are several reasons one should call for more proactive actions. First, electricity demand has been persistently increasing by 5% on average over the last ten years, partially driven by unregulated crypto mining activities due to cheap or subsidized electricity in Abkhazia¹ and Svaneti. Moreover, inefficiencies in consumption derived from subsidies still remain, since the commercial sector also uses cheap electricity for business purposes which causes spikes in electricity demand. Second, the slow development of new generation capacity is still an issue. Over the last decade, generation has been increasing on average by just 2%. It is worth noting that this increase was driven primarily by the 22% growth in thermal power plant (TPP) generation, while renewable electricity (RE) generation has been increasing by just 1%.

A key step to increasing security in the electricity sector could be the promotion of local RE generation² and increased efficiency of existing TPPs (to reduce dependence on imported natural gas). The current resistance of local communities to large hydropower plants (HPPs)—sometimes due to disinformation, misinformation, and miscommunication between the affected communities and project developers—remains a problem. More transparency and inclusiveness towards these communities in the initial stage of projects can be one of the solutions.³ Besides, the electricity system needs renovation and upgrades to integrate new renewable energy sources and maintain stability.⁴ As for demand-side management, one possible step would be to impose restrictions on subsidized electricity consumption for commercial purposes, target subsidies to vulnerable consumers, and regulate crypto mining activities. Another option is to accelerate energy efficiency policies, stimulating the widespread adoption of more energy-efficient appliances and facilities by industries, households, and the commercial sector, together with the construction of more energy-efficient buildings.⁵ Finally, energy demand planning by the installation of smart grids and meters can also contribute to solving the problem of persistent electricity consumption increases.⁶

Analyzing challenges characterizing the electricity sector, one should not forget that the Georgian grid is interconnected, and its stability and frequency is controlled by the Russian electricity system. Georgia works in a synchronized manner not only with the Russian but also with the Azerbaijani system, thus interdependence not only on Russia but also on Azerbaijan gives Georgia leverage to feel comparably secure since any instability derived from the Russian system will affect not only the Georgian but also the Azerbaijani system (WEG 2022). Nevertheless, opportunities for integration with the European Network of Transmission System Operators for Electricity (Entso-E) and its Continental Europe grid should not be overlooked. On the positive side, the Georgian Electric System Operator (GSE) has been working on acquiring supervisor status in ENTSO-E, which includes preparatory works for the integration of the Georgian system into ENTSO-E. As for technical feasibility, there are two possibilities for Georgia: either connecting to the Turkish system or realizing underwater interconnection with the EU members of the Energy Community.  Noteworthily, the feasibility study of the underwater interconnection project started in April 2021 and will last for 18 months. At the preliminary stage, the experts positively evaluate the project.

THE NATURAL GAS SECTOR

Due to increased gasification in the country and rising TPP generation, Georgia has had to import more and more natural gas from Russia over the last few years to fill the deficit in the natural gas market. Russian imports accounted for 15% of total imports in 2021 compared to 6.3% and 8%, respectively, in 2019 and 2020. The main natural gas provider for Georgia remains Azerbaijan. Due to Georgia’s strategic geopolitical location, the country’s transit opportunities for natural gas to Turkey and Europe from the Shah-Deniz gas field give it the advantage to buy 5% of the transit at a discount price and use this social gas for the residential sector and TPP electricity generation. Considering the existing circumstances, Azerbaijan plans to increase the transit amount, providing more natural gas (doubling the amount of transit from 10 bln. cubic meters to 20 bln. cubic meters per year) to Europe in the upcoming years, which will translate into more cheap natural gas for Georgia and increased security. Some discussions around Turkmenistan’s integration into the South Caucasus Pipeline have already started. Furthermore, existing energy crises created the possibility for Iran⁷ to return to the world energy market as a natural gas and oil provider. Therefore, at first glance, one might consider this a potential source of diversification for Georgia. Nonetheless, there are several obstacles to overcome for this to happen. First, Turkmenistan needs approval from Azerbaijan to provide its resources to Georgia and Europe. Second, Iran can export its natural gas to Georgia only in two ways, through Azerbaijan or through Armenia. Given that the Armenian gas pipelines are owned by the Russian company Gazprom, this gives little hope to Georgia to reduce its dependence on its current trade partners. However, the country has more realistic options to make the natural gas sector more resilient to price spikes. Georgia has been planning to develop an underground natural gas storage facility as required by the regulations of the European Energy Community (EEC). It was expected to be completed by 2024, but as the representative of the Ministry of Economy and Sustainable Development explained the construction may be further delayed due to fund transfers towards COVID pandemic crisis control. Finally, natural gas as a source of heating and warming water can be gradually replaced by concentrated solar power plants (solar thermal plants) (CSPs) and heat pumps. Even though the prices of these technologies are high compared to conventional sources of heating, the trend is decreasing year by year. Even more, existing energy crises and price spikes of traditional energy sources are likely to stimulate their integration into the energy systems.  For the last few years, Georgia has extensively gasified villages. These policies apparently contradict the western urge toward more secure and clean energy consumption. Therefore, it is important to reassess how these measures will affect the energy security of the country.

THE OIL SECTOR

As far as oil and oil products are concerned, over the 2014-2021 period the share of Russian diesel in the market varied between 10-20%, while Russian petroleum was in the range of 0%-40% plummeting to 15% of total imports in 2021. It is apparent that businesses need to diversify their suppliers further to avoid becoming and/or remaining substantially dependent on a potentially risky partner in a key energy product. There exists a high risk that businesses in Georgia are seduced by discounted prices for Russian oil products and avoid western sanctions, as is the case for Indian and Chinese suppliers. However, the government should take more responsibility to control such deviations from western principles and political will and try to encourage businesses to diversify their suppliers towards less problematic providers.⁸ Furthermore, to ensure the stability of oil product prices, it is essential to start thinking about oil product storage facilities and refineries. Filling the storage while prices are lower and using them later for price stabilization during fuel crises will less painfully affect the consumption basket of individuals and business operations. Refineries, on the other hand, will give the country more options for diversification of crude oil and will also help to stabilize the price of oil products. Finally, increasing trends to conversion toward electric and hybrid vehicles in Georgia can also generally reduce the existing reliance on oil products from the transport sector.⁹

RUSSIAN CAPITAL IN THE ENERGY SECTOR, THREATS OF CYBER SECURITY, AND PRICE DUMPING

Other important discussions revolve around the Russian capital in the energy sector.  World Experience of Georgia (WEG) in its 2022 report explains that since the energy sector is regulated and every energy subject pursues licensed work, the sector will be more resilient to western sanctions on the Russian capital. Their conclusions derive from legal analysis based on the Law of Georgia on Licenses and Permits. According to the law, if any energy company violates the rules written in the licensee agreement, a special supervisor will be set by the Regulatory Commission to ensure the stable provision of electricity to consumers. This can extend to cases such as that of a Russian owner encountering problems getting additional financial sources for operations from local banks and financial institutions. However, another question is whether there will be enough financial resources in the country to take over from Russian investors in the market and ensure the smooth continuation of activities.

One should not also forget the increasing threats of cyberattacks on energy systems, arising along with system digitilization. Thus, the operators’ readiness and specialists’ preparedness to prevent cyberattacks and to ensure cyber-hardening of existing infrastructure is another direction of policy development to strengthen the country’s energy security.  These threats should ideally be evaluated and preventive measures should be put in place before the sector becomes fully digitalized. We should bear in mind that the electricity market opening is planned for September 2022. In order to ensure efficient market operations, investments in smart grids, meters, and automatized systems will be necessary. 

Finally, there is an urgent need for very thorough supervision from the regulatory commission to avoid distortive dumping activities¹⁰ from unfavorable and unreliable trade partners and importers.¹¹

CONCLUSIONS

We have reviewed several options in each sector as for how to minimize dependence on the Russian sector and ensure energy security. These are: stimulating local electricity generation, ensuring energy efficiency, diversifying oil product suppliers, and building storage facilities for gas and oil products. Furthermore, we have discussed the possibilities of integration with ENTSO-E and problems with Russian capital in the energy sector.

Actions in each of these areas have their own uncertainties, and some of them require a long timeframe for implementation. On the positive side, it is not necessary for all of these options to be chosen and implemented separately and/or in a strictly defined sequence. On the contrary, a wise energy policy would gradually combine all policy measures taking advantage of complementarities and synergies that would arise, basing choices on the most up-to-date information, thereby reducing uncertainty. As resources are limited, it would be crucial to keep all of these elements in mind as one assesses the economic efficiency of each alternative and conducts a rigorous quantitative impact assessment and monetization of all expected costs and benefits. Such a cost-benefit analysis should be complemented by a thorough risk assessment, attributing a value to risk reduction and making sure this aspect is incorporated in the final steps of the decision-making/policy-making process (when strategies and policies are chosen and implemented). All this preliminary work will ensure that the projects will bring higher benefits to the society, deriving from greater energy security, while minimizing associated risks.

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[1] Dealing with Abkhazia’s spiking electricity consumption is mainly a political matter related to the need to enforce the 60/40 rule, according to which 60% of Enguri and Vardnili HPPs’ generation should go to Georgia and the remaining 40% to Abkhazia. Nevertheless, negotiations should take place earlier since Abkhazia will be getting less financial assistance from Russia due to substantial expenses directed to the Russia-Ukraine war and the burden on the Georgian electricity system might increase.

[2] According to the 2019 National Renewable Energy Action Plan, the potential hydropower production of Georgia was estimated to be 50 TWh per year, while approximately 21% was utilized in terms of capacity by 2021, potential wind power generation accounts to 4 TWh per year currently around 2% was installed by 2021, and biomass potential amounts to 3-4 TWh, while only 0.01% was utilized by 2019. Georgia also has potential for geothermal and solar power generation, though utilization from these sources is still negligible. Even though we should mention the success of the Net Metering System especially after increasing installed capacity limit for Solar Power Plants (SPPs) up to 500 KW, generation from solar power plants amounted around 17.7 MWh per year, increasing generation from SPPs more than ten times compared to previous years, this amount still represents a negligible share of total electricity consumption in 2021.

[3] Lately, first steps to ensure more inclusive and transparent energy planning have been taken. The Energy Efficiency and Renewable Energy and Sustainable Development Department at the Ministry of Economy and Sustainable Development incorporated all stakeholders in discussions on Integrated National Energy and Climate Change Action Plan (NECP) over 10 working meetings, a key policy document for the energy sector.

[4] Measures in this direction have been already taken GSE plans to construct, extend and rehabilitate 561 Km of transmission lines and 13 substations under Energy Network Improvement Programme (ENIP).

[5] There exists a National Energy Efficiency Action Plan incorporating all these actions, though enforcement is still a challenge.

[6]  A smart grid promotes energy saving in power system. First, it improves the utilization efficiency of the power system through optimizing scheduling and reducing line losses. Second, it ensures the power consuming efficiency through provision of all kinds of necessary information for electric power users, such as current and historical electricity consumption, carbon dioxide emissions from the consumption of electrical energy, instant demand, environment temperature, humidity, and illuminance, etc. The electricity information is fed back to the users, which helps them adjust their power consumption mode. An integral part of smart grids is smart meters, which accurately measure power usage and give real-time information to consumers about hourly electricity prices. When customers see that prices are highest in the peak demand period, they reduce consumption and decrease the pressure on the system. From October 2021 all new buildings in Georgia are required to be equipped with smart meters while old meters will be gradually replaced in old buildings in the upcoming years.

[7] Georgia already has some experience importing natural gas from Iran in 2006, moreover there were some negotiations between Georgia and Iran about potential Iranian gas imports in Georgia. 

[8] Especially when diversification of the oil market is much easier since Georgia has up to 70 providers and oil products can be imported by different means of transportation: barges, tankers, overland, pipelines, trucks, and railroads.

[9] Excise tax was changed for hybrid cars and stimulating policies were introduced for electric cars in 2016. Thus, the imports of hybrid and electric cars increased dramatically, contained more than 20% since 2017, though the share somehow decreased in 2021 apparently reflecting changes in fossil fuel and natural gas prices.

[10] To reduce such risks, the Georgian National Energy and Water Supply Regulatory Commission (GNERC)

created a marketing monitoring department in 2021.

[11] At the initial stage of market opening, it might be a sensible option to restrict importers from the market unless it is ensured that the monitoring system is well-functioning and captures any deviations from fair market rules.