European Energy Community and Georgia’s Political Uncertainty About Its Membership

12 February 2015
Georgia recently signed an Association Agreement (AA), which implies the harmonization of the internal legislation with the EU laws in different sectors. While it demonstrates Georgia’s European aspirations, AA provides a framework for new relationships and sets out the requirements for Georgia to comply with EU regulations. As a result, Georgia, as a transit country in the South Caucasus region, seeks enhanced energy relations and cooperates with EU in the framework of the Energy Community Treaty. In 2007 Georgia was granted the status of “observer” in the Energy Community. Negotiations over intensified energy cooperation between Georgia and the EU resulted in Georgia’s effort to become the member of the Community. In 2013 Georgia officially applied for membership. Discussions over membership started successfully and by now two rounds of negotiations have been held. However, despite successful negotiations, Georgian energy sector faces important challenges. Precondition of Georgia’s full membership implies harmonization of EU regulations and directives. Implementation of the Directive implies deregulation of the electricity market for creating more transparent and free market. Over the past years, the Georgian electricity sector partially has undergone the process of deregulation. For example, the state-owned Electricity Company has been unbundled into generation, transmission and distribution companies. However, much remains to be done both in the legal and regulatory and market structure areas to stimulate competition in the market. According to the Electricity Directive, in the absence of effective unbundling there is a risk of discrimination among market participants, which violates costumers’ right to choose their suppliers without legal restrictions. Today, the level of unbundling is not sufficient in Georgia. Third party access and market opening are other primary requirements of the Electricity Directive. As for the natural gas sector, which is the most actively used energy resource in Georgia, Georgia faces important challenges. Georgia does not have oil and gas reserves and imports about two thirds of the primary energy supply to satisfy its local demand. Almost all natural gas is imported from Azerbaijan (90% of supplies) and Russia (10% of supplies). As a result, dependency on imports from a small group of suppliers hinders competitive natural gas development. According to the Directives, Energy Community member states are obliged to ensure provision of real choice for consumers, competitive gas prices, higher standards of service and security of supply. Community Directives also regulate energy efficiency and renewable energy usage. In terms of energy efficiency, the key requirement for member states is to develop National Energy Efficiency Action Plan (NEEAP), which means to develop a long term strategy for renovation of buildings. Most of the buildings in Georgia were built during the Soviet era and demonstrate very low energy efficiency levels. Currently, Georgian legislation does not cover any energy efficiency regulation. As for the development of renewable energy, the key requirement implies establishing binding targets in order to increase the share of renewables in energy consumption. However, Georgian energy legislation does not incorporate any regulation on renewable energy. What makes Georgia a unique case to study for the Community? The major change Georgia should make is to diversify its suppliers and create a more liberal energy sector, which will prevent monopolistic activities. But peculiarities of the Georgian energy sector, resulting from the country’s geographical location, need to be addressed. Full implementation of Community Directives will have significant social and political effects in Georgia. The key challenge to the Georgian electricity sector is the impact of price liberalization for households stemming from market openness. Nowadays, the Georgian electricity sector is characterized by subsidized prices, which allows the government to set relatively low prices for electricity (compared to EU member states). After switching to the new market model, the government will no longer be able to regulate prices, which will significantly increase the electricity price. Increased prices will have momentous effects on vulnerable customers, while keeping in mind the absence of a social package that integrates target subsidies. Speaking about the huge social effect of the membership, another important political impact is the Government’s readiness to abandon its initial pre-election promises. The new Government of Georgia (elected in 2012) had a socially-oriented political agenda. Decreased electricity and natural gas prices were among the top priorities of the newly elected government. While the social support was significantly affected by the price manipulation from the Coalition of Georgian Dream, it might be very painful for the Coalition to provide a politically justified argument of the membership that will explain increased prices. In terms of diversifying suppliers, the most sensitive sector for Georgia is that of natural gas. In order to diversify suppliers in this sector, which is a cornerstone of the Community requirements, Georgia is in a disadvantaged position – it has limited suppliers (Azerbaijan and Russia ) and geographical location does not serve as a favorable factor. Another important issue that needs to be addressed is geographical difficulties. Among Community members there are two countries from the former Soviet Union: Ukraine and Moldova (joined the Community in 2011 and 2010 respectively). Compared to these countries, having direct geographical links to European states, Georgia is excluded from the EU market, which serves as a barrier for Georgia to establish direct connections with European countries. For Ukraine and Moldova joining the EnC was a relatively painless process geographically, but in terms of progress in the energy sector they could not meet the Community requirements after all. The deadline for implementing most of measures of EnC has passed. Even though Georgia might be further ahead than Ukraine or Moldova in terms of energy market development (namely electricity sector), geographical location is an important drawback for Georgia to meet all requirements of the third energy package. Another important factor that deserves to be addressed is Russia’s attitude towards the Community and its members. When Moldova was joining the Energy Community, Russia tried to use gas as a means of manipulation over Moldova’s decision to join the Energy Community. Russia offered the low-priced gas to Moldova instead of choosing European energy liberalization measures. While the share of Russian energy is significant in Georgia, Russia’s intention to influence post soviet countries and their decision to detach their economy from Russian needs to be addressed as an external factor. Overcoming these challenges and ensuring successful implementation of AA, including in the energy sector, should be mutual interest of Georgia and the EU. Considering the geopolitical context the stakes of its success are high for both Georgia and the EU. Georgian government should elaborate a transitional plan which would minimize social impact of the changes. On the other hand, EU should consider being more flexible in granting possible derogations to cooperate with the Georgian government and support Georgia’s successful implementation of the transitional plan.