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EU4Energy Talk: Flexibility and Gas Market Design

Interview with Mr.Peter Pozsgai, EU4ENERGY Gas Expert, Energy Community Secretariat, Austria

What reforms and activities is EU4ENERGY implementing to organize natural gas market in Georgia?

The Energy Community Secretariat – as an implementing body of the EU4ENERGY Governance Project – provides assistance to Georgia in developing such a legislative and regulatory framework, which is in line with Georgia’s obligations as a Contracting Party of the Energy Community. In 2017, the Secretariat developed a draft natural gas distribution network code in order to put in place European standards in the contractual relations between final consumers such as households and their suppliers. These rules include for instance how consumers can connect to the gas distribution network and how they can switch to another supplier if they want to. For the year 2018, the Secretariat is currently assisting the Georgian energy regulatory authority (GNERC) in updating its tariff methodologies both for the transmission and for the distribution levels. This means that the prices for the transport of gas for consumers both on the wholesale and on the retail markets will be calculated via a similar methodology as for the consumers in the European Union.

In addition to the actions implemented within the EU4ENERGY Programme, the Secretariat delivered further inputs to its Georgian partners such as the draft Law on Energy and a draft Natural Gas Market Concept Design. These acts are currently discussed in the Georgian Ministry of Economy and Sustainable Development and are expected to embark on the legislative procedure in the Parliament of Georgia.

Could you tell us, what does Natural Gas Market Concept Design mean and why it is important for Georgia to develop it?

While the Law on Energy defines the high-level scope and principles, it cannot address all the structural details in the setup of the gas market. The Natural Gas Market Concept Design, which is foreseen by the draft Law on Energy to be developed, provides a more detailed guidance on the functioning, the structure and the organization of the gas market, including the rights and obligations of the market players. It also sets out how a more mature, open and competitive Georgian gas market is expected to operate introducing the forward and day-ahead market concepts and rules related to the balancing of the gas system. The Natural Gas Market Concept Design is expected to be adopted in the form of a Government Decree and as such will represent one of the pillars of Georgia’s legislative framework for the gas market.

The Concept Design will be complemented by other acts of GNERC, which will govern the concrete rules and procedures for identifying and registering market participants and which will inter alia define the types and templates of contracts, the standard products that are to be sold on the gas market and the way the organized market place (virtual trading point or gas exchange) should work.

How would you assess current gas market environment and infrastructure in Georgia, what are the key issues in the sector?

A very high level of market concentration features the Georgian gas market today both on the wholesale and on the retail levels. Consumers have no real choice of other market players in case they wish to switch away from the dominant supplier. This may lead to monopolistic behaviour and may raise security of supply concerns in case the dominant supplier is unable to provide the necessary amounts of gas. The merit of an open and competitive gas sector is not just about market-based pricing but also about the opportunity to choose alternative suppliers. The draft Natural Gas Market Concept Design proposes regulatory measures to provide opportunities to new market players for entering the Georgian market. This is to be done via a so-called gas release programme, via which the dominant supplier would be forced to offer part of its gas for sale, openly available for everyone to purchase.

On the other hand, Georgia lies on the path of the EU’s flagship project, the Southern Gas Corridor, which is planned to connect Azerbaijan and the Caspian area to European consumers. According to the intergovernmental agreements currently in force, and to the exemptions negotiated during the accession process to the Energy Community, Georgia does not implement the EU’s Third Package rules on the major gas transit pipelines that cross its territory until 2026. This exemption also means that Georgia cannot have access to the gas that is transiting the country, and it cannot carry out trade operations along the transit pipeline. With this in mind, it is still worth to consider how and when the Georgian market could be linked to the EU’s internal gas market via the transit infrastructure. This would obviously be the cheapest way to be connected to an almost 500 bcm market.

Georgia has been an Energy Community Contracting Party for a little more than a year but the ambitions for reforms from the side of the successive governments have been remarkable, which we sincerely hope that will continue. The energy regulatory authority GNERC is one of the most active and highly qualified regulators among the Contracting Parties.

What are the initial steps Georgia has to take to develop and open the natural gas market and regulate prices?

The legal obligations stemming from the Energy Community membership foresee that all non-household consumers will be free to choose their suppliers from 31 December 2018 and that households will have the same right starting from 31 December 2019. The question to exercising this right is how it can actually be implemented in such a highly concentrated market.

The rest of the reforms need to be implemented until 31 December 2020 and they include numerous actions. The company responsible for transporting natural gas will need to be separated from the gas production, supply and trading activities both on the wholesale and on the distribution level as well. The operator of the transmission network will have to provide open access to third parties and it will need to charge tariffs in a manner that is non-discriminatory and is defined in a transparent way. One of the tools to foster gas trade in the Georgia is the establishment of a virtual trading point, which would serve as a central platform for buyers and sellers and which, on the longer term, could provide credible price signals. Of course, the establishment of the structure is not enough in itself. Companies will have to be comforted via a predictable regulatory framework and consistent government commitment to the reforms in order to have confidence and engage actively in the Georgian gas market.

What are the high level goals and aim of the project?

The EU4ENERGY project is part of the European Union’s Eastern Partnership initiative. The EU4Energy Governance project focuses on Georgia, Moldova and Ukraine in preparing and adopting legislation that is in line with the Energy Community acquis. It also helps to improve the institutional framework for the entire policy cycle and to increase the pace of adoption of the legislation. Through workshops and seminars, we engage in developing greater technical, institutional and administrative capacity in the energy ministries and agencies to progress beyond the adoption of primary legislation.

By Nutsa Galumashvili

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