Challenges and Perspectives of Georgia's Transition to New Energy Market Model

Georgia will launch a new energy market model on September 1, 2022. This is in response to the commitment Georgia made when signing the Association Agreement with the EU in 2014, as well as in 2017, when it became a member of the European Union Energy Union, the state had to transform its energy market according to EU directives (EU Energy Package)

“A modern, competitive power market that is integrated with neighboring power systems is essential for Georgia to realize its aspiration to become part of the global energy market and is also key for Georgia’s integration with Europe’s Energy Community,” told Annie Steed, Deputy Director of Economic Growth Office at USAID to Diplomat.

She also spoke about the benefits of new electricity market and noted that it will allow Georgian families, businesses, and manufacturers to find economic, efficient, and innovative energy solutions and take control of their energy costs. Energy suppliers will need to provide competitively priced products and services, passing on the benefits to their customers.

There have been important steps taken by the state in order to create new energy markets, including changing the legal framework and introducing a variety of legislative changes, but the biggest changes have still yet to come, including the launch of the energy exchange (Georgia’s power trading platform), which will introduce a number of groundbreaking innovations in the electricity sector.

“There is a picture of this today- the share of imported energy is increasing, which is not desirable. We need to develop local power generation, especially if we take into account Georgia’s huge energy potential. Therefore, the launch of a new wholesale electricity market model is the most important phase of the ongoing reform in the electricity sector, and the progress to follow depends on its successful implementation,” claimed Davit Narmania, Chairman of Georgian Energy and Water Supply Regulatory Commission (GNERC) in his interview with Diplomat magazine.

Davit Narmania, Chairman of Georgian Energy and Water Supply Regulatory Commission (GNERC)

The same view is shared by Annie Steed and states that new energy market will ensure that Georgia has a more stable and reliable electricity supply from its own clean and renewable power generation sources, reducing overdependence on imported electricity from any single provider.

“USAID sees a competitive power market as a requirement for greater energy security, creating an environment that can attract more investments into Georgia’s renewable energy resources. These increased investments in domestic renewable energy production will help Georgia meet its clean energy goals and climate commitments, provide new high-tech employment opportunities, and reduce its import dependence,” said Annie Steed and reiterated USAID’s readiness to assist Georgia in preparing for the launch of this important new market and its eventual maturation to meet the needs of the public and facilitate the development of Georgia’s economy and energy security.

As the GNERC chairman told us, the launch of the energy exchange will enable large consumers to purchase their energy on the market, both in the retail sector and through the exchange, rather than from specific monopolists like JSC Telasi and JSC Energo-Pro Georgia. In general, the stock exchange will have different prices at different times, based on demand-supply, as a result, the launch of the new market model will stabilize prices, which is good for energy security, from financial perspective. Judging by the technical directions, mechanisms have been put in place, implying continuous and unwavering progress.

“During off-peak hours, consumers will be able to purchase relatively cheap energy, for instance, Georgian Railway will be able to purchase cheap energy at night and transport cargo at lower prices, in our opinion, this will benefit energy trading organizations on the stock exchange a lot - European practice dictates the same,” said Davit Narmania.

Due to its short-term, hourly nature, the stock market enables market participants to purchase and sell products for each hour, thereby reducing the imbalance between planned and actual production and consumption.

“The market model must therefore be activated in order for the stock exchange to function effectively. Hourly trading must start at the wholesale level and market participants must be accountable for any imbalance. Only then will the stock exchange acquire its true function. As a result, according to the market model concept approved by the government, the exchange and market of balancing and ancillary services will be launched simultaneously,” Irina Milorava, Director General at JSC Georgian Energy Exchange told Diplomat.

Irina Milorava, Director General at JSC Georgian Energy Exchange

As for challenges, Narmania and Milorava are not expecting any problems and say Georgia is ready to launch a new market model, supported by the use of one of Europe’s most authoritative market operators - Nord Pool that operates in 16 European countries. According to Milorava, legal and technical documents were developed and a trading platform was constructed in collaboration with this company, and it was delivered on schedule to participants.

Currently, the platform is being tested; demo trading is underway; in order to avoid any problems in trading, the GNERC is requiring companies to be registered on the stock exchange. Companies registered on the exchange are electricity producers, such as hydroelectric plants, and suppliers, as well as large consumers who will be able to buy energy on the exchange in the future.

The main challenge posed by the new reform is the readiness of the market participants and adaptability to the new reality, since market participants have been operating under conditions where they are not responsible for planned generation and consumption. “Therefore, this news proved to be a serious challenge for them, especially since making correct predictions is not solely up to the participants, but also pertains to the availability of reliable information from administrative bodies such as hydrology and weather forecasts”, said Milorava and added that this challenge is particularly acute for renewable energy sources.

With the new market model also come new opportunities. New players will enter the market - traders and suppliers who will be only engaged in the sale and purchase of electricity and, for example, offer a variety of services to a manufacturer or customer who does not want to engage in difficult activities of electricity trading.

Milorava believes that the new market will serve as an important incentive for the development of a new generation, unlike the existing market, another segment appears - the power market, where the generation facilities can sell backup capacity to the system operators, generating additional income for themselves. “The hourly trading and hourly pricing will enable generation investors to make informed decisions about generating new power, which will subsequently lead to a reduction in electricity shortages,” Milorava noted.

Davit Narmania describes the real price of electricity as the main advantage of the new market model, and that this knowledge is crucial for the development of energy, as it allows investors to know that they will be entering a competitive market, and it will be enough simply to communicate their intentions to GNERC.

Moreover, new markets present opportunities for consumers who are transitioning from passive to active. Milorava believes that time-differentiated tariffs will change consumer behavior, and that such results will also be market-price-driven, since consumers respond to market prices the same way they respond to the object of generation.

“Additionally, customers, such as generation facilities, can take part in the power market and receive additional benefits; another extremely pleasing fact is that even people who have not worked in the energy sector before are finding the reform and the new market model interesting. As a result, many new and fresh faces have entered the sector,” Milorava said.

USAID Energy Advisor Nikoloz Okreshidze also praises the transition to a new electricity market model, pointing out that it is an important step towards creating a competitive energy market. “However, more work remains to be done in a very challenging economic environment. Globally, energy markets are volatile as a result of Russia’s brutal invasion of Ukraine and other factors. Georgia’s new market model is considerably more complex than the existing one, and Georgia’s prior experience in launching modern market models should strengthen the roll out of the new ‘day-ahead’ model.”

Nikoloz Okreshidze, USAID Energy Advisor

Several obstacles remain for a successful market launch, including the metering and communication infrastructure, questions about the capacity of new market participants, and unbundling of utilities, according to Okreshidze. “Previous launch delays have also increased uncertainty among stakeholders – but it is important to get the launch right, since opening the market prematurely could result in a non- functional market which would likely discourage stakeholders further.

That is why it is important for Georgia to ensure that all the necessary pieces are in place before the market goes live.”

A competitive, transparent, and integrated energy market is crucial for Georgia’s continued economic development, its Euro-Atlantic path, and the prosperity and wellbeing of its people.

“USAID remains committed to supporting the Georgian Government, the private sector, and energy stakeholders to complete the final steps needed for the successful launch of the new market model – and the huge opportunities that will follow,” said Okreshidze.