Government Adopts New Electricity Market Model Concept

MG Law Office, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ana Kochiashvili, Tamar Jikia, associate Mariam Kalandadze, Junior Associate Ana Jikia and Paralegal Lasha Machavariani is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

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Last year, the Parliament of Georgia enacted a new Law on Energy and Water Supply (the Law on Energy) that entered into force on 27 December 2019 and established a general legal framework for further implementation of the EU Directives and Regulations. The Law on Energy provides the legal basis for power related secondary legislation, the main pieces of which are the Electricity Market Model Concept and the Electricity Market Rules. The Electricity Market Rules have not yet been adopted. On 16 April 2020, the Government of Georgia (the GoG) adopted the Electricity Market Model Concept (the Market Concept) by its Decree #246.

The Market Concept introduces general principles for organizing and functioning of the wholesale trade market of electricity. The Market Concept aims: (a) to establish attractive environment for investors and to provide free options for consumers by way of developing competitive and transparent electricity markets; (b) to form organized electricity markets, inter alia, day-ahead and intraday markets, as well as balancing and ancillary services market and the market for bilateral agreements; (c) to provide clear distinction between the duties and responsibilities of the entities functioning in the energy sector; (d) to form competitive and liquid market price. Furthermore, the Market Concept sets out the mechanism for fulfilling the obligations envisaged by the contracts that were concluded before the Law on Energy entered into force and special requirements of supplying occupied territories of Georgia with electricity.

Market Concept Principles

The general principles on which the Market Concept is based, are:

a) Competitive, transparent and free trade on the electricity markets;

b) Avoidance of the conflict of interests and discrimination;

c) Sale of electricity on the wholesale market by means of competitive market, particularly, by bilateral agreements and/or on organized electricity markets including day-ahead, intraday and balancing markets;

d) Trade of electricity only on the organized markets by public service provider energy enterprises and providers using the facilitation mechanism/scheme envisaged by the Law on Facilitation of Production and Use of Renewable Energy;

e) Determining hourly schedules of generation and consumption, means of generation/consumption of electricity and their loading capacity by the responsible persons (self- dispatching);

f) Hourly trade on organized markets and, accordingly, liability of the market participants for the hourly imbalance;

g) Purchase of electricity only on the day-ahead and intraday markets in order to reimburse the losses;

h) Allocation of cross-border capacities in accordance with the transparent and fair rules.

Market Segments and Their Operation

The Market Concept regulates the market structure and rules of operation and the rules to organize the public service.

Wholesale Market Structure and Operation

The electricity wholesale market is divided into 4 segments: (a) day-ahead market; (b) intraday market; (c) market for bilateral agreements; and (d) balancing and ancillary services market.

Subjects of the wholesale market are: electricity market operator; transmission system operator; distribution system operator; electricity producers; suppliers; large consumers and wholesale public service providers.

The operator of day-ahead and intraday markets shall ensure the operation of the respective markets, administer the registry of the markets’ participants, and establish transparent, accessible and reliable system of financial settlements.

The operator of balancing electricity and ancillary services shall ensure operation of the respective markets, determine respective market products, estimate imbalance prices, and determine the value of financial guarantees for securing the payment for products and imbalance fees.

The transmission system operator will (i) determine the forecasted volume of balancing and ancillary service products; (ii) manage the energy system on self-dispatching principle and undertake other balancing measures, including activating certain producers on the basis of the balancing market outcomes; (iii) organize a cross-border balancing mechanism, including emergency support; and (iv) register the persons responsible for balancing, including balancing service providers and assigning codes to them; (v) manage and develop electricity metering system for retail market operations, ensure accessibility of the hourly metering data.

Final consumer can freely choose the supplier on the wholesale electricity market and purchase electricity.

Public Service Management

Public wholesale service organizations, universal service suppliers, suppliers of last resort and public service producers, including a source of guaranteed capacity, are obliged to provide public services. The obligation to provide public services is temporary arrangement which shall be reviewed at least once every two years.

The wholesale public service is established to support electricity generation from renewable energy sources and their integration into the market, to support the universal service providers by ensuring a stabilized purchase price and to secure the supply of electricity to occupied territories (Autonomic Republic of Abkhazia). For above purposes, the wholesale public service provider shall:

a) purchase electricity under guaranteed power purchase agreements and sell it on organized market;

b) ensure financial settlement with the producers participating in the renewable support schemes and other support schemes;

c) ensure financial settlement with the public service generators for differences in price between the market price and the price established by the Georgian National Electricity Regulatory Commission (the Commission);

d) purchase electricity on the organized market to secure supply to the occupied territories and be responsible for relevant imbalance;

e) ensure financial settlement with universal service providers for differences in price between the market price and the price established by the Commission.

The electricity purchased by the guaranteed purchase agreement can be sold on the organized market by the public wholesale service organization or by the producer itself. In order to compensate the price difference or to implement other facilitative arrangements the producer and the public wholesale service organization can execute the agreement that shall be agreed with the GoG. Otherwise, the difference shall be paid by the public wholesale service organization. Producers that are beneficiaries of the facilitation scheme of the renewable energy shall ensure sale of the electricity themselves. Costs envisaged by the facilitation scheme shall be paid by the public wholesale service organization.

Producers providing public services shall trade on the organized market. The obligation of the electricity producers to provide public services is reflected in the conclusion of the agreement on price difference with the public wholesale service organization. The difference between the price provided by the agreement and day-ahead market price shall be paid to the public wholesale service organization by the producer in case of positive difference; in case of negative difference the public wholesale service organization shall pay the difference to the producer.

The electricity for the consumption on the occupied territory of Georgia shall be purchased on the day-ahead or intraday market.

The Market Concept further envisages electricity supply by universal service providers. They will supply electricity on a regulated basis to households and small enterprises that have not selected a specific supplier.

The supplier of last resort will supply electricity with a pre-established tariff, set by the regulator to those consumers who have lost the supply due to planned or unplanned suspension in the supplier’s activities or due to material breach of supplier’s obligations.

Stages of Market Opening

The Market Concept determines the deadlines for the opening of the specific markets.

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Georgia has been steadily reforming its energy markets to ensure non-discriminatory access thereto by any third party. The GoG strives to encourage new investments and to facilitate investment flows towards a well-functioning electricity market. The process is underway and more changes are expected to be introduced into Georgian legislation to successfully implement the reform.

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Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

MG Law is the first full-service law firm in Georgia to be founded by international partners. The firm advises a diverse group of Georgian and foreign companies, financial institutions, investment funds, governments and public enterprises.

Among many other areas, the firm primarily focus on the following sectors: Banking & Finance, Capital Markets, Arbitration & Litigation, Labor & Employment, Infrastructure and Project Finance, Energy Law, Real Estate, Tax and Customs, Investment Law, Corporate Law, and Cryptocurrency & Blockchain.

For more information, please visit www.mglaw.ge or contact Archil Giorgadze at archil.giorgadze@mglaw.ge and Nicola Mariani at Nicola.mariani@mglaw.ge

Hydro-electric power plants that were constructed before 1 August, 2008 will be released from the obligation to provide public services as provided in this table: