Electricity Cooperation in the South Caucasus: The Role of the Regional Integration Projects

July 13, 2016 | 00:00
Electricity Cooperation in the South Caucasus: The Role of the Regional Integration Projects
Electricity Cooperation in the South Caucasus: The Role of the Regional Integration Projects
The Energy Charter Secretariat has recently published an occasional paper aimed at assessing the dynamics of cross-border electricity cooperation in the South Caucasus. The study has analysed electricity trade patterns and the domestic institutional frameworks for electricity markets in each country (Armenia, Azerbaijan and Georgia) to reveal whether they provide enough room for regional cooperation. This commentary shortly discusses how the membership in the Eurasian Union and the Energy Community – two regional integration projects that aim to create common electricity markets – could affect regional electricity developments.

The South Caucasus – Armenia, Azerbaijan and Georgia, being a crossroads for regional grid connections among Iran, Russia, and Turkey – might benefit from various seasonal, price and geographical combinations in electricity trade. The small sizes of the countries’ domestic electricity markets provide incentives for combining efforts in meeting various needs in national power systems. In addition, regional cooperation allows decreasing regulatory uncertainties and enhancing investors’ confidence which are crucial for capital intensive cross-border electricity projects.

However, the dynamics of regional electricity trade might be affected by regulatory changes and broader political commitments of the countries. one of such comitments is increasing regional integration and greater supranationalisation of energy sectors in various parts of the world. Apparently, the South Caucasus is also affected by these trends. Armenia is member of the Eurasian Economic Union which is planning to create a common electricity market by 2019 and a single hydrocarbon market by 2025. Georgia is negotiating to join the EU Energy Community, created in 2005 to make compatible the energy sectors of its members with EU energy acquis.

Without a doubt, connecting the region with the EU internal electricity market and the prospective regional electricity markets of the EU Energy Community and the Eurasian Economic Union will allow the South Caucasian countries to meet their energy needs more effectively. However, these countries’ membership in the integration projects also requires discussion of the projects' technical, political and regulatory implications for the whole region.

Notwithstanding aiming at market-oriented legal frameworks and liberalisation of domestic electricity markets, these regional integration projects may produce differentiated market designs. While these projects potentially have a broad room for approximation and harmonisation, their competing logics can externalise to the electricity sector – and broader countries’ strategies. Creating overlapping authorities, the projects may externalise politicised practices to the electricity sector, thus downgrading regional cooperative efforts in electricity. This is especially sensitive in case of perpetuating political tensions in the South Caucasus, where any technical and ad hoc cooperation is well-needed.

The regional integration projects may affect frameworks that common technical standards could be based on, as in case of the intended disconnection of the Baltic power systems from the current synchronous operation within BRELL (Belarus, Russia, Estonia, Latvia, and Lithuania). Azerbaijan and Georgia are synchronised with Russia and constitute part of the IPS/UPS. Georgia is also synchronised with part of northern Armenia. The remaining part of Armenia’s electricity network operates synchronously with Iran. Technical constraints prevent the synchronisation of the Armenian, Georgian, Iranian and Russian grids due to extensive operational coordination needed. In this case, asynchronous “back-to-back” connections serve as a stepping stone to a later (potential) full synchronous interconnection. In this regard, technical assistance to interconnection of all national power systems is essential, and, in this regard, the EU Energy Community is currently delivering assistance to Armenia. The latter is an observer to the Energy Community, which welcomes the country to join it fully whilst ensuring certain derogations to the Energy Community Treaty.

Additionally, separate power development plans and diverging regulatory frameworks of the countries might impede regional complementarity of generation capacity. The latter offers opportunities for better investment allocation in generating capacity, improving load factors across power systems. Regional complementarity of generating capacities can adjust the relevant costs due to power exchange through regional interconnectors and contribute to developments in renewable energy. Potential export of hydro energy from Georgia to Armenia, Russia and Turkey, plans for updates of the nuclear plant in Armenia and potential export of electricity to Georgia, and export of electricity from Azerbaijan to Turkey need to be discussed at a comprehensive regional platform. Various schemes for support of renewables in these countries, also within the scope of the integration projects, may also affect the competitiveness and regional pricing.

Finally, the existence of physical cross-border infrastructure and compatible technical characteristics are prerequisites for any regional trade. Most regional interconnectors have been recently completed to meet trading needs of the region. Thus, the AGT (Azerbaijan–Georgia–Turkey) Power Bridge completed in June 2015 increased the capacities of electricity transit to Turkey up to 700 MW and has offered an opportunity to export excessive electricity from Azerbaijan to Turkey via Georgia. The ongoing expansion of exchange capacity between Armenia and Georgia to 350 MW, with a further planned increase to 700 MW by 2021, is likely to estimate potential increase in cross-border trade. Enhancement of cooperation between Armenia and Iran (swaps of Iranian natural gas for Armenian electricity) and announced construction of a new 400 kV power line (estimated to be operational by 2018) will provide enough room for Armenian electricity output being exported to Iran, especially in case the Armenian NPP is renovated.

However, infrastructure projects should be complemented with compatible power trade mechanisms in order to boost cross-border exchange. It has been widely acknowledged that effective cross-border power exchange requires more advanced competitive trading mechanisms and greater market openness, which, in turn, requires complementary domestic reforms. Until now, price differentials did not drive trade significantly, and bilateral technicalities aggravated by political reasoning (such as the closed Armenia–Turkey and Armenia–Azerbaijan lines) guided cooperative dynamics. In order for price differentials to play an important role in cross-border trade, a greater degree of market liberalisation is needed, so that generation costs can affect incentives of market participants.

In the framework of the Eastern Partnership, the Council of European Energy Regulators (CEER) and the European Commission organise regular multi-lateral meetings and specialised workshops with the energy regulatory bodies of the six partner countries (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine). The ENTSO-E methodology of cost-benefit analysis is extensively adapted to the technical, legal and regulatory environment of the region. In particular, the INOGATE administered varius projects aimed at the harmonisation of electricity standards in the South Caucasian and Central Asian countries, Moldova, and Ukraine in 2009–2011. INOGATE also recently assisted the Ministry of Energy of Armenia in the adoption of TPA legislation in electricity transmission networks, particularly regarding the regulatory status of the Armenia–Georgia Interconnector. These initiatives offer platforms for discussions, best practice exchange, and technical and expert assistance. However, they largely depend upon the political component of integrationist projects and the geopolitical considerations of the countries involved.

It is unclear how these competing projects might affect the commercial dynamics of electricity projects in the region, but surely the hesitancy of the South Caucasian states to strengthen regional ties and diverging integration dynamics are sending mixed signals to foreign investors. A next step is ensuring compatible regulatory frameworks and technical and regulatory approximation of the domestic electricity sectors of the countries. It is advised to ensure that both integration projects are developing in compatible fashion in order not to produce regulatory gaps. It is essential to have a bottom-up cooperation approach and gradual technical approximation in the region since persisting political and historical legacies in the region do not allow any pan-regional political framework.

The paper Regional Electricity Cooperation in the South Caucasus: Cross-border Trade Opportunities and Regional Regulatory Uncertainties is available for download at EnergyCharter.org.

Irina Kustova is Research Fellow at the Energy Charter Secretariat and holds a PhD cum laude from the School of International Studies, University of Trento, and an MA in European Studies from Maastricht University (2009). She also worked at the Agency for the Cooperation of Energy Regulators (2014) and the Delegation of the European Union to Russia (2008). During her PhD, Irina has also spent periods as a visiting research fellow at the King’s College London (2012) and the Energy Research Institute of the Russian Academy of Sciences (2012). Her expertise lies in the areas of global governance, energy security and EU integration. Her work has been published or is under review in such journals as Journal of Contemporary European Research, Cooperation and Conflict, Journal of European Integration, and Journal of World Energy Law and Business.

Image: A view of the Georgian Akhaltsikhe substation, which includes two HVDC back-to-back links, 3 Synchronous Condensers, and the air-insulated substation. Copyright: Siemens: www.siemens.com/press.
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