Energy Security Challenges and Opportunities for the Country of Georgia

Securing Enough Energy to Satisfy National Energy Needs

Georgia’s demand for energy has been increasing steadily over time due to the development of the Georgian economy and the improvement in standards of living. However, domestic production of energy has not been able to keep up with increased demand. On the contrary, energy production from domestic energy sources has declined over the same period, requiring ever-increasing imports of energy sources to satisfy national energy needs (Figure 1).

Figure 1:

Evolution of total energy consumption, domestic energy production, and energy imports (all energy sources, renewables and fossil fuels): 2013–2019.^[1] Source: Author’s calculations based on data from the National Statistics Office of Georgia (2014–2020).

As a result of the widening gap between total energy demand and domestic energy production, the country’s dependence on imported energy has been growing over time. In relative terms, the share of domestic production has been decreasing from 34% in 2013 to 21% by 2019 (Figure 2), with 95% of the energy domestically produced in 2019 coming from renewable sources.

Figure 2:

Share of domestic production in total energy consumption, 2013–2019. Source: Author’s calculations based on Geostat data.

The decrease in domestic energy production over the period from 2013 to 2019 was mostly due to a decline in two energy sources produced domestically, coal and biofuel and waste, which fell by 96 and 49% over the six-year period, respectively (Figure 3).

Figure 3:

Energy production from domestic energy sources, by source: 2013–2019. Source: Author’s calculations based on Geostat data.

The decline in coal production is associated only to a limited extent with a reduction in demand for coal (down only by one quarter over the same period), and its partial substitution with gas. Most of the decline in output can be linked to the poor state of the coal industry, with inefficient and ageing infrastructure, marred by frequent accidents, and in dire need of investments to become competitive at the national and international level, in a period in which the whole world—including the Georgian government—has been trying to phase this source of energy out to slow down climate change. The decline in biofuel production instead is the joint result of stricter policies to combat illegal logging and unsustainable management of Georgian forests,^[2] coupled with the expansion of the gas network serving Georgian households.

According to the Georgian Gas and Transportation Company (GGTC), between 2013 and 2020, more than 1000 settlements—hosting slightly less than 30% of the Georgian population—were connected to the gas network. According to the same source, in line with the gasification program agreed with the Government of Georgia, 90% of the Georgian population should have obtained access to the natural gas distribution network by 2024. The effect of this increasing access to the natural gas network on Georgia’s natural gas consumption is evident observing the dramatic increase in the amount of natural gas consumed by the residential sector (+76%) over the period from 2013 to 2019 (Figure 4). Another important driver of natural gas consumption has been the increasing demand (+38%) for natural gas to fuel Thermal Power Plants (TPPs).

Figure 4:

Evolution of demand for natural gas, by use, 2013–2019. Source: Author’s calculations based on Geostat data.

As of 2019, natural gas is by far the main energy source for the Georgian economy, amounting to 45% of the Total Primary Energy Supply (TPES) of Georgia, followed by oil products with a share of 26% (crude oil amounts to just an additional 1%) and hydro with a share of 15% (Figure 5). Among the top three energy sources, only hydro is domestic.

Figure 5:

Shares of TPES in 2019, by source. Source: Author’s calculations based on Geostat data.

Due to its lack of substantial domestic production of gas and oil, Georgia spends a significant amount of money to import oil and oil products and gas.

According to the 2019 energy balance (National Statistics Office of Georgia 2014–2020), the four main energy sources imported by the Georgian economy were natural gas, oil and oil products, coal and electricity. Figure 6 presents the evolution of imports for these energy sources over the period 2013–2019. In line with the previous discussion, natural gas—whose domestic production is extremely limited—is the most imported energy source, with its share visibly increasing over time. Gas is followed by imports of oil and oil products, which have been relatively stable since 2015. At a substantial distance, we find electricity and coal imports.

Figure 6:

Imports of natural gas, oil and oil products, coal, and electricity, 2013–2019. Source: Author’s calculations based on Geostat data.

According to Geostat data, between 2017 and 2019 Georgia spent approximately 2320 mln. USD on oil and oil products imports. The largest providers of oil and oil products to the Georgian market on the basis of expenditure shares were: Romania (23.3%), Russia (23%), Turkmenistan (14.9%) and Azerbaijan (13.6%), respectively. Overall, the import market for oil and oil products appears fairly diversified: Georgia imports from 61 different countries, with six (Russia, Romania, Turkmenistan, Azerbaijan, Bulgaria and Turkey) providing imports with a value amounting to 86.9% of the total expenses of Georgia on oil and oil products (Figure 7).

Figure 7:

Share of total expenses (in USD) on import, by country and by energy source (combined total of 2017, 2018 and 2019). Source: Author’s calculations based on Geostat data.

Over the same period, 897 mln. USD were spent on natural gas imports. Around 22% of the imported natural gas was used in the transformation sector (where thermal power plants transformed it into electricity).

Most (92.4% of the total expenditures on gas) went to pay for gas imports from Azerbaijan, while a much smaller portion (7.3%) was used to buy natural gas from Russia. Over time, the dependence on Azerbaijani gas declined, although marginally (down to 90.5% in 2019), and the share of Russian gas increased (to 9.5%). No other country provided a significant share of gas to the Georgian market over the period from 2017 to 2019 (Figure 6). While from a purely numerical point of view the increase in Russian imports’ share could be taken as a slight improvement in terms of diversification, this increase has been raising some concerns within Georgian society due to the tense relations between Russia and Georgia. From this point of view, and also from a longer-term perspective, expanding the range of import options to other countries would be the only way to genuinely increase the energy security of the gas sector.

Within the three years under analysis, Georgia satisfied around 13% of its electricity needs using electricity derived from neighbouring countries. Although the imports of coal were larger than those of electricity (in terajoules), the total expenses on electricity were significantly higher. Over the period from 2017 to 2019, Georgia spent approximately 221 mln. USD on electricity imports, with expenditures on electricity imports following an increasing trend. It is important to note that the data on the direct import cost of electricity underestimate the true burden associated with electricity demand, because thermal power plants use gas to generate electricity. As mentioned above, between one fifth and one fourth of total natural gas imports are used in thermal power generation. Therefore, the true cost of satisfying the country’s electricity needs—and its impact on import dependence—is substantially higher than suggested by the electricity import data. A significant part of electricity imports in the 2017–2019 period came from Azerbaijan. In monetary terms, 75% of the total costs associated with electricity imports went towards the Azerbaijani supply. More recently, in 2020 and 2021, the share of Azerbaijani electricity fell, and a portion came from Russia and Turkey. I highlight this particular event as the change was quite abrupt and electricity imports from Russia in particular seem to have stabilised at a substantially higher level in quantitative terms, with 72% of the electricity import needs covered by Russian imports. At this stage it remains unclear whether the increase in the share of imported electricity from Russia is temporary or indicates a radical and permanent shift in the Georgian electricity market.

Coal imports over the period 2017–2019 cost Georgia 69 mln. USD. The main import market for coal was Russia, with a 95.7% share of the total value of coal imports. The second exporting country (in value terms) was Turkey, with 2.9%, while the other eight countries providing coal to Georgia comprised only 1.4% of the total costs (Figure 3).

As we have seen, to satisfy its steadily increasing demand for energy, Georgia had to increasingly rely on imports, often from a limited number of countries. This trend has led to increasing concerns about energy security. To reduce these concerns, Georgian policymakers have several options. The first is to reduce the country’s dependence on imports. The second is to increase the diversification of supply sources.

Reducing Dependence on Imports

Dependence on imports can be reduced either by reducing—or at least containing the increase of—energy consumption, or by increasing the growth rate of domestic energy sources.

With energy demand growing more slowly, energy dependence could be reduced even with slower growth of domestic energy resources. While the concept of limiting energy demand growth might be looked at with suspicion (after all, fast-growing economies usually face strong growth in energy demand), containing the growth of energy demand could be achieved without hampering economic growth by increasing the efficiency with which energy is utilised in Georgia to generate energy services. This would allow generating the same—or even more—energy services while consuming less energy.

The potential savings from increased energy efficiency in Georgia are substantial, as the energy intensity of the Georgian economy was estimated to be some 30% higher than the average for the countries of the EU in 2018 (Haralampieva and Zakaria 2018). The inefficient use of energy is undoubtedly encouraged by energy subsidies. Residential gas, for example, is charged a much lower—subsidised—price compared to gas used for commercial purposes. Another example of distortive subsidies is the policy of providing free electricity to the mountainous regions, which has led to a massive increase in the demand for electricity for the mining of cryptocurrencies. Containing energy demand effectively would require finding alternative—less distortive—ways to support vulnerable groups and communities without encouraging wasteful behaviours.

Given the margin for improvement, the country might indeed aim at substantially containing the growth of its energy demand while continuing on its path to economic development. Increasing energy efficiency would also be fully consistent with the plans of the Georgian government to move the country towards a “greener path,” in compliance with the country’s international commitments. Lower energy demand would require consuming less fossil fuel and, therefore, emitting fewer greenhouse gases. Energy efficiency could be pursued across the board, starting from energy transformation, transmission and distribution up to end-use, with potential energy savings for businesses and households alike. Interventions in all these areas are already in the government agenda for the coming years, and will be further defined in the upcoming National Integrated Energy and Climate Plan of Georgia (NECP).^{[3] [4]} These include investments in rehabilitation, renovation and upgrades of the existing infrastructure for transformation, transmission and distribution, as well as initiatives to encourage savings on the demand side, also through the introduction of smart meters and a smart grid, necessary for more effective demand-side management actions. Every “NegaWatt,” or Watt of energy not used thanks to increased efficiency, would translate into increased energy security and in reduced need for energy production and import. The country’s performance over the past years under this perspective, however, has been rather mixed, with the energy intensity of the country declining slowly (Figure 8).

Figure 8:

Energy intensity, 2013–2019.⁴ Source: Author’s calculations based on Geostat data.

Additionally, increasing the growth rate of domestic energy sources would lead to a reduction in import dependence. Given the increasing demand for modern energy sources, as witnessed by the significant shift from wood to gas for heating and cooking purposes, despite the higher price, and due to electricity’s flexibility, a greater emphasis should be placed on increasing electricity generation from renewables. This would also support the government’s intention to encourage a broader electrification of the transport sector. The potential for electricity generation from renewables is indeed substantial, and the overall energy potential of renewables is even larger. According to the most recent estimates of the Government of Georgia, contained in Georgia’s National Renewable Energy Action Plan^[5] (NREAP: GoG 2019), Georgia is well endowed with renewable energy sources that could be used not only to generate electricity but also heat (Table 1).

While it is unrealistic to expect that Georgia will manage to utilise all its potential renewable energy sources in the short and even the long term, even reaching significantly less ambitious targets could go a long way towards reducing energy dependence, while making the Georgian economy greener. According to estimates from the Ministry of Economy and Sustainable Development (MOESD), the new (renewable) installed capacity between now and 2030 will amount to almost 50% of the total capacity existing today. This is a significant amount, considering that a 30% increase in the electricity generated by renewables would generate an amount of energy theoretically sufficient to replace natural gas imports for electricity generation. However, this increase would remain very far from eliminating the dependence on energy imports. Taking 2019 as a reference point, Georgia would need to nearly double the energy generated from renewables to get back to the same share of domestically generated energy as in 2013 (34%).^[6] Georgia’s large hydropower potential could play a key role in supporting the expansion of energy generation from renewables, both directly and indirectly. The main indirect benefit of hydropower is associated with the possibility of using water reservoirs to store excess energy generated by other renewable energy sources such as wind and solar, either by ceasing generation and withholding water in presence of excess generation, or even by pumping water back into the reservoirs (GSE 2021).

As of now, however, Georgia is facing several factors hampering the growth of domestic generation, among them the increasing opposition of the local population to large hydropower plants, the uncertainties characterising national politics and incentive schemes, as well as the fluctuating interest of potential international investors in the field of renewables, linked to the persistence of economic and political instability both in the world and the region, and to global shocks hitting the world economy. A key issue remains, therefore, whether Georgia will manage to gather the necessary financial resources to support its energy transition and the greening of its economy. Luckily, several international institutional donors (such as the EU, USAID and the WB, among others) have declared their willingness to support Georgia’s efforts in this direction. Hopefully, the country will manage to leverage this support to also attract substantial private investments, especially in the field of energy generation, once the geopolitical tensions subside.

Diversifying Imports

Although energy independence sounds unrealistic for the foreseeable future, regardless of the improvements in energy efficiency and the increase in domestic energy supply, there is another way in which Georgia could increase its energy security further: by diversifying its trade partners.

Diversification of imports is a key step towards energy security (Yergin 2006). On one hand, it allows hedging geopolitical and economic risks, limiting the negative impacts on availability and cost of energy sources associated with localised shocks. On the other hand, it increases the bargaining power of the country, increasing the competitive pressure on suppliers to keep prices at a reasonable level. Finally, it reduces the risk that suppliers use the energy lever to put pressure on the country for noneconomic reasons. This is a particularly relevant issue for Georgia, whose relations with its most powerful and energy-rich neighbour, Russia, have been quite tense since the fall of the Soviet Union.

As we have seen in the previous sections, Georgian energy imports are relatively concentrated, with two countries playing a major role: Azerbaijan and Russia. Over the period from 2017 to 2019, these two countries provided (in value terms) 37% of oil and oil products imported by Georgia, as well as 99.7% of natural gas imports, 95.7% of electricity imports and 95.7% of coal imports. This is far from an ideal situation and exposes Georgia to significant risks in terms of energy security should the energy supply from either of these two important partners be reduced due to negative shocks to their generation and/or export potential, and/or to increasing geopolitical tensions.

Diversifying suppliers, however, presents its own challenges. The main challenge is likely associated with the cost of diversification. Both Russia and Azerbaijan are neighbouring countries, well connected to Georgia via pipelines and electricity transmission lines. Their cost for delivering gas and electricity is, therefore, bound to be lower than that of electricity and gas coming from most alternative providers, taking into account the costs of building the infrastructure required. In the case of Azerbaijani gas, the case for diversification is lower than for Russian. Azerbaijani gas is relatively cheap for Georgia, as Georgia enjoys the benefits of being a transit country. Moreover, as host of the pipelines that transport Azerbaijani gas towards Turkey and Western Europe, Georgia faces relatively lower risks of interruption of supply. Some diversification, however is theoretically already possible—and potentially beneficial—through Turkey and Armenia (the other two countries with which Georgia shares its southern border). Georgia is already connected to both Turkey and Armenia via gas pipelines and via high-voltage electricity transmission lines.

The Georgian government is currently planning to strengthen its electricity line interconnections with both countries (along with strengthened interconnections with Russia and Azerbaijan). Another key step towards increasing diversification of the electricity sector would be the realisation of an underwater interconnection with the EU members of the Energy Community and to the synchronous grid of Continental Europe, allowing Georgia to trade with European countries (GSE 2021).^[7] At this stage, however, there are no significant movements in this direction.

As far as gas is concerned, there have been discussions about the potential role of liquefied natural gas (LNG) in increasing Georgia’s energy security. This would require the construction of a costly regassification plant, but would indeed dramatically increase the potential for diversification. Unfortunately, at this stage direct access to LNG is prevented by the closure of the Bosphorus for safety reasons. This might change in the future if gas tankers are allowed to cross the Istanbul Canal^[8] once it is completed. In the meantime, however, pipe connections with Turkey could be used—in case of need—to allow Georgia to access LNG regassified in Turkey. Another—perhaps less likely, considering the current geopolitical situation—route to increase the diversification of Georgian gas supplies could come from access to Iranian gas through Armenian pipelines.

Georgia is also working to increase the diversification of its coal and coal products imports. While Russia currently remains its top supplier, in the first 11 months of 2021 the Russian share declined to about 84%, with Kazakhstan and Turkey providing 8.3 and 6.7% respectively. What is notable in this case is the year-on-year increase in imports from Kazakhstan, more than tripling in value compared to the previous year, as total Georgian coal imports were declining.

Overall, diversification of energy imports remains low for three out of the four major energy sources imported by Georgia, but the potential for improvements is substantial.

Increasing the Security and Reliability of Energy Infrastructure, and the Overall Resilience of the System

Although having long-term reliable access to reasonably priced energy sources constitutes the foundation of energy security, there are other—more technical—aspects that should not be overlooked. To ensure the uninterrupted availability of energy sources at an affordable price it is also essential to rely on an interconnected, resilient and secure infrastructural network. Georgia is clearly in much better shape from this point of view than it was even a few years ago. However, there is still work to do to bring the Georgian infrastructural network in line with the best international standards, both in the electricity sector and in the gas sector.

Among the key investments are the (already mentioned) realisation of new interconnections and modernisation of the gas and electricity networks, coupled with the realisation of additional energy storage capacity. In the case of electricity, this will imply the realisation of additional HPPs with reservoirs and power storage stations that are expected to facilitate the integration of renewables. Georgia has also been planning to develop an underground natural gas storage facility as required by the regulations of the EEC to smooth shocks due to the sudden interruption of gas flows. The realisation of the underground storage facility—expected to be completed by 2024 and to cover up to 15% of the annual national natural gas consumption—was delayed due to the Covid-19 pandemic, but is still planned. These investments are expected to increase not only the efficiency of the system but also its reliability and resilience.

The modernisation of the electricity grid and gas network is also expected to pose, however, additional challenges, like the greater exposure of the system to cyberattacks. Due to the shocks experienced by Georgia in the recent past, especially the sabotage of key gas and electricity infrastructure, Georgian policymakers are aware of the risks associated with potential disruptions to the national networks. For this reason, increasing the physical and cybersecurity of key energy infrastructure is considered a priority for the country.