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

Full text

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
1
ABSTRACT
This occasional paper addresses major developments in cross-border electricity
cooperation in the South Caucasus. The position of the South Caucasus, at a
crossroads between the emerging Eurasian and European electricity markets, offers
lucrative opportunities for cross-border trade and provides incentives for restoring
the single transmission network that used to serve the countries of the region before
the collapse of the Soviet Union. This study examines regulatory, economic, and
political factors that affect the prospects of a regional electricity market. Accordingly,
the paper is organised into three parts, addressing institutional, economic and
political developments in the region, and relevant barriers to more in-depth regional
cooperation.
The first part examines developments in domestic institutional and regulatory
frameworks and discusses to what extent the countries of the region have followed
the recent trend towards greater liberalisation and privatisation of the industry. It is
argued that despite all of the countries having attempted various forms of market
opening, restrictive practices in electricity sectors persist. The study argues that
cross-border electricity trade should be supported with the approximation of
domestic regulatory frameworks and shows that the Energy Charter Treaty (ECT)
might offer a common, level playing field for market participants without imposing
any particular market model on national governments. Encouraging pro-competitive
rules and non-discrimination, the Energy Charter Process points to beneficial effects
of market liberalisation on electricity trade, but it does not prescribe the ways and
forms in which this liberalisation should occur.
The second part casts light on regional integration initiatives and persisting political
and security legacies. The creation of single electricity markets is attempted within
the EU Energy Community and the Eurasian Economic Union. While both projects
seek greater market integration and liberalisation of electricity sectors, competing
regionalism behind the projects might potentially increase their regional rivalry in the
future. These regional projects inevitably relativize political and historical legacies in
the South Caucasus, and might lead to further regional fragmentation.
The third part addresses economic and technical aspects of cross-border electricity
trade. It analyses electricity trade flows across the region and assesses available
cross-border capacities. It examines possibilities for intensification of cross-border
trade on the basis of several indicators – electricity demand and generation capacity,
electricity losses, cross-border flows and capacities, and technicalities of transmission
systems. It points out that price differentials are not likely to play an important role in
boosting cross-border electricity trade at this stage, and complementarity of
generating capacities serves better as a purpose of regional cooperation.

OCCASIONAL PAPER SERIES
The paper concludes that due to the small sizes of national electricity markets,
regional cooperation is crucial for attracting investments in the sector. The politically
neutral market-based principles and extensive investment protection provided by the
ECT might be a silver bullet for the post-conflict region with competing regional
projects.
Key words:
electricity markets, power trade, regional electricity cooperation, Energy
Charter Treaty, South Caucasus
Disclaimer
Information provided in this study is based on publicly available sources. The author
has taken all reasonable care in researching the information contained in the paper,
but no independent verification of sources has been undertaken. Given a high
variability in the available information, the content of the paper should not be used
as a substitute for the relevant statistical information.

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
3
Introduction
Cross-border electricity cooperation brings numerous economic benefits for
neighbouring countries – it enhances the economic efficiency of the use of cross-
border transmission capacity on seasonal and daily bases and provides monetary
gains from power trade.
1
Combining different load curves also decreases blackouts
and ensures optimisation of investment plans in power generation. A number of
ongoing and accomplished regional initiatives have demonstrated the virtues of
regionalisation of electricity markets and the benefits electricity trade might bring.
These projects, aimed at reallocating and redirecting power surpluses among
neighbouring countries, include, inter alia, the EU internal electricity market,
2
The
Eight Country Interconnection Project (EIJLLPST),
3
the CASA-1000 project in Central
and South Asia,
4
and the planned Gobitec project in Northeast Asia.
5
Cross-border cooperation incentivises more efficient capacity utilisation, but also
requires large-scale, long-term investments in electricity network infrastructure. The
feasibility of interconnector projects depends on both projects’ commercial
attractiveness for investors and on the existence of a common level playing field in
the region. Perpetuating regulatory uncertainties and vague investment protection –
the factors that often reflect weak domestic institutional frameworks – might become
a crucial obstacle for any cross-border project and a key challenge in attracting
foreign investors, particularly in transition countries.
Two major trends – regionalisation and liberalisation – have been leading to
alterations in electricity sectors across the world since the 1990s. Commercialisation
and privatisation of electricity sectors have been increasingly viewed as a way to
ensure that sector’s effectiveness across regions and countries,
6
and have been
1
Sunderasan Srinivasan (2013) Electricity as a Traded Good, Energy Policy 62, pp. 1048–1052; Hamed
G. Shakouri, Mehrdad Eghlimi and Davood Manzoor (2009) Economically Optimized Electricity Trade
Modeling: Iran–Turkey case, Energy Policy 37, pp. 472–483.
2
ACER Market Monitoring Report 2015,
http://www.acer.europa.eu/Official_documents/Acts_of_the_Agency/Publication/ACER_Market_Monito
ring_Report_2015.pdf
3
This project involves interconnecting the electrical grids of Egypt, Iraq, Jordan, Libya, Lebanon,
Palestine, Syria, and Turkey. See: Arab Fund for Economic and Social Development,
http://www.arabfund.org/default.aspx?pageId=454
4
Casa 1000, http://www.casa-1000.org/
5
Gobitec and the Asian Supergrid for Renewable Energy Sources in Northeast Asia (Energy Charter
Secretariat, 2014), http://www.encharter.org/index.php?id=643&L=0
6
Xu Yi-chong (2006) The Myth of the Single Solution: Electricity Reforms and the World Bank, Energy
Policy 31, pp. 802–814; Paul L. Joskow (2008) Lessons Learned from Electricity Market Liberalization,
The Energy Journal Special Issue 2, pp. 9–42; Paul L. Joskow and Richard Schmalensee (1983) Markets
for Power: An Analysis of Electric Utility Deregulation. Cambridge, MIT Press; David M. Newbery (2002)

OCCASIONAL PAPER SERIES
promoted by various international financial institutions.
7
Throughout the 1990s,
these reforms comprised various degrees of privatisation, unbundling, and
deregulation, with allocation of authority to independent regulatory agencies.
8
Consequently, these reforms have challenged states’ traditional planning strategies
and incentivised states to coordinate their initiatives in order to ensure that regional
power exchanges provide an optimal combination of their resources.
9
However,
formal institutional reforms have often not overthrown existing informal practices
that continued to perpetuate throughout the sector, especially in developing and
transition economies.
10
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.
11
In a
more ambitious perspective, connecting the region with the EU internal electricity
market and the prospective regional electricity markets of the EU Energy Community
Treaty and the Eurasian Economic Union will allow the countries to meet their energy
needs more effectively. Since the Turkish grid operator TEIAS joined the European
Network of Transmission System Operators for Electricity (ENTSO-E) as an observer
Issues and Options for Restructuring Electricity Supply Industries, Cambridge Working Papers in
Economics 0210; Ioannis N. Kessides (2004) Reforming Infrastructure – Privatization, Regulation, and
Competition. Oxford University Press, World Bank: Washington, DC.
7
Bhavna Bhatia and Mohinder Gulati (2004) Reforming the Power Sector: Controlling Electricity Theft
and Improving Revenue. The World Bank, Washington, D.C; Daniel Müller-Jentsch (2001) The
Development of Electricity Markets in the Euro-Mediterranean Area. Trends and Prospect for
Liberalization and Regional Integration. The World Bank, WTP 491, April.
8
Ronald Fischer, Rodrigo Gutierrez and Pablo Serra (2003) The Effects of Privatization on Firms and on
Social Welfare: The Chilean Case. Research Network Paper R-456, Inter-American Development Bank,
Washington, D.C.; Jacint Jordana and David Levi-Faur (eds.) (2004) The Politics of Regulation.
Institutions and Regulatory Reforms for the Age of Governance. Edward Elgar: Cheltenham, UK,
Northampton, MA, USA.
9
Hamed G. Shakouri, Mehrdad Eghlimi and Davood Manzoor (2009) Economically Optimized
Electricity Trade Modeling.
10
Paul L. Joskow (2008) Lessons Learned from Electricity Market Liberalization; Yin-Fang Zhang, David
Parker and Colin Kirkpatrick (2008) Electricity Sector Reform in Developing Countries: An Econometric
Assessment of the Effects of Privatization, Competition and Regulation, Journal of Regulatory
Economics 33, pp. 159–178; Michael Pollitt (2008) Electricity Reform in Argentina: Lessons for
Developing Countries, Energy Economics 30(4), pp. 1536-1567; Rafaella L. Mota (2003) The
Restructuring and Privatisation of Electricity Distribution and Supply Businesses in Brazil: A Social Cost-
Benefit Analysis. Cambridge Working Papers in Economics 0309; Tooraj Jamasb (2002) Reform and
Regulation of the Electricity Sector in Developing Countries. Cambridge Working Papers in Economics
0226.
11
Nino Ghvinadze and Laura Linderman (2013) Cross-border Electricity Exchanges: Bolstering
Economic Growth in the South Caucasus and Turkey. Issue Brief, The Atlantic Council, October.

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
5
in January 2016, the Turkish electricity network is integrated with the European grid,
and this integration offers the South Caucasus a well-needed connection to Europe.
Current electricity sector reforms across the countries of the region have not yet
resulted in significant enhancement of cross-border trade. A wide range of economic,
technical, and regulatory factors have played an important role in the success of
these reforms. Political legacies in the region also affect prospects for a regional
electricity market. First, bilateralism persists in the region due to complex political
and historical legacies of the post-conflict societies and strategic choices of the
states involved.
12
Second, the transformative dynamics of regional integrationist
projects affects cooperative developments in electricity. Different institutional
frameworks of the Eurasian Economic Union and the EU Energy Community create
overlapping authorities in the region and may externalise politicised practices to the
electricity sector, thus downgrading regional cooperative efforts in electricity.
Armenia and Russia are creating a common electricity market within the Eurasian
Economic Union, and Georgia is negotiating to join the EU Energy Community. As a
politically neutral, legally-binding instrument, the Energy Charter Treaty (ECT) is well-
positioned to provide a platform for discussions and best practice exchange, as well
as ensure necessary investment protection and stability of the framework for cross-
border projects. However, the extent to which the countries are ready to be proactive
in using the available ECT tools lies somewhere at the intersection of political and
institutional factors.
This occasional paper analyses the dynamics of cross-border electricity cooperation
in the region. First, the study looks at domestic institutional frameworks in each
country (Armenia, Azerbaijan and Georgia) to reveal whether regulatory provisions
for their electricity sectors provide enough room for regional-level cooperation.
Discussing to what extent cooperation is feasible under fragmented institutional and
political preferences, the paper addresses the role the ECT can play in providing a
common level playing field for regional cooperation.
Second, the paper assesses market conditions in the region in order to reveal existing
opportunities for cooperation. Numerous ad hoc cooperative endeavours have taken
place between Turkey and the EU, and also between the South Caucasus, Turkey, and
Iran. This section analyses opportunities for regional electricity trade and
infrastructure development plans. It is argued that a more inclusive cooperation at
the technical level among national regulators is welcomed by many stakeholders in
the region. Launching a regional dialogue on establishing a hub for electricity trade
in the future might provide a necessary ground for creating a stable environment for
cross-border projects.
12
Mustafa Aydın (ed.) (2011) Non-traditional Security Threats and Regional Cooperation in the
Southern Caucasus. IOS Press BV, Amsterdam.

OCCASIONAL PAPER SERIES
The conclusion addresses the future of regional electricity cooperation in the South
Caucasus. Taking into account high sensitivities towards any attempts for
cooperation seen as politically motivated, it is advised to use a market-based,
bottom-up approach to identify practical needs and technical cooperatives strategies
in the sector. An inclusive dialogue on domestic developments programmes will
enrich understanding of needed capacities and interconnectors by national
governments and various stakeholders.
Electricity market reforms and domestic institutions in the South Caucasus
It has been widely acknowledged that effective cross-border power exchange
requires more advanced competitive trading mechanisms and greater market
openness – in other words, “functioning cross-border power markets require
complementary domestic reforms”.
13
These domestic reforms, mostly in the form of
liberalisation and decentralisation of the electricity sector, have been conducted
largely in line with the concept of the regulatory state, which is majorly characterised
with “an extensive use of regulation … and of a massive diffusion of the autonomous
regulatory agency as a new institutional model for public management”.
14
Electricity
sector restructuring and electric utility privatisation have been conventionally argued
to increase efficiency of the sector and ensure fiscal imperatives, as well as to attract
foreign investments in the sector.
15
Three steps have been acknowledged as essential
in order to tackle inefficiency and indebtedness of the electricity sector:
16
 introduction of cost-reflective prices;
 removal of direct and indirect subsidies;
 imposition of financial and budget constraints on the basis of
Performance Based Regulation (PBR).
The transition economies of the South Caucasus have attempted to pursue
regulatory reforms in line with World Bank provisions since the 1990s. These
transition economies were, to a large extent, tasked to increase the rate of
investment and mitigate chronicle imbalances in the performance of state-owned
13
Regional Electricity Markets in the ECT Area. Report (Energy Charter Secretariat, Brussels, 2003).
Here, p. 17.
14
Jacint Jordana and David Sancho (2004) Regulatory Designs, Institutional Constellations and the
Study of Regulatory State. In: Jacint Jordana and David Levi-Faur (eds.) (2004) The Politics of
Regulation. Institutions and Regulatory Reforms for the Age of Governance. Edward Elgar:
Cheltenham, UK, Northampton, MA, USA, pp. 296–319. Here, p. 296.
15
Paul L. Joskow (2008) Lessons Learned from Electricity Market Liberalization. Here, p. 11.
16
Robert P. Anex (2002) Restructuring and Privatizing Electricity Industries in the Commonwealth of
Independent States, Energy Policy 30, pp. 397–408.

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
7
utilities.
17
All countries attempted some degree of privatisation and deregulation,
whilst Georgia, Russia and Turkey have pursued these reforms somewhat further. For
example, Georgia’s reforms are in line with the EU internal electricity market model
and aim to integrate the country’s grids with Turkey and, further, with European
grids. Turkey has been gradually opening the market, including the recent changes to
electricity market licence regulation introduced by The Regulation Amending the
Electricity Market Licence Regulation on 23 December 2015.
Electricity reforms have aimed at reducing budget pressures in the form of needed
financial injections from state-owned enterprises with low performance (artificially
low tariffs left little room for utilities to self-finance), introducing higher fiscal
responsibility, and expanding capacity that is often ageing and low efficiency. To a
large extent, these reforms have been driven by attempts to remove burdening
arrangements, such as subsidies and low collection rates, from national balances.
18
In a nutshell, electricity reforms need to address a number of legal and regulatory
issues in various combinations depending on domestic needs.
19
This study relies on a
list of elements of electricity reforms elaborated by Jamasb et al. (2005),
20
this is not a
must-to-do list, but incorporates some of the most important issues that are likely to
be addressed during electricity reforms. The elements are, inter alia, the following:
corporatisation of state-owned utilities; enactment of an electricity reform law;
unbundling of vertically-integrated utilities; provision of third party access to
networks; establishment of an independent regulator; establishment of a competitive
wholesale generation market; liberalisation of the retail supply market; privatisation
of electricity assets; and definition of rules concerning consumer protection. Table 1
summarises the major outcomes of various reforms in the South Caucasus.
17
Tooraj Jamasb, Raffaella L. Mota, David Newbery and Michael Pollitt (2005) Electricity Sector Reform
in Developing Countries: A Survey of Empirical Evidence on Determinants and Performance. Policy
Research Working Papers, World Bank Group, March,
http://elibrary.worldbank.org/doi/abs/10.1596/1813-9450-3549
18
Tooraj Jamasb, Raffaella L. Mota, David Newbery and Michael Pollitt (2005) Electricity Sector Reform
in Developing Countries. Here, pp.7–8.
19
See, for example, Robert Bacon (1999) A Scorecard for Energy Reforms in Developing Countries.
Viewpoint, Note 175, April, World Bank Survey,
https://openknowledge.worldbank.org/bitstream/handle/10986/11487/multi_page.pdf?sequence=1&i
sAllowed=y
20
Tooraj Jamasb, Raffaella L. Mota, David Newbery and Michael Pollitt (2005) Electricity Sector Reform
in Developing Countries. Here, pp.7–8.

OCCASIONAL PAPER SERIES
Table 1. Electricity reforms in the South Caucasus
Elements of
electricity
reforms
Armenia21
Azerbaijan22
Georgia23
Corporatisation
of state owned
utilities
Measures to improve
utilities’ financial
performance and bill
collection; tariff reforms
begin in 1994, entities are
transformed into closed
joint-stock state-owned
companies (1997).
1998: a financial
rehabilitation plan (tariff
increases, the
improvement of payment
discipline, and debt
restructuring).
2003: the Integrated
Financial Rehabilitation
Plan for Utilities.
Measures to improve
Azerenerji’s financial
performance, including
optimisation of transmission
losses and operational costs,
metering, and bill collection.
Adopted a medium-term
tariff policy that
incorporates a transition to
full cost recovery for utility
service providers. 2007: the
tariff reform (the electricity
tariff was increased three-
fold).
Measures to improve utilities’
financial performance and bill
collection.
Generation and distribution
are largely privately owned.
Transmission company
Georgian State Electrosystem
(GSE) and Energy System
Commercial Operator (ESCO)
are commercial state-owned
entities.
Enactment of an
electricity reform
law
The Law on Energy (1997,
with further amendments):
separation of generation,
transmission, and
distribution.
The Law on Electricity
Distribution Company
(EDC, 2000): privatisation
of distribution; dropping
the requirement that the
prospective owners
commit to a fixed level of
The Law on Energy (1998,
with further amendments);
The Law on the Use of
Energy Resources (1998,
with further amendments);
The Law on Electricity (1998);
The Law on Power Plants
and Heat Generation Plants
(1999, with further
amendments).
The State Programme for
the Development of the Fuel
The Law on Electricity and
Natural Gas (1997, with
further amendments), and the
Electricity (Capacity) Market
Rules (2006).
21
For an overview of reforms in Armenia, see: From Crisis to Stability in the Armenian Power Sector,
World Bank Working Paper 74, 2006; In-depth review of the investment climate and market structure
in the energy sector of the Republic of Armenia. Report (Energy Charter Secretariat, Brussels, 2015).
22
For an overview of the electricity sector of Azerbaijan, see: Azerbaijan Country Profile, EBRD,
http://www.ebrd.com/downloads/legal/irc/countries/azerbaijan.pdf; In-depth review of the investment
climate and market structure in the energy sector of Azerbaijan. Report (Energy Charter Secretariat,
Brussels, 2013); Sector Assessment (Summary): Energy, (Asian Development Bank),
http://www.adb.org/sites/default/files/linked-documents/cps-aze-2014-2018-ssa-02.pdf
23
For an overview of reforms in Georgia, see: Assessment of Power Sector Reforms in Georgia. A
country report (Asian Development Bank, 2015), http://www.adb.org/sites/default/files/institutional-
document/161067/georgia-psr-report.pdf

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
9
investment (USD 80
million).
2004: The Law on Energy
Efficiency and Alternative
Energy.
The Government currently
considering adopting a
Grid Code.
The Energy Sector
Development Strategy of
Armenia (adopted in 2005,
updated in 2007)
and Energy Sector (2005–
2015)
The State Programme on the
Use of Alternative and
Renewable Sources (2004)
Unbundling of
vertically-
integrated
utilities
The unbundling of a
vertically integrated
Armenergo
into
generation, transportation
and distribution utilities
(started in 1995).
The sector:
 generation
companies
 one state-owned
transmission
company (CJSC High
Voltage Electrical
Networks);
 one privately owned
distribution company
(CJSC Electricity
Network of Armenia);
 a state-owned system
operator (CJSC
Electric Power System
Operator);
 a state-owned
settlement centre.
Unbundling is not
envisaged:
 Azerenerji JSC
(established in 1996,
vertically-integrated
state-owned)
 Azerishig, state-owned
distribution company.
Created by the
presidential decree on
February 9, 2015 on the
basis of Baku Electric
Grid JSC, state-owned
regional distribution
company, in order to
improve power supply
of the regions of the
country.
 several independent
private mini-power
plants.
The unbundling of Sakenergo,
the state vertically integrated
monopoly, into generation,
transmission and distribution:
 Generation companies
 Georgian State
Electrosystem JSC (state-
owned) and JSC
Sakrusenergo (50% by
the state and 50% by
RAO UES) –
transmission companies;
GSE owns and operates
330, 220 and 110 kV
lines (along with some
35 kV lines) and high
voltage substations,
(including the 500 kV
substation), and holds
the licence for the
Dispatch Centre. JSC
Sakrusenergo operates a
500 kV line.
 ESCO is responsible for
balancing electricity
demand and supply, and
for contracting for
electricity export and
import.
 The Dispatch Centre
(GSE is a dispatch
licensee)
Provision of third
party access to
Non-discriminatory access,
but not formally organised
Non-discriminatory access,
but not implemented in
Free third party access –
separate technical and access

OCCASIONAL PAPER SERIES
networks
(i.e. access of generators to
networks and connection
tariffs).
Ongoing assistance to the
Ministry of Energy for the
adoption of TPA legislation
in the electricity
transmission networks of
Armenia by INOGATE
(majorly for the Armenia–
Georgia Interconnector).
practice due to the market
structure.
No grid code.
rules (the Market Rules and
Grid Rules adopted by the
GNEWERC in 2014).
Priority access to the
transmission network to
Turkey (long term contract
with the TSO) with new HPPs.
Establishment of
an independent
regulator
The Armenian Energy
Regulatory Commission
(AERC), established in
1997; now called the
Public Services Regulatory
Commission (PSRC) –
regulatory implementation
(tariffs, service quality and
licensing, consumer
complaints).
The PSRC issues licenses
for generation of thermal
energy (including
combined electric/thermal
generation), transmission
and distribution, import
and export.
The Tariff Council – tariff
regulation;
Ministry of Industry and
Energy: policy
implementation, licensing,
and sanctions against
energy companies for non-
compliance with energy
legislation
The Georgian National Energy
and Water Supply Regulatory
Commission (GNEWERC):
drafting and approving tariff
methodology and licensing
rules, and granting and
revocation of licenses. It
establishes tariffs and issues
licenses for generation
(excluding existing hydro
power plants under 13 MW
and new power plants in
operation since 2008).
Establishment of
a competitive
wholesale
generation
market
De facto “single buyer”
model market: regulated
prices, direct contracts.
Electricity export requires a
license from the PSRC.
None. Export and import
operations need a special
permit.
The “single buyer” model was
replaced by ESCO in 2006.
Market participants are
allowed purchasing electricity
both via direct contracts and
ESCO. ESCO is responsible for
balancing, exports/imports
and exports of surplus power
not sold through bilateral
contracts. TSO functions are
split between ESCO and the
Dispatch Centre.
New generating plants and
existing generating plants
under 13 MW are no longer
subject to tariff regulation by
GNEWRC.
Electricity import/export is
deregulated – no licensing

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
11
required.
Liberalisation of
the retail supply
market
Tariffs are set by a
regulator generally
regarded as near medium-
term cost recovery levels.
A uniform tariff for
residential consumers.
Opening of the retail market is
planned by 2017.
Privatisation of
electricity assets
Privatisation of the power
distribution network, and
of most generating
companies (including small
HPPs).
Attempts to privatise the
distribution company
throughout the late 1990s;
Midland Resources
Holding (MRH) gained
control over the
distribution systems in
2002 and later sold it to
RAO UES.
In the early 2000s, assets
of generation sector were
swapped to Russian
companies in state debt
forgiveness.
Some consultations during
2011–2015 on the
privatisation of electricity
assets, but no immediate
plans.
Several private mini-power
plants (HPPs) are privately-
owned.
Attempted long-term
management contracts for
the distribution companies
throughout the 2000s.
Generation and distribution
are majorly privately-owned
(except for the Enghuri and
Vardnili HPPs).
Definition of
rules concerning
consumer
protection,
allocation of
subsidies, etc.
The PSRC is responsible for
consumer complaints.
Gradual transition to cost-
based tariffs,
improvements of bill
collection (in 1999, shifted
to post offices instead of
bill collectors).
Meter relocation program,
twelve thousand new
tamper-proof meters
installed with the
Automated Metering and
Data Acquisition System
(AMDAS, 1999–2001).
Ministry of Industry and
Energy handles consumer
complaints and ensures
service quality control.
In 2007, Azerenerji initiated
the installation of meters,
including prepayment smart
meters. This has resulted in
much improved collection
from an average of 38% in
2006 to nearly 88% in 2013.
Introduction of a modern
metering, billing, and
collection system (began by
AES, an American company
that bought 75% of JSC Telasi,
the distribution company in
Tbilisi, in 1998. The company
was sold to RAO UES in 2003).
Step tariffs residential
Private
investment in
greenfield sites*
The Armenia Renewable
Energy and Energy
Efficiency Fund: 2011 a first
version of the Armenian
Renewable Energy
The State Programme for
Usage of Renewable and
Alternative Energy Sources;
The Agency for Renewable
and Alternative Energy
Strategy to replace thermal
generation with renewable
energy (hydropower),
approximately 67 greenfield
projects offered on Build-
Own-Operate (B-O-O)

OCCASIONAL PAPER SERIES
roadmap:
Local renewable energy
sources; green energy
projects; private sector
participation in small
hydropower generation.
Sources under the MIE.
principle.
Sources: ADB,
24
Energy Community
25
, EBRD
26
, ESCO,
27
INOGATE
28
* Note: World Bank Survey criterion
The output of similar reforms might, however, vary across the countries. Inevitably, a
country’s institutions and sector governance might alter the effectiveness of reforms
and signal significant risks for foreign investors. Much depends not only on particular
reform provisions, but also on the political will of governments to not to allow vested
interests and institutional legacies to circumvent the reform path. Peculiarities of
decision-making processes that lie behind the formal similarities of many
institutional innovations can become the keys to successful reforms. Thus, a set of
institutional reforms implemented de jure in most countries under discussion during
the post-Soviet transition has been challenged de facto by persisting informal
practices, such as ownership, institutional cultures and group interests.
29
In case of serious budget constraints, reforms become a way to inject much needed
financial resources in the sector from international and private donors. However,
liberalisation of domestic markets requires certain political choices, which might be
rather sensitive and much dependent on the domestic political situation. A
combination of various issues that a government faces during regulatory and market
reform might decrease its commitment to proceed with far-reaching regulatory and
24
Assessment of Power Sector Reforms in Georgia. Country report (Asian Development Bank 2015),
http://www.adb.org/sites/default/files/institutional-document/161067/georgia-psr-report.pdf
25
Giorgi Tushurashvili (2013) Energy Strategy and Energy Policy Developments for the Promotion of
Clean Power Generation in Georgia, Energy Community, https://www.energy-
community.org/pls/portal/docs/1910181.PDF
26
Georgia country profile, EBRD, http://www.ebrd.com/downloads/legal/irc/countries/georgia.pdf
Armenia country profile, EBRD, http://www.ebrd.com/downloads/legal/irc/countries/armenia.pdf
27
Electricity System Commercial Operator, History,
http://www.esco.ge/index.php?article_id=12&clang=1
28
Workshop on the Assistance to the Ministry of Energy for the adoption of TPA legislation in the
electricity transmission networks of Armenia, INOGATE, 15 December 2015,
http://www.inogate.org/activities/608?lang=en
29
Tooraj Jamasb, Raffaella Mota, David Newbery and Michael Pollitt (2005) Electricity Sector Reform in
Developing Countries: A Survey of Empirical Evidence on Determinants and Performance; Robert P.
Anex (2002) Restructuring and Privatizing Electricity Industries in the Commonwealth of Independent
States.

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
13
institutional changes.
30
Among others, the countries of the South Caucasus have
faced a need to ensure domestic stability, protect political and strategic interests,
address institutional dependencies in the sector, and simultaneously calibrate
domestic political aspirations and group interests.
 Domestic politics and social stability. An increase of end-user tariffs to cost-
recoverable levels – an inevitable step during market reforms – has remained
a crucial issue of the countries’ domestic politics due to its social sensitivity.
Non-economic prices for energy are a historical legacy of the Soviet period,
when the price for electricity as a necessity was nominal. Costs for household
electricity were bundled into the rent, and electric power was not paid by
consumers.
31
Coupled with the economic downturn and skyrocketing poverty
of the population, low electricity prices remained a highly sensitive issue for
domestic politics. Moreover, large-scale non-payments represented another
obstacle for reforms, and poor metering complicated bill collection further. In
turn, industrial and residential prices below economic costs inhibit
investment inflows in generation and transmission, since investors fail to
recover costs and make reasonable profits. The political sensitivity of tariff
policy incentivises governments to maintain control over tariff calculations
and intervene when necessary. Setting cost-reflective prices remains a crucial
issue in the vicious circle of investors’ lack of confidence in regulatory
frameworks and any significant reform attempted in the sector. Similar to
many other transitional economies, such as those of Central Asia, the South
Caucasus has faced the dilemma of attracting foreign investors and ensuring
social stability.
32
The lack of investment becomes especially apparent in the
countries with budget restrictions, such as Georgia and Armenia, while
others, like Azerbaijan, can inject some state financing into the sector.
 Political and strategic considerations. Despite calls for more technical and
regulatory cooperation being articulated by various stakeholders in the
region, regional politicisation trends have deeply penetrated the sector. A
technical and economic rational to restore a single electricity network
conflicts with political preferences of the states, and difficulties in regional
cooperation are nested into strategic legacies and unresolved territorial and
historical conflicts. A lack of political incentives to engage in open dialogue
30
Julian A. Lampietti, Sudeshna Ghosh Banerjee and Amelia Branczik (2007) People and Power.
Electricity Sector Reforms and the Poor in Europe and Central Asia. The International Bank for
Reconstruction and Development / The World Bank, Washington DC.
31
Susanne A. Wengle (2015) Post-Soviet Power. State-led Development and Russia’s Marketization.
Cambridge University Press.
32
Anatole Boute (2015) Towards Secure and Sustainable Energy Supply in Central Asia: Electricity
Market Reform and Investment Protection (Brussels: Energy Charter Secretariat, 2015).

OCCASIONAL PAPER SERIES
and increasing competition for regional leadership complicate pan-regional
approaches to electricity.
 Institutional legacies in the electricity sector. Fragmentation of the Soviet
system into several stand-alone grids facilitated under and overcapacities
across the region. These problems have been aggravated with an economic
slowdown in the sector and shifts in domestic demand/supply patterns.
Industrial consumption fell as a result of the economic downturn of the
1990s, while residential demand grew, thus increasing peak-load demand.
This further aggravated the gap between generation and capacities across
the region, which emerged from the breakup of the Soviet single power
network. Persisting organisational structures in the electricity sector of the
South Caucasus initially made it rather unattractive for privatisation, and
lowered governments’ incentives to engage with reforms. Most companies
were majorly state-owned and financed by governments with no direct
relationship to electricity sales revenues. Subsidies for electricity utilities,
both direct, such as payments from the government to a company in the
form of a compensation, and indirect, such as low interest loans and various
arrangements due to informal practices, are still present in most countries.
For example, the independence of GNEWRC from Georgian government
bodies has been questioned in the country report by the Asian Development
Bank.
33
Moreover, the same study argues that cross-ownership of generation,
supply and distribution, and transmission activities in Georgia impedes the
sector’s competitive practices. Another example refers to the recent protests
in Armenia against an electricity price increase of 17–22% during summer
2015.
34
While political sensitivity to the tariff policy was one of the major
triggers of these protests, they were also driven by allegedly persisting
inefficient and non-transparent regulatory practices in the sector.
 Group interests. The logic of reform has often confronted with resistance
from domestic actors who are accustomed to obtaining economic and
political benefits from non-privatisation. Cross-sectoral ownership by various
oligarch and interest groups in the countries prevents effective unbundling
of the industry and implementation of competitive provisions. For example,
the initial attempt of the Armenian Electricity Distribution Company (EDC)
during the 1990s to improve bill collection by means of hiring a large
number of inspectors resulted in poor collection, in part due to the collusion
of inspectors and the population during cash bill collection. Privatisation also
33
Assessment of Power Sector Reforms in Georgia. Country report. Asian Development Bank 2015.
Here, p. 4.
34
Armenian protests: Thousands rally against energy price hike. BBC, 24 June 2015,
http://www.bbc.com/news/world-middle-east-33238070

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
15
often met resistance from various groups and policy-makers. Thus, in order
to prevent vested interests from prevailing over reforms, the Government of
Armenia shifted relevant responsibilities from the Ministry of Energy to the
Ministry of Justice during the early 2000s.
35
Removing trade and investment barriers (such as monopolies, lack of open access to
grids, and limited access to final consumers) remain essential issues in the region.
Investment attractiveness depends both on a country’s investment climate and
guaranteed investment protection and on regional infrastructure, especially given the
fact that the national electricity markets of Armenia, Azerbaijan and Georgia are
rather small. However, until regulatory reforms result in greater market opening,
trade will remain limited to sporadic (bilateral) exchange. Insufficient cooperation
and coordination among transmission system operators and the lack of
harmonisation of national markets have been continuously reported as the principle
factors causing the lack of progress in regional power trade. Numerous discussions
with stakeholders and donors have revealed a general acknowledgement of the need
to enhance the role of national regulatory agencies and transmission system
operators in harmonising practices.
Regional integration initiatives and a South Caucasian regional electricity
market
Security considerations and historical legacies play an essential role in the region,
and while this paper focuses on economic and regulatory aspects of regional
economic integration, it acknowledges the pivotal importance of political problems
that have penetrated the region. Truly mutually beneficial cooperation cannot be
achieved without political issues being resolved – and this would require long-term
political commitments from the countries of the region.
36
This political complexity is aggravated by emerging regional integration dynamics.
Overlapping authorities of regional frameworks – the Eurasian Economic Union and
the EU Energy Community – might affect regional electricity cooperation. From one
side, these regional initiatives create market-oriented legal frameworks that aim for
the further regionalisation and liberalisation of domestic electricity markets. From the
other side, they also create fragmented political authorities and may provide
differentiated market designs.
37
Aggravated with persisting political and historical
35
From Crisis to Stability in the Armenian Power Sector. Here pp. 4–6.
36
Thomas de Waal (2013) Black Garden: Armenia and Azerbaijan Through Peace and War, 10th Year
Anniversary Edition, Revised and Updated, NYU Press.
37
David Lane and Vsevolod Samokhvalov (eds.) (2015) The Eurasian Project and Europe. Regional
Discontinuities and Geopolitics. Basingstoke & New York, NY: Palgrave Macmillan; Piotr Dutkiewicz

OCCASIONAL PAPER SERIES
legacies, the emergence of a common harmonised framework for a regional
electricity market seems to be challengeable. This section discusses these two
regional projects – the Eurasian Economic Union and the EU Energy Community –
and outlines other regional and multilateral frameworks that address the issues of
the electricity sector in the South Caucasus.
The Eurasian Economic Union
Reintegration of electricity networks in the post-Soviet space was attempted
immediately after the dissolution of the USSR – in 1992, the Council of CIS signed the
Agreement on Coordination of Interstate Relations in the Electric Power Industry,
which was followed by the Agreement on Parallel Work of Electric Power Systems in
1998. The CIS Electric Power Council, at the moment the only body to address
mitigation of negative externalities due to the dissolution of the single Soviet
electricity system, aimed at coordination of new national electricity markets, united
by technicalities and infrastructure, but divided by regulatory approaches. It adopted
several strategies of cooperation in electricity, and the Concept of a common
electricity market in 2005. The Concept prescribes a gradual opening of electricity
markets, a decrease of barriers for market access, and a steady integration of national
energy markets.
38
The Agreement on formation of a common electricity market was
signed in 2007 by Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan as
part of the Eurasian Economic Community (EurAsEC) arrangements. In the 2000s, the
EurAsEC started creating a common power market (CPM).
The Eurasian Economic Union, an integrationist project for the post-Soviet states
launched in the late 2000s, has proposed major initiatives in hydrocarbon and
electricity markets. As announced, Armenia, Belarus, Kazakhstan, Kyrgyzstan, and
Russia
39
intend to create a common electricity market by 2019, and a single
hydrocarbon market by 2025. The priority attributed to a common electricity market
refers to historical legacies and institutional path dependence on the Soviet
electricity system, which provides numerous organisational and technical advantages
– these countries operate with similar technical and regulatory standards. Regarding
a common electricity market, the Concept of the Common Electricity Market was
approved by the Eurasian Economic Commission in May 2015, and, in 2016, the
Programme for a single electricity market is expected to outline the merge of
member states’ energy systems into a single network. The implementation of
provisions should be performed by member states over 2016–2018, and the
and Richard Sakwa (eds.) (2014) Eurasian Integration – The View from Within. Abingdon & New York:
Routledge.
38
Evgeny Vinokurov (2008) The CIS Common Electric Power Market. Sector Report (Eurasian
Development Bank), http://eabr.org/general/upload/docs/CEPM_eng.pdf
39
Armenia and Kyrgyzstan joined the Eurasian Economic Union in 2015.

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
17
intergovernmental treaty on a common electricity market should come into force in
2019.
Several options were considered during consultations on the model of a common
electricity market – first, a single market based on the model of the wholesale
electricity market of Russia; second, the creation, in Russia, of regional electricity
markets approximately equal to the markets of Belarus and Kazakhstan; and, third,
the formation of a common electricity market with preservation of national electricity
markets of member states. The last option was chosen as the most pragmatic and
best suited for a successful integration output. Overall, the integration process is
expected to take place in three major steps. First, harmonisation of national
legislation, market opening reforms (unbundling), and development of a common
legal base for supranational governance of the electricity markets. Second, national
electricity markets are opened to other members. Third, national markets are
expected to be integrated into a common market.
This intensive working plan needs, however, to bypass political bargaining among
member states of the Eurasian Economic Union.
40
Thus, Belarus insists on the priority
of the creation of a single gas market before the electricity one mostly due to their
interest in equal pricing and accessing oil and gas infrastructure, and the question
remains open to debate.
41
Despite silence from the media, the question of whether
the integration process in gas and electricity should be separated or treated as a
single process may create unexpected delays. Creation of a common electricity
market shall be accompanied with relevant domestic reforms of the sector, but a
different degree of member states’ preparation might create obstacles.
In any case, the creation of a common electricity market will have serious
implications for Armenia, a member state of the Eurasian Economic Union.
42
Having
functioning connections with Iran and Georgia, the country might need to mitigate
emerging differences between two regional integrationist projects, the Eurasian
Economic Union and the EU Energy Community. A member of the latter, Georgia, is
increasingly moving its existing regulatory framework up to the standards of the EU
internal electricity market.
40
However, earlier in 2016, the Concept for development of the common gas market of the Eurasian
Economic Union was approved.
41
Союзники снова споткнутся о , Belrynok, 19 August 2015,
газ
http://www.belrynok.by/ru/page/industry/833/
42
Armenia and the Customs Union: Impact of Economic Integration. Report 20 (Eurasian Development
Bank, 2013), http://www.eabr.org/general//upload/CII%20-
%20izdania/2014/%D0%90%D1%80%D0%BC%D0%B5%D0%BD%D0%B8%D1%8F-
%D0%A2%D0%A1/doklad_20_en_preview.pdf

OCCASIONAL PAPER SERIES
The EU Energy Community
The EU Energy Community was created in 2005 as part of the EU’s external policies
towards its neighbourhood and was primarily aimed at “the import of the EU energy
policy into non-EU countries.”
43
It has invoked the significant structural and
institutional reorganisation of electricity markets in member states and neighbouring
countries through the implementation of EU energy acquis by its contracting parties,
but without granting them possibility to participate fully in creation or amendment of
the rules.
Along the lines of the reforms conducted within the EU, the EU Energy Community
requires several electricity market reforms in order to meet the criteria of EU energy
acquis. Thus, contracting parties need to make compatible with EU legal frameworks
the organisation of the electricity sector (unbundling), provide third party access to
networks, and design national electricity markets according to the EU model.
44
As a
part of negotiations within the Energy Community, Georgia aims to design its
domestic electricity market in line with EU acquis.
45
Regional initiatives
In addition, several regional initiatives, most of which are under the auspices of the
EU framework, offer technical and regulatory approximation of the domestic
electricity sectors of the countries. Thus, fostering electricity cooperation is one of
the objectives of the EU Eastern Partnership. 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).
46
Until now, four workshops have been
organised. At the one that took place in 2014, regulatory aspects of market
integration in building regional electricity markets were discussed.
The INOGATE programme is tasked to provide technical and project support to
partner countries, which include the countries of the South Caucasus. In particular, a
project aimed at the harmonisation of electricity standards in the South Caucasian
43
Energy Community website, https://www.energy-
community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY
44
Jean-Michel Glachant and François Lévêque (eds.) (2009) Electricity Reform in Europe: Towards a
Single Energy Market. Cheltenham: Edward Elgar.
45
Tamar Tsurtsumia (2015) Electricity Cooperation Opportunities in the South Caucasus: The Role of
Georgia, Occasional Paper (Energy Charter Secretariat, Brussels, 2015).
46
CEER–Eastern Partnership, CEER,
http://www.ceer.eu/portal/page/portal/EER_HOME/EER_INTERNATIONAL/CEER_Eastern_Partnership

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
19
and Central Asian countries, Moldova, and Ukraine, was administered in 2009–2011.
47
Some specific projects administered by INOGATE under EU financial support include
the participation of Tbilisi in the Covenant of Mayors, a European movement
involving local and regional authorities, aimed to deliberate on increasing renewable
energy and energy efficiency.
48
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.
49
The EU-backed Black Sea Synergy initiative, among others, aims at greater stability
and approximation of energy policies in the region.
50
The Organisation of the Black
Sea Economic Cooperation, a regional platform created in 1992, also addresses
energy issues, electricity networks in particular, as part of its activities.
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.
Cross-border regional trade opportunities and infrastructure projects in
the South Caucasus
Technical and economic factors play a significant role in boosting regional
cooperation and ensuring further market integration. Technical barriers, lack of
compatibility between systems, inefficiencies in the use of cross-border
interconnectors for balancing countries’ electricity needs, lack of domestic and cross-
border interconnectors, high technical and commercial losses, and lack of adequate
investment in electricity network infrastructure are a few factors that can seriously
complicate greater integration of electricity networks and inhibit regional trade
opportunities.
This section analyses the prospects for regional trade according to the following
indicators:
47
Harmonisation of electricity standards, INOGATE, http://www.inogate.org/projects/harmonisation-
of-electricity-standards?lang=en
48
Infrastructure and Environment, Delegation of the European Union to Georgia,
http://eeas.europa.eu/delegations/georgia/projects/overview/infrastructure_environment_rural_dev/in
dex_en.htm
49
Workshop on the Assistance to the Ministry of Energy for the adoption of TPA legislation in the
electricity transmission networks of Armenia, INOGATE, 15 December 2015,
http://www.inogate.org/activities/608?lang=en
50
Joint Staff Working Document, Black Sea Synergy: review of a regional cooperation initiative,
European Commission, SWD(2015) 6 final, 20 January 2015,
http://eeas.europa.eu/blacksea/doc/swd_2015_6_f1_joint_staff_working_paper_en.pdf

OCCASIONAL PAPER SERIES
 Electricity demand in the countries of the South Caucasus – production and
consumption;
 Generation capacities – capacity utilisation and investment programmes in
their renovation and restoration;
 Electricity losses – technical and commercial;
 Technical specifications – connections of countries’ power systems;
 Cross-border trade flows in the region;
 Cross-border capacities – existing and planned interconnectors.
Cross-border trade in the region is present in the form of bilateral exchanges. Further
enhancement of regional trade lacks adequate domestic and cross-border
infrastructure, as well as synchronicity among the countries’ power systems. The
small sizes of the countries’ domestic electricity markets provide incentives for
combining efforts in meeting various needs in national power systems and attracting
foreign investments. Table 2 outlines major production and consumption data of the
South Caucasian countries and their neighbours.
Table 2. Electricity Production and Consumption, GWh, 2013
Armenia
Azerbaijan
Georgia
Iran
Russia
(South
UES)*
Turkey
Production:
7710
23354
10059
270371
82842
240154
Hydro
2173
1489
8271
15244
22049
59420
Nuclear
2360
0
0
5414
17136
0
Thermal
3173
21729
1788
185930
42617
170641
Other
4***
136^
0
231**
1040
8729^^
Final
Consumption
5404
15982
9074
212274
85585
196168
Industry
1209
2996
2327
76797
n/a
91384
Transport
124
531
282
394
n/a
826
Residential
2028
6716
3624
65234
n/a
44972
Commercial
and public
services
950
4829
1202
32334
n/a
54072

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
21
Agriculture
and fishing
151
910
34
33650
n/a
4914
Other
942
0
1605
3865
n/a
0
Sources: IEA, InterRAO UES, author’s calculations
Notes: Hydro includes production from pumped storage plants (IEA);
*: data for United Electricity System of South;
**: biofuels and wind;
***: wind;
^: waste, wind, and solar PV;
^^: wind, biofuels, geothermal, waste, and others.
There is room for greater demand in the future. For instance, Turkey’s electricity
demand is estimated to grow 7.4% by 2018, reaching 357,202 GWh.
51
Additionally,
seasonal variations in the countries’ electricity demand can become a solid ground
for further regional cooperation. Several preliminary considerations might be
particularly important:
 Seasonal variations in hydropower generation in Georgia allow the export of
electricity to neighbouring countries during spring and summer floods. The
recently completed interconnectors with Azerbaijan and Turkey, and ongoing
construction of the interconnector with Armenia, will offer opportunities to
use Georgia’s hydropower generation potential more effectively.
 Turkey can offer the highest electricity prices in the region and high demand
in summer. However, capacities in the East–West transmission corridor limit
Turkey’s electricity imports.
52
From April to June, Turkey limits imports from
Georgia (up to 350 MW), which is also due to an increase in generation at
local HPPs. Planned construction of HPPs in the eastern part of Turkey is
aimed to satisfy growing demand and mitigate environmental concerns, and it
might be advised to plan this construction within a broader regional
framework.
 The recently expanded Azerbaijan–Georgia interconnector (500 kV) offers an
opportunity to export excessive electricity from Azerbaijan to Turkey via
Georgia. Exports from Georgia to Azerbaijan might balance Georgia’s seasonal
surpluses, but flexibility of domestic gas pricing for electricity production in
51
Turkish Electrical Energy 10-year Generation Capacity Projection (2009–2018),
http://www.teias.gov.tr/eng/ApkProjection/CAPACITY%20PROJECTION%202009-2018.pdf, Here, p.12.
52
The analysis of the East–West transmission corridor and the blackout on 31 March 2015: Report on
Blackout in Turkey on 31st March 2015, ENTSO-E, 21 September 2015,
https://www.entsoe.eu/Documents/SOC%20documents/Regional_Groups_Continental_Europe/201509
21_Black_Out_Report_v10_w.pdf

OCCASIONAL PAPER SERIES
Azerbaijan should be taken into account while assessing the feasibility of
these export flows.
 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. A new interconnector between Armenia and Iran
also opens room for cooperation among Georgia, Armenia and Iran, as well as
Russia.
53
Complementarity of generating capacities in the region
Existing large surplus generation capacities and daily and seasonal variations in
capacity utilisation are one of the most important indicators of a potential increase in
physical trade in electricity.
54
Any assessment of regional trade opportunities needs
to take account of installed and operational capacities, their utilisation, and various
renovation and restoration programmes.
Complementarity of generation capacity among the countries offers opportunities
for better investment allocation in generating capacity, improving load factors across
power systems.
55
Maintaining reserve margins (usually up to 20% of installed
capacity) is typically obligatory for security reasons,
56
but regional cooperative efforts
can reduce the relevant costs due to power exchange through regional
interconnectors. Regional complementarity of generating capacities can also
contribute to developments in renewable energy and improve the overall countries’
environmental dispatch.
57
Table 3 outlines the countries’ generating capacities and
maps out major power plants.
53
On 23 December 2015, Armenia, Georgia, and Iran, and the chief executive of the Rosseti signed a
memorandum on cooperation in the energy sphere. Armen Grigoryan (2016) Armenia, Georgia, Iran
and Russia Plan to Expand Energy Cooperation, Eurasia Daily Monitor 13(1),
http://www.jamestown.org/single/?tx_ttnews[tt_news]=44939&no_cache=1#.VtlrX7-Q_Wg
54
Regional Electricity Markets in the ECT Area. Report (Energy Charter Secretariat, Brussels, 2003).
Here, p. 45.
55
Multi Dimensional Issues in International Electric Power Grid Interconnections. (Department of
Economic and Social Affairs, Division for Sustainable Development, United Nations, 2006),
https://sustainabledevelopment.un.org/content/documents/interconnections.pdf Here, pp. 15-17.
56
Regional Electricity Markets in the ECT Area. Here, p. 36.
57
Re-Powering Markets. Market Design and Regulation during the Transition to Low-carbon Power
Systems. Report (International Energy Agency, 2015).

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
23
Table 3. Generating capacity, MW
Country
Installed
generating
capacity
Major power plants (PPs)
Comments
Armenia
4,021
 The Metzamor NPP (376 MW);
 Hrazdan (1110 MW) and
Yerevan (550 MW) thermal (gas-
fired) PPs;
 Sevan-Hrazdan (556 MW) and
Vorotan (400 MW) Cascades;
 Wind power plant Lori-1 (2.64
MW) and small hydropower
plants with less than 30 MW;
 The Yerevan Thermoelectric
Plant (50 MW) for the Nairit
Chemical Plant;
 The Vanadzor Thermoelectric
Plant (50 MW) – not operating
Armenia imports natural gas from
Russia and Iran (for TPPs) and uranium
from Russia.
The Metsamor NPP (planned to retire in
2026) and two HPPs provide base-load
capacity.
The TPPs are used to meet winter peak
demand and provide baseload capacity
during NPP maintenance.
There is underuse of renewable sources
of energy, small hydropower, and solar
hot-water heaters.
Azerbaijan
6,231.6

13 TPPs (around 80%)
:
Azerbaijan TPP (2,400 MW);
Janub South TPP (780 MW);
Sumgait TPP (525 MW); Shimal
(400 MW); Sangachal (300 MW);
Baku TPC (107 MW);
Baku PP (104 MW); Shahdagh
(104 MW);
Astara (87 MW);
Shaki (87 MW);
Khachmaz (87 MW); Nakhchivan
PP (87 MW); Nakhchivan GTES
(64 MW)

15 HPPs:
Mingechevir HPP (402 MW);
Shamkir HPP (380 MW);
Yenikend HPP (150 MW);
Fizuli (25 MW);
Takhtakerpu (25 MW);
Shamkirchay (25 MW);
Varvara (16 MW);
Ismayilli-1 (1.6 MW);
Gusar-1 (1 MW);
Araz (22 MW);
Bilav (22 MW);
Arpaçay-1 (20.5 MW); Arpaçay-2
(1.4 MW);
Vaykhir (5 MW);
Goychay (3.1 MW).
New capacities reached 867 MW in
2013. Heavy oil PPs are mostly no
longer used since 2013.
Janub TPP replaced Ali Bayramli TPP
(the second largest PP in Azerbaijan) in
2013.
Private sector investments in the
generation facilities accounts for about
1% of the total installed capacity (mini-
PPs). Construction of mini-HPPs (such
as Takhtakerpu (25 MW), Goychay (3.1
MW), Ismayilli-1 (1.6 MW)) is completed
in 2014.
The Nakhichevan exclave is inter alia
dependent on power imports from Iran
and Turkey. Arpaçay-1 and Arpaçay-2 in
the Nakhichevan were commissioned in
2013–2014.

OCCASIONAL PAPER SERIES

Wind PPs
– completed in 2013–
2015:
Gobustan (2.7 MW);
Pirakushkul (80 MW);
Khizi (5.3 MW);
Khizi (Shurabad) (48 MW);
Yeni Yashma (50 MW);
Mushviq (8 MW)
Georgia
3,700

HPPs (2657.1 MW):
Enguri HPP (1,300 MW);
Vartsikhehesi (184 MW);
Vardnilihesi (220 MW);
Lajanurhesi (112.5 MW);
Zhinvalhesi (130 MW);
Gumathesi (68.8 MW);
Rionhesi (48 MW);
Khrami II (114.4 MW);
Khrami I (112.8 MW);
Zahesi (36.8 MW);
Khadorihesi (24 MW);
Dzevrulhesi (80 MW);
Shaorihesi (38.4 MW);
Chitakhvhesi (21 MW);
Ortachalahesi (18 MW);
Atshesi (16 MW);
Satskhenishesi (14 MW);
Small HPPs (below 13 MW)
(118.4 MW)

TPP (913 MW):
Mtkvari TPP (300 MW);
Tbilisresi (272 MW);
G-Power (110 MW)
Gardabani (231.2 MW)
Gradual replacement of thermal
generation with hydropower.
Limited reservoir capacity. Large
reservoir HPPs – Khudoni (702 MW) and
Namakhavani (450 MW) – are planned
by 2020.
Hydro generation is highly seasonal: in
summer, the country needs to export
excess power, and in winter, to import .
Khadorihesi and G-Power were
launched in 2005–2006.
Gardabani TPP was commissioned in
2015.
According to Ministry of Energy, 22
HPPs (1,550 MW) are either under
construction or at licensing stage and
are planned to be operational by
2020.58
Source: EIA; ADB, Azerenergji,
59
EU Energy Community, CEER,
60
Ministry of Energy of Georgia
58
Georgia Energy Policy Talks, Tbilisi, INOGATE, 25 February 2016,
http://www.inogate.org/documents/Final_ThemePaper_1stEnergyTalk_Feb25_20160219.pdf
59
Energy production, Azerenerji,
http://www.azerenerji.gov.az/index.php?option=com_content&view=article&id=91&Itemid=112&lan
g=en
60
Energy System of Azerbaijan, Presentation at Workshop ‘Building regional electricity markets’, 27
May 2014, CEER,
http://www.ceer.eu/portal/page/portal/EER_HOME/EER_INTERNATIONAL/CEER_Eastern_Partnership/3r
d/WO/02_02_Azerbaijan.pdf

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
25
Armenia needs to calibrate the NPP baseload, which is economically appropriate but
environmentally challenging given the seismic instability. Additionally, their NPP is
scheduled to be retired in 2026, and is planned to be replaced with a new reactor
(with a capacity of 1,060 MW). Funding for this project is expected to be derived
from a joint venture with Russia, but is yet to be confirmed. If completed, a new NPP
will offer enough opportunities for electricity export, both to Georgia and Iran.
However, since Georgia has decreased import significantly, Armenia’s export
opportunities to Georgia need closer analysis.
The Hrazdan TPP is of low efficiency (35%) and is used to cover peak loads and
substitute the NPP during regular maintenance. A new Hrazdan 5 TPP (440 MW)
meets operational standards. The Yerevan TPP has 550 MW installed capacity, but
only one generating unit is operational with around 50 MW. It is largely outdated
and needs renovation. A new 240 MW combined cycle gas turbine at the Yerevan
TPP came online in 2010. Additional construction of small HPPs (87 MW by 2015,
additional 61 MW by 2020) and wind PPs (40 MW by 2015 and 120 MW by 2020) are
being envisaged.
61
However, the construction of Shnogh HPP (75 MW) and Loriberd
HPP (66 MW) is considered feasible in case of greater regional integration.
62
Azerbaijan has rich domestic oil and natural gas sources, and TPPs are likely to
remain the major source of electricity production (up to 90%). With the completion
of new combined cycle gas turbine generation units by around 2016, old and less
efficient generation units will be decommissioned, and the overall generation
availability will rise to 75%. Since 2013, heavy oil TPPs are largely out of use – to
compare, in 2003 they generated around 40% of electricity.
63
Existing surplus of
electricity production can be exported to Georgia and Turkey after the
interconnector has been completed (the Azerbaijan–Georgia–Turkey Power Bridge).
Georgia prioritises the efficient use of hydro potential and enhancement of other
green sources. Internal generation capacity has been increased with updates in
hydropower generation areas in the North (Svaneti and Racha-Lechkhumi) and in
South-West and South (Samtkhe-Javakheti, Guria and Achara). Georgia’s hydropower
electricity production is characterised with high seasonality, and geographical
peculiarities of the rivers. One of options to balance seasonal fluctuations and ensure
stability of generation is the increase of reservoir capacity by construction of a new
61
Priorities of the development of the Armenia’s electricity market, Presentation at Workshop ‘Building
regional electricity markets’, 27 May 2014, CEER,
http://www.ceer.eu/portal/page/portal/EER_HOME/EER_INTERNATIONAL/CEER_Eastern_Partnership/3r
d/WO/02_01_Armenia.pdf
62
Ibid.
63
Energy System of Azerbaijan, Presentation at Workshop ‘Building regional electricity markets’, 27
May 2014, CEER.

OCCASIONAL PAPER SERIES
large reservoir HPPs, Khudoni (702 MW) and Namakhavani (450 MW), planned by
2020. Yet, HPPs with regulating water reservoir are challenging to build.
Renewable energy in the region
Growing environmental concerns provide room for a greater role for renewable
energy sources and new technologies for thermal plants across the region.
64
Inter
alia, an increase of the share of renewable energy in electricity generation is put forth
as a priority by the countries of the region: for example, Turkey’s 2009 Electricity
Market and Security of Supply Strategy aims for an increase up to 30% by 2023 by
utilising hydropower potential in the country; and Georgia’s National Renewable
Energy Action Plan (NREAP) and National Energy Efficiency Action Plan (NEEAP)
welcome greater developments of renewable energy, especially hydropower,
according to the EU legal framework and best practices. Azerbaijan also made efforts
for developing cleaner energy during the last decade – in 2003, 40% of electricity
production was generated from heavy oil PPs, which recently were nearly faded out.
The country also invests in the construction of mini-HPPs, wind PPs (104 MW), and a
TPP (34 MW) that runs on waste.
Electricity losses in the region
For the countries of the South Caucasus, reducing technical and commercial (non-
technical) losses became one of the priorities during the 1990s. While excessive
technical losses result mostly from the inefficiency of substation, transformer and line
transmissions and their outdated controls, commercial losses are comprised of thefts,
meter tampering and bypassing, and non-payment. The countries confronted a need
to mitigate inefficiency, regain control over bill collection and implement relevant
automated systems for control over flows.
Throughout the 2000s, the countries managed to decrease technical losses
significantly, in part by implementing a wide range of new technologies to improve
control over transmission and distribution. Traditionally, monitoring and control have
been conducted semi-manually, relying on telephone communications with plant
operators and field personnel. Increasingly, automated control has been introduced,
inter alia, supervisory control and data acquisition (SCADA) systems with automatic
generator control (AGC).
65
In 2007, Azerbaijan carried out a SCADA project and substantially increased
residential tariffs, installed meters and improved bill collection. As the in-depth
review of the investment climate and market structure in the energy sector of
64
For a detailed discussion, see Maximilian Kühne, Philipp Ahlhaus and Thomas Hamacher (2015)
Perspectives for electricity generation from renewable energy Sources in the South Caucasus region,
Caucasus Analytical Digest 69, pp. 11-15, http://www.css.ethz.ch/publications/pdfs/CAD-69-11-15.pdf
65
Multi Dimensional Issues in International Electric Power Grid Interconnections.

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
27
Azerbaijan points out, “as of 2010, losses in the transmission system are 3.8%,
whereas losses in the distribution system are 16.6%, where both loss ratios are
calculated as the loss over total generation.”
66
In May 2015, the Asian Development
Bank and Azerbaijan signed a Memorandum of Understanding for a $1 billion
investment programme to upgrade the country’s power distribution network.
Technical losses in Azerbaijan’s electricity distribution networks are expected to be
reduced from 16.5% to 6.5%, and losses from energy transmission lines to 2.8% by
2020. The newly created Azerishig JSC is envisaged to implement reforms.
67
During the 1990s, in Armenia, nearly 25% of supplies disappeared as commercial
losses.
68
The initiatives of the government to relocate meters to public areas has
improved the situation significantly. This approach proved to be more cost-effective
than replacement of old meters, which was envisaged in most post-soviet countries
during the 1990s.
The programme for power system rehabilitation implemented in Georgia has
improved the situation regarding losses. Electricity transmission and distribution
losses were 29.15% in 1996, and 11.2% in 2011. According to GNERC, in 2014 actual
losses decreased approximately by 32% compared with 2009, and losses in
distribution networks were 5.2%, which is 42% less than in 2009. Electricity losses in
the transmission network were steady, with a slight (2.1%) increase in 2009.
69
One of
the prerequisites for transfer to the retail market by 2017 is the introduction of so-
called “smart” meters on the wholesale level.
Compatibility of electric power systems
The integration of national power systems – grid connections – requires
synchronisation of networks. All power systems in the region operate at a 50 Hz
frequency. Azerbaijan, Georgia and Russia are synchronised and constitute part of
the IPS/UPS. Georgia is synchronised with Russia and part of northern Armenia. The
remaining part of Armenia’s electricity network operates synchronously with Iran. The
power systems of Russia and Iran cannot be synchronised due to extensive
operational coordination needed.
66
In-depth review of the investment climate and market structure in the energy sector of Azerbaijan.
Report (Energy Charter Secretariat, Brussels, 2013). Here, p. 35.
67
Azerbaijan To Upgrade Its Power Distribution Network, Engerati, 5 May 2015,
http://www.engerati.com/article/azerbaijan-upgrade-its-power-distribution-network
Yet, there are unclear signals about the reform. As the latest news reports, ADB continuously
postpones the approval of the loan.
68
Armenia from crisis to stability. Here, p. xi.
69
Georgia Energy Policy Talks, Tbilisy, 25 February 2016,
http://www.inogate.org/documents/Final_ThemePaper_1stEnergyTalk_Feb25_20160219.pdf

OCCASIONAL PAPER SERIES
Since technical constraints prevent the synchronisation of the Armenian, Georgian,
Iranian and Russian grids, new transmission lines between Armenia and Georgia with
asynchronous “back-to-back” connections will allow the single synchronisation of all
four countries’ electric grids.
While synchronous alternating current (AC) power grids require a high level of
technical compatibility and operational coordination, High Voltage Direct Current
(HVDC) allows the asynchronous interconnection of networks that operate at
different frequencies, or are otherwise incompatible. AC operation provides “the
greatest benefits of interconnection”, but they also “entail greater reliability risks”,
such as vulnerability to disturbances in neighbouring systems.
70
They are also a
viable alternative when synchronous AC connections are difficult or impossible due
to the use of different frequencies in the systems to be interconnected, or other
important system differences. DC ties between different AC systems deliver some of
the benefits of interconnection while avoiding many of the technical problems of
synchronous operation.
The basic design features of an interconnection include the following elements:
71
• whether an interconnection is AC or DC;
• if DC, whether it is single-pole or double-pole (+/-);
• transmission capacity (in MVA);
• transmission voltage (in kV);
• system components and overall design;
• the operating agreement.
HVDC connections are feasible for longer (more than 600 km) distances, and are
more costly than AC for shorter distances. There are two general types of
asynchronous interconnection: a) HVDC transmission over some distance between
two converter stations, which are connected at either end to an AC system; and b)
HVDC “back-to-back” interconnection to AC systems on either side, without any
intervening transmission. Back-to-back connections have sometimes served as a
stepping stone to a later full synchronous interconnection.
Cross-border electricity flows in the South Caucasus
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
70
Multidimensional issues in international electric power grid interconnections, UN, Department of
Economic and Social Affairs, 2006, p. 18.
71
Ibid., pp. 22-23.

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
29
market liberalisation is needed, so that generation costs can affect incentives of
market participants.
72
Table 4 shows cross-border electricity flows among the
countries of the South Caucasus and their neighbours.
Since 1997, Armenia has been exchanging electric power with Iran, supplying power
in summer and receiving power during the winter peak demand load. These
countries also envisaged an electricity-to-gas exchange (3 MWh of Armenian
electricity – 1000 cm of Iranian natural gas). Taking into account increased gas prices
for natural gas imported from Russia, enhancement of electricity generation with
Iranian natural gas at the Yerevan and Hrazdan TPPs seems commercially attractive
for Armenia. After ongoing interconnector projects are completed, electricity
exchange capacity between Armenia and Iran will reach 1200 MW. Enhancement of
this trade can improve the efficient use of resources – providing optimal loading of
nuclear plants and decreasing dependence on imported natural gas.
With Georgia, Armenia has an asynchronous system connection. Some electricity
sales have been made to Georgia, however, the terms and conditions of these sales
are not available. In 2012, the countries signed an Agreement on Power Supplies
during Emergency Situations.
73
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. Additional
imports from Georgia might be feasible – if prices are attractive for private investors
in Georgian HPPs.
Trade between Georgia and Russia is falling due to Georgia’s internal load, and
export to Russia during summer is less efficient for Georgia than to other countries
(mainly Turkey). At some point in the past, construction of a 500 kV line (Dariali–
Vladikavkaz) was discussed, but, inter alia, this was largely acknowledged as a
commercially challenging project.
This is also explained by Georgia’s increasing role as a transit country and exporter of
electricity to Turkey, particularly after the completion of the Azerbaijan–Georgia–
Turkey Power Bridge in 2015. Supplies from Azerbaijan to Turkey via Georgia started
in February 2016. Currently, they are made under a debt repayment scheme:
Azerbaijan repays its debt to Turkey for the electricity which is delivered to the
Nakhichevan Autonomous Republic. Given large-scale energy efficiency programmes
in Azerbaijan (including new combined-cycle TPPs), it is possible to expect an
increase of exports to Turkey in the future.
72
Regional Electricity Markets in the ECT Area. Here, p. 46.
73
On 27 July 2014, Georgia referred to Armenia with the request to provide emergency power
supplies due to the major blackout in most of Georgia, including Tbilisi (Success Story. Armenia
supplies electricity to Georgia during major blackout. USAID Armenia, 2014,
http://www.leds.am/ss/USAID%20SUCCESS%20STORY_Georgia%20blackout_2014.pdf)

OCCASIONAL PAPER SERIES
Table 4. Cross-Border Electricity Flows in the South Caucasus, GWh
Armenia
Armenia
(2013)*
(E): 1313
(I):148
Azerbaijan
Azerbaijan
(2013):*
(E): 495
(I): 127
Georgia
Georgia
AM>GE
(2013): 0.001
(2014): 2.10
GE>AM
(2013): 73.16
(2014): 140.46
AZ>GE
(2013): 23.56
(2014):184.23
GE>AZ
(2013): 6.61
(2014): 8.03
(2013):*
(E): 450
(I): 484
Iran
Iran
Electricity
exchange for
natural gas (3
MWh for 1000
cm); electricity
for electricity
exchange
IR>AZ
to the
Nakhichevan
(electricity
swaps)
(2013):*
(E): 11727
(I): 4144
Russia**
Russia
RU>AZ
(2014): 53
AZ>RU
(2014): 134
RU>GE
(2014): 607.07
(2013): 460.55
GE>RU
(2014): 160
(2013): 370.61
(2014):*
(E): 680
(I): 294
Turkey
Turkey
AZ>TU via GE
:
since February
2016
TU>AZ
: to the
Nakhichevan
TU>GE
(2013–2015):0
GE>TU
(2013): 0.005
(2014): 236.49
IR>TU
(2014): 850
(2013):*
(E): 1227
(I): 7429
Source: IEA, InterRAO UES, ESCO
Note: * total Export/Import; ** – Southern part of Russia

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
31
Cross-border interconnector capacities
Due to small sizes of the domestic markets of the South Caucasian countries,
regional cooperation is essential for administering the construction of
interconnectors. Regional frameworks have secured recent completion of several
interconnector projects to connect Turkey and Georgia, enhance connections
between Azerbaijan and Georgia, and between Armenia and Iran. The accomplished
results have already proved the enhancement of physical opportunities for electricity
exchanges. Several ongoing projects are likely to complete the power bridges across
the region.
Most of the ongoing and completed projects have been supported by external
funding from international donors (the most active are the US Agency for
International Development (USAID), EU’s Neighbourhood Investment Facility (NIF),
European Bank for Reconstruction and Development (EBRD), the German
Development Bank (KfW), and the International Financial Corporation (IFC)). Existing
cross-border capacities are presented in Table 5.
Table 5. Cross-border interconnector capacity in the South Caucasus
Interconnector
Countries
Capacities/ Operation Mode
Centralnaya–Inguri (“Kavkasioni”)
(Russia–Georgia)
500/850 MW (500 kV) – parallel
synchronous
Psou–Bzybi (“Salkhino”)
(Russia–Georgia)
200/100 MW (220 kV) – island
(isolated)
“Dariali”
(Russia–Georgia)
30 MW (110 kV), to be put in
operation – island (isolated)
Derbent–Khachmaz
(Russia–Azerbaijan)
300 MW (330 kV)
Belidzhi–Yalama
(Russia–Azerbaijan)
50 MW (110 kV)
Hopa–Batum
(Turkey–Georgia)
15 MW/120 MW (220 kV) – island
(isolated)
Borçka–Akhaltsıkhe (“Meskheti”)
(Turkey–Georgia)
700 MW (400 kV) – parallel
asynchronous. HVDC B2B at
Georgia’s side. Completed in 2013
Kars–Gumri
(Turkey–Armenia)
200 MW (220 kV) 154 kV. Not in
operation
Iğdır–Babek
(Turkey–Azerbaijan
40 MW (154 kV) – island (isolated)

OCCASIONAL PAPER SERIES
Source: Ministry of Energy of Georgia, GSE, Azerenergji
As Table 5 shows, recently completed projects between Turkey and Georgia and
between Georgia and Azerbaijan offer significant improvements in physical cross-
border exchange. Thus, the project Power Bridge (Azerbaijan–Georgia–Turkey) is a
sub-regional project under the Black Sea Regional Transmission System planning
project (BSTP) with, inter alia, EBRD and USAID financial support. The interconnector
between Georgia and Turkey was completed in 2013, the AGT Power Bridge in June
2015, and they increased the capacities of electricity transit to Turkey up to 700 MW.
The BSTP has been administered since 2004 with major participants including USAID,
the US Energy Association and TSOs of the region (Armenia, Bulgaria, Georgia,
Moldova, Romania, Ukraine and Turkey). This Project aims to enhance regional
cooperation and includes projects, training, and facilitation of investments in the
region. Its Working Group is currently adapting the ENTSO-E methodology of cost-
benefit analysis to the technical, legal and regulatory environment of the Black Sea
region.
Nakhichevan)
Doğubeyazıt–Bazargan
(Turkey–Iran)
40 MW (154 kV) – island (isolated)
Başkale–Khoy
(Turkey–Iran)
250-450 MW (154kV/400 kV) island
(isolated)
Agarak–Ahar
(Armenia–Iran)
400 MW (220 kV) 2 lines
Alaverdi–Gardabani (“Alaverdi”)
(Armenia–Georgia)
Appr. 200 MW (220 kV) in case of
export maximisation in peak hours
requires expansion or a new 400 kV
line.
island (isolated) mostly
Larvari and Ninotsminda
(Armenia–Georgia)
Two lines with 20 MW/30 MW (110
kV), commercial operations of two
old lines. Island
Akstafa
(Armenia–Azerbaijan)
400 MW (330 kV) out of use
Astara–Parsabad
(Azerbaijan–Iran)
700 MW (220-330 kV), upgraded in
2009
Samuh–Gardabani (“Gardabani”)
(Azerbaijan–Georgia)
250 MW(330 kV) – parallel
synchronous. Newly built
Mukhranis Veli
(Azerbaijan–Georgia)
850 MW (500 kV) – parallel
synchronous. Reconstructed

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
33
Ongoing and planned projects are designed to complete the connections among the
countries of the region. Enhancement of cooperation between Georgia and Armenia,
and between Armenia and Iran, are among the priorities for the future. Table 6 shows
these major projects.
Table 6. Infrastructure projects in the South Caucasus
Sources: Ministry of Energy of Armenia, TEIAS
The presence of physical cross-border infrastructure and compatibility of systems’
technical characteristics are prerequisites for any regional trade. However, these
should be complemented with compatible power trade mechanisms in order to
boost cross-border exchange. It is also advised to discuss domestic plans for sector
development, given various complementary opportunities for generating capacities.
Harmonisation of regulatory frameworks has also been continuously reported by
market players as one of the most welcomed issues.
Interconnectors (planned and under
construction)
Capacities/operation mode
Turkey–Iran
600 MW (400 kV DC), HVDC B-to-B Station in
investment plan, commissioning in 2018
Turkey–Iran (Van–Khoy)
400 kV AC, OHL for HVDC B-to-B Station in
investment plan, commissioning in 2018
Turkey–Iran (HVDC B-to-B Station)
100 MW (154 kV DC) Under discussion
Turkey–Georgia (Tortum–Akhaltsıkhe)
Planned commissioning date – 2019; 400 kV AC in
investment plan, planned commissioning in 2019
Turkey–Georgia (Muratlı–Batum)
154 kV AC Under construction (planned
commissioning date – 2018)
Armenia–Iran
800 MW (400 kV by 2018), planned to increase the
overall capacity up to 1200 MW
Armenia–Georgia
400–500 kV, asynchronous

OCCASIONAL PAPER SERIES
Conclusion: The role for the Energy Charter Treaty in regional electricity
cooperation in the South Caucasus
Regional cooperation opens room for lucrative power exchange among the countries
of the South Caucasus. First, it allows complementarity of domestic generating
capacities, which might contribute to balancing seasonal inconsistencies in the
countries’ power balances. Moreover, redistribution of excessive power generation
across the countries might be complemented with more cost-effective investment
arrangements for new capacities in these countries. Second, foreign investment
inflows into these small national power markets are more feasible if a regional
cooperation platform provides a certain degree of regulatory compatibility,
investment guarantees beyond political commitments, and more lucrative market
conditions. The attractiveness of such a regional platform increases once it can
potentially tie the two major power markets of the European Union (and its Energy
Community) and the emerging Eurasian region.
However, any substantial cooperative outcome faces three crucial obstacles. First,
post-conflict historical legacies in the region require significant political compromise
in order to boost apolitical, functional cooperation. The emerging, divergent
solutions regarding the roadmap towards regional electricity cooperation are
increasingly tricky to mitigate.
Second, despite the fact that the two regional projects, the Energy Community Treaty
and the Eurasian Economic Union, share basic market-oriented provisions regarding
the electricity sector, they represent two competing regional integration projects.
Inevitably, membership in these projects is a choice the countries of the region shall
need to make. 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 is sending mixed signals to
foreign investors and may impede investment inflows.
Third, domestic institutional structures affect states’ political preferences regarding
regional frameworks and particular projects. Achieving regional cooperation requires
not only political entrepreneurship but also harmonisation of activities across
different domestic electricity sectors. Thus, developments of interconnection
capacities need to be complemented with the adjustment of the relevant domestic
regulatory frameworks. Coupled with the significant interest of market participants in
strengthening regional economic cooperation, these measures might bring
improvements in electricity cooperation in South Caucasus.
Regional electricity cooperation requires a platform for political dialogue and a
systematic channel for knowledge and information sharing. For this, the Energy

ENERGY CHARTER SECRETARIAT KNOWLEDGE CENTRE
35
Charter Process – and its major instrument, the Energy Charter Treaty – might
become the appropriate tool for all countries of the region and their neighbours.
Since these states are all either signatories or observers of the Process, the use of the
Process as a platform for (informal) regional cooperation both significantly lowers
any transaction costs borne by the participants and ensures a politically neutral
framework for cooperation. The last might become a silver bullet for a politically
sensitive and fragmented region. Moreover, the ECT offers a unique legal framework
for energy trade, transit, investment protection and energy efficiency, providing legal
guarantees for investors and hedging against domestic political and regulatory
alterations.
The Author
Irina Kustova, Fellow, Energy Charter Secretariat