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Energy and Public Utilities in the Southern Caucasus

The energy systems of the former Soviet Republics have been heavily burdened by their Soviet legacy. The overly extensive, inefficient and resource wasting industry and Soviet-era patterns of household consumption, amongst other challenges, have translated into ineffective and environmentally unfriendly energy resource management and use. The tightly interconnected and centralized infrastructure has been heavily damaged and is difficult to maintain.

During the Soviet Union the energy networks of Georgia, Armenia and Azerbaijan functioned as a constituent part of the integrated Trans-Caucasus system, sharing a joint dispatch directorate in Tbilisi. The Trans-Caucasus system, in turn, was incorporated into the united energy system of the Soviet Union’s European area with a dispatch center located in Moscow. The disruption of the system following the collapse of the Soviet Union severely affected the interconnected systems of the three countries.

The shortage in communal services and the absence of reliable and secure public utility services mirrored the countries' troubled transitions, socio-economic hardships and low living standards.

The three South Caucasus states then struggled through a period of industrial, infrastructural and economic collapse which was further complicated by civil-military crises in the 1990s. The energy systems and public utility supplies, including electricity and gas as well as water, were on the verge of collapse in all three states.

For instance, Georgia was unable to surmount its severe energy crisis for many years. The number of blackouts on an average day mounted from 3 to 15 in the period up to 2003.1 The capacities of the country's energy system shifted dramatically from one day to the next.

From 2008-2009, even after a period of tremendous reforms, Georgia generated domestically only 64 percent and consumed 50 percent of energy compared to its 1989 levels.

Production bln kWh Consumption bln kWh

19892 15.8 18

20003 7.4 6.9

The energy systems in Armenia and Azerbaijan have also suffered hardships along with other former Soviet republics. In the wake of the collapse of the Soviet Union, these countries began to cope with the implications of independence and attempted to sustain fragmented utility systems that were not designed to operate as a single grid. Even in Azerbaijan, a country rich in energy resources, electricity production had decreased by more than 25 percent by 1995 and by 2008 had only reached 93 percent of its 1990 production levels

                                                             1 Margvelashvili, Murman, The Problems of Georgian Power Sector (WEG), Energy Regulation Newsletter

No.1(6) 2005 2 World Bank Factbook, 1993 3 The resolution of the Parliament of Georgia on State Policy in the Energy Sector of Georgia, June, 2006

 

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(23,152 million kWh).4 In the early 1990s Armenia's population suffered several brutal winters with only two hours of electricity supply per day.5 The situation in Armenia was even more severe because of the economic blockade imposed by its neighbors (Azerbaijan and Turkey) due to the Karabakh conflict.

Despite this difficult starting point, gradual development and economic growth in all three countries have allowed them to stabilize and reform the sectors over the past several years. The study below gives a detailed account of how the utility systems in these three countries have evolved and how these sectors look today.

While the trends and tendencies seen in Georgia, Azerbaijan and Armenia are quite similar, as are the major challenges faced by the countries, the timing, concrete policies and resources are specific to each state. Azerbaijan is the only country in the region with substantial oil and gas reserves; it ranks 19th in the world in this respect. Georgia is particularly rich in water resources, with per capita availability almost four times higher than in neighboring Armenia and Azerbaijan. Armenia, meanwhile, largely depends on nuclear energy and puts emphasis on renewable sources, such as wind power generation.

Georgia, which covers a territory of 69,700 sq km with a population of 4.6 million, is rich in hydro resources - there are 26 060 rivers on its territory. The total annual electricity generation potential of these rivers is equivalent to 15000 MW, while the average annual production of electricity by local hydropower plants (HPPs) amounts to 50 billion kWh.6

While Georgia is rich in water resources, the country is completely dependent on imports for its oil and gas supply. This situation further increases the strategic importance of the country's ample water resources. Given the significant potential of hydro energy, the government's strategic vision involves utilizing these assets, increasing capacity and transmitting the electricity produced to the immediate region and beyond.7

The diversification of oil and gas import schemes and their transit carry implications for the country's security and development strategies at large. The construction of the Baku-Tbilisi-Ceyhan oil pipeline, and the Baku-Tbilisi-Erzerum gas pipeline, as well as the Kars-Akhalkalaki Railroad make the country an important regional hub for the transit of gas, oil and other goods.

Armenia is the smallest country in the region in terms of area and population, with a territory of 29,743 sq km and 3.21 million inhabitants.8. The country has no domestic oil or gas production, and its water resources are also modest. Nevertheless, Armenia has significant domestic electricity generation resources, which come primarily from thermal and nuclear power generation. In 2006 Armenia's power plants on average generated 678.2 MW of power, while the country's electricity consumption rate on average was 635.5 MW. In 2006, non-thermal domestic electricity generation accounted for 76 percent of total generation, of

                                                             4 AzStat Information. Available at: http://www.azstat.org/statinfo/balance_fuel/az/010_1.shtml#sl 5 From Crisis to Stability in the Armenian Power Sector: Lessons Learned from Armenia’s Energy Reform

Experience, World Bank Working Document No. 74, p. xi. 6 Information from the Ministry of Energy of Georgia. Available in the section of statistics at:

http://www.minenergy.gov.ge/ 7 Interview with Georgia's Energy Minister, Reuters, 4 April, 2008. Available at:

http://www.minenergy.gov.ge/index.php?m=373 8 July, 2009 est. CIA factbook

 

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which 43 percent was nuclear. This is the only country in the region that has a nuclear power plant.

Armenia also “places a strong emphasis on energy efficiency and renewable energy”,9 which distinguishes it from other countries in the region. It boasts a wind power plant in Lori with four wind stations and an overall capacity of 2.6 MW, and it is currently building a large wind farm together with Iran.10

Azerbaijan is the largest state in the region, with a territory of 82,629 sq km and a population of 8,3 million.11 It is also the only country in the region with large energy resources, although its water resources are limited. Its proved oil reserves are 7 billion bbl, ranking it 19th in the world, and its gas reserves total 849.5 billion m3.12

The “Oil Boom” in Azerbaijan resulted in a 30 percent growth in GDP in 2006. Since then, the country has been temporarily affected by the global economic slowdown that began in 2008. Currently, the oil sector accounts for about 54 percent of GDP and three quarters of industry.13

In general, all three Southern Caucasus states and their energy systems suffer from low energy efficiency. For example, Georgia consumes six times less energy per capita compared to Finland or Norway and 2,5 times less compared to Greece. Yet, at the same time, it consumes 4,5 times more energy on GDP production than these countries. In Azerbaijan the obsolete water supply system causes water losses reaching 25-50 percent. Despite considerable improvements in water supply management in Armenia, Water Suply System (WSS) losses in the country's capital still stand at up to 80 percent.14 These figures indicate how ineffectively resources are used as compared to real consumption volume.

All three countries are also facing environmental challenges. These states are signatories of a number of international agreements and several other important documents, (The Energy Charter Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA), Framework Convetion on Climate Change (FCCC) and its Kyoto Protocol, European Neighborhood Policy (ENP) and Individual Action Plans, Energy Community Treaty, etc.). On the one hand, these documents serve as guides for the participating states on how to increase energy efficiency and environmental considerations while on the other hand, the states are bound to meet the requirements laid out in the agreements. For example, the Energy Charter urges its participants to stipulate a vision, strategy and action plan and set the relevant regulations and issue-based programs aimed at increasing energy efficiency and decreasing environmental damage.

The varying domestic capacities, resources and economic potential of these countries create different political and strategic policy implications for them. Georgia’s hydro riches, Azerbaijan’s fossil fuel reserves and Armenia's energy networks/policy experience push the

                                                             9 USAID Environment: Climate Change Program - Armenia. Country and Regional Information. 10 National Statistical Service of the Republic of Armenia. Available at:

http://www.armstat.am/en/?nid=126&id=02004&year=2010&submit=Search  11 July 2009 est., CIA factbook 12 CIA factbook assessment 13 Country Profile. Azerbaijan. European Stability Initiative. Available at:

http://www.esiweb.org/index.php?lang=en&id=262 14 Interview of V.Avoyan, Contract Director of Yerevan Jur CJSC, July 2010 (Media information).

 

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countries to capitalize on different strategic tasks in the energy sector, which translates into country-specific situations in the public utility sectors.

The baseline study below analyzes the public utility sectors (electricity, gas, water) in the three countries of the Southern Caucasus and outlines infrastructural, structural, political, legislative, economic and security aspects of those in each state. The paper sheds light on the functioning of each sector, the main actors, the major challenges facing the systems, the major problems facing consumers, the dynamics of development over the past several years, and more. The involvement and role of civil society actors is given particular focus.

The studies on each country were carried out by Georgian, Armenian and Azerbaijani researchers based in Tbilisi, Yerevan and Baku, respectively, in coordination with the EI LAT’s team. The conclusions of the study provide a solid basis for further, more concrete needs-based assessment and engagement strategies.