Andrius Šimkus │ Energy Community Secretariat Tbilisi, 5 October 2018 Natural Gas Market Concept Design for Georgia: the regulatory essentials Andrius Šimkus │ Energy Community Secretariat Tbilisi, 5 October 2018 High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Law of Georgia “On Energy” (LoE) *draft version #8 of 15 March 2018 Chapter XXIX - Opening & functioning of energy markets Art. 125 - Market opening & reciprocity Art. 126 - Measures to promote market opening Art. 127 - Monitoring & supervision of energy markets Art. 128 - Competition in energy markets Art. 129 - Significant influence upon energy markets Chapter XXXI - Organisation of the natural gas market Art. 136 - Scope of the natural gas market Art. 137 - Organisation of the natural gas market Art. 138 - Tasks of the natural gas market operator Art. 139 - Natural Gas Market Concept Design & Natural Gas Market Rules Art. 140 - Natural gas market participants Art. 141 - Derogations in relation to take-or-pay commitments High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Legal background Art. 139 LoE Natural Gas Market Concept Design (GMCD) Natural Gas Market Rules (GMR) MoESD mandatory compliance High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Natural Gas Market Concept Design (GMCD) Legal form: Decree of the Government of Georgia general guidance for the organisation & functioning of the GM definition of the general market structure general outline of the rights & obligations of GMPs High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Natural Gas Market Rules (GMR) Legal form: Resolution of GNERC market design in accordance with GMCD organisation & operation of the GM (procedures, principles & standards) method for identification & registration of GMPs types & templates of applicable contracts products (commodities) for trading on the GM standards & procedures for trading on the GM (bilateral & organised) organisation of trading platform(s) record keeping & data management etc. High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Regulatory scope & subject Regulatory scope & subject of GMCD & GMR have to be clearly separated Natural Gas Market Concept Design (GMCD) Natural Gas Market Rules (GMR) THE STRUCTURE: WHAT constitutes the GM? & WHO acts (can act) on the market? THE PROCEDURE: HOW the GM is organised & operated? & HOW does the GM function? High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Legal framework of market relations Law of Georgia “On Energy” (LoE) Natural Gas Market Concept Design (GMCD) mandatory market structure Natural Gas Market Rules (GMR) General Natural Gas Supply Conditions (Art. 114 LoE) general outlines (R-GM) Standard natural gas supply contracts (Art. 115 LoE) Supplier Switching Rules (Art. 117 LoE) basic principles National Natural Gas Emergency Plan (Art. 150 LoE) Natural Gas Transmission Network Code (Art. 77 LoE) Natural Gas Distribution Network Code (Art. 92 LoE) High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Natural gas market participants (GMPs) CROSS-BORDER EXCHANGES PRODUCTION SYSTEM OPERATION TRADE & SUPPLY CONSUMPTION Importers Producers TSO Traders (W-GM) Final customers DSOs Exporters Suppliers (R-GM) SSO High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Non-household customers Market opening Each eligible customer in Georgia shall be entitled to a free choice of the natural gas suppliers and its change (Art. 125 LoE) Non-household customers Household customers Art. 180(2) LoE From 1 January 2019 From 1 January 2020 High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Scope of the natural gas market Natural gas market (GM) Retail natural gas market (R-GM) bilateral transactions between final customers & their suppliers (‘supplier-to-customer’ market) Wholesale natural gas market (W-GM) bilateral (forward) natural gas market (‘trader-to-trader/supplier’ market) organised day-ahead natural gas market (DAM), when established organised natural gas balancing & ancillary services market (BAM), when established High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Retail market: ‘supplier-to-customer’ R-GM SoLR contract (Art. 121 LoE) Supplier SoLR Final customer Large customer simultaneous contracting (Art. 122(4) LoE) market-based contract (Art. 114 & 115 LoE) PSO supplier PSO customer standard PSO contract (Art. 115 & 119 LoE) PSO contract (Art. 9 LoE) High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Wholesale market: ‘trader-to-trader/supplier’ Cross-border exchanges W-GM cross-border entry Trader import balancing gas & losses (tender)* trade Importer System operation transit trade trade TSO/DSO Exporter trade balancing gas & losses (tender)* export Producer cross-border exit High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Issue No 1 - cross-border trading Cross-border exchanges in natural gas are exempted from application of TEP rules & GM regulation Cross-border exchanges cross-border exchanges in natural gas do not fall within the regulatory scope of GMCD & GMR non-regulated proceedings could be intervened with regulatory measures only without prejudice to applicable IGAs & contractual arrangements Georgia has its national competence to consider such intervention at its discretion (outside LoE & GMCD) no GM regulation applies until imported quantities of natural gas are internally realised (traded) on the GM this exemption applies only vis-à-vis non-EnC Parties cross-border entry import Importer transit Exporter N.B.: VTP or any other market instrument for cross-border trading may be introduced only without prejudice to applicable IGAs & contracts export cross-border exit N.B.: external gas sources is not a regulatory issue and shall not be covered by GMCD, it is a strategic (political & economic) matter to be targeted by the State Energy Policy (Art. 7 LoE) High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Issue No 2 - system & market entry (1) System entry Natural gas enter Georgian system/market regulation area: physically - at an internal system entry point (connection point between transit pipeline & internal transmission network) commercially - after importer sells natural gas on the GM (whether bilaterally or on the organised market) cross-border entry transit internal system entry (VTP) Relevant solutions: internal system entry point shall be a single point for all transfers of natural gas ownership in Georgian balancing zone (VTP) Georgian balancing zone shall be defined as an area from the internal system entry point to final consumption points Nominations, CAM, CA & balancing mechanisms shall be applied by system operators within the balancing zone (cross-border exchanges & transit not covered!) TSO shall bear the responsibility of operational/commercial balancing of Georgia’s natural gas system (balancing zone) cross-border exit (2) Market entry cross-border entry import transit Importer trade Legal framework: GMCD - only basic principles to be established GMR - market (trading) & balancing instruments to be elaborated TNC/DNC - operational instruments to be elaborated cross-border exit High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Day-ahead natural gas market: gas exchange W-GM R-GM purchase Trader sale & purchase Large customer Supplier balancing gas & losses (tender)* System operation MO imports* DAM TSO/DSO from 1 Jan. 2023 purchase balancing gas & losses (btender)* Producer sale High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Mandatory sale of imported natural gas GEx 50% Bilateral or GEx 1 Jan. 2023 GEx 75% Bilateral or GEx 1 Jan. 2024 ALL natural gas imports (quarterly basis) GEx 100% 1 Jan. 2025 Possible exemption ≤33% PSO* High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Balancing & ancillary services market W-GM Trader sale & purchase balancing gas & losses (tender)* MO System operation DAM + BAM TSO/DSO balancing gas & losses (bidding) from 1 Jan. 2023 balancing gas & losses (btender)* Producer sale High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Designation of the Market Operator MO shall be responsible for the organisation & operation of DAM & BAM (organised GM), when established MO shall be also responsible for connection & integration of Georgia’s GM with other organised gas markets MO shall be designated by its authorisation (licensing) by GNERC MO shall perform its activities in accordance with LoE, GMCD & GMR It is intended that only a single MO is designated in Georgia As the first step, MO may be organised by the TSO as a separate legal entity High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Done  in progress  to be done Workshop on GMCD – MoESD – 28 June 2018 Initial draft GMCD – EnCS – 16 July 2018 Updated draft GMCD – EnCS – 24 July 2018 Draft Law on Energy – MoESD – October 2018 Draft GMCD – MoESD – ? Draft GMR – GNERC + USAID – ? New market design & rules to be in full effect from 1 January 2021 High-level Policy Talks on the Natural Gas Market Concept Design for Georgia

Thank you for your attention! www.energy-community.org Workshop on the Natural Gas Market Concept Design for Georgia