Skip to main content

Regional Electricity Cooperation in the South Caucasus: Cross-border Trade Opportunities and Regional Regulatory Uncertainties

by Irina Kustova - 15 April 2016

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 European Union (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.

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.


The contents of this work are the author's sole responsibility. They do not necessarily represent the views of the Energy Charter Secretariat or any members of the Energy Charter Treaty.