Issue 5, 2011. October-November

   

INVESTMENT WATCH: HYDRO INVESTMENT IN GEORGIA

Investor.ge is expanding its coverage of investment and business opportunities. Analyst Aleqsandre Bluashvili reports on new deals and trends in the hydro-power sector

In the years since the Rose Revolution, the turn-around of the electricity production and distribution systems has been one of the government's most visible achievements. Thanks to increased production and more efficient distribution, most of the country now enjoys 24-hour electricity supply and Georgia has even become a considerable net exporter.

In 2004 annual generation of electricity was 6.9 million Megawatts (MW); by 2010 this had increased to 10.1 million MW. This has allowed Georgia to move from a net importer of 1.2 million MW in 2004 to a net exporter of 1.3 million MW in 2010.

At the same time, the Government of Georgia has been highlighting Georgia's potential for developing hydro-electric power as a source of clean energy production. The Ministry of Energy and Natural Resources of Georgia currently has preliminary agreements for up to 40 new hydro-electric power stations. If all of these are built, they will constitute $4 billion in new investments in the sector.

However, in the wake of the war and the financial crisis currently only Mtkvari HPP (Hydro Power Plant) and Paravani HPP are under construction. The first company to start construction was JSC Caucasus Energy & Infrastructure; it is building a 46 MW hydro-power plant on the Mtkvari River in Akhaltsikhe, in Samtskhe-Javakheti region. The location is particularly suitable as its proximity to the border with Turkey makes export easier, while the recently improved local infrastructure aids construction.

Construction began in December 2009 and is scheduled to end in 2015. When completed, Mtkvari HPP will be capable of generating 200 thousand MW annually. Taking into account that the average price of electricity in Turkey is approximately 12.5 cents per kWh, this would translate into $26.25 million worth of electricity if it was all exported. Total construction cost is estimated to reach $65 million. Caucasus Energy and Infrastructure received $58 million in funding from the Overseas Private Investment Corporation to cover a large portion of the costs.

Another hydro-power plant under construction is Paravani HPP. Georgian Urban Energy, a subsidiary of Turkish Anadolu Industry Holding, has invested $125 million in the project. Paravani HPP is located on Paravani River in south-eastern Georgia, 35 km from the Paravani Lake. Construction started in 2009 and will take four years.

Paravani HPP will start operating by the end of 2013 at a capacity of 425 thousand MW per year. In addition to the plant, the investment project includes construction of a 35 km transmission line that will connect the facilities to the national grid, as well as roads to improve access to the plant. EBRD and the International Finance Corporation have helped finance the project with a $115 million loan.

Projects in the pipeline

In addition to these two projects that are already under construction, the Ministry of Energy and Natural Resources of Georgia also highlighted a number of projects that are at particularly advanced stages of investment. Investor.ge talked to the companies involved. "Clean Energy Invest", a Norwegian-based company, plans to build 4 HPP-s on the Adjaristskali river, in Adjara region, 15 km from the border with Turkey. At an estimated cost of $385 million, the annual electricity generation of the Adjaristskali project will be 864 million kWh.

A feasibility study for the project is underway and, if approved, construction will start in January 2012. "We are currently optimizing the design of the project ... Hydro-power projects with dams and tunnels are very complicated construction projects and a lot of effort has to be put into the planning phase in order to ensure that the construction phase develops according to plan," noted Bjorn Brandtzaeg, Director of the Adjaristskali project in an e-mail interview with Investor.ge.

Clean Energy Invest plans to export more than 80% of the electricity generated at Adjaristskali to the Turkish market.

The development of hydro-power in Georgia is being supported financially by a range of international financial institutions, including the World Bank Group, Asian Development Bank, European Bank of Reconstruction and Development and European Investment Bank.

In addition, other donor assisted programs are helping the government to market the projects. The Hydro Investment Promotion Program (HIPP) is a USAID funded project that assists government efforts to implement specific key tasks that should lead to more investments in the hydro-power sector, particularly in small and medium plants. HIPP is expected to attract investment of up to $70 million, adding 400 MW of renewable energy to the current generation.

But if the opportunities are this big and there is so much support, why has it taken so long?

The most obvious reason is financing. In the aftermath of the financial crisis, credit is more expensive, which presents considerable challenges for large, capital intensive projects like hydro-power. Clean Energy Invest, for example, identified this as the greatest challenge of the project. "We are working with IFC, a member of the World Bank Group, our co-developer of the project to make the project bankable," said Bjorn Brandtzaeg.

Another reason for the delays is that the infrastructure for electricity export needs to be in place before companies are willing to invest. To that end, EBRD and EIB are currently implementing the Black Sea Transmission Network Project that will add 300 km of high-voltage transmission line across southern Georgia connecting the Georgian transmission grid to the Turkish grid.

The new 400 kV transmission line to Turkey will be operational by 2012-2013, facilitating the export of Georgian electricity.

Finally, the regulatory environment, both in Georgia and Turkey, is still under development.

Jake Delphia, head of the HIPP project, told Investor.ge the biggest hurdles to investment in the Georgian hydro-power sector are the lack of "full harmonization of energy sector regulations to international standards, an operational transmission line to Turkey and an active promotional campaign".

"Once everything is in place we will see much larger investment flows into the Georgian hydro-power sector," he said.