Issue 3, 2013. June-July



Opportunities abound for Georgia's energy sector, both as a transit country and an electricity producer. But specialists warn that the country will not be able to reach its potential if it does not reform its legislation.

Nicholas Clayton

In 2010, Georgian President MikheilSaakashvili proudly announced that after two decades of energy dependency and deficits, Georgia had become a significant net exporter of electricity.

As late as 2005, Georgia received its entire natural gas supply from Russia, and Georgia remained a significant importer of electricity as well. By 2010, Russia's share of Georgia's energy imports had dropped to 17.3 percent and Georgia was actually exporting 15 percent of the electricity it generated, according to figures from the Georgian Oil and Gas Corporation (GOGC) and the Ministry of Energy and Natural Resources (MoE).

But since then, electrical power generation in Georgia has been outpaced by growing demand and analysts say that the country's ability to maintain its energy security will depend on key regulatory reforms and the fate of large international energy transit projects.

A Growing Opportunity

If Georgia can continue to develop electrical generation projects, it has an opportunity to not only become energy independent, but to reap dividends as a major energy exporter to Turkey and European markets.

According to MoE studies, Georgia has only tapped about 18 percent of its hydroelectric power generation potential and could produce as much as 40 TWh more - about four times the country's current electricity consumption - through new projects.

Three such projects took a big step forward last month with a pledge for a $700 million investment from India's Tata Group, Norwegian company Clean Energy Invest, and the International Finance Corporation. The deal marked one of the largest single foreign investments in Georgia's history, and the three new hydropower plants the group will develop in Georgia's Adjara region will supply about 400 MWh per year once they are fully realized. The projects should start producing after their first phase of construction is completed in 2016.

In a statement, Tata Power Managing Director Anil Sardana said the power generated by the project will be primarily sold to Turkey.

Turkey's energy demand is expected to increase by more than 90 percent by 2021 according to MoE figures, and Georgia's western neighbor is developing into both a lucrative potential export market, and also a major source of investment capital.

Turkish companies Anadolu, Agaoglu and KGM are already developing hydro projects in Georgia and many analysts say that private Turkish investment in renewable energy in the region is set to rise considerably. OnurKurugöl, a partner at the Istanbul-based Odin Financial Advisors, said that due to increasing profit margins and government incentives, "every major Turkish holding (company) is getting into energy."

A legal advisor for the European Bank for Reconstruction and Development, which is helping to provide financial support to Georgia's renewable energy development, said that Turkish firms are "dominating" the applications for new projects so far. He spoke on condition of anonymity because he is not authorized to speak with the press.

However, he also said that out of the 51 Memoranda of Understanding already signed between private companies and the Georgian government for hydroelectric projects, only two to three are likely to move forward in the next year if the regulatory environment does not change.

Currently, he said, if a company signs a concession agreement with the government to develop a hydroelectric plant on a river, for instance, there is no guarantee to stop another company from building a project upstream from it that would negate its capacities.

USAID is currently working with the Georgian government to create this framework and is hoping to do some of the investors' legwork for them by conducting 40 pre-feasibility studies for hydro projects over the next two years, said Stephen M. Haykin, USAID's Caucasus mission director.

Speaking at the Georgian International Oil, Gas, Infrastructure and Energy Conference (GIOGIE) in March, he noted that many potential investors are worried by Georgia's scant legislation, understanding that even if necessary changes are made after the company invests, the new regulations might adversely affect their bottom line.

USAID has proposed legal guarantees of financial compensation for the adverse affects of future laws and is also working to improve Georgia's energy trading system, Haykin said. But Norberto Pignatti, an energy specialist at the International School of Economics in Tbilisi, said that regulations aren't the only obstacle to hydropower development.

First, he said, most of the "easy" projects for increasing Georgia's hydroelectric power generation have been completed, including upgrades to existing Soviet-era plants. Any additional increase will require building new projects from scratch, and a hydro plant, he said, "is not like any other investment."

Because they are expensive to build, investors must look to extremely long horizons for returns. On the plus side, hydroelectric dams generally have high longevity, with an average lifespan of 70-75 years, he said. On the downside, however, the long-term nature of the investment magnifies the impact of any uncertainty in the market.

Due to nagging apprehensiveness among international investors over Georgia's political situation and other factors, Pignatti said it is understandable that developers are not "rushing to invest."He also stressed, however, that while it can be useful for a country like Georgia to have a domestic energy surplus- and guard it against international price shocks - regions with more integrated energy markets made up of countries both importing and exporting electricity tend to be more efficient in the long run.

Developments on the Horizon

While Georgia works to get its renewable energy development on the right course, the future of its natural gas supply will be most impacted over the next 10 years by forces outside of its control in the international haggling over Caspian gas pipeline projects.

The launch of the South Caucasus Pipeline (SCP) in 2006 gave Georgia access to Azerbaijani natural gas, allowing it to drastically reduce its dependency on energy supplies from Russia. Georgia currently receives 26 percent to 35 percent of its annual gas supply through this pipeline at a highly discounted rate and purchases another 56 percent of its gas through it from SOCAR, according to GOGC statistics.

Towards the end of 2013, the Shah Deniz Consortium, led by BP, plans to begin building an expansion to the SCP and has agreed to provide Georgia with 5 percent of the gas transited through it.

The Consortium is also expected to commit later this year to building the Trans Anatolian Gas Pipeline (TANAP), which will transport 10 billion cubic meters of gas per year from the SCP to Turkey's border with Europe. From there, the gas will continue on to terminals in the EU either through the Trans Adriatic Pipeline (TAP) or the Nabucco West project.

In addition to increasing Georgia's overall gas supply, Pignatti said the new pipelines will strengthen Georgia's position as a strategic energy corridor bypassing Russia at a time when the EU is seeking to diversify energy sources. But, he said, "Quantifying this impact [...] is easier said than done."

Looking to the Future

While analysts say that predicting trends in the energy sector beyond 10 years is difficult to the point of futility, many in the region point to a future opportunity for Georgia once the pipeline pieces fall into place.

The second phase of development of the Shah Deniz field in Azerbaijan - the country's richest - will add an additional 16 billion cubic meters of gas per year to the energy mix being transported through Georgia to European consumers. Most of this is expected to be pumped straight through Georgia. But Liana Jervalidze, a professor and energy specialist at Ilia State University, said at the GIOGIE that this increase in capacity, plus the development of other gas fields in Azerbaijan, could present a lucrative opportunity for Georgia to re-export natural gas across the Black Sea.

A feasibility study is currently being conducted for the Azerbaijan-Georgia-Romania Interconnector (AGRI) project that would funnel Azerbaijani gas to Georgia's Black Sea terminal at Kulevi where it would be liquefied and sent across the sea to Constanta, Romania, by ship. According to Jervalidze's presentation, the project would require $2.6 billion to $5.7 billion in investment to make it possible, depending upon its final scale, and much of that would be spent constructing infrastructure and a liquefied natural gas (LNG) terminal in Georgia. Another project, called White Stream, would deliver gas through the same route by pipeline with an initial price tag of $3 billion.

Although potentially lucrative for Georgia, even champions of the projects like Jervalidze admit that they would only be feasible about 10 years after the TAP or Nabucco West pipelines are built.

Currently, LNG is more expensive to transport and three forces are likely to make a major impact on worldwide gas demand in the coming years - the development of previously inaccessible shale gas resources in the United States, the push for lower energy consumption in Europe, and the fate of Turkmenistan's massive untapped resources.

These three trends could both drastically increase supply to the European market and depress its overall demand, thus jeopardizing any new East-West energy transit project.

While these future projects are tantalizing to think about, analysts say, Georgia currently needs to get down to the dull business of building a regulatory framework that will increase investor confidence in renewable projects and find smart ways to invest its own funds.

If Georgia is going to be able to capitalize on its potential in the energy sphere, Pignatti said that it needs to "step in, pushing for the projects that it considers to be more promising, becoming an active investor, maybe to resell its share later once the uncertainty has gone down."