Issue 6, 2013. December-January

   

KHUDONI: THE FUTURE OF GEORGIA'S ENERGY SUPPLY

Maia Edilashvili

While there is fierce opposition to plans for the Khudoni Hydro Power Plant in Svaneti, the government and hydro power specialists maintain that it is a project that could revolutionize the future of Georgia's energy sector.

Georgia has an estimated 300 rivers with the potential to create energy, but is using just ten percent of them - a fraction of the 70 percent used by European countries, noted Nodar Begalishvili, the chairman of the Scientific Council at Georgian Institute of Hydrometeorology.

Begalishvili, who has spent 44 years studying hydroelectric energy, believes hydroelectric energy - particularly large hydroelectric projects - are Georgia's future. Currently, Georgia's annual electricity production is 10 billion kw/h. Begalishvili, however, believes Georgia can produce ten times that if Khudoni and other hydro power projects are built.

"Of cause, we must construct Khudoni and as many more Hydro Power Plants [HPPs] as possible if we want to develop as a country," he said. "[O]ur only natural wealth is water and hydro resources ..."

Foreign investors appear to agree.

Trans Electrica Ltd, an Indian company, plans to construct the Khudoni HPP in the Enguri river gorge in Mestia Municipality. The HPP's planned capacity is in excess of 700 MW and planned annual generation is estimated at 1.5 billion kw/h. If constructed, Khudoni will become the country's second largest HPP after Enguri, a 270-meter cascade HPP dam with a capacity of 1,320 MW and annual production potential of 3.8 billion kw/h. Enguri currently comprises approximately 35-40 percent of Georgia's total electricity generation.

By comparison, the Khudoni project includes a 200-meter high dam, currently slated to be constructed 31 kilometers from Enguri dam. Trans Electrica started constructionin 2012 and is expected to put the HPP into operation in 2018.

Opposition to the dam includes locals who worry that their communities, homes and cemeteries will be flooded as a result of the dam. The controversy is not new: under the Soviet government, a similar project was planned in the late 1980s. It was halted, however, due to mass protests led by late Prime Minister Zurab Zhvania.

However, faced with pressure to diversity energy sources and increase electricity exports, in 2008 the Georgian government revisited the idea of building a new major hydro power station.

When the Saakashvili government approved the Renewable Energy 2008 strategy, it included a list of hydro projects, including the Khudoni project, citing the need to create enough energy to export to bolster the country's economy and self-sustainability. NGOs, many specializing in human rights and environment rather than in economic analysis and energy, have blasted the new project for its potential harm to the environment and property rights.

A big concern of environmentalists is that going ahead with Khudoni project - spanning 1,538 hectares in total - would leave 528 hectares of land under water, displacing 2,000 people or 184 households from indigenous Svan communities.

"The villages Khaishi and Chuberi, agricultural lands, pastures, parts of the forest, two churches, cemeteries, significant historical sites, includingKhaishi fortress [dating from the Middle Ages] and another still-to-be-studied archeological monument dating back to the first century ... will be either flooded or indirectly affected," reported Green Alternative, a Tbilisi-based NGO and a major opponent of the project.

Additionally, opponents argue that both the government and investors have failed to provide sufficient arguments concerning what makes Khudoni a "strategically important" project.

Why Does Georgia Need Khudoni?

For nine months out of the year, Georgia is self-sufficient in electricity. The majority of the country's hydro energy comes from run-of-river plants, which benefit from Georgia's rains and snow melts. Energy production is so high, even with small plants, that Georgia is an energy exporter in the summer.

But in the winter, when the water flow is low, the country has to import electricity. According to official statistics, in 2012 Georgia imported 614.59 million kw/h electricity, buying most of it from Russia and a minor share from Azerbaijan and Turkey. The same year, Georgia exported 528.15 million kw/h to Russia, Turkey, Armenia and Azerbaijan. The most successful year over the last decade was the rain-rich 2010, when Georgia was able to sell 1.5 billion kw/h electricity, an indicator of further potential for export - especially to energy-hungry Turkey - if Georgia can create the capacity necessary to stabilize its production. Export potential has swayed even former opponents to Khudoni: in 2012, the Georgian Dream Coalition campaigned against the project, as well as large dams in general. But, after coming to power, they have continued the former government's energy policy, including plans for completing Khudoni.

According to Deputy Energy Minister Ilia Eloshvili, currently Georgia pays up to $30 millionper year to Russia to buy electricity, the same as the budget funding for the Ministry of Sport and Youth Affairs in 2012. Official statistics show that Georgia's electricity consumption increased from 8.6 billion kw/h in 2007 to 10 billion kw/hin 2012; hydro power covered 70 percent of that.

"Georgia's electricity deficit increases by 3-4% annually," Eloshvili told Investor.ge "[I]t's a must to use our hydro resources in order to meet the growing need and [avoid] dependence either economically or politically on any neighbor, in particular [considering] what a difficult region we live in."

The government's expectations are high for fiscal indicators as well: the Ministry of Energy estimates that an investment of $1.2 billion will provide revenues in income tax of approximately $3 million annually during the construction period.

"After it has been put into operation economic growth will be boosted by 2.7 percent per year. No other plant can bring such a huge benefit to Georgia; this is why we should do our best to construct Khudoni," Eloshvili said.

Large vs. Small

But critics maintain the government's current policy, known as Build-Own-Operate (BOO) - the company that constructs the dam owns and operates it -puts more profits into investors' pockets, than the government budget. Irakli Galdava, Research Fellow at ISET Policy Institute,believes the currenttransmission tariffis ahumble return on the massive capital outlays and environmental damage. "The build-own-operate (BOO) principle means that investors build a power plant - own it forever - unless he/she decides to sell the HPP, and operates it. This means that the country should not expect to [acquire] a HPP in state ownership," Galdava told Investor.ge.

"Imagine that Enguri and Vardnili HPPs (both under state ownership), producing about half of [Georgia's] total hydro generation and selling electricity at a price lower than 1.5 tetri, is under private ownership. What would be the price in this case? Definitely several times higher ..."

Galdava recommends the government introduce a transfer to state ownership after a set period of time, a practice common in other countries. Green Alternative, which has been campaigning against large dam projects, believes the state will receive so little from Khudoni that it is not worth building.

The government, however, maintains that small- and medium-sized HPPs alone cannot solve Georgia's challenges.

"We need big plants with dams. Electricity is not storable but we do have possibility to store water in reservoirs," Eloshvili said. "This is how Enguri HPP operates - during the spring and summer seasons we keep water at the highest point to use it in winter. Such HPPs are called regulating ones as they help to dole out water resources seasonally. Khudoni will be such a type of HPP." Murnam Margvelashvili, the director of Energy Studies at World Experience for Georgia (WEG), agrees. "Small HPPs are not an alternative to large ones. For instance, Khudoni's capacity would be 700 MW, while Ortachala HPP's (a medium-sized HPP located in Tbilisi and owned by the Czech Company Enrgo-Pro) capacity is 18 MW. This means we would need to construct as many as approximately 40 HPPs of this size to get the same capacity," he said.

Economists have also weighed in on the large-versus-big debate, noted ISET's Galdava, and do not recommend relying only on small hydropower plants - an idea promoted by environmentalists.

Currently, 27 mini HPPs are in operation with a total installed capacity of approximately 90 MW. Margvelashvili stressed that the Khudoni project is an opportunity, not a threat.

"Sixty-five percent of our energy comes from outside sources. How can we miss such an opportunity?" he asked.