Issue 1, 2016. February-march



Over the past three years, the Georgian government has attracted investors for four major hydro power plants and scores of small and medium ones. spoke with Deputy Energy Minister Ilia Eloshvili, investors and sector analysts about what is pushing the boom.

A question of independence

Georgia is racing to produce more energy to match the country's growing demand. While most attention has been on negotiations with Gazprom to purchase more natural gas, the government is equally focused on producing more electricity, according to Deputy Energy Minister Ilia Eloshvili.

The government's new energy development plan, passed by parliament last year, envisions a country where enough electricity is produced to satisfy the growing demand. Georgians current consume just 2,000 kilowatt hours per capita, a fraction of the consumption in developed countries.

But Eloshvili noted that number is increasing by an average of five percent every year; he estimates the deficit could grow to as high as 1.5 or 2 billion kilowatt hours in a few years if the country does not increase its own production capacity.

"The development of the hydro power plants has two major goals for us, one is economical because ... in terms of economic value, they are bringing in income taxes, revenue taxes, property taxes, they are employing people and they are producing a Georgian product, which is electricity, which can be exported and this will improve the trade deficit. So in terms of economy, they are absolutely vital for us," he said.

"But they have another feature, which is energy security. This is the major concern for the government.

The people underestimate the trend of dependence on electricity...people are underestimating the negative affect of dependence on neighboring countries, and it doesn't matter which country."

But Georgia has a natural solution: hydro power. Energy analysts at Galt and Taggart Research say the country has "vast" potential, with just 20-25 percent currently being utilized. "According to our estimates, 4,000 to 4,500 megawatts of installed capacity is economically feasible and can be added to the grid," the research house told in an email interview.

Eloshvili said the government plan includes creating around 500-600 megawatts of thermal power (one megawatt hour equals 1000 kilowatt hours), 300-400 megawatts of wind power and 3,400 megawatts of hydro power over the next several years.

They are already moving toward those goals: over the past three years, thermal power plants with a capacity to produce 230 megawatts - and 150 megawatt capacity in hydro power plants have been built. "That is a $500 million investment in our economy," Eloshvili said.

There are also scores of other projects either under study or under construction, he added.

There are four major hydro power plants planned, with the combined capacity to produce 1500 megawatts of electricity: Nenskra, a 800 megawatt hydro plant, is under construction. The construction of the Khudoni, Oni and Namakhvani projects is estimated to start within the next 12 months, Eloshvili said.

There are also many smaller projects, already built, under construction or in the final stages of the pre-feasibility study.

New rules, new process

The government credits new, streamlined requirements for the uptick in hydro projects.

Eloshvili said there have been major changes to the rules and regulations for hydro investment, including a change in how the government treats the guarantees investors have to pay before the project starts. The new system requires fewer guarantees from investors up front, and offers them a more forgiving set of deadlines - as well as a "buffer" before starting to seize the guarantees over delayed deliverables.

In addition, the new rules offer more benefits for developers who propose completely new sites for hydro plants, and allow memorandums to be signed with a minimum of interference from the ministry.

Eloshvili also noted that a system for Power Purchase Agreements (PPA) has been created, so developers know in advance how much the government will pay for the energy produced in peak months - and the government knows how much energy is available to them.
This system, the deputy minister said, gives small and medium hydro power plant developers the security to be able to plan their investment, and sell power to Turkey in the off season.

Galt and Taggart analysts agree that, on the regulation side, there are "few if any barriers, as regulation is liberal and focused on attracting investment."

Encouraging competition

But some investors argue that more needs to be done to ensure the market is competitive and liberal.

Schulze Global Investments Managing Director in Georgia, Mikheil Nibladze, told that investors need a better, more open market for selling electricity to Turkey during the summer months, when Georgia has enough electricity but the demand is at its peak for Turkey.

He noted that while the new transmission line to Turkey offers hydro plant owners access to the market, "the line is currently underutilized because there is not enough electricity production in Georgia and Turkey has its constraint set in terms of limiting the ability to take the electricity from the Georgian border in particular months during summer."

While praising the reforms the government has made on lowering guarantees, Nibladze stressed that "more concrete efforts need to be made, especially in terms of the open market and trade with Turkey."

"By this I mean creating a harmonized market-mechanism for selling electricity openly to any buyer, without obstacles in transmission and distribution, through an exchange," Nibladze said.

Radislav Dudolenski echoed his concerns. Dudolenski has been involved in the Georgian energy market since 2006, when he worked for Energy-Pro in Georgia. Now he is developing small hydro power plants with his own company, Hydrolea.

"The rules should be competitive," he said. "The less administration, the less regulation and the more [open the] market is - that will definitely make me feel more comfortable. Of course there are economic cycles, prices go up, prices go down...but that is just business."

Hydro power plant owners need a more liberal market, where there is room for competition, he said, noting that will make the sector self-regulating and more attractive for investors.

The energy ministry's Eloshvili noted that the reforms have liberalized the Georgian market, and made it more competitive.

He noted that if an investor is not interested in access to the transmission line or a PPA, they can build a plant and start selling energy without even informing the ministry.

"If those developers will do the research, look into our rules, they will understand they already are number one. There are absolutely no restrictions," he said. "How can we be afraid of competition when we ourselves introduced the competition?"