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Opinion: Opening the floodgates in Georgia

   March 12, 2020        352        Vakhtang Ghonghadze

Few power plants in the world are championed for their visual aesthetics. Fewer still can claim the title of cultural heritage site. Hoover Dam on the Colorado River in the U.S. and London’s Battersea Power Station are perhaps two exceptions proving the rule that power plants are there to be used, not seen.

Georgia can count on a third: the Enguri hydroelectric facility. The world’s second-highest concrete arch dam (at 271.5 m) is located on the breathtaking Enguri River in Georgia’s Upper Svaneti region – itself a UNESCO World Heritage Site. Enguri not only contributes almost a third of the country’s hydroelectricity, in 2015, the Georgian government designated the dam a heritage site in its own right. Over the past few years, the government has even sought to open up Enguri to the wider world – transforming it into a 157-hectare tourist zone. Estimates for visitor numbers have ranged as high as 400,000 per year.

Powering future growth

It’s not just Enguri that is attracting visitors. The tourism sector is booming across Georgia. Though a welcome boon to the national economy, it’s putting the country’s electric grid under pressure. More tourists are prompting construction of new, power-hungry hotels. Add this to years of strong economic growth – and factor in Georgia’s newfound reputation as an attractive location for bitcoin mining – and it becomes clear that demand for energy in the country is fast outpacing installed capacity.

All in all, the Georgian power sector faces a capacity deficit of about 1.0 GW. A growing economy means this gap is widening every year. The deficit must be serviced with expensive electricity imports from Azerbaijan, Russia and Turkey. Last year, total Georgian electricity consumption stood at 12.595 million kWh, of which 1.508 million kWh had to be imported. The government regards this as a matter of critical national energy security.

Georgia certainly has the means to bridge the gap. Blessed with rivers and mountains, the country could unlock much more clean, renewable energy sourced from small and mid-sized hydro plants (i.e., those with capacity of 10 MW to 30 MW and 100 MW, respectively, according to the World Bank’s classifications).

At Silk Road Energy, for instance, since 2011 we have developed, owned and operated a run-of-river, state-of-the-art hydro plant with installed capacity of 9.8 MW, known as Bakhvi 3, on the Bakhvis Tskali River in western Georgia’s Guria region. Providing 40 GWh of electricity year-round, the project benefits from a guaranteed power purchase agreement and guaranteed export transmission agreement, which allow it not only to serve the domestic market but also to export some of its energy to Turkey in the summer.

Hydropower is already core to the Georgian energy mix – providing as much as 80% of capacity. Yet, even with 86 hydro plants currently online, Georgia has not harnessed a quarter of its full hydroelectric potential. According to estimates from the Ministry of Energy and USAID, the country coul have as much as 40 billion kWh of hydro potential.

Unlocking an economic opportunity

In addition to satisfying rising domestic power demand, making full use of Georgia’s hydroelectric capabilities would allow it to export energy to its neighbors. The reason lies in hydropower’s fundamental seasonal imbalance. From April to August – months characterized by lower energy consumption – higher water levels support increased production, allowing Georgia to export surplus electricity. Last year, for example, it exported 588 million kWh. But in the winter, the country must buy electricity from its neighbors to satisfy relatively higher domestic energy demand. More investment in the sector would unlock unrealized exporting capacity across the year.

Government support of the private sector will be crucial for new hydro plants to attract investment and get the go-ahead. As is the case worldwide, strong growth of the renewables sector needs to be nurtured with proper feed-in tariffs – not to mention adequate investment in the storage technology that forms a crucial part of the clean energy transition.

Since our company was established in 2011, for example, we have enjoyed not only fruitful discussions with the government but also strong partnership with the financial sector – allowing us to invest up to $20 million in Georgia’s hydropower industry so far. In 2017, we were the first small hydro company in Georgia to tap the private placement markets, issuing dollar-denominated unsecured 10-year bonds.

And conditions seem particularly favorable today. Energy markets in the region are being opened up to private investment, and robust legal frameworks are being aligned with strong European standards.

Specifically, after amendments to national energy law, the Georgian electricity markets are undergoing a transformation. According to recent updates published by the Georgian State Electrosystem (GSE, the main owner and operator of the national grid), a transitionary period, expected to last until 2022, is designed to shift the Georgian markets “from a vertically integrated structure” toward a “structure with legal, financial and functional separation of transmission and distribution functions from suppliers, traders and generators.” The goal is to deregulate, stimulate competition and boost efficiency on a “wholesale level,” which will “cascade into the retail markets.”

For prospective investors, this opening up of energy commodities markets effectively offers the chance to gain direct access to consumers – giving them an alternative sales mechanism to the government’s guaranteed PPAs. At Silk Road Energy, we have already taken advantage of the first and second phases of the government’s reforms by selling energy directly to private consumer companies. This diversification of our portfolio of customers has been reflected in the company’s strong performance in 2018 and 2019.

Enguri Dam has been a national icon since the 1960s. But the Georgia of the 2020s needs to unlock its full hydropower potential. The outlook for investment in climate-friendly, reliable power is bright. Now is the time to close the generating deficit and buttress energy security – to support economic growth and make the most of the renewable transition.

Vakhtang Ghonghadze is chief executive officer of Silk Road Energy. Based in Tbilisi, the company is fully owned by the Silk Road Group (a private investment group active in the Caucasus) and is dedicated to the long-term goal of helping the world meet all of its energy needs through renewable energy. Silk Road Energy’s flagship project, the 9.8-MW Bakhvi 3 hydro project, was commissioned in 2015.

Hydro Review