Georgia’s hydropower sector holds ample development potential. The launch of a 400kV transmission line with Turkey and initiatives to harmonize the Georgian market with Turkey are key steps that position Georgia well to become an important regional energy player. We believe Georgia will increase hydropower output 41% to 11.5TWh by 2021. Given domestic consumption growth, a large chunk of this additional generation capacity could even be absorbed domestically. For 5 years up to 2012, Georgia was a net exporter of electricity, but low water levels and increased domestic consumption cut exports in 2013 and demonstrated the need for additional generation capacities. However, the Enguri hydro plant has signed an agreement with a Turkish party to sell 200GWh this summer (at US¢ 7.5/kWh), which signals a return to export markets after a poor 2013. Electricity prices remain stable, while new HPPs can now benefit from 10-year off-take tariffs for 20% of produced volumes with the Georgian market operator and priority access to the newly commissioned Turkish line.
With total investment of c. US$ 350mn, the completion of the 400kV Akhaltsikhe – Borçka transmission line is a major step towards harmonizing Georgia’s electricity sector with Turkey’s and Europe’s. In December 2013 Turkey and Georgia additionally agreed to study the construction of a 400kV Tortum – Akhaltsikhe transmission line. Turkey is also set to become a member of the European Network of Transmission System Operators for Electricity (ENTSO-E), which would create an opportunity for Georgian electricity traders to directly access Eastern European customers. Another 500kV line to Armenia is under construction and Georgia’s transmission capacity to Russia is expected to nearly double to 1,480MW by 2020, according to our estimates, after a new 500kV line becomes operational.
The expected electricity deficit in Turkey is tightening, but the market remains attractive for Georgian exports. The Turkish Electricity Transmission Company (TEIAS) has cut projected electricity consumption growth rates for 2014-2021 from a 7.0% CAGR to 5.5% and raised its projection for 2013-2017 electricity generation growth rates from CAGR 2.5% CAGR to 5.9%. Half of this expected growth in generation comes from new thermal power plants powered by natural gas (with gas costs of c. US$ 400 per cubic meter) and coal. TEIAS’ new generation assumptions seem optimistic, in our view, and we expect Turkey will continue to import Georgian electricity for two main reasons: seasonality and price. Turkey experiences an electricity deficit during the summer months when Georgia produces excess hydropower, and the price of Georgian electricity exported to Turkey compares favourably to other countries. In 2012, only the Czech Republic provided Turkey with cheaper electricity than Georgia (US¢ 5.3kWh vs. US¢ 6.8kWh from Georgia; 2012 average: US¢ 7.7kWh).
Total Georgian electricity exports fell 3x from 1.5TWh 2010 to 0.5TWh in 2013 due to lower HPP generation as a result of a drier year with low water levels and higher domestic consumption. This caused a domestic deficit and drove imports. A return to average weather conditions and water flow rates and the commissioning of new, previously delayed HPPs will build up capacity and Georgia will resume exports in 2014. For example, the Enguri HPP signed an agreement to export 200GWh to Turkey in June-August as high water levels are driving expectations of surplus energy production in summer 2014. We expect Georgia will become a marginal net exporter of 0.1TWh as of 2016.
The government has launched several initiatives to support the sector. USAID’s Georgian Electricity Market Model 2015 (GEMM 2015) aims to harmonize Georgia’s market rules with Turkey’s to allow day-ahead market operations and offer exporters more transparency in setting prices. An agreement is also in place to develop the Geographic Information Systems (GIS), which will consolidate hydro-meteorological data in digital form and allow users to manage water resources more effectively.
