Wednesday, 27 May 2015

The Challenges to Georgia's Energy Sector

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By Ariela Shapiro (05/27/2015 issue of the CACI Analyst)

In April 2015, Georgia’s Ministry of Energy (MoE) officially presented for review the International Energy Agency’s (IEA) Energy Policy Review of Countries in Eastern Europe, Caucasus and Central Asia, which details Georgia’s energy strategy, achievements and recommendations for future policy recommendations. This policy document aligns with the Georgian Government’s updated energy strategy and recommends Georgia to increase its energy security through utilizing its renewable energy potential, upgrading its energy infrastructure and diversifying supply via interconnections with neighboring countries. The document inadvertently highlights existing security gaps in Georgia’s energy sector. Given Georgia’s geopolitical realities and critical reliance on neighboring countries for energy, the current administration faces multiple challenges to building a self-sustaining and secure energy sector capable of meeting both local consumer needs and projected export obligations.  

BACKGROUND: Since 2004 and the years of chronic blackouts, Georgia has made significant progress towards both stabilizing its energy grid and integrating it with key regional energy trading systems. Through a variety of international donor financed projects, the Georgian Government (GoG) has rebuilt and or replaced Soviet era infrastructure, such as natural gas pipelines, transmission lines and substations, while also utilizing state of the art technology to maintain critical substation and pipeline infrastructure. To further ensure the energy grid’s ability to respond to critical imbalances, the GoG has supported the need for system-wide integrated automated emergency response systems. 

In parallel with stabilizing Georgia’s energy sector, various administrations have worked to establish the country’s role as a regional energy transit route and potential energy export point. On September 18, 2013, the Georgian and Turkish governments ratified a cross-border interconnection agreement, which is intended to meet Turkey’s forecasted increased energy consumption needs. Given the country’s massive natural hydropower resources, Georgia was, and is still considered by many, to be a natural candidate to supply Turkey’s projected energy demand.

In order to ensure a stable and secure flow of power to Turkey, the GoG, through the support of the European Bank for Rehabilitation and Development (EBRD) and the KfW bank, and within the framework of the Black Sea Transmission Network Project, built the new 400 kv Borchkha- Akhaltsikhe transmission line, supported by the high voltage direct current (HVDC) back-to-back Akhaltsikhe Substation.

In another instance, USAID supported the GoG to replace or refurbish 147 kilometers of critical natural gas pipeline segments between Poti and Gori, which will enable local consumers to receive regular access to natural gas. In addition, KfW, the Asian Development Bank (ADB) and EBRD are also supporting the rehabilitation of the Jvari-Khorga transmission line and relevant key substations. The Jvari-Khorga line is critical for stabilizing the electrical grid in Western Georgia, and the 500 kv Imereti line, while further ensuring a reliable transit of energy from northern Georgia to Turkey

Recently, the International Finance Corporation (IFC) announced its involvement in a US$ 250 million project to rehabilitate the Shuakhevi hydropower plant (HPP), located in the Adjara Region. The IFC debt arranged financing consists of two US$ 90 million long term senior loans, one each from ADB and EBRD, with US$ 70 million committed from IFC.  However, the IFC’s total investment is US$ 104 million, which includes a US$ 34 million equity investment in the project company, Adjaristqali Georgia, and is a joint venture for India’s Tata Power, Norway’s Clean Energy, and the IFC. 

IMPLICATIONS: As indicated, most investments in critical fixed infrastructure in Georgia were attained through the support of donors or international financial institutions, rather than solely secured foreign direct investments. Recently, the financing model of infrastructure projects has transformed from sole support by international donors to a hybrid partnership consisting of international donor/financial institutions and private investors, implying that international donors have helped leverage private investment interest in Georgia. In addition to the Shuakhevi HPP project, the Paravani HPP, located in the Samtskhe Javakheti Region, reflects one form of a new creative funding model.

The Paravani HPP, operated by Georgian Urban Energy, is owned by the Turkish Andolu Group and EBRD, with the former being a 90 percent stakeholder and the latter holding 10 percent. To support construction costs, the EBRD invested US$ 52 million, while an additional US$ 40.5 million came from the IFC and a further US$ 23 million was raised from commercial banks. 

While both the Shaukhevi and Parvani projects demonstrate the tremendous international interest in Georgia’s hydropower resources, they also imply that private investors are shy to invest without the safety-net offered by international donors and or financing agencies. At present, no sole FDI joint ventures or public-private partnerships, i.e. between private investors and the GoG, have materialized in the energy sector. 

In addition, while the GoG is capable of financing and implementing small infrastructure projects such as the construction of a 25 kilometer new natural gas pipeline in Khakheti, larger projects require external support in the areas of financial and technical assistance. 

Under these donor funded critical infrastructure projects, most key construction and oversight functions are performed by either international contractors or technical specialists.  As a result, Georgian companies and individuals are rarely directly involved in all the fundamental phases of these projects, such as design, construction, operation and maintenance. While donors and their contractors work with and coach relevant Georgian counterparts, these capacity building activities usually impact a select few Georgian nationals. In most cases, these individuals already possess advanced training and knowledge, as compared to the overall population, and are often later recruited by international firms for projects outside Georgia. 

Currently, Georgia does not have a substantial cadre of highly trained technical specialists, possessing the knowledge and skills to construct, operate and maintain its energy grid without the support and guidance of international technical experts. Therefore, key infrastructure sites are often constructed by international contractors, rendering Georgia dependent on external advice and support to build its energy network. 

CONCLUSIONS: The Georgian Government faces multiple challenges in creating a policy that will support both the country’s long-term energy security and interdependence with regional trading partners. Before becoming fully integrated into regional energy networks, Georgia must first ensure the stability of its internal energy grid, which requires continued maintenance and upgrading, as well as its ability to meet local consumption needs. In 2014 Georgia imported electricity from Armenia, Azerbaijan, Russia and Turkey, with Russia and Azerbaijan being the key import countries. Therefore, while Georgia does export energy during the summer months due to hydropower resources, its energy sector requires additional time, financing and human resources before gaining long-term stability, sustainability and security. The energy sector may be further strengthened by increasing generation capacity, building new power plants or rehabilitating existing ones and constructing new transmission lines, all of which will work to support a reliable transit of power through Georgia.

AUTHOR'S BIO: Ariela Shapiro is an international development professional with five years’ experience working in the Southern Caucasus and Eastern Europe for USAID and World Bank activities supporting democracy and governance, economic growth and energy infrastructural development. Most recently, she is supporting a USAID funded project to develop municipal and national government joint activities in specific energy and economic sectors.

Image Attribution: Scott Sutherland & Wikimedia Commons

 

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