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TBC Capital: Investment Opportunities in Georgian Energy Sector

Georgia’s energy sector is one of the country’s most attractive investment opportunities. Hydropower is the cheapest source of renewable power for Georgia and we strongly believe the sector will continue to be attractive for investors over the mid-term.

The investment story is rooted in Georgia’s massive untapped hydropower potential: current electricity production represents just 40% of Georgia’s estimated annual hydropower output potential of 15 TWh. In addition to 22 hydro plants currently under construction or in the licensing stage and MOUs signed for the construction of 72 small and medium hydro plants, the Ministry of Energy has an additional 80 HPP projects available for investment.

The energy sector is a key driver of the Georgian economy: over the last 5 years the sector was the 2nd largest contributor to total foreign direct investment (FDI) with US$ 750mn (15% of total FDI). Over the last decade Georgia’s hydropower sector has attracted numerous strategic investors. Currently, 22 hydropower plants with planned total capacity of 1,500MW (around 50% of the existing total installed capacity) and investment value of US$ 2.6bn are either under construction or in the licensing stage. Over the last 5 years, 8 small and medium HPPs with total installed capacity of 146MW have been built. Both local and international investors participated in these projects.

Additional generation assets will be needed to meet growing electricity consumption. Generation capacities are falling short of growing consumption. Georgia’s electricity generation has not kept up with growing consumption since 2012. Over the last 5 years output increased 23% to 10.4TWh as of 2014, while consumption grew 27% to 10.2TWh, largely in-line with GDP growth. We expect consumption growth will continue to track GDP trends.

Wholesale electricity prices are on the rise. In 1H 2015 the average balancing electricity price at which ESCO (market operator) surged 55% y/y, driven by increasing consumption on the back of insufficient growth in generation capacity, with the shortfall being bridged by more expensive sources like imports, thermal power, or newly built hydropower plants. Newly built HPPs are still by far the cheapest source of electricity.

Georgia’s neighbor and key trading partner Turkey is an attractive market for exports due to growing consumption, geographical proximity, and an inverse consumption pattern (shortages in the summer when Georgia has a surplus). A new 700MW capacity transmission line now connects the two countries, which will allow for rapid growth in exports.

Georgia is on its way to establishing a fully competitive electricity market, which will enable producers to sell electricity at competitive prices. The Georgian government aims to develop a true competitive market and harmonize regulation with Turkish and EU standards. The reforms are aimed at establishing a trading mechanism to help create a competitive market with transparent pricing and a stable environment.

Georgia’s goal is to become a regional hub for electricity transit and increase cross-border transmission capacity with its neighbours. In addition to exporting its own electricity to Turkey, Georgia can also transmit Russian and Azeri electricity to Turkey and Russian electricity to Iran through Armenia. Georgian State Electrosystem (GSE) plans to increase transmission capacity to Armenia, Russia, and Turkey by 4.5x, 1.8x and 2.1x, respectively.