EXECUTIVE SUMMARY GEORGIA

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2 EXECUTIVE SUMMARY GEORGIA Current Status of Georgia Electricity Market: 1 The entire electricity infrastructure (HPPs, transmission lines, interconnectors etc.) is very old and needs to be refurbished. A lot of HPP are constructed before 50 years and are currently off-line. Georgia power production strategy relies mainly on Hydro Power Plants. However, Only 18% of the country s hydro potential has been utilized During the last several years Georgia has became net exporter of electricity instead of importing practice during 90-ies. The Georgian government has proceeded more rapidly with restructuring and liberalization of the energy industry than many other Eastern Europe countries. As a result, there are several bilateral inter-countries MoU about investing in energy sector In conclusion: The electricity sector in Georgia is managed by the State Energy Agency and by Ministry of Energy. 1. Investing in HPP in Georgia should be profitable according to financial inputs presented before. Some estimation about green field returns is about 25% (equity IRR). 2. Main advantage of Georgia is currently very supportive legal regulation which determines energy green field investments. Construction permits could be received for less than 60 days, and environmental impact permit for 80 days. 3. PPA could be agreed by regulator from case to case without tender process. 4. Neighborhood countries are net importers of electricity and grid connection is solid but once all three electricity lines are operational, total transmission capacity to Turkey will reach 1,500 MW - 10 times more than current capacity. 5. Main risks are connected with emerging market risks as in SEE countries.

3 1. Doing business in Georgia One of the world s fastest-reforming economies by the World Bank opinion, changes in business regulation in 2011 which improved economy and doing business; Easy to start and doing business; It requires 3 procedures, takes 3 days and costs 4,98% GNI per capita to start a business in Georgia; Construction permits - rank 7 out of 183, number of procedures 10, takes 98 days; Tax rate - 15%; 2 2. Macroeconomic overview Population of Georgia is approximately while estimated GDP (PPP) for 2010 was $22,44 billion with real growth rate of 6,4% GDP growth rate in Georgia projected for period is 4-5% GDP per capita in Georgia for 2010 was $4900 Investment (gross fixes): 15,4% of GDP Inflation rate (consumer prices) (2010): 7,1% Discount rate ( 2008): 8% Decrease in corruption- global ranking in Transparency International s Corruption Perceptions Index in 2010: 68 Industries : steel, electrical appliances, mining (manganese and copper) Electricity- production in Georgia in 2008 was 7,97 billion kwh while electricity- consumption was 6,902 billion kwh

4 3. Georgia Energy Sector Overview 3 Over 85 percent of Georgian electricity is produced by hydroelectric plants. The rest of the electricity is produced by thermal power plants (EIA, 2005). Georgia imports almost 100 percent of the fuel for the thermal power plants (mainly natural gas) from Russia. Unexplained blasts damaged pipelines carrying natural gas from Russia to Georgia in the winter of Georgia was without gas for days in extremely low temperatures. In response to this situation, Georgia indicated its commitment to ending its near total dependence on Russian energy imports (BBC, 2006). Hydro resources take the first place among the natural riches of Georgia rivers on the territory of the country with approximately length of km. Fresh water supply of Georgia, which is made up of ice, lakes and water reservoirs, is 96.5 km3. Around 300 rivers are significant in terms of energy production; their total annual potential capacity is equivalent to MW, while the average annual production equals to 50 million KWh. As Georgian rivers are characterized by distinct seasonality, resources can be distributed only by building hydro power stations with regulating water reservoir in the short and long term perspectives. Hydro power stations with small reservoirs are more common because of construction difficulties from the ecological point of view.

5 The Government of Georgia has approved the State Program Renewable Energy 2008 which includes the list of potential Greenfield projects and rules for construction of new renewable energy sources. According to the State Program, memorandums of understanding are signed between the Government of Georgia and investors on the following projects such as: Khudoni HPP with the installed capacity of 750 MW and generation of 1,5 bln KWh; Cascade of Namakhvani HPPs - with the installed capacity of 450 MW and generation of mln KWh; Faravani HPP - with the installed capacity of 78 MW and generation of 425 mln KWh; Cascade of HPPs on the rivers: Chorokhistkali, Lukhuni, Tekhura, Gubazeuli, Mtkvari, Bakhvistskali etc. totally 21 HPPs (total installed capacity of MW and generation of 5,5 bln. KWh) are under construction agreements. Intended amount of investments for the construction of HPPs equals to USD 2.4 bilion. A table with summary information for Georgia is displayed below. 4

6 Average annual electricity generation of wind potencial in Georgia is evaluated at 4 bln. KWh and installed capacity 1500 MW. According to the wind energy potential the territory of Georgia is divided into high, mean and low speed zones where the wind speed fluctuates from 2,5m/s up to 9,0 m/s. High effective radiation of the Sun in Georgia. In most regions of the country annual duration of solar shining ranges from 250 up to 280 days amounting to approximately hours. The total solar energy potential is evaluated at 108 MW. In Georgia solar transformers are reasonable to be used only in the mountainous. According to the hydro geological study of the territory of Georgia the forecasted stocks of geothermal waters equal to mln m3 annually. More than the 80 % of geothermal deposits are located in the western Georgia and Zugdidi Tsaishi geothermal field. Comparatively low temperature of the geothermal waters does not allow generating electricity Additional 20 bln. KWh can be produced through renewable energy sources in the near future in Georgia with the capacity to save 7 mln. tones standard fuel. At the regional scale the natural riches outlined above will allow us to reduce the utilization of fossil fuel and accordingly the greenhouse gas emissions in the air: - CO2 by 9 mln. tones, CO by 5000 tones, NO2 by tones. 5

7 Hydroelectric: 6 The vast majority of Georgia s power supply is from hydroelectric generation. The available generation is usually far less than the full capacity due to widespread plant outages. The hydroelectric power station capacity of 2,843 MW is shared between 20 large-scale plants and about 30 small generating plants of less than 10 MW each (UDI, 2009). The largest power plant is the Enguri power station with an installed capacity of 1,300 MW. The plant generates 4.2 billion kwh of electricity annually, which is 45 percent of Georgia s entire electric generation. By absolute indices of potential hydro resources Georgia is fourth among CIS countries (after Russia, Tajikistan, Kazakhstan), but by concentration of potential hydro resources, Georgia is one of the top territories in the world. The hydro resources are concentrated in Western Georgia and the hydropower potential of the Inguri and Rioni rivers have been mostly developed. Hydroelectric generation will continue to play a major role in Georgia s energy plans for the foreseeable future, primarily because of favorable hydrological conditions. The Ministry of Fuel and Energy is currently continuing rehabilitation of power plants and is also seeking creditors and investments for new construction. Efforts are being made to create appropriate opportunities for foreign investors. The Cadastre of small hydro power technical potential of Georgia s rivers includes around 300 potential places for new hydro with total capacity 4000 MW

8 7 LARGE HYDRO POTENTIAL PROJECTS

9 8 SMALL HYDRO POTENTIAL PROJECTS

10 Georgia s Electrical Grid: The electrical transmission grid of Georgia features a good geographical structure and can reliably service the transmission of energy from any power plants to the hand users, in the country and to the neighbored countries (Turkey, Armenia, Azerbaijan, Russia). Transmission Capacity is shown at the below picture. 9

11 10 4. Overview of Legal and Regulatory Framework Greenfield projects based on Build-Own-Operate (BOO) principle All new constructions are totally deregulated o No tariff set for the newly built HPPs - investor is free to choose the market and the price

12 o Electricity tariff varies between 45 EUR per MWh and 50 EUR p/mwh o there is no special fee for the connection to the grid o Free third-party access to the grid o No license is required to export and no tariff set o GoG can offer a guaranteed purchase for three winter months o Profit increases from selling carbon credits o New HPPs has priority access for transmission to Turkey (Long term contract with TSO) 11 Regulations Steps for Investment in Georgia s hydro potential:

13 Step 1: Submit application form Step 2: Sign MOU with GoG Step 3: Obtain construction permit (Issued within 60 working days by the Ministry of Economy & Sustainable Development) Step4: Obtain generation license (Issued within 30 working days by GNEWRC) Step 5: Start electricity sales Feasibility, detailed project design Land possession/ownership document Environmental and social impact assessment 12

14 Project Implementation Permits: Feasibility Study - The MoU includes a provision for the investor to perform a detailed feasibility study and an environmental impact assessment (for projects 2MW or more). The length of time allocated for completion of such studies is determined by the timeline and schedules submitted by the investor in the Application, and are expected to range up to 18 months. Land Transfer - if the plant site is State-owned, GoG will transfer the land plot to the investor for a nominal fee (The nominal fee is set by the local municipalities for the purpose of privatization and it is closer to market price) through the direct sale procedure for land privatization. Construction Permit- issued by Ministry of Economic and Sustainable Development of Georgia for HPP of 2MW or more and by agencies of local selfgovernance for HPP under 2MW. It takes 30 days for verification of Land ownership, maximum 20 days for approval of technical design (including Environmental Impact Permit), and up to 10 days for issuance of Permit. 13 Environmental Impact Assessment - approved by Ministry of Environmental Protection in no more than 60 days for public hearing and up to 20 days for approval by the ecology committee. Constructions permit procedures: Permit is the legal basis for implementation of the construction of the plant and relevant infrastructure, absence of which any work is deemed illegal. Construction Permit is issued by the Ministry of Economic and Sustainable Development of Georgia for 2MW or more, by agencies of local selfgovernance for under 2MW. The rules and terms for issuing a construction Permit are governed by the relevant law and GoG statute, including the following timeframe: o Land ownership verification no more than 30 days o Approval of technical design (including Environmental Impact Permit) no more than 20 days o Issuance of Permit no more than 10 days

15 After construction permit is obtained, applicant is obliged to have detailed design, feasibility study, land ownership/possession document, environmental and social impact assessment. Environmental Impact Assessment Construction permit and environmental permit are linked. The Construction Permit Application includes the submission of an Environmental Impact Assessment, which must be approved by the Ministry of Environmental Protection before the Construction Permit is given. Public hearing should not take more than 60 days and approval by the ecology committee more than 20 days. Preoperational procedures include: 14 Generation License - issued by the Georgian National Energy and Water Supply Regulatory Commission ( NGEWRC ), is the legal basis for power generation activity and should be obtained prior to the operation of units of 13MW or more. It has a granting period of approximately 30 days, including 5 days to confirm application completeness. Interconnection Agreement - newly constructed HPP need to make interconnection agreement with the owner of Transmission line/grid. The connecting is free of charge and transmission rates are set by the GEWRC. Feed in tariff and mandatory purchase agreement According to the Guaranteed Power Purchase Agreement (PPA) three winter months during first ten years of operation a newly constructed HPP has to sell and ESCO has to purchase the investor s electricity under a tariff approved by GNEWRC. During that period of time, a generation licensee may also sell electricity to the local market through a direct contract under a deregulated tariff. Beyond the three winter months, newly constructed HPPs are free to contract and sell electricity competitively either locally or export it. Electricity export is carried out on the basis of a direct contract and, for a new HPP project, is subject neither to licensure nor to tariff regulation.

16 According to the electricity power Market Rules, licensed suppliers of electricity and any eligible consumers (currently some of the larger wholesale customers) of electric power may make short term (one year) or long term (5 years) direct contracts for the sale and purchase of electricity supply. Contracts must be registered with and scheduled by ESCO, the commercial operator, and the dispatch operator. Longer term balancing of electric power trade when not covered by bilateral contracts is carried out by ESCO. ESCO balances the difference between the actual consumption, and the amount of electric power specified by direct contracts between suppliers or eligible customers and producers. The Dispatch Operator, part of the GSE transmission system, is responsible for shorter term reliability of system operations. Hydropower stations built after August 1, 2008 have been fully deregulated and are entitled to trade electric power and energy at unregulated tariffs. 5. Financial Economical HPP potential evaluation 15 Green field investment in Georgia HPP could be profitable projects. Expected Equity IRR is about 25% with assumption of 5 euro cents per KWh. Main risk of investment is related with rate of receivables collection, construction costs, and terms in PPA. Regulatory risk in current situation seems to moderately low Deregulated power sector with very impressive turnaround since 2004 Distribution companies privatized and operating at a profit Significant existing private investment in generation assets GoG's strong support and commitment aimed at developing hydropower resources Simplified Procedures Diversified & Expanding export markets including EU Liberal Tax Legislation Only 6 taxes effective in Georgia o Low and flat tax rates o Internationally accepted methods and practices o Minimum bureaucracy o Light administrative burden to taxpayers o Georgia has in force 30 OECD model Double Taxation Avoidance Treaties

17 6. Current HPP projects Competitors

18 Companies currently or recently active in hydro project/market in Georgia: 17 Nurol Energy Production (Turkey) SK Engineering and Construction (Korea) AES-Telasi (USA) Energo-pro Georgia Anadolu Ağaoğlu Trans Electrica Ltd. EPC Clean Energy Invest Sources: 1. data.worldbank.org 2. Publications of EBRD efault.aspx 5. /factbook 6. FAQ about Hydro/ internal document 7. Doing Business in Georgia 8. World Bank publications

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