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Jul 31, 2019
Energy Sector Overview: Charging Forward
- Electricity consumption is growing faster than generation in Georgia. Consumption has grown at a 5% CAGR over the past six years to 12.6 TWh in 2018, while generation increased at a 3.8% CAGR to 12.1 TWh. The hike in electricity demand has resulted in higher net imports, which grew 13% y-o-y in 2018 to 0.9 TWh. Lack of water resources decreased generation to 6.2 TWh in 1H 2019, down by 2.1% y-o-y, leading to increased net imports of 0.4 TWh, up by 185% in the same period.
- Cryptocurrency mining and growth in tourism boosted electricity consumption in 2016-2018. Consumption by household and commercial users grew at a 6.1% CAGR over two years to 8.9 TWh in 2018, whilst consumption by eligible consumers (mostly cryptocurrency mining companies) grew at a 22% CAGR to 1.8 TWh. Electricity consumption of tourism and large companies mining cryptocurrency accounted for 10% of total consumption in 2018.
- A dearth of generation capacities are expected to hike electricity imports. TBC Capital projects a 5.1% annual increase in electricity consumption in Georgia over the next five years to 16.1 TWh by 2023. An expected slowdown in cryptocurrency mining will be offset by increased tourism and growing production in the following years. Generation is expected to grow at a 4.1% CAGR to 14.8 TWh until 2023 and 1.9 TWh of net imports will be required to meet the expected shortfall in generated electricity.
- Increasing demand for electricity, the potential for market deregulation and growth in electricity prices form the investment story for Georgia’s electricity sector. In 2019-2022, 25 HPPs with installed capacity more than 610 MW, annual generation of 2.3 TWh and total investment exceeding USD 1 bn are scheduled to be completed. However, up to 1,000 MW of additional hydropower capacity is required to satisfy the increasing domestic consumption by 2023.
- Downside risks raise uncertainty for the investment outlook. The main challenges facing Georgia’s electricity sector include the abolishment of price-hedge PPAs, delays in deregulation, problems with HPP construction, and electricity price fluctuations in Turkey as the main export market. We believe that additional incentives will be needed to attract investment into new generation capacities and underpricing the electricity could deter investments and worsen customer conditions in the longer term.
- Risks of the electricity supply interruptions are moderate. Domestic producers satisfy over 90% of Georgia’s electricity demand. However, Enguri HPP’s high market share (33%) decreases supplier diversification. The plant is not expected to be decommissioned, but ongoing repair works and problems with the Abkhazeti breakaway region are creating issues in generation and in the security of supply. The construction of new capacities will decrease share of Enguri HPP to 28% by 2023 and increase supplier diversification.
- Increasing demand for electricity and lack of sufficient generation capacity are expected to create upward pressure on prices. Infrastructure investments will also contribute to the price increase. However, the average price increase should be moderate, partly because the future market model will maintain a regulated portion alongside the deregulated part.
- Stakeholders are expected to benefit with the implementation of new Electricity Trading Mechanism. Although employee training and integrating new technology will bring new costs, market participants will benefit from the free market and improved quality of service. There is no guarantee of lower electricity prices after market liberalization, but a more open market leads to better investment incentives and improved service quality.