The draft energy law was prepared by the Energy Community secretariat experts under the EU4ENERGY program. The draft envisages the implementation of a day-ahead market for electricity trading, adoption of the institute of a power supplier, creation of a system services trading platform, and unbundling of licensed activities, among other issues. The draft law does not have an answer, so far, to the most challenging question: how to integrate the existing PPAs into the day-ahead market without causing major distortions. Full implementation of the changes drafted in the document will require about two years after final approval.
GNERC recalculated WACC components for each type of utility. As a result, the weighted average cost of capital (WACC) was increased from 13.54% to 16.40% for electricity generation, transmission, and distribution activities and was set at 13.54% and 15.99% for natural gas and water supply services, respectively. WACC is used by GNERC to guarantee licensed companies a reasonable return on investment and incentivize cost reduction. Another significant change in the tariff methodology was extending the tariff period for electricity distribution and transmission companies from one to three years. Notably, for natural gas distribution and water supply activities, the WACC methodology was adopted recently, for tariff years 2017-2018.
Tariffs were revised upward for Khrami 1 and Khrami 2 HPPs, as a result of the GEL depreciation against the Japanese yen and the US dollar. Both HPPs have long-term tariffs in place up till 2025. The tariffs are subject to revision once every three years, based on the USD/GEL exchange rate, and annually, based on the JPY/GEL rate (only for Khrami 2). The revisions amounted to an 18-20% increase in tariffs, based on the year, for 2018-2024. Notably, as the highest regulated tariff on the market, the tariff of Khrami 2 HPP serves as the reference price for the deregulated market. Unless any further changes take place, the price that ESCO will pay deregulated HPPs for balancing electricity will increase from 9.4 tetri/kWh to 11.25 tetri/kWh through end-2018.
Domestic consumption increased 7.2% y/y in October 2017 and 8.8% y/y in 10M17. The main driver of growth in October was a 61.7% y/y increase in direct consumption, driven by a 94.3% y/y increase in Ltd Georgian Manganese usage, which contributed 5.6 percentage points to overall growth. Consumption of distribution companies was up by a modest 3.5% y/y.
Growth in demand coincided with a drop in domestic supply, creating the need for electricity imports, which came from Azerbaijan. A 10.7% y/y decrease in hydro and 6.0% y/y decrease in thermal generation resulted in an 8.6% y/y decline in domestic supply. The decrease in hydro generation was due largely to a 27.3% y/y drop in Enguri/Vardnili generation, from a high base in Oct-2016 (+44.8% y/y). Generation of other regulated HPPs was also down 11.6% y/y. Deregulated HPPs were the only group of HPPs posting an increase in Oct-2017 (+38.3% y/y), solely due to the addition of sizable HPPs (Dariali, Khelvachauri, and Shuakhevi) to the group.
