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Georgia's Tourism Sector - Tourism at Full Speed

2 May, 2018

The world has already rediscovered Georgia as a popular tourist destination. Tourist numbers are already close to the country’s population of 3.7mn. The total number of international visitors (tourists, transit and one-day arrivals combined) increased at a CAGR of 21.7% over 2008-17 and reached a record 7.5mn persons in 2017. With 3.5mn tourists in 2017, 2018 looks set to be another bumper year with tourist arrivals forecast to reach a new record of around 4.2mn – above Georgia’s local population.

Georgia managing to attract tourists from non-traditional markets. Traditionally, visitors to Georgia have been more frequently from CIS countries and Turkey. However, the highly sought-after diversification of the arrival mix is evident, with the share of the top four source markets down from 88.1% in 2012 to 80.1% in 2017 as arrivals have increased significantly from the Middle East and Iran.

Tourism is most flourishing part of Georgian economy, which was otherwise affected by regional economic turmoil in 2015-2016. Revenue from the tourism sector of US$ 2.8bn (18.1% of GDP) in 2017 helped to significantly reduce the country’s current account deficit, when it fell to single digits at 8.7% of GDP for the year. Importantly, Georgia has never seen a decline in its tourist revenues – even in 2009 and 2015, beating peers which experienced reduced tourism revenues in those years.

We estimate that tourist arrivals will more than double over the next five years to 7.6mn – 2.0x Georgia’s population. At this proportion, Georgia will overtake Hungary (1.6x), Slovenia (1.5x), Albania (1.4x) and Bulgaria’s (1.2x) ratios from 2016 but will still be below the proportions found in Croatia (3.3x), Cyprus (2.7x), Montenegro (2.7x) and Estonia (2.4x) in 2016. The findings for Georgia seem reasonable as in the other countries mentioned above, tourist numbers used to double every five to seven years. Additionally, we do not exclude faster growth in tourist arrivals in Georgia given the quick success of on-going reforms in the tourism sector.

Georgia generates far less than peer countries in terms of per arrival spending. This is explained by 1) the dominance of neighbouring countries in its arrival mix; and 2) the low share of “real tourists” compared to peer countries. Despite the number of tourists doubling over 2012-17, per visitor spending only increased to US$ 364.2 in 2017 from US$ 318.6 in 2012. Efforts should be directed to lift per visitor spending toward the US$ 500-800 level found in peer countries. In order to attract more high-yielding visitors, Georgia’s tourism industry needs to focus on high-potential niche tourism products such as winter tourism, wine tourism, medical and wellness tourism, MICE tourism, and gambling.

Visitor growth matched by consistent growth of accommodation sector. Over 3,000 new hotel rooms were added to Georgia’s accommodation stock in 2017. Without success in attracting high-yielding visitors coupled with an extensive pipeline of upscale hotels, we expect pressure on prices and occupancy rates in this segment. At the same time, budget accommodation still seems scarce considering the rapid expansion of the Airbnb market in 2016-17. The extensive pipeline for mid-market brands and increased interest in regional destinations also hint at an oversupply in the luxury hotel segment in Tbilisi.

Insufficient infrastructure and scarcity of skilled labour remain major challenges. Georgia meets the medical and sanitation requirements of a successful tourist destination, as well as safety and security standards according to different studies. However, the same studies identify underdeveloped tourism infrastructure as well as scarcity of skilled labor and service quality as key weakness in the sector.

Tourism development is a key area of the government’s four pillar of reforms introduced in 2016. These reform targets aim to improve the relationships between towns and villages, to promote high-quality sustainable tourism development and to transform Georgia into a four-season tourism destination.

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Georgia's Energy Sector - Electricity Market Watch | February 2018

12 Apr, 2018

FDI in energy sector increased 61.0% y/y to US$ 188.6mn in 2017. The largest FDI providers were: Energo-pro Georgia and related companies - Energo-pro Generation and G-Power; Adjaristskali Georgia - investor of Shuakhevi HPP, Mtkvari Holding and Nenskra Hydro - investors of Mtkvari HPP and Nenskra HPP, respectively. 

Domestic electricity consumption increased 4.6% y/y to 1.1TWh, slightly below the planned level (-2.5%). The sole contributors to consumption growth were distribution licensees: 1) Energo-Pro Georgia subscribers’ consumption increased by 16.3% y/y. The growth can be explained by addition of new subscribers; 2) Telasi consumption was up 2.3% y/y, albeit from a high base in February 2017 (+8.3% y/y). 

Electricity generated by domestic sources increased by 15.4% y/y to 0.9TWh in February 2018, slightly above (+3.5%) the planned level. Hydro generation showed significant increase (+64.3%y/y) in February 2018 from a very low base (-33.1%y/y) in February 2017. Enguri/Vardnili generation more than doubled increasing 119.6% y/y from last year’s low base when Enguri was stopped due to tunnel expertise. Abkhazian region consumed 94.8% of electricity generated from Enguri/Vardnili. Generation of other regulated and deregulated HPPs also increased significantly by 40.2% y/y and 44.6% y/y, respectively, due to high water flow and addition of new HPPs (Dariali and Khelvachauri) to the group of deregulated HPPs. The surplus in hydro generation resulted in 24.4% y/y decline in thermal generation, about 16.6% below the planned level. Wind generation showed 7.0% increase to 6.2GWh and contributed 0.6% of total supply.

Electricity imports were down by 32.8% y/y from last year’s high base, when interruption in Enguri increased demand for imports drastically. Import came fully from Azerbaijan and accounted for 15.2% of total electricity supplied to the grid. Average import price increased by 52.2% y/y and reached USc 5.3/kWh, from last year’s low base (-22.6% y/y). In February 2017, there was a subsidized electricity import from Russia via Salkhino line to satisfy the excess needs of Abkhazian region.

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Georgia's Energy Sector - Electricity Market Watch | January 2018

15 Mar, 2018

Total investment for transmission projects is estimated at EUR 683.9mn over 2018-2028. The Ten Year Network Development Plan (TYNDP) for 2018-2028 approved on 28 December 2017 incorporates revised forecasts of electricity consumption growth, and updated pipelines of power plant and transmission network projects. The TYNDP targets 49% of total investment to be spent over 2018-2020, mostly financed by credits from IFIs (KfW, EBRD, WB, ADB, EU-NIF) and GSE’s own resources. Under the previous edition of TYNDP total estimated investment stood at EUR 735.4mn, and the decrease largely reflects already implemented projects in 2017. Commissioning dates for cross-border transmission projects were revised to 2020 from 2018 for 400kV line Marneuli (Armenia) and 154kV line Batumi-Muratli (Turkey), to 2021 from 2020 for 400kV line Akhaltsikhe-Tortum (Turkey) and to 2023 from 2021 for 500kV line Stepantsminda (Russia).

Forecast for electricity consumption growth was revised upwards in TYNDP 2018-2028. The annual consumption growth rates in the pessimistic, moderate and optimistic scenarios are revised upwards from 1.0%, 3.5% and 5.0% to 3.0%, 5.0% and 7.0%, respectively. The generation scenarios vary by the assumed rates of commissioning for the power plant projects at different stages of development. The base case scenario is assumed to be L3G3, with consumption growth rate at 7.0% (reaching 27.9TWh in 2029) and full utilization of HPPs under construction, licensing and development stages, resulting in 32.3TWh total domestic generation in 2029. The base case scenario gives approximately 4.4TWh of net exports in 2029. 

LEAP model for Georgia forecasts 3.9% annual average growth of domestic consumption over 2015-2030. The Long-range Energy Alternatives Planning (LEAP) model was developed by Energy Efficiency Center Georgia (EEC), under the USAID’s Governing for Growth (G4G) grant project “Electricity Demand Forecasting Model”, enabling forecasting of monthly electricity demand and peak loads. The model uses a bottom-up approach, evaluating the end-use in household, commercial and public services, industry, transport, agriculture, forestry and fishing, crypto-currency mining, Abkhazian region and the losses of the system.

Renewable energy primary law for Georgia is expected to be adopted in August, 2018. The draft is being prepared with the assistance of the Norwegian Water Resources and Energy Directorate and Danish consortium NVE-NIRAS. The project aims to fulfill Georgia’s obligation under Energy Community treaty towards implementation of directive N2009/28/EC. The directive requests contracting parties to set and therefore achieve national goals for the share of renewable energy into the total sources consumed in transport, electricity, heating and cooling in 2020. The law should define states’ policy principles, missions, and general requirements, also promote the schemes supporting renewable energy. 

Domestic electricity consumption in January, 2018 increased 7.6% y/y to 1.2TWh, slightly below the planned level (-2.3%). The growth was driven by 11.9% increase in consumption by distribution licensees: consumption by Energo-Pro Georgia subscribers, including former Kakheti Energy Distribution subscribers, increased 17.2% y/y, from relatively low level in January 2017 (2.7%y/y); Telasi consumption was up 3.6% y/y, albeit from a high base in January 2017 (+10.5% y/y). Electricity usage by eligible consumers showed slight increase (+0.9%y/y), while Abkhazian regions consumption was down 1.9%y/y. 

Electricity generated by domestic sources in January, 2018 increased by 6.1% y/y to 1.0TWh, slightly above (+2.2%) the planned level. Hydro generation showed significant increase (+19.9%y/y) from a low base (-10.4%y/y) in January, 2017. Enguri/Vardnili generation was slightly down 2.7% y/y, while generation of other regulated and deregulated HPPs increased 43.9% y/y and 34.4% y/y, respectively. Thermal generation declined 14.0% y/y, which was 18.3% below the planned level. Wind generation increased 9.6%y/y to 7.1GWh and contributed 0.6% of total supply. Electricity import increased 12.9% y/y to 202.1GWh, and accounted for 16.6% of total electricity supplied to the grid in January 2018. Notably, electricity import was 22.5% below the planned level. 92.2% of imported electricity came from Azerbaijan, while the rest came from Russia (4.0%) and Armenia (3.7%).

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Georgia's Energy Sector - Electricity Market Watch | December 2017

1 Feb, 2018

Electricity power purchase agreements (PPAs) have been eliminated. The government made changes to Decree 214, regulating the expression of interest process for HPP projects on the Ministry of Energy’s list. Currently, the list of potential power plants includes 98 small and medium HPPs with total approximate installed capacity of 1.5 GW. According to the change, listed HPPs will no longer receive guaranteed PPAs from ESCO. In addition, the minimum pre-construction bank guarantee will increase from US$ 5,000 to US$ 15,000. The winner selection criterion (if several candidates bid for the same project) will be the amount of the bank guarantee the investor submits. Previously, the project was awarded to the bidder with the lowest PPA tariff in their proposal. The change will not affect MoUs that have already been signed. The Ministry of Economy did note that strategically important HPPs, such as those with seasonal regulations, might still receive guaranteed tariffs, as an exception, subject to detailed fiscal risk evaluation by the Ministry of Finance. 

Telasi and Energo-Pro are going to invest GEL 85.6mn and GEL 343.5mn, respectively, in grid rehabilitation over 2018-2022. That plan includes the addition of new subscribers, rehabilitation of amortized transmission lines, construction of new substations, increase in transmission capacities, etc. Users currently connected to the 35-110kV transmission grid will be obligated to register as direct consumers in May 2018. Subsequently, they will no longer be subscribers of Telasi or Energo-Pro and will purchase electricity directly from suppliers at prices negotiated with the suppliers on a monthly basis. Direct consumers will pay all service fees to the respective service providers (2.393 tetri/kWh) and the guaranteed capacity fee to ESCO. This change will roughly double direct consumption.

Electricity consumption is expected to increase by 7.1% in 2018. According to the electricity (capacity) forecast of 2018, approved by the Ministry of Economy, the growth in consumption will be met by higher import (+30.8% y/y) and hydro generation (+7.3% y/y). Import sources will be determined during the year according to available commercial contracts. Thermal generation is expected to decrease 4.5% y/y in 2018. According to the forecast, only three small HPPs, with expected generation of 8.9GWh, will be added to the supply side in 2018. HPPs that were commissioned in 2017 will be the main source of the increase in hydro generation. Export of electricity is also expected to increase (+17.5% y/y). Export companies and directions will be determined through the auctions held by GSE during the year. 

Domestic consumption increased 7.7% y/y in 2017 and reached 11.9TWh. Consumption by distribution companies increased 7.1% y/y and accounted for 71.1% of domestic consumption. Telasi subscriber usage (+5.2% y/y) accounted for a third of distributor demand, while Energo-Pro Georgia and former Kakheti Energy Distribution consumption (+8.1% y/y) accounted for the rest. Electricity usage of eligible consumers increased 18.1% y/y, despite the fact that two companies (Rustavi Steel Corporation and Georgian Railway) gave up this status in 2017. Consumption of the Abkhazian region increased 3.9% y/y and accounted for 16.9% of domestic consumption. Exports increased 22.7% y/y and reached 0.7 TWh in 2017. Electricity transit through Georgia declined considerably (-70.1%y/y) to 254.0GWh, of which 80.7% went from Azerbaijan to Turkey, 16.6% from Russia to Armenia, and the rest - from Russia to Turkey.

Growth in demand was met by electricity imports from Azerbaijan (61.3%), Russia (30.2%), and Armenia (8.5%). Electricity import in 2017 increased 3.1 times y/y from the low base in 2016 (-31.5% y/y) to 1.5 TWh, or 11.5% of total electricity supplied to the grid.  The reasons behind the dramatic increase were consumption growth in 2017 and lower hydro generation in the winter (-7.5% y/y), mainly due to Enguri’s maintenance works. Electricity import was chosen over additional generation by certain TPPs due to the flexibility of import, technical constraints, the insignificant difference in prices, and the necessity to have some thermal capacity reserved for system security. Total supply of electricity, comprised of domestic generation (11.5TWh) and import (1.5TWh), reached 13.0TWh (+8.1% y/y) in 2017. 91.0% of total supply was consumed by domestic consumers, 5.3% was exported, and 3.7% was used by power plants or lost during transmission.

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