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

29 Nov, 2017

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.

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Georgia's Tourism Sector - Tourism Market Watch | October 2017

20 Nov, 2017

Turkish Airlines maintains the leading position on the Georgian market by number of passengers served in 9M17. However, the increased competition over the last two years has weakened the airline’s lead. Its share on the Georgian market has almost halved from 19.8% in 2015 to 11.2% in 9M17. Georgian Airways, the only local carrier on the market, is close behind, with 9.6% of the market. Since the addition of direct flights from Kutaisi to European cities, Wizz-Air’s competitive position on the Georgian market has strengthened considerably.

The share of air travel in total arrivals to Georgia is on the rise, thanks to improvements in air connectivity and growth in the number of visitors from secondary source markets. The number of visitors arriving by air was up 49.0% y/y to 1.4mn in 10M17 and accounted for 21.5% of total arrivals, up from 13.5% in 10M15.

The number of international arrivals was up 15.2% y/y to 0.61mn in October 2017. Out of the top four source markets, there was strong growth from Russia (+30.3% y/y), Armenia (+12.7% y/y), and Azerbaijan (+9.1% y/y). The number of visitors from Turkey also increased (+2.4% y/y) for the fourth consecutive month, but the increase was a modest one. Arrivals from the EU were up 17.4% y/y to nearly 30,000 visitors.

Secondary source markets also posted robust performances in 10M17. Arrival growth from secondary (non-EU) source markets contributed 3.8ppts to the overall growth of 18.8% y/y. The number of Israeli visitors increased 35.9% y/y to over 115,000 visitors, while the number of visitors from Saudi Arabia was up 171.5% y/y to almost 55,000. Arrivals from the EU were up 24.0% y/y to over 293,000 visitors in 10M17, with Germany, Poland, and UK accounting for a third of the growth.

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

30 Oct, 2017

Energo-Pro Georgia, the largest electricity distribution company in the country, was rated "BB.” Fitch Ratings has assigned JSC Energo-Pro Georgia (EPG) an Expected Long-Term Foreign Currency Issuer Default Rating (IDR) of 'BB(EXP)' with Stable Outlook. The rating is based on expected cash flows and market situation for the next three years. GNERC’s regulatory methodology, whereby tariffs are revised every three years, and the upward revision of the WACC from 13.54% to 16.4% as of January 2018, positively affect the ratings.

Total installed capacity of Georgia increased 10.0% over the last two years to 4,104.9 MW. 2016-2017 additions have included 12 hydro (352.7 MW) and one wind (20.7MW) power plants. Three large HPPs – Dariali (108MW), Khelvachauri (47.5MW), and Shuakhevi (178.7MW) – account for 89.5% of the aforementioned capacity increase. According to the 2017 forecast, these three HPPs will produce 0.5 TWh of electricity in 2017 and satisfy 4.2% of annual consumption (11.9TWh). 

Total installed capacity of Georgia will increase by 13.8% by 2020, if projects at construction stages are completed on schedule. 35HPPs with 337.2MW of installed capacity are at the construction stage to be commissioned by end-2020. Their timely completion will result in 1,586.0 GWh of additional hydro generation annually. In addition to the HPPs at the construction stage, the pipeline includes over a hundred projects at the feasibility stage, as well as a second GOGC-owned CCGT project (230MW) in Gardabani, to be completed by 2020, and designed to satisfy electricity demand during winter deficits. 

Domestic consumption increased 16.3% y/y in September 2017 and 9.0% y/y in 9M17. Consumption by eligible consumers, up 91.1% y/y, was one of the key drivers, as usage by Georgian Manganese increased 149.7% y/y and contributed 7.6 percentage points to overall growth in September 2017. Consumption of distribution companies, up 13.0% y/y, was an even larger contributor (10.1 ppts). Consumption by Energo-Pro Georgia subscribers, including former Kakheti Energy Distribution subscribers, increased 13.2% y/y, while Telasi consumption was up 12.5% y/y. The Abkhazian region’s electricity usage was down 8.2% y/y and accounted for 11.0% of domestic consumption.

Electricity import increased 5.5 times to 132.9GWh and accounted for 13.9% of total electricity supplied to the grid in September 2017. Notably, the level of import was only 0.7% above the plan. The main source of import (60.6%) was Azerbaijan, with the rest coming from Russia. Domestic generation increased 2.8% y/y, with HPP generation up 10.4% y/y (74.1% of total). Thermal generation decreased 32.4% y/y (11.2% of total) from the low base in 2016 (-40.6% y/y), while the new wind power plant accounted for 0.7% of total electricity supply.

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Georgia's Tourism Sector - Tourism Market Watch | September 2017

10 Oct, 2017

Turnover in hotels and restaurants increased 17.5% y/y to US$ 553.8mn in 2016, according to Geostat’s annual figures. Turnover reached US$ 271.7mn in 1H17, as strong visitor growth has boosted hospitality sector revenues. The sector has also posted significant gains in employment, with over 37,000 people employed in the hotel and restaurant industry in 2016.

Branded hotel supply outside of Tbilisi is set to increase significantly in coming years. Adjara Group Hospitality plans to open a 100-room Rooms Hotel in Kokhta-Mitarbi, the mountain resort near Bakuriani, which opened to visitors last season. With locations in Batumi and Sagarejo also in the pipeline, the Rooms brand could potentially have a portfolio of five hotels across Georgia by 2019.

The Agency of Protected Areas has published visitor statistics for 9M17. The number of visitors to protected areas was up 32.7% y/y to over 856,000 in 9M17 and already surpassed the 2016 annual figure. The number of domestic visitors increased 30.3% y/y to nearly 486,000, while the number of international visitors was up 36.0% y/y to nearly 371,000.

The number of international arrivals was up 20.9% y/y to 0.76mn in September 2017. Out of the top four source markets, there was strong growth from Armenia (+11.8% y/y), Azerbaijan (+15.6% y/y), and Russia (+32.0% y/y). The number of visitors from Turkey also increased (+10.5% y/y) for the third consecutive month.

The tourist category continues to drive arrival growth in September 2017. The number of overnight visitors (‘tourist’ category) was up 24.8% y/y and accounted for 49.9% of international arrivals. Same-day arrivals and transit visitors posted 12.7% y/y and 22.6% y/y growth rates, respectively. The number of tourist arrivals in 9M17 is up 28.8% y/y to 2.78mn, already higher than the number of tourists in Georgia in all of 2016.

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