research reports

The economic recovery continues to strengthen in Georgia despite the halt in international tourism. Decent fiscal stimulus is supporting domestic demand, along with strong growth in remittances since June 2020 and continuation of bank lending. Notably, VAT revenue growth turned positive in August 2020 for the first time since March this year, hinting at better-than-expected recovery dynamics. We do not assume the re-imposition of strict lockdown measures in our base case scenario, though the risk has increased in recent days amid rising COVID-19 cases. We maintain our growth forecast (-5.1% in 2020), but note that our GEL forecast (GEL3.1/US$ in 2H20) is skewed to the weaker side. This, however, supports further adjustment in imports and a current account deficit of below 9% of GDP in 2020, in our view. The NBG maintained its key rate at 8.0% on September 16, despite the pullback in inflation, as the regulator remains cautious of GEL weakness and a possible deterioration in sentiment due to the recent increase in COVID-19 cases and approaching elections.

Electricity consumption was down by 4.5% y/y to 6.1TWh in 1H20, caused by lockdown and related decreased economic activity due to Covid-19 pandemic. The decrease was most significant in 2Q20 (-10.7% y/y), as lockdown started in mid-March. Ministry of economy and sustainable development forecasts 5.8% y/y decrease in annual consumption of 2020, according to the updated (as of Jul-20) annual balance of electricity. Notably, Abkhazian region’s electricity consumption increased in both quarters by 8.0% y/y and 27.8%y/y respectively, while for the rest of Georgia drop in consumption was 0.7% y/y in 1Q20 and deepened to 16.7% in 2Q20. In 1H20, the Abkhazian region’s consumption was up by 15.2% y/y, while consumption by rest of Georgia was down by 8.8% y/y.

The energy market will undergo significant changes from July 2021. The GNERC adopted the day-ahead and intraday market rules, as well as the balancing and ancillary services market rules, and appointed the relevant market operators. The day-ahead market will start operating and an imbalance settlement mechanism will be introduced in Jul-21. The full launch of the intraday market and ancillary services market is scheduled for 2022. Relevant platforms are in the test mode, and trainings of market participants will start from Sep-20. 

Market reforms follow the planned timeline. In 2Q20, following regulatory changes were made: Parliament of Georgia adopted laws on energy efficiency and energy efficiency of buildings; Government of Georgia adopted national renewable energy action plan for 2020 (NREAP) and national energy efficiency action plan for 2030 (NEEAP); Government also adopted new support mechanism for hydropower plants and made some changes into the newly adopted energy law; GNERC adopted rules for: day-ahead and intraday markets, balancing and ancillary services markets, licensing and unbundling of distribution system operator. 

A new incentive mechanism has been introduced for hydropower plants with a capacity of more than 5 MW. During the first 10 years of operation, for each September-April period, ESCO will assist HPPs in market risk insurance. If the market price for any hour falls below USc 5.5/kWh, ESCO will cover the difference between the market price and USc 5.5/kWh. Maximum limit of this assistance/insurance will be USc 1.5/kWh. Before 2017, the Guaranteed Power Purchase Agreement (PPA) mechanism was used to encourage renewable energy investments. The instrument was terminated in 2017 because it was considered to pose high fiscal risk to the state and to be the possible disruption to competitive markets. The new mechanism limits fiscal risk of the state to USc 1.5/kWh, while effectively guaranteeing the investor income of USc 5.5/kWh, as market prices are not expected to fall below USc 4/kWh in the long run.

The sale of more than 5% of the shares of the licensed companies must be agreed with GNERC. According to the Jun-20 amendment to the new Energy law, distribution and transmission system operators must notify GENRC in advance regarding the terms of sale (or change in ownership) of over 5% of company’s shares. The Georgian National Energy and Water Supply Regulatory Commission is authorized to cancel the transaction or request change of terms, if it considers that the terms of the transaction impair the quality of service or affect the tariff of the system operator.

The Partnership Fund handed over ESCO and GSE to the state, while its shareholding in JSC Telasi (24.5% of shares) was put up for auction. The State owned Partnership Fund has transferred two subsidiary energy enterprises, the Electricity System Commercial Operator (ESCO) and distribution and transmission licensee Georgian State Electrosystem (GSE), to state ownership. The transfer did not lead to a change in the management of the companies, as the companies have already been monitored by the Ministry of Economy and Sustainable Development. Moreover, as part of the reform, the Partnership Fund also plans to sell a 24.5% share in JSC Telasi, for which a public auction has been announced. The starting price at the auction is US$ 10.5mn and the final sale price will be announced in Sep-20. The remaining 75% of Telasi shares are owned by Inter-RAO.