The creation of an investment-friendly environment in potentially competitive sectors is a significant prerequisite for the development of the Georgian economy, even more so when such sectors are capital-intensive and characterized by a long-term business cycle (i.e. one where it takes a minimum of five years to get back an investment). Gaining a competitive advantage, even if only in a sector or two, has a positive spillover effect on supporting industries as well. Moreover, the benign consequences for the economy as a whole are greater than just the benefits of increased revenues and employment in that particular sector. One such potentially rewarding sector for investment in Georgia is that of hydroelectric power plants (HPP). Supporting investments in this area is very important for Georgia for a number of reasons.
Hydro energy is of vital importance for the country to ensure the uninterrupted supply of electricity. During the past two years, the consumption of power has increased by 10 percent annually. This upward trend will continue in the future and, at our current levels of energy production, will turn Georgia into a net electricity importer within two years’ time. Consequently, both base and peak energy reserves must be safeguarded and, to that end, further developing hydro resources is the best solution.
Apart from ensuring a stable power supply, there are three additional major reasons why hydro energy is important for Georgia:
1 Energy independence: The lack of natural resources, such as oil and natural gas, makes Georgia energy-dependent on other countries in the region. Given the rather tense political situation in the Caucasus, it is necessary for Georgia to have at least one component of energy independence in place in order to protect its economy from total collapse as a result of politically motivated decisions (let’s recall the hardships of January 2006 that followed a series of explosions, over a course of a single day, on Russia’s main gas pipeline and electricity cables that supplied Georgia). France serves as a good example of a country that recognized the need for energy independence when, after the oil embargos of the 1970s, it decided to build nuclear power plants (NPP) despite the high environmental and social risks they posed. At present, 75 percent of French electricity is generated by NPPs.
2 Clean Energy: HPPs generate electricity that is ecologically cleaner than other efficient alternatives – be it coal-, masut- or gas-fired thermal power plants (TPP). Production of electricity from other renewable energy sources (notably wind and solar power), meanwhile, is so expensive that building such plants without subsidies is impossible. Moreover, energy from such sources is intermittent and cannot meet peak demand.
3 Long-term stability of price: About 80 percent of the cost of energy production at HPPs comes from the depreciation of resources spent during construction and only the remaining 20 percent is subject to inflation. The cost of HPP-produced energy is thus not only cheaper than other alternatives, but also its price is more stable and it does not depend on the global price of resources. Other electricity sources – either generated by TPPs or imported – are 30 percent more expensive than the electricity generated by the newly-built HPPs.
At present, Georgia uses about one third of all the hydro energy resources that are technically available and economically efficient for it. There is the potential to build HPPs in Georgia with a total capacity of 5,000 MW. The construction of that capacity will require between nine or ten billion US dollars and from 10 to 15 years, provided that the relevant conditions are in place. Designing and constructing a medium-size HPP takes up to five years; getting back the investment takes between eight to ten years after it is commissioned. Finding investment for such a huge long-term project in full is impossible in Georgia. Nor is the Georgian banking sector prepared to fund medium and large size projects. Investments should, consequently, be sought from international financial markets and strategic investors.
Countries fiercely compete to attract global investments in order to develop their economies. Given that Georgia is considered a country with a higher level of risk, foreign capital will only flow into the country if these risks are insured to some extent or are decreased. To that end, the investment environment in the energy sector must further improve, not only by implementing a development-focused energy policy but also by improving the infrastructure of power transmission lines and the arrangements for electricity purchase contracts, among other things.
The benefit of such improvements will be reaped by everyone – customers, energy companies and the state budget.
If the 5,000 MW capacity energy projects are realized, the country will be able to generate an additional 20 billion kWh of electricity, twice that currently generated. The rise in production will meet the increasing demands for the next 15 to 20 years. Moreover, the additional capacities will help keep the generation tariff at a lower rate than inflation over the next 20 years. This will alleviate the burden of ordinary customers and facilitate the development of energy-intensive industries. For example, the huge capacities of HPPs in Iceland (which provide 75 percent of their total generation) encouraged their construction of aluminum plants.
The high-voltage power transmission line connecting Georgia with Turkey, the construction of which is almost complete, will also enable Georgian energy companies to increase their profits because of higher electricity prices in Turkey. The market is conducive to this – electricity is cheaper during spring and summer in Georgia (because of excessive hydro resources, there is no need for TPP-generated or imported electricity), whereas in Turkey consumption rises in summer to a point where retail prices are four times higher than those in Georgia. This favorable environment for increased profits can be translated into additional investments for Georgia.
The sale of 20 billion kWh of electricity, as well increased exports, will increase Georgia’s GDP in the range of 1.4-1.8 billion GEL (the exact figure depends on the market price of electricity in a given year), while the budget will receive an additional 300 million GEL every year.
The development of the hydro energy sector has significant positive spillover effects, including:
• Improvement of the trade balance. At present, imports to Georgia exceed exports by 3.25 times, according to the official statistics for January-October 2012. For macroeconomic stability, this negative trade balance must be improved.
• Encouraging of the development of supportive industries. As some 60 percent of investments in the hydro power sector account for the construction costs of HPPs, the development of the hydro energy sector will spur growth, for example, in the construction and construction materials industries, as well as in research, design and engineering institutions.
• Employment levels will naturally increase, especially during the construction period. But more importantly, the development of the hydro energy sector will stimulate the revival of hydroelectric engineering – a profession which has almost been forgotten in Georgia. Today, quite a large segment of energy professionals are of retirement age and replacing them will only become possible if the profession is attractive to younger generations. At present energy companies have to bring in many such specialists from abroad. Furthermore, as the high standard of qualifications needed to be a professional engineer ensures a high wage, the development of this sector also means the creation of a number of highly paid jobs.
• The supply of clean water for drinking or irrigation remains a matter of serious concern for many districts and villages. With proper planning, the water reservoirs built for HPPs could also be used to supply water to such settlements.
When planning any form of power plant there are, of course, environmental issues to consider. It is true that large water reservoirs do adversely affect the environment. Critics of the construction of HPPs often cite Georgia’s largest plant, the Enguri HPP, as an example of these negative effects. However, it must be said that there is no further potential to build another HPP of even half the capacity of the Enguri plant in Georgia. Moreover, if planned properly, the negative environmental effects can be minimized – as they have been in many examples worldwide. No developed country with the potential for HPPs, including Canada, Austria, Switzerland, the United States, Brazil and others, has rejected the development of the hydro energy sector for environmental reasons. In Norway, for example, 98 percent of all electricity generated is hydro. It is also noteworthy that thermal power plants have a much greater negative effect on the environment, not even taking into account their other disadvantages, such as the higher price of TPP generated electricity or their undesirability in terms of a country’s energy independence.
Today, many media outlets are using unfounded and exaggerated negative arguments to try and convince us that the construction of HPPs is damaging for the country. I wanted to use this article to briefly explain what such arguments are trying to encourage us to reject.