Cheap Electricity and Expected Results
For almost three decades now one and the same question has been heard in Georgia – should the Khudoni hydro power plant (HPP) be built or not? Even though by all estimates the country will receive significant economic benefits from its construction, which will directly affect the population of Svaneti where the HPP is to be built, environmentalists and the residents of 14 Svanetian villages are against this investment. Those are the villages which will be flooded with water after the construction of the Khudoni dam.
Energy and Economic Effect
The Khudoni HPP project envisages, inter alia, the construction of a dam, a reservoir and a 500 kV power transmission line. The designed capacity of the project is 700 MW, which means 1.4 billion kilowatt hours (kWh) annually. According to preliminary estimates, the construction of the Khudoni HPP would increase the country's electricity generation by 20 percent.
The Khudoni HPP will be the second largest-capacity plant in the Georgian energy system, after the Enguri HPP, and will account for almost 16 percent of the country's hydropower generation. Moreover, the operation of the Khudoni HPP will enable the Enguri HPP and Vardnili HPP to generate additional energy without pumping any further investment into these plants. By various estimates, that additional energy will range between 300 to 476 million kWh. Georgia will thus be able to get additional hydro energy – of the same volume generated, for example, by the Zhinvali HPP – without constructing further plants and, moreover, will generate more of the cheapest hydro energy in Georgia, that of Enguri HPP worth 1.18 tetri per kWh.
The additional power generated will further strengthen the energy independence of Georgia. As Deputy Energy Minister Irakli Khmaladze explains, at present, Georgia has to purchase 700 million kWh of electricity from the Russian Federation. The cost of this imported electricity is 6.64 US cents per kWh. Khmaladze also says that over the past six or seven years, electricity consumption has increased by between 5 and 10 percent, whilst the cost of electricity has risen by between 7 and 10 percent.
Electricity generation is directly linked to economic growth. Consequently, if we expect economic growth in the future we must expect an increase in electricity consumption too. According to forecasts of the Energy Ministry, the energy deficit will increase alongside the price of imported electricity. By 2018, this shortage will reach 1 billion kWh, at the very least, whilst the price of imports will rise by 8 or 10 cents. As regards the electricity generated by Khudoni alone, that will cost 5.64 cents per kWh over the period of 10 years after the Khudoni HPP has become operative. Taking into account the additional cheap electricity that would also be produced by the Enguri and Vradnili HPPs, Georgia will have an increase of at least 450 million kWh of electricity over that period at a weighted average price of 2.5 cents per kWh.
Calculations of the Energy Ministry show that the price of electricity generated in Georgia will be at least 10 times lower than its sales price. Moreover, the 50 million USD which the country currently has to pay to the Russian Federation or another country to import energy will remain in the state budget. This sum totals half a billion USD over a period of 10 years.
The company that has been planning to construct the Khudoni HPP since 2011 is Trans Electrica. The total amount of investments the company will make currently stands at 1.2 billion USD. Since 2011 the company has been paying property tax, with the budget of Svaneti having received 600,000 USD annually for the third consecutive year now.
The taxes to be paid by the company will significantly increase after the hydro power plant has become operative. During the operation of the Khudoni HPP, the company will pay 20 million GEL in the form of annual profit tax; an income tax worth 20 million GEL will also be paid during the construction of the plant and an additional 4.5 million GEL after the completion of the construction when some 350 people start working on the plant, each receiving an average salary of 1,700-1,800 GEL. For the use of the power transmission line to carry its electricity towards Turkey, the company will pay 19 million GEL. The trade deficit will go down by 8 percent annually, whilst the country's Gross Domestic Product will increase by 1.1 percent.
Social and Cultural Aspects
To achieve the above described economic effects, up to 14 villages in Svaneti, an area of 0.17 percent of the entire territory of Svaneti, must be covered with water. A total of 184 families, comprising 769 people must be resettled. Of these families, 90 have sworn they will not allow construction of the Khudoni HPP. They cite two reasons for that decision: the rules for determining compensation, on the one hand, and the fact that graves, churches and cultural monuments may be submerged under water.
Trans Electrica admits that the toughest component of their investment concerns the resettlement of the local population. However, a representative of the company, Nino Asatiani, asserts that the problems related to flooding are exaggerated – for example, no one intends to submerge graves and churches or destroy the area's cultural heritage. Moreover, the investor company intends to build a new village in Svaneti and to relocate the graves, churches and cultural monuments there.
The representative of the company also explains the rule for determining compensation: Trans Electrica plans to cover compensation to the local population by following the World Bank's standard. According to which, the company must: inventory the property of each family; not damage any property which a family intends to retain; provide compensation for that property which cannot be relocated; and must not pay the population less than market price. Trans Electrica will allow the population to conduct an independent audit if they so wish.
The process of resettlement is linked to yet another problem – the controversy over land ownership. The state previously registered lands that did not officially belong to anyone as state property and subsequently transferred these to the investor company. This makes up an area of 1,400 hectares of land in the territory adjacent to the power plant. Even though the state acted correctly in terms of the law, the local population now claims that the land (pastures, arable land, et cetera) belonged to them and that the state illegally sold them. Upon reaching an agreement with the government of Georgia, Trans Electrica decided to return those lands to the population – first helping locals to register them, at the company's own cost, and only then commencing with the buyout of the land. To this end, the company hired a Canadian company, rePlan.
The representative of Trans Electric, Nino Asatiani, speaks about the direct and indirect benefits the Khudoni HPP will bring to the local population of Svaneti and the country as a whole. According to Asatiani, some 4,000 people will be employed in the construction of the power plant. Auxiliary industries, such as those dealing with the production of construction materials and focused on design and research, will also develop because the largest part of the investment – 60 percent, will be spent on construction alone. In the long term perspective, the Khudoni investment will contribute to the creation of high-paid jobs. Moreover, it will promote the professions of hydro energy specialists and electrical engineers in Georgia – at present, specialists in this field are mainly brought in from abroad.
The company will focus on utilizing the youth of Svaneti and will train them by its own means. After the power plant becomes operational, it will provide jobs for up to 400 employees.
The economic arguments for the construction of the power plant are not sufficiently strong for environmentalists. They assert that level of seismic activity in Svaneti is high, they are also concerned about the threat of landslides and that the accumulation of huge amounts of water in the territory will create problems for the health and safety of the local population.
Environmentalists demand that instead of constructing the Khudoni HPP, the country develop a strategy for the overall energy development of Georgia, involving constructing smaller hydro power plants, rehabilitating existing ones, and decreasing electricity losses from transmission lines.
Energy Minister Kakhi Kaladze branded the position of the environmentalists as "the whim of few non-governmental organizations." According to him, the protest rallies are staged by those forces who are engaged in the timber business in Svaneti.
In the assessments of specialists, small hydro power plants are not cost-effective and would be forced to close down within years of being commissioned because they will fail to cover their costs. Moreover, small power plants will not be able to solve the key problem: Georgia lacks electricity from September to April and currently has no other option but to import it. By building Khudoni HPP with a dam, it will become possible to preserve water during the spring and summer, when Georgia has excess electricity and even exports it, and to then use this water reserve throughout the six months of autumn and winter to generate electricity.
Boomerang Pre-election Promises
The arguments for and against construction are numerous, however, the fact is that the pre-election promises made by this government have ultimately worked against the government itself. For example, a coordinator in the Georgian Dream coalition, Tamar Pirtskheliani, is asking the ruling party to deliver on its pre-election promise. According to Pirtskheliani, during the 2012 parliamentary election campaign, when Bidzina Ivanishvili met with local residents in Svaneti, the first issue that Svans raised was their categorical demand against the construction of the Khudoni HPP. As Pirtskheliani asserts, this promise was given to them back then.
However, after coming to power Bidzina Ivanishvili changed his position. The prime minister advised Svans to treat the Khudoni HPP issue "with understanding." Even the Catholicos Patriarch of All Georgia Ilia II, who gave the prime minister an expensive gift, failed to persuade Bidzina Ivanishvili to change his stance on that issue.
"They have even bothered the Patriarch and sent him to me two requests not to construct a hydro power plant on two locations – in the Khde gorge, because it will lack water, and about the Khudoni HPP, because the water will rise there. I asked the Patriarch to support these projects and His Holiness understood me perfectly well because this is the foundation of the development of our country. We shall construct as many hydro power plants as possible in order to allow Georgia to generate more electricity. This will be a basis for establishing multiple different enterprises. The economy and jobs need energy and we must realize that," Ivanishvili declared.
Deputy Energy Minister Ilia Eloshvili admits that giving such promises was a mistake on the part of the ruling team. He says that Khudoni must be constructed and the government must not become hostage to its own pre-election promises.
Eminent domain, or compulsory purchase, is the right of the state to seize the private property of the population without their consent on the premise of public necessity.
This right of the state is guaranteed by the Law of Georgia on the Procedure of Expropriation for Necessary Public Need. According to the law, private property can be expropriated for the aim of conducting the construction of main highways; railway lines; pipelines for raw oil, natural gas and oil products; electricity transmission and distribution lines; water supply and sewerage systems; atmospheric water collectors; telephone lines and TV cables; facilities and buildings of public need; also for conducting work necessary for national security and the extraction of natural resources.
According to the law, a decree from the ministry of the economy and the consent of a court is required to grant a subject the right to expropriate private property. This subject may be a state or self-government body or a legal person in public or private law.
The law requires that the subject agrees on compensation terms with the owner of the property before undertaking the expropriation. To this end, the property must be evaluated by the expropriator and the owner must be paid compensation no less than the evaluated amount. All types of property must be evaluated, including those which may be insignificant and less valuable but that are nonetheless related to the property to be purchased and that would be of no use independent of that property.
In the event that the parties cannot reach agreement, the law allows for settling the dispute in court. In this case, the property is evaluated by an independent expert, but the final decision is taken by the court on the basis of this evaluation and the evidence provided.
According to the law, any expenses related to expropriation must be born by the expropriator.
The commencement of the construction of the Khudoni HPP is scheduled for 1 March 2014. The government has not openly declared whether it will apply this law, though representatives of the energy ministry have repeatedly underlined that no one will be forgiven for a breach of law – either the investor or the local population.
The expropriation of private property has its proponents as well as opponents. The main argument of the proponents is that economic growth always leads to the necessity of building new roads, highways, gas pipelines or hydro power plants. The state follows the assumption that the population is more oriented on short-term results and, being limited by its narrow interests, does not easily realize the needs of long-term development. By this assumption, the state justifies its right to expropriate private property and thus accelerate the inevitable process of development. That the state fails to fully justify its infringement of private property, even for higher aims, is, if anything, seen as its promise to citizens that they will receive compensation for their property. In this particular case, the risk that the population either does not receive compensation or that the compensation will be inadequate for the market value of their property will increase. Moreover, the risks related to the relocation of graves, churches and other cultural monuments will also increase. However, even in a case when the state issues compensation, the question always emerges – how fair will the compensation be?
Opponents of the expropriation of property assert that the state must not determine economic justice. On a free market, where both parties agree on compensation without coercion, such compensation can really be considered fair because both parties are content with the transaction.
The state, in contrast to actors existing on the market, does not conduct its transactions within the format of free negotiation and agreement. The state takes over someone else's property by threats or coercion. It is a fact that when the state needs to apply the right of expropriation, it will not make an offer of compensation to the population that would be more advantageous for them than their retaining the existing property. After all, were this not the case, the population would itself have agreed to the handover of their property. Thus, no matter how loudly the state declares that it issued compensation, this will have nothing in common with economic (market) justice. One should also take into account that the state does not have its "own" money (in contrast to a private investor); consequently, when it issues compensation, this amount is a result of redistribution – it takes from one in order to pay compensation to another. There is no justice here either.
Yet another frequently applied assumption is that since a private company, in this particular case, an investor, pursues its own interests, it will try its best to pay as little compensation as possible. Such an assumption is, however, one-sided because, on the other hand, given that the investor has a high interest, but does not have a legal right to expropriate unless the economy minister and then a court decides to permit this, he/she is thus more open for negotiations than the state. Consequently, the population is provided with a greater possibility to defend its interests and receive the compensation closest to its expectations.
The Law of Georgia on the Procedure of Expropriation for Necessary Public Need puts an expropriator in a more favorable situation. Bearing in mind that an investor has considerably greater opportunities than the local population to use its connections, hire seasoned lawyers, and so on and so forth; whereas the arguments of the local population are, as a rule, more emotional than pragmatic, then, when it comes to expropriation, the chances of receiving "fair compensation" further decreases.
A Brief History of Khudoni
In Georgia, a country which counts around 26,000 rivers, it is theoretically possible to generate 15,000 MW of electricity. This means there is the potential of receiving 80 billion kWh of power annually.
Three rivers are particularly attractive for the construction of large hydro power plants – the Enguri, the Rioni and the Mtkvari. The Khudoni HPP would be part of the Enguri cascades system. Today, this system already includes two hydro power plants – the Enguri HPP (1,329 MW) and the Vardnili HPP (220 MW). Taken together, both plants generate an annual total of 5.5 billion kWh of electricity. The hydro resource potential of the Enguri River is twice that – estimated at 10.3 billion kWh. The full application of this potential requires the construction of three more hydro power plants, in addition to Khudoni.
The construction of the Khudoni HPP started in 1986 when the road to the plant was built. To install the water-supplying turbines and generators necessary for generating power, several kilometer-long tunnels were arranged in a mountain. A place was also allocated where the dam and reservoir would be constructed.
In 1989 construction was suspended because of the environmental and seismic risks cited by various groups. The issue of seismic risk first came on the agenda after the earthquake in Armenia in 1988.
The energy crisis of the 1990s brought the issue of the construction of Khudoni to the fore once again. By various calculations, in 1989, Georgia generated 13.6 billion kWh of electricity while consuming 18.5 billion kWh, consequently having to import 4.5 billion kWh. In the period between 1990 and 1994, generation dropped to 6.9 billion kWh.
Later, the design of the Khudoni HPP was modified to scale up its resistance to earthquakes from 8 to 9 points on the Richter scale of magnitude. This modification caused a decrease in the designed capacity of the HPP from the initial 1.7 billion kWh to the present 1.4 billion kWh.
In 2006, the World Bank conducted an assessment of risks related to the Khudoni HPP. The subsequent report, which was published in 2009, states that the environmental risks are minimal because of the location of the Khudoni HPP; compared to the other HPPs built on the Enguri River, Khudoni is located at the highest point. With regard to seismic risk, the World Bank noted that these can easily be mitigated by modern technologies without causing a decrease in the volume of electricity or pushing the price of generating electricity up.
The Effect of Cheap Electricity
Cheap electricity significantly affects the competitiveness of the country. The productivity of the economy determines the welfare of any country. How productive the economy is depends on the cost of those goods and services that the country produces, taking into account the available monetary, human and natural resources. How valuable goods and services produced by this or that country are is determined by their market price, on the one hand, and by the efficiency of production, on the other. If the economy of a country is productive, standards of living are also high – with higher salaries, a stronger currency and a greater tendency for fast capital growth. Consequently, one may say that the competitiveness of a country depends on the level of its productiveness.
In the global market, it becomes increasingly difficult for a country to compete with others in the production of goods and services if it does not introduce new technologies. Developing countries often cannot afford to do this. In the Global Competitiveness Index, established by the World Economic Forum, Georgia has its lowest scores for those very indicators – technologies and innovation.
In this regard, foreign direct investments are of crucial importance for Georgia as they bring in not only the monetary means needed for production, but also the technological knowledge.
Foreign direct investments flow much easier into those countries which, among other factors, have low production costs and a cheap labor force. When the electricity tariff is low and stable, businesses easily control this cost, which means that they retain more money for reinvestment and expansion, for producing more goods and rendering better services. At the same time, households need to pay less in the form of taxes and retain more income to purchase products.
Technological development not only boosts the country's economy but also changes the structure of this growth: sectors and firms applying outdated technologies become weaker and give way to new sectors and firms that emerge and expand on the market. Consequently, more productive and profitable sectors and firms replace those less profitable and productive ones, which translates into increased productivity of the overall economy and a higher employment rate. This is something that benefits all.