22 SEPTEMBER 2009 INTERNATIONAL WATER POWER & DAM CONSTRUCTION
REHABILITATION
system operator to purchase all small hydro generated energy at a
short-term average cost. The success of the programme depended
on this change as without it there were not sufficient guaranteed rev-
enues for projects to be commercially viable.
In 2006, Georgia’s energy sector was in a state of flux. The gov-
ernment had passed an amendment to the Law on Electricity and
Natural Gas, deregulating all small hydro power plants (<10MW).
This meant that there was no guaranteed offtake by licensed energy
sector participants, and that small hydro would be permitted to sell
to anyone, including licensed sector companies and private electric-
ity users at freely negotiated prices. Unfortunately, with few poten-
tial industr ial customers and issues of their cred itworthiness as
customers, the only viable customers would be electrical distribu-
t
ion companies and the independent market operator.
In addition to deregulation, Energo-Pro, Georgia’s largest electri-
cal distribution company, was also in the process of being privatised.
The privatisation included six hydro power plants providing Energo-
Pro with a dominant market position in distribution and generation.
The d eregulation of small hydro power pl ants wa s intend e d to
open the market for these producers, but instead constricted it to the
point of impracticality by forcing the producers to compete with
existing hydro plants with low tariffs.
A number of donor organizations, including USAID, helped con-
vince the government that if it was serious about achieving energy
security and reducing dependence on imported electricity and natur-
al gas, it would have to find a way to make small hydro viable.
During the summer of 2007, meetings were held between the
Ministry of Energy, energy sector regulators, and energy sector com-
panies, with REP representing the interests of small hydro opera-
tors. These m eetings reformulated the relat ionships between all
sector participants. The outcome was that new market rules includ-
ed provisions for the independent market operator, ESCO, to pur-
chase all unso ld small hydro output at a rate representing the
weighted average of the month’s balancing electricity purchases. This
would then provide rehabilitated small hydro guaranteed revenue
to repay their loans.
Financing for these projects can be broken down into two phases.
In Phase 1, USAID would provide limited fin ancial assistance to
complete fi n an c in g needs. In addition, REP expanded training to
owners and potential investors in Georgia’s energy sector in an effort
to create market conditions under which projects would be possible
without grant assistance (Phase 2).
Phase 1 included the creation of a loan facility supported by the
European Bank for Reconstruction and D evelopment (EBRD),
which made the full loan amounts available to Georgian banks for
on-lending. The ideal financing equation was to be 40% owner’s
equity, 40% commercial loans, and 20% USAID grants. It was
agreed that any losses would be equally sh ared by EBRD and its
Georgian partner.
The Bank of Georgia was the first bank to consider financing for
small hydro projects. While there were delays as the two institutions
worked out differences in evaluation criteria and approval sched-
ules, the Lapota a nd Okami projects eventua lly were financ ed
through this agreement. The success of these two projects raised the
confidence of the Bank of Georgia, and the interest of other banks.
The project next approached banks who expressed an interest in
making energy related loans. Georgia’s TBC Bank financed the next
two projects – Misaktsieli and Machakhela.
In 2008, USAID announced that there would be no more grant
money available for small hy dro pro jects. It was time for REP to
attempt to finance Sulori throug h pure equity and debt proj ect
financing. In the end, Cartu Bank, which was also working with
EBRD loans, was compelled by the project’s financial potential and
provided a loan to the owners of the Sulori plant which succeeded
in meeting the objective of pure project finance.
USAID believes that this phased approach was one of the keys to
the success of the programme. It also believes this model would be
applicable for financing energy and other infrastructure projects in
developing countrie s whe re investor confidence level s need to be
raised substantially to attract investors to the market.
D
EMONSTRATING PROJECT FINANCE
While the scene has been set to develop the remaining 4-7000MW
of untapped hydro generation in a country rich with hydro
resources, REP is no longer accepting new projects. The project was
never intended to assist with the rehabilitation of all non-working
small hydro in Georgia, only to demonstrate that it would be possi-
ble to actually enable rehabilitation based on project finance. That
was proven with the completion of the Sulori small hydro plant.
Under the auspices of the REP, local business consultants have
been trained in how to prepare business plans and funding propos-
als to assist future developers. Bankers, other financial institutions
and inves t o r s have been trained in the art of understandi n g what
e
nergy projects are, how to assess risks and when to make loans.
Unfortunately, due to the disruption to the Georgian economy in
the aftermath of the August 2008 conflict, political instability within
the country and the global economic crisis, few new rehabilitations
have been initiated at this time.
There is some interest in investing in Georgian hydro generation
by foreign investors who would rely on energy exports for a signif-
icant portion of their revenues. The export m arket is currently
restrained by transmission capacity to Turkey. With this in mind,
Georgia is working on a new 500kV transmission line that is expect-
ed to come on line in 2013.
Nikolas Okreshidze, Senior Energy Engineer,
USAID/Georgia, nokreshidze@usaid.gov
Horst U Meinecke, Chief of Party, Rural Energy Program,
Georgia, Winrock International, hmeinecke@winrock.ge
The US Agency for International Development is the
principal foreign assistance mechanism of the US
Government, working in 85 countries worldwide on
projects ranging from economic growth and energy
development, to education and health improvement, and
the strengthening of democratic governance systems
(www.USAID.gov).
Winrock International, the implementer of the Rural
Energy Program under a USAID Cooperative Agreement
is an independent, nonprofit organisation that works with
people in the US and around the world to increase
economic opportunity, sustain natural resources, and
protect the environment (www.winrock.org)
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WP
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Georgia’s REP small hydro projects
The projects fall into three different categories:
Rehabilitation of small hydro plants with partial US Government funding
(Five Projects): Kabali (1.5MW), Kakhareti (2.8MW), Lapota (2MW),
Misaktsieli (2.6MW), and Okami (1.6MW)). These projects were financed with
owners’ equity, USAID grants and commercial debt. These projects are
complete and in commercial operation.
Rehabilitation of small hydro facility with no US Government funding (Two
Projects): Algeti (0.25MW) and Sulori (0.8MW)). These project were financed
with owners’ equity and commercial debt. Both projects are complete and in
commercial operation.
Installation of micro hydro power plants (Three projects): Gadamshi micro
hydro, a 40kW, off-grid installation supplying a small village in Western
Georgia which had been without electricity for 15 years. Shenako (50kW)
and Kekhmor (80kW) in the high mountainous region of Tusheti are also off-
grid installations which supply nine high altitude villages which are now only
occupied during the summer months. These latter two projects are financed
by grants from USAID and the World Bank, and in-kind contributions from the
communities of labour, supplies and construction materials.