The proposed Georgian State Electrosystem Corporatization and Electricity Market Reforms program aims to strengthen the corporate governance and financial management of Georgia's electricity transmission company, Georgia State Electrosystem (GSE), and improve electricity market competition by supporting an independent market operator. These reforms are critical to strengthen GSE's corporate governance; financial management, transparency and debt sustainability; and to improve electricity market competition. The proposed policy-based loan will be implemented during 2018-2019. Transaction technical assistance (TA) will facilitate program implementation, including providing technical advice to and building the capacity of the Ministry of Economic and Sustainable Development (MoESD). The proposed program is in line with the Asian Development Bank (ADB) country partnership strategy for Georgia, 2014-2018.
|Project Name||Georgian State Electrosystem Corporatization and Electricity Market Reforms Program|
|Project Type / Modality of Assistance||Loan
|Source of Funding / Amount||
|Strategic Agendas||Inclusive economic growth
|Drivers of Change||Governance and capacity development
Private sector development
|Sector / Subsector||
Energy / Energy sector development and institutional reform
|Gender Equity and Mainstreaming||No gender elements|
|Description||The proposed Georgian State Electrosystem Corporatization and Electricity Market Reforms program aims to strengthen the corporate governance and financial management of Georgia's electricity transmission company, Georgia State Electrosystem (GSE), and improve electricity market competition by supporting an independent market operator. These reforms are critical to strengthen GSE's corporate governance; financial management, transparency and debt sustainability; and to improve electricity market competition. The proposed policy-based loan will be implemented during 2018-2019. Transaction technical assistance (TA) will facilitate program implementation, including providing technical advice to and building the capacity of the Ministry of Economic and Sustainable Development (MoESD). The proposed program is in line with the Asian Development Bank (ADB) country partnership strategy for Georgia, 2014-2018.|
|Project Rationale and Linkage to Country/Regional Strategy||
Georgia is naturally positioned as a regional power hub, with an advanced electricity grid and interconnections with Armenia, Azerbaijan, Russia, and Turkey. Government policies to restructure the electricity sector coupled with public investment to repair dilapidated transmission infrastructure have transformed a power sector on the verge of collapse to one of the most technologically advanced grids; electricity losses have declined from 15% in 2000 to less than 2% in 2017. Georgia has significantly expanded its regional interconnection infrastructure, and transit and cross-border trade capacity has increased by over 80% to about 3 gigawatts. This capacity is expected to double by 2021, but the actual regional power trade remains very seasonal, and uses less than 10% of available transit and cross border trade capacity.
Georgia's electricity sector has successfully transformed from a state monopoly to a liberalized market. Most sector entities are privately owned, except for GSE, the Enguri and Vardnili hydropower plants, and the electricity market operator. Georgia signed an Association Agreement with the European Union (EU) in June 2014, undertaking an obligation to become a member of the European Energy Community through continuous reforms and legal approximation with the third energy package adopted by the EU member states. Reforms have commenced with technical support from the EU energy community, and the government is committed to continuing the reforms. Reforms include the establishment of an independent energy sector regulator, unbundling and privatization of power generation and distribution assets, and introduction of long-term concessions and guaranteed power purchase agreements (PPAs) for private investments in HPPs. While PPAs have been instrumental for hedging major risks of HPP developers in Georgia, the cumulative total of PPAs executed is highlighted by the International Monetary Fund (IMF) as a key source of the country's fiscal risk. To manage the contingent fiscal risks and sector sustainability, the government approved Public-Private Partnership (P3) legislation in 2018, and is making major efforts to improve GSE's financial performance and its corporatization before the end of the rehabilitation plan in 2023.
GSE (transmission system operator and Despatcher) owns 75% of the high-voltage transmission lines. Since 2008, GSE has operated under a 15-year financial rehabilitation plan approved by the Ministry of Finance. Prior to 2008, GSE was unable to pay its liabilities because of low tariffs and collection rates, and accumulated debts resulting from poor management. The rehabilitation plan has targets for GSE's debt repayment and the level of government support for the financing of transmission rehabilitation and expansion.
Georgian electricity transmission is characterized by relatively strong defensive qualities, including noncyclical and inelastic demand with stable growth in sales and predictable revenues backed by a new tariff setting. The tariffs are based on a transparently determined cost plus return on regulated asset-base, providing a strong basis for GSE's revenue generation from domestic transmission operations. However, the new tariffs have not improved GSEs financial position because of its weak internal management structure, lacking corporate ring fence provisions to commercialize assets, and due to insufficient volumes adversely impacting transit volumes.
Georgia's Parliament adopted the State Policy in Energy Sector (2015) to support (i) diversification and utilization of renewable generation to fully meet the domestic demand for electricity, (ii) Georgia's emergence as a regional platform for generation and trade of clean energy, (iii) implementation of east-west and north-south transit projects to strengthen regional connectivity, and (iv) gradual harmonization with the EU's third energy package. Sustainability of the key components of the strategy requires a strong and stable transmission network run by a fully independent and financially stable GSE, and electricity trading through open market operations. The government intends to rationalize the financial management and enhance the financial stability of GSE to reduce its reliance on the government's budget. Rationalization of state-owned enterprises in general is also a key reform under the IMF program.
In April 2018, Parliament ratified the accession agreement to the European Energy Community (EEC) and the country's subsequent membership in the EEC. The membership framework requires that the government align its energy market practices with EU's best practices, which requires changing the tariff calculation methodology for electricity, and adopting a competitive electricity market structure. ADB's proposed policy-based program is in line with the government's Energy Sector Strategy and its commitments under the EEC accession agreement.
|Impact||Financial sustainability and sector performance achieved|
|Outcome||GSE autonomy and competition in electricity trading enhanced|
GSE''s corporate governance
GSE financial management, transparency, and debt sustainability
Electricity market operations
|Summary of Environmental and Social Aspects|
|Stakeholder Communication, Participation, and Consultation|
|During Project Design|
|During Project Implementation|
|Responsible ADB Officer||Adnan Tareen|
|Responsible ADB Department||Central and West Asia Department|
|Responsible ADB Division||Energy Division, CWRD|
Ministry of Finance
16 Gorgasali St., 0114
|Concept Clearance||19 Jul 2018|
|Fact Finding||23 Mar 2020 to 27 Mar 2020|
|MRM||28 Apr 2020|
|Last Review Mission||-|
|Last PDS Update||31 Jul 2018|
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|Title||Document Type||Document Date|
|Georgian State Electrosystem Corporatization and Electricity Market Reforms Program: Concept Paper||Concept Papers||Jul 2018|
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