2021 June-July Analysis Featured

Galt & Taggart: as the power comes back online, so does the economy

Decreased electricity consumption, struggling electricity providers and the impending temporary shutdown of the Enguri hydro power plant (HPP) were just some of the many topics that rose to the top of the public agenda last year when Covid-19 saw the lights go out in shops, restaurants and other public spots.

But the relative degree of stability and predictability in regards to the pandemic in recent months has allowed the lights to be flipped back on.

Responding to the trend, Bank of Georgia’s brokerage and research arm Galt & Taggart (G&T) recently published a report highlighting the most interesting trends the energy sector exhibited in 2020 and Q1 2021.

Consumption

If energy consumption is a measure by which to measure the awakening of the economy, the report reads, the Georgian economy seems to be stirring.

In 2020, electricity consumption in the entirety of Georgia including the breakaway Abkhazia region plummeted 4.9% y/y to 12.1 TWh due to Covid-19 lockdowns and the subsequent reduction in economic activity.

In the rest of Georgia without the Abkhazia region, consumption was down a full 10% in 2020. However, the same data set for Q1 2021 shows that electricity consumption was down just 1.4%, indicative of significant recovery given the height of pre-pandemic activity of the first two months of 2020.

Meanwhile in the Abkhazia region, electricity consumption was up a whopping 23.9% y/y in 2020, and 18.6% in Q1 2021.

The picture of energy consumption in the past year is not one of decreased consumption across the board, however.

“The pandemic showed us just to what extent the electricity system is dependent on the commercial sector for demand. The downtowns we saw in 2020 are more demonstrative of the effect shutdowns had on businesses,” G&T Senior Analyst Mariam Chakhvashvili told Investor.ge. In fact, residential electricity consumption increased 4.2% y/y in 2020 as many workers were kept away from the office and ‘took their work home with them.’ This turn of events broke a five-year trend of an on average 0.1% growth rate in residential consumption.

G&T’s Electricity Market Watch report highlights another interesting trend brought to us courtesy of the pandemic: the electricity consumption of residential subscribers of Energo-pro Georgia increased by 7.4% y/y, while Telasi subscribers’ consumption decreased by mere 0.4% y/y, illustrating an outflow of the population from Tbilisi to the suburbs and regions.

Generation and imports

Nearly two-thirds (64.6%) of electricity demand was met by hydro generation, 22.1% by thermal generation, 0.7% by wind generation and 12.6% was imported in 2020.

While wind and solar continue to have negligible contributions to Georgia’s domestic energy production, there are five wind power plant projects that are ready to commence the construction phase, G&T’s Chakhvashvili notes.

“Feasibility studies have been carried out, and the projects are ready to go. Several barriers remain, however. Companies interested in implementing such projects would like to see incentive mechanisms from the government, such as power purchase agreements (PPAs). Moreover, there are limitations from the state electrosystem on the volume of variable renewable energy that can be hooked up to the network.

For this, distribution and transmission grids will have to be upgraded, or power plants will have to have higher reserve capacities.

These issues are directly written into the 2021-2031 development plan for Georgia, which provides for a tripling of the currently allowed volume of variable energy,” Chakhvashvili explains.

Georgia remained a net importer of electricity in 2020 with trade deficit down 16.8% y/y to U.S. $58.7 million in value terms and up by 5.3% y/y to 1.4 TWh in volume terms. In 2020, Georgia imported 1.6 TWh (-1.0% y/y) electricity and exported a mere 0.2 TWh (-36.8% y/y), resulting in a net import of 1.4 TWh (+5.3% y/y).

The reduction of the trade deficit in value terms is explained by the comparatively low cost of electricity imports via the Salkhino line for the Abkhazia region (22.8% of total imports), decreasing the total cost of imports. Revenue from exports was also down (by 25.4% y/y to U.S. $5.8 million) in line with the reduction of electricity exports.

Despite decreased consumption in 2020, the import of electricity and thermal generation remained flat to fill in for the winter deficit and compensate for the drop in HPP generation caused by less-than-ideal weather conditions.

In 2020, 45.1% of imported electricity came from Azerbaijan, 35.4% from Russia and 19.5% from Turkey. Turkey was until recently an export market for Georgian production, but in line with decreased market prices, import from this direction has now become the norm.

Georgia’s installed power generation capacity increased 432 MW in 2020, including a 230 MW thermal power plant in Gardabani, the 178 MW Shuakhevi HPP in the Adjara region, and six small HPPs with a total capacity of 23.4 MW.

HPPs commissioned in 2020 satisfied 2.2% of electricity demand of 2020, out of which 2.0 percentage points fell on the Shuakhevi HPP.

Following the shutdown of the Enguri HPP situated on the administrative boundary line between Georgia and its Russian-occupied region of Abkhazia, which underwent urgent renovation work that promises to bolster the capacity of the country’s largest HPP by up to 30% in the coming years, the volume of electricity imports nearly doubled in (+93% y/y) in Q1 2021, with Abkhazia receiving energy from Russia via the Salkhino line.

With the extra capacity of the Enguri HPP coming online, Georgia will cut back on some of its need for imports. But as the economy continues to recover, G&T’s Chakhvashvili points out, consumption will also be on the rise, and Georgia will need to boost the offerings on its renewables market to ensure a degree of energy security.