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On 7 July 2015, as an answer to an Imedi TV journalist’s question, the Minister of Energy of Georgia, Kakha Kaladze, stated that the depreciation of GEL dealt a heavy blow to the energy sector as the share of imported electricity and electricity generated by thermal power stations is quite high in Georgia and both sources are dependent upon imported natural gas.

FactCheck

analysed the influence of the depreciation of GEL upon Georgia’s energy sector.

GEL has depreciated by 29% in the past eight months. The depreciation caused the prices on consumer goods and services to increase. As of today, annual inflation has reached 4.5%. Prices on imported products have gone up especially as importers buy this production in foreign currency and sell it in GEL in Georgia.

According to the data of 2014, the share of imported electricity in Georgia’s domestic energy consumption was 7.7% whilst this number decreased to 6% in the first half of 2015. About 19% of consumed energy is generated by thermal power stations which use imported natural gas for their operation. The depreciation of GEL renders the electricity and the natural gas necessary for the thermal power plants more expensive in the national currency.

Supply of Electricity (Million kWh) 2011 2012 2013 2014 2015 (6 months)
Production 10,105 9,695 10,059 10,370 5,575
Thermal Power Stations 2,212 2,472 1,788 2,036 1,102
Share in Supply 21.3% 24.5% 17.3% 18.5% 19.0%
HPPs 7,892 7,223 8,271 8,334 4,473
Share in Supply 76.0% 71.6% 80.0% 75.7% 77.1%
Import 471 615 484 852 350
Share in Supply 4.5% 6.1% 4.7% 7.7% 6.0%
Overall Resources 10,575 10,309 10,543 11,222 5,925
Losses 192 226 198 216 125
Network Supply 10,383 10,087 10,345 11,006 5,800
Source:

 Electricity Market Operator

The table makes clear that the prices on 26% of electricity consumed in Georgia (the sum of electricity generated by thermal power plants and imported electricity – about 2,880 million kWh) have gone up. The depreciation of GEL has a direct influence upon the prices of imported electricity as well as the prices of the natural gas used by thermal power plants as both are purchased in USD. Apart from the exchange rate of GEL, the price changes in USD are also important. In this sense, we have a trend of growth on imported electricity.

Cost of Imported Electricity 2011 2012 2013 2014 2015 (6 months)
Cost of Imported Electricity (USD Million) 24.4 32.7 30.3 51.0 22.9
Price kWh (cents) 5.18 5.31 6.26 5.99 6.54
Average Annual Exchange Rate of GEL 1.686 1.651 1.663 1.766 2.177
Price kWh (tetri) 8.73 8.77 10.41 10.57 14.24

The average annual exchange rate of GEL depreciated by 32% after 2012. In addition, the price of 1 kWh of imported electricity increased by 1.23 cents (23%). In total, the depreciation of GEL and the rise in the prices of electricity increased the price of 1 kWh of imported electricity by 5.5 tetri (62%).

The change in the costs of the electricity generated by thermal power stations has a greater influence upon the increase of consumer tariffs than the price of imported electricity. About 19% of consumed energy comes from thermal power stations. The price of natural gas in USD is fixed; however, due to the depreciation of GEL, thermal power plants are forced to pay 32% more for one cubic metre as compared to 2012.

The electricity market is quite special as consumer prices are not determined in terms of competition. Consumer tariffs are determined by the Georgian National Energy and Water Supply Regulatory Commission. Whilst determining the prices, the Commission takes into account the net cost of generating the electricity as well as delivery tariffs and the profit share of the energy companies.

A decrease in electricity tariffs was one of the pre-election promises of the Georgian Dream coalition. At the end of 2012, the Georgian National Energy and Water Supply Regulatory Commission and energy companies were tasked with “finding” the resources to lower the tariffs. Tariffs did indeed drop in January 2013. The tariff for electricity decreased by 3.54 tetri for those using no more than 300 kWh whilst for those using more it went down by 2.7 tetri.

The tariff remained the same for legal entities. The decrease in the tariff happened mainly at the expense of a decrease in profit for the energy companies. On 25 July 2012, during the evening news report on Rustavi 2, the former Chairman of the Georgian National Energy and Water Supply Regulatory Commission, Guram Chalagashvili, made the following statement about the decrease in electricity tariffs at the end of 2012:  “As for the agreements with the energy companies which were abolished, hundreds of millions of dollars were to be invested in the sector according to these agreements.” As a result, generating electricity became less attractive for the Georgian market which influenced the amount of investments in the energy sector. About 45% less foreign direct investments (FDI) were made in the energy sector in Georgia in 2014 as compared to 2012. Investments dropped even further in the first quarter of 2015, amounting to just USD 11 million which is 10.4% less than it was in the same period of 2014 and 63% less than in the first quarter of 2012.

The balance of the external trade of electricity worsened in 2014. This worsening was mainly due to the increase in the amount of imported electricity. About 64% more kWh of electricity was imported in 2013 as compared to 2014.

Million kWh 2011 2012 2013 2014 2015 (6 months)
Import 471 615 484 793 349.5
Export -931 -528 -450 -545 -400
Balance 460 -86 -34 -248 51

The companies which experienced losses due to the decrease in the electricity tariffs – Energopro and Telasi – addressed the Georgian National Energy and Water Supply Regulatory Commission with a request to increase consumer tariffs. On 23 July 2015, the Commission made a decision to increase the tariffs. As a result, the tariff on 1 kWh of electricity increased by 3.35 tetri in the regions; however, Energopro was demanding a 4.5 tetri

increase. A decision has not yet been made about Telasi’s request; however, the Minister of Energy of Georgia himself believes that the tariffs will increase in Tbilisi as well.

Changes in Tariffs of Energopro Users Tariff until 2013 (kWh/t) Tariff from 2013 to August 2015 (kWh/t) Tariff since August 2015 (kWh/t)
0–101 kWh 12.98 7.63 10.978
101–301 kWh 16.52 11.00 14.348
301 kWh and more 17.5 14.83 18.178

The Government of Georgia has decided to subsidise the increased electricity tariff for socially vulnerable families which will cause the state budget’s expenses to increase. Subsidisation is definitely not the way for strengthening the energy sector or improving the country’s economic situation. Given the fact that periodically spending large sums of money from the state budget and taking domestic loans were among the reasons for the depreciation of GEL, it becomes clear that subsidisation further increases risks to the stability of the exchange rate and hence the probability of maintaining even an increased tariff becomes lower.

Conclusion The depreciation of GEL has a direct influence upon the prices of imported electricity and the prices of natural gas used by thermal power plants which constitute about 26% of the energy consumed in Georgia. Hence, the Georgian National Energy and Water Supply Regulatory Commission has already made the decision to increase the tariff on electricity (from 1 August 2015) by 3.35 tetri

for Energopro customers. Tariffs will probably increase for Telasi customers as well.

It should be pointed out that consumer tariffs for individuals in both the regions and Tbilisi have dropped by 3.54 tetri

since the beginning of 2013. The tariff decreased mainly due to the drop in the profits of energy companies and their investment obligations which ultimately damaged the energy sector. Companies were left with smaller resources for maintaining infrastructure and developing energy output. The amount of foreign direct investment in the energy sector started to decrease from 2014. Investment dropped by 63% in the first quarter of 2015 as compared to the same period of 2012. Had the tariff not been lowered in 2013, it would not be necessary to increase it now and the production of electricity in Georgia would have increased significantly.

The depreciation of GEL was, along with the external factors, due to the country’s economic policy and the depreciation of GEL inevitably caused the electricity tariff to go up.

The fact that the depreciation of GEL dealt a heavy blow to the energy sector is true. However, if we look at the situation from 2013, it becomes evident that the reasons for the depreciation of GEL and the drop in investments in the energy sector were mistakes made by the government.

Hence, explaining the increase in the tariffs of electricity with the depreciation of GEL alone is HALF TRUE.