Regulation Shortcomings in Domestic Supply of Electricity

Regulation Shortcomings in Domestic Supply of Electricity


The FINANCIAL -- Investing in renewable energy is becoming more and more popular in Georgia following the adoption of the Decree of the Government of Georgia (GOG) on renewable energy development in April 2008.

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The highlight of the Decree is perhaps the deregulation of the field in a way that allows potential investors to individually negotiate the investment terms, including the financial terms of cooperation with the GOG.


Following lengthy negotiations over several energy projects involving investors and the GOG, a new practice was developed, by virtue of which main players on the energy market as well as the package of agreements to be executed by such players were identified. The contractual framework in a nutshell is as follows:

The Implementation Agreement (IA), which in some projects is also named the Memorandum of Understanding (MOU), is executed between the investor and the GOG. This document regulates the main aspects of the construction, operation and maintenance of the hydro power plant;
The Transmission and Dispatch Agreement (TDA) is executed solely for export purposes between the investor, on the one hand, and the transmission and dispatch licensee holders, on the other. The TDA guarantees the necessary capacity on the transmission network for exporting electricity; and
The Power Purchase Agreement (PPA) is executed between the investor and Electricity System Commercial Operator (ESCO). The PPA defines the terms of the domestic supply of electricity.

It is without any doubt that the primary goal of foreign investors investing in the renewable energy of Georgia is the export of the generated electricity. This is rather veracious now since the GOG, in cooperation with the Government of the Republic of Turkey, has recently finalized construction of a new 400 KV transmission line for exporting the electricity to Turkey and moreover, is planning to construct a new line.


In this regard, considering that the investor is responsible for delivery of the electricity to the Turkish border, the abovementioned TDA guarantees the necessary capacity on the transmission network up to the Turkish border. However, when speaking of the development and financing of the hydro power project, IFC, EBRD and other financial institutions look for more guaranteed off-takes than merely an export opportunity. This is because firstly, the export price is not defined and secondly, under certain conditions export may be prohibited by the dispatch licensee.


For the above-given purposes, the guaranteed off-taker of the electricity in the domestic market is ESCO. As mentioned above, the relationship of the investor with ESCO is regulated by the PPA and the applicable Georgian legislation (in particular, the Market Rules of Georgia). Investors are duty-bound to deliver 20% of the generated electricity within the winter months to ESCO for a fixed price. In the event of impossibility of exporting electricity due to some reason, the investor may sell its generated electricity to ESCO for the regulated price.


At first glance, everything seems to be duly regulated: the rights and obligations of the parties when exporting electricity are covered by the TDA, whereas for domestic supply such rights and obligations are set forth in the PPA. In addition, the referenced agreements also include certain legal remedies in case of default. 


Provided that under the TDA the investor is responsible for delivering electricity to the Turkish border, the agreement is counter-signed by the transmission and dispatch license holders as well. However, in terms of the PPA, considering that ESCO acquires electricity at the first connection point of the power plant with the national electricity grid, the transmission and dispatch license holders are not signatories to the PPA. This has a negative impact on the off-take of electricity and creates a deficiency in the regulation of the domestic supply of electricity.


By way of an example, due to certain technical discrepancies at the 400 KV line the dispatch licensee has restricted export for a certain period of time and the investor decided to deliver the electricity to ESCO. However, subsequent technical failure on the transmission and dispatch licensee’s part made it impossible to deliver the electricity to the domestic market (either to ESCO or other purchasers). ESCO will never pay for the electricity that was deemed delivered to ESCO and considering that investors have no agreement with the transmission and dispatch licensee holders that would govern the rights and obligations of the parties in the domestic supply of electricity (licensees are not signatories to the PPA), the investor will never be able to recover the lost profit from the licensees.


In practice, according to our knowledge, representatives of the financial institutions were requesting ESCO take on an obligation of paying for the electricity that was deemed delivered. ESCO never took on such an obligation, which is correct from the legal standpoint to the extent that ESCO should not be liable for the default of third parties, such as the electricity dispatch and transmission licensees. ESCO simply pays for the duly received electricity. Consequently, the investors should seek an alternative mechanism for settling the aforementioned gap.


In order to remedy the abovementioned regulation deficiency and even provide a more attractive and guaranteed financial model for international financial organizations, investors shall have contractual remedies against the transmission and dispatch licensee holders of the main grid throughout the territory of Georgia. This can be achieved either by bringing the investor, licensees and ESCO under one contractual framework of the PPA or by adding an additional section to the TDA stating that the TDA shall also cover aspects of the domestic supply of electricity and define the respective rights and obligations of the parties.