Net Consumption (GWh)

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1 GEORGIAN ENERGY MARKET Over the last 20 years Georgia s power market has evolved from a vertically integrated single buyer utility, to a competitive regional power market model. The Georgian wholesale power market operates on a bilateral contract basis, and balancing is done by the Electricity System Commercial Operator (ESCO). Georgia is a net exporter of power, with sales to Russia and Armenia, and swap arrangements with Turkey and Azerbaijan. Power export is conducted by and through different market entities. Any Georgian entity can export power from Georgia; no export license is required. The retail power market consists of three distribution companies which capture both distribution and retail sales. All three are owned and operated by non-georgian electricity sector investors. Some power generation is owned directly by the distribution companies, and one has a direct energy swap arrangement with a power utility in Turkey. The Dispatch Center of the main transmission company (GSE) schedules and dispatches the high voltage system and coordinates the network/contract flows across international boundaries. GENERATION AND CONSUMPTION IN GEORGIA Consumption and Generation: Key Data Points Electricity consumption dramatically decreased (approximately 50%) in Georgia at the time of breakup of the former Soviet Union. But electricity consumption increased approximately 2 TWH between 1994 and Since 2004, electricity consumption has slowly but steadily grown. Electricity consumption in 2010 was slightly above 8 TWH. 12 Net Consumption (GWh) Source: Energy Information Administration

2 Preeminence of Hydropower Generation in Georgia Hydropower generation dominates the Georgian power market. Total Generation for 2010 (GWh) Total Generation Thermal 683 Hydro total 9375 Hydro with seasonal regulation 6525 Hydro run of river 2533 Hydro <13 MW 317 The electricity generating capacity in Georgia far exceeds the generating capacity requirement of the country. During several months of the year thermal power production is non-existent. As new hydropower plants are constructed or rehabilitated, the amount of thermal power as a percent of total production is decreasing. In 2010, thermal power production represented only 7% of total electricity production within Georgia. The Government of Georgia would like to eliminate all or nearly all thermal power production by Generation and Net Consumption 2010 (GWh) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Thermal Hydro Net Consumption Generation Tariffs While newly constructed hydropower plants will be deregulated and be able to sell at the market price, GNEWSRC sets tariffs for regulated electricity producers in Georgia based on the following principles.

3 Tariffs must provide a reasonable return on invested equity sufficient to attract financing for the construction/reconstruction of assets and the further development of the sector. Energy and capacity losses during transmission/distribution must be reflected in tariffs. Tariffs for each customer group must reflect the actual cost of supplying that group. Comparatively high cost electricity producers, including TPPs, have a two-tier tariff comprising a capacity payment based on the generator s fixed costs, and an energy fee that covers costs for each kwh of electricity sold by the company. Lower cost electricity producers, including HPPs, have a single tariff that is calculated as the total annual cost plus return on invested capital, divided by the total generated electricity during the year. The average generation tariff in Georgia is approximately US$0.028/kWh although it fluctuates widely between US$0.007 for older power HPP plants, and US$0.068 for newer power plants. Trading, Market Players, Market Formation The wholesale power market is a direct contract market with a wholesale market entity, ESCO, supporting wholesale trade. As new hydropower plants enter the market, they will have the opportunity to sell to ESCO, qualified consumers (industrial consumers), network operators (to cover energy losses), or to export power directly or sell to an exporter.

4 The eight largest retail consumers are qualified to purchase power competitively. The distribution companies and the transmission companies are also allowed to purchase power to cover their energy losses. Hydropower plants less than 13 MW can contract to sell power in both the wholesale market as well as to any retail consumer. Hydropower plants greater than 13 MW built after August 1, 2008, have been fully deregulated and are entitled to trade electric power at deregulated tariffs to qualified consumers, ESCO and for export. ELECTRICITY SYSTEM COMMERCIAL OPERATOR (ESCO) The functions of ESCO are as follows. Purchasing and selling balancing power (capacity) to cover differences between bi-lateral contracts and actual schedules. Making sufficient medium and long-term contracts on power import and export to assure longer term balancing of supply. Providing the power system with the reserve capacity under the law and under the requirements established by the Ministry of Energy in the Electricity Market Rules. Providing licensees with information in order to plan their power requirements, and reserve capacity and consumption. Maintaining a consolidated database for wholesale power trade including the creation of a consolidated accounting registry. Specifying the quantity of electricity transacted hourly among sellers and buyers, and providing relevant settlement information required for appropriate payment. According to the Electricity Market Rules, licensed suppliers of electricity and any eligible consumers (currently some of the larger wholesale customers) of electric power may make shortterm or long-term direct contracts for the sale and purchase of electricity supply. Contracts must be registered with and scheduled by ESCO, the commercial operator, and the Dispatch Operator. Longer term balancing of electric power trade when not covered by bilateral contracts is carried out by ESCO. ESCO balances the difference between the actual consumption and the amount of electric power specified by direct contracts between suppliers or eligible customers, and producers. The Dispatch Operator, part of the GSE transmission system, is responsible for reliability of system operations. BRIEF OVERVIEWOF TRANSMISSION AND DISTRIBUTION Distribution and Retail Power Market Three distribution companies provide most of the retail sales. Telasi Distribution Company, JSC, covering the region in and near Tbilisi Kakheti Distribution Company, covering the eastern part of Georgia Energo-Pro Distribution Company, covering Central and Western Georgia, excluding the regions of South Ossetia and Abkhazia

5 Georgian legislation allows that retail consumers above 7 GWh annual electricity purchases can negotiate power agreements with power producers and importers. There are eight qualified retail consumers and each purchases power from power producers. Consumption (TWh) Distribution Companies Telasi Abkhazia Energo-Pro Kakheti Energy Distribution GSE Direct Customers Transmission and Dispatch The transmission company is owned by two entities the Georgian State Electrosystem which owns 500 kv substations, the 220 kv network and several facilities down to 35 kv, and SakRusEnergo which owns the existing 500 kv lines. The new 500 kv network under construction is owned by EnergoTrans, a subsidiary of GSE. Scheduling and dispatching of the network is performed by the Dispatch Center of GSE. The Dispatch Center also balances the system. Information on the scheduled and actual production from each power plant is recorded hourly and passed along by Dispatch Center to ESCO. In turn, ESCO calculates a monthly settlement for each market member that includes power purchases, and sales and balancing charges. Transmission, Dispatching and Wheeling Tariffs (US ) Voltage 0.4 kv 6-10 kv kv 220 kv 500 kv Eenergo-Pro Telasi Kakheti GSE Transmission GSE Dispatch SakRusEnergo EnergoTrans Tbd Source: GNEWSRC