The distribution system in Georgia suffered from underinvestment until cost reflective tariffs allowed for upgrades.

Two stages of reform over 20 years drastically transformed the Georgian electricity sector. At first, significant structural changes and privatization introduced modern management techniques to a defunct and unsustainable power system; in the second phase, further market liberalizations led to significant yet sustainable investments in infrastructure and renewable generation and the creation of an advanced international power-trading market.

Following the Soviet Union’s collapse, a civil war broke out in Georgia. Economic disruptions reduced the ability of Georgia to pay for Russian energy supplies which caused severe energy shortages from 1992-2002, causing rippling effects across the entire economy. The international donor community responded with a series of programs and aid for the energy sector, beginning the first stage of Georgian electricity market reform from 1995-2004.

The management contract helped to turn around UEDC in less than four years. At the end of the contract, UEDC was a reputable supplier of reliable, 24-7 power and collections rose from 11 percent to 80 percent, tariffs were reformed, and commercial systems were introduced through the company.

This first phase of market reform began with a number of legal and regulatory reforms aimed at modernizing the operations of the power sector. Sakenergo, the state-run, vertically-integrated utility, unbundled into Generation, Transmission, and Distribution entities. This action, however, was not initially successful in reforming the Georgian power market, partially due to a widespread economic recession and continued utility governance issues. In order to address these issues, the Government of Georgia (GoG) passed the Electricity Law in 1998, which allowed for the creation of the Georgian National Energy Regulatory Commission and the Georgia Wholesale Electricity Market.

In an effort to bring in private capital and management practices, the GoG privatized Telasi, the distribution system of Tbilisi, and Mktvari, Georgia’s largest and most modern thermal generation in 1998, selling the assets to the American utility company AES. Despite the fact that the privatization was viewed as unsuccessful because AES eventually sold the Telasi assets for a considerable loss, this first privatization introduced modern management practices and international attention to the sector.

Still facing significant issues in the power sector both within Tblisi and throughout the country, the GoG asked the U.S. government for help in commercializing the remaining sector actors, including The Georgian Wholesale Electricity Market (Market Operator), the Georgian State Electrosystem (Transmission System), and the United Energy Distribution Company (UEDC), which was the result of a consolidation of the nation’s 59 smaller distribution companies. At the time, UEDC provided electricity to most of Georgia outside the capital (approximately 70 percent) but it was facing financial, technical, and operational challenges related to the consolidation and everyday operations; its debt was high, it was unable to collect on its bills, and it could not pay its taxes to the government.

The share of hydropower in Georgia’s total electricity generation has been steadily rising in recent years (from 85 percent in 2004 to 92 percent in 2011). Since 2006, electricity production from hydropower plants has increased by almost 40 percent, while thermal power plant production has decreased by 55 percent.

The GoG signed five-year management contracts for the Market Operator in 2001 and for the Transmission System in 2003 as a way to attract investment, improve management, and optimize operations in the electricity sector. In 2003, USAID funded a private firm, PA Consulting (now Tetra Tech) to serve as a management contractor for UEDC to help prioritize reform and move UEDC toward commercial operations. With a focus on good governance and improved management practices, a wide range of internal changes and reforms took place at UEDC over four years which enabled a more reliable supply of electricity to businesses in the country and expanded access to previously unconnected customers. The management contract focused on mitigating corruption by training employees on best practices and streamlining the staff positions throughout the company. This in turn reduced the operating budget and improved daily operations. As a result, the utility’s transformation was possible with minimal external capital due to its focus on intensive internal management reforms.

The management contract helped to turn around UEDC in less than four years. At the end of the contract, UEDC was a reputable supplier of reliable, 24-7 power and collections rose from 11 percent to 80 percent, tariffs were reformed, and commercial systems were introduced through the company. As a result, UEDC was sold in 2007 to the Czech firm Energo-Pro a.s. as part of a transaction valued at over $400 million, the largest private transaction that had occurred in Georgia.

Improving the financial and operational stability of the distribution company was just the first step in a larger market reform story. The second phase of the Georgian reform story began in 2004 and continues to this day. As a result of changes in the country’s political appetite for public investment programs, the GoG prioritized investing in millions of dollars into improving government-owned electricity transmission infrastructure. The investments improved reliability and decreased technical losses throughout the system. Simultaneously, the GoG restructured its single-buyer electricity market into the Georgian Wholesale Electricity Market by introducing the ESCO in 2006. This change allowed generators, distribution companies, direct customers, and exporters to enter into direct contracts, while the ESCO bought and sold balancing power and reserve capacity.

As the liberalization of the marketplace allowed for new generation the GoG deregulated the price of wholesale electricity. As reforms continued and domestic tariffs rose to cost-reflective levels, the nation was able to attract investments in new generation projects from clean, renewable energy. The share of hydropower in Georgia’s total electricity generation has been steadily rising in recent years (from 85 percent in 2004 to 92 percent in 2011). Since 2006, electricity production from hydropower plants has increased by almost 40 percent, while thermal power plant production has decreased by 55 percent. The goal of the Government of Georgia in the coming years is continue to increase generation from renewable resources and use gas as backup energy and spinning reserve. To achieve this target, private sector investment projects are currently underway to construct an additional 52 HPPs designed to deliver a total installed capacity equivalent of 2,100 MW and annually generate 8,500 GWh.

To further support these positive developments, the GoG prioritized improving the transparency of the electricity sector, evidenced by the 2013 Government Decree No. 214, on the Approval of the Rules for Expression of Interests for Feasibility Study of Construction, Ownership, and Operation of Power Plants, which set transparent criteria for all interested parties.

As the Georgian electricity sector continued to improve, it began to look outside of its borders for power offtake agreements with Turkey. Currently, USAID is assisting Georgia in establishing an electricity trading mechanism to manage the hourly trading, balancing and settlement of bi-lateral electricity purchase and sale contracts and which is harmonized with the hourly electricity trading market of Turkey.