New Law of Georgia on Contracts for Difference: Government Incentives to Drive Renewable Energy Investments in Georgia

The Government of Georgia (GOG) has made the development of a renewable energy (RE) market a top priority. To incentivise investments, the GOG has actively worked on creating a favourable legal framework for investors. In line with the Energy Community Treaty and the EU/Georgia Association Agreement, the GOG has implemented several reforms for establishing a competitive energy market to foster the growth of clean energy supply in Georgia.

By growing the number of RE projects, Georgia is directing its focus towards self-sufficiency and exporting electricity to neighbouring countries and Europe. To facilitate this endeavour, plans are underway to establish a Black Sea submarine cable connecting Georgia with Romania.

A significant milestone was achieved in 2022, when Georgia recorded its highest-ever income from electricity exports, totalling around USD85 million. Currently, most electricity exports are directed towards Turkey, where a surge in demand drove the approximate tariff per kWh up to 14.1 US cents in 2022.

Moreover, starting from 1 July 2023, operators in Georgia’s RE market will have the opportunity to trade on the Georgian Energy Exchange. This will foster market competition and create accurate price signals for both existing and potential market participants, thereby enhancing the overall efficiency of the electricity markets.

To ensure price stability and encourage investments in RE projects, the GOG recently approved the Support Scheme for Generation and Consumption of Energy from Renewable Sources and Capacity Auction Rules through Ordinance No 556 (the “Ordinance”). The Ordinance introduces a new support scheme for individuals/companies interested in investing in Georgia’s RE market. It includes the option to enter into a contract for difference (CfD) with the GOG.

On 10 February 2023, the Ministry of Economy and Sustainable Development of Georgia (the “Ministry”) announced its first CfD auction for a capacity of 300 MW. This led to the selection of 24 investment projects involving hydro, wind and solar energy, which are currently undergoing development.

A CfD is an agreement between a participant chosen in the capacity auction and the Electricity System Commercial Operator (ESCO). Under the CfD, ESCO is responsible for reimbursing the selected participant the difference between the tariff proposed by the selected participant and the price established in the day-ahead market if the proposed tariff is lower. Conversely, if the price in the day-ahead market is higher than the proposed tariff, the selected participant must compensate ESCO for the difference.

The execution of the CfD relies on the implementation of a feasibility agreement, which aims to assess the technical and economic viability of the project (the “Feasibility Agreement”).

The support scheme covers a period of 15 years, and thus facilitates long-term financing agreements for investors, starting from the date of a power plant’s commencement of operation, for various renewable energy sources, and covering the subsequent months:

Both ESCO and the selected participant are responsible for covering the difference between the proposed tariff and the price determined in the day-ahead market only during the Support Period.

The reimbursement amount will be calculated daily using the hourly data from the day ahead market, in accordance with the official exchange rate set by the National Bank of Georgia. The total reimbursement will be paid by the end of each reporting month.

CfD auctions are announced by the Ministry.

Participants willing to participate in the auction should submit the following documents to the Ministry:

• general information about the participant;

• prior technical and economic study of the potential project;

• proposed tariff;

• presumed schedule for implementation of the project;

• bank guarantee in the amount of GEL10,000 per MW;

• location and main parameters of the plant;

• topographic map of the location (scale 1:25,000);

• short geological information and map of the location;

• seismic information and map of the location;

• hydrological and meteorological information;

• energetical model;

• initial information regarding the environmental impact;

• potential scheme and possibility to connect the network;

• information regarding infrastructure;

• potential cost estimate;

• economic report;

• financial model;

• information about registration in the debtors’ registry; and

• confirmation that the company is not subject to liquidation or insolvency/rehabilitation processes.

The Capacity Auction Commission (the “Commission”) examines the participants’ applications. If any deficiencies are found in the submitted documents, the Commission allows additional time for the participants to make corrections. The Commission’s review process for applications usually lasts one to three months.

If there are several applications for the same project area, the project with the lower tariff will be selected.

Once the project is selected, the Commission prepares a report which will be submitted to the GOG for approval. If the project is approved by the GOG, both the GOG and the selected participant will proceed to enter into the Feasibility Agreement. If the participant fully complies with the terms specified in the Feasibility Agreement, the GOG will then proceed to enter into the CfD with the selected participant.

Following the execution of the CfD, the selected participant is required to engage in trading activities on Georgia’s day-ahead market. After a period of five years from the start of the plant’s operations, the selected participant has the option to terminate the CfD by providing a written notice at least six months in advance.

In conclusion, the newly introduced legal framework by the GOG for CfDs is anticipated to offer positive prospects by ensuring price stability and long-term revenue certainty for RE projects. This, in turn, is expected to attract investments and foster the development of such projects.

Should you require further information, reach out to MG Law (Andersen Global Member Firm) at [email protected].