U.S. DEPARTMENT OF THE TREASURY DEVELOPMENT IMPACT HONORS ENERGY WITHOUT BORDERS THE TRANSMISSION LINE

The Black Sea Energy Transmission Line opens the way to the long-cherished dream of energy flowing freely across the borders of a wider Europe. The 315 km high-voltage line – the first major interconnector between the Caucasus grid and the Western grid – allows electricity to flow between and Turkey and increases energy security in the region. It is especially significant today, when the energy security issue has taken on even more importance because of a rise in geopolitical tensions.

The Black Sea Energy Transmission As other countries and regions Thanks to the opening of the Turkish Line, which runs between east and re-energise their search for new market with its higher wholesale prices, west of Georgia and connects to the energy partnerships – from Moldova coupled with the wealth of Georgia’s north-east of Turkey via a high-voltage where work has already started on hydropower resources, a great number of substation, is one of the largest a similar line to the Baltic states private sector investors started building infrastructure projects in Georgia in which intend to synchronise their new hydropower energy generators in decades, and a major investment by the grids with the EU – the Black Sea line Georgia. Many are co-financed by the EBRD, the European Investment Bank will serve as a blueprint for a more EBRD, the largest renewable energy (EIB), the German development bank secure and open energy market. investor in the region. The first of these KfW, and the country’s government. hydropower plants, the 87 MW Paravani Within Georgia, the Black Sea Electricity It is also part of the EBRD’s support for HPP, came on-stream at the end of 2014. Transmission Line has already improved Georgia on its path to reform, especially the reliability of power supply, enabled during what have been difficult years cross-border electricity trade, and since the global economic crisis brought unprecedented investment and the armed conflict of 2008. into the renewable energy industry. Context Georgia, a small and ancient country This land of beautiful mountains and imports – especially in the crucial in the Caucasus mountains, has 26,000 rivers has vast hydropower winter months when hydropower often played a larger role in the region potential. But this potential was capacity falls. In addition, the Georgian than its size would suggest, and largely untapped and Georgia had electricity supply was highly unreliable pursued ambitious goals. One of those remained a net energy importer. because it depended on a single high goals – to be energy independent voltage line between west Georgia, Its crumbling energy infrastructure had and a regional trading hub – seemed where most electricity is generated, not been modernised in decades, it unachievable just over a decade ago. and the east of the country, where suffered from regular blackouts and most of the demand is located. relied heavily on its powerful neighbour, Russia, for hydrocarbon

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Georgia has the largest hydropower potential in Attractive Flowing hot and cold Europe and on a per capita basis is believed to investment In the Georgian summer melting snow possess one of the largest hydropower resource Large-scale plants built and and high rainfall provide the raw bases in the world. planned by domestic and materials that power hydro plants. The foreign investors increased flow generates more energy than can be used locally. Across the Paravani Dariali DARIALI border Turks need that energy to keep themselves cool and power businesses. 87MW 100MW 185MW Hot business model Turkey Georgia Huge existing capacity With further upgrades Enguri, alone, is estimated to be able to host about Winter Winter

3,530 MW of capacity with potential Summer Summer annual production of 10.3 TWh SHUAKHEVI Enguri Vardnili PARAVANI GARDABANI 0.1 0.2 0.06 0.048 MW MW 1,320 220 back-to-back substation Average annual tarrif (US$/kWH) BORCHKA enables energy to be traded across borders Watch our video Higher energy tarriffs in Turkey provide The 15-year mission to a strong incentive to invest in this local renovate the world’s energy source and reduce imports of second biggest arch dam. foreign fossil fuels. http://bcove.me/6bljlans Greener power million people live in the Run-of-river plants allow the capacity of Land of opportunity Black Sea region of Turkey 550 MW is currently under construction 8.5 a river to be used many times over, with aimed at supplying Turkey minimised environmental impact. How it works Proposed plants Black Sea Transmission line 4 large Powering businesses Weir Electricity supply is now more reliable City by population size Penstock MW Tiblisi = 1.5 million for everybody – from households to Transports water 1,644 businesses – including these to the powerhouse Hydro plant (existing or planned) EBRD clients. Powerhouse 18 under negotiation 42 small-to-medium Enguri = 1,320 MW Tailrace Left: glass mould maker, Turkey Returns water to river Source: EBRD, USAID, Wikipedia, Right: baker, Georgia MW 644 609MW Hydropower.ge, Imagico.de

1.0 0.8 0.6 0.4 0.2 0.0 Western Europe has The Georgian domestic market was too the former USSR system, was virtually long desired a deeply small to make large-scale investments non-existent. The only exception in the energy sector viable. Among was a limited joint operation where a interconnected power its neighbours – Armenia, Azerbaijan, small part of the Turkish system was transmission network which Russia and Turkey – only Turkey’s operated in synchronisation with the benefits from generators with market was commercially attractive, in Georgian network, but did not allow fact very much so. But trade between trade between the two networks. cross-border capacity and can Turkey, interconnected with the western So what would be the way forward? draw on significant European electricity network, and the renewable energy Caucasus network, still connected to potential. It now has an example to emulate – in Georgia.” Riccardo Puliti EBRD Managing Director for Energy and Natural Resources ransmittingransmitting ransitionransition The Black Sea Transmission Line stabilised Georgia’s Georgia has the largest hydropower potential in Attractive Flowing hot and cold power transmission network, In the Georgian summer melting snow Europe and on a per capita basis is believed to investment improved reliability of power possess one of the largest hydropower resource Large-scale plants built and and high rainfall provide the raw bases in the world. planned by domestic and materials that power hydro plants. The supply to the south Georgian foreign investors increased flow generates more energy ENGURI than can be used locally. Across the regions and significantly Paravani Dariali Shuakhevi DARIALI border Turks need that energy to keep reduced energy losses.” themselves cool and power businesses. 87MW 100MW 185MW Sulkhan Zumburidze Hot business model Chairman of GSE Management Board Turkey Georgia Huge existing capacity ZESTAPONI With further upgrades Enguri, alone, TBILISI is estimated to be able to host about Winter Winter

3,530 MW of capacity with potential Summer Summer The EBRD is the largest BATUMI SHUAKHEVI annual production of 10.3 TWh financial investor in Georgia. Enguri Vardnili PARAVANI GARDABANI The Bank will hold its Annual 0.1 0.2 0.06 0.048 MW MW 1,320 220 Akhaltsikhe back-to-back substation Average annual tarrif (US$/kWH) Meeting in Tbilisi in May in BORCHKA enables energy to be traded across borders Watch our video Higher energy tarriffs in Turkey provide 2015, which further illustrates The 15-year mission to a strong incentive to invest in this local its continued commitment to the renovate the world’s energy source and reduce imports of second biggest arch dam. foreign fossil fuels. success and further evolution http://bcove.me/6bljlans Greener power of the Georgian million people live in the Run-of-river plants allow the capacity of economy, and to the Land of opportunity Black Sea region of Turkey 550 MW is currently under construction 8.5 a river to be used many times over, with development of its aimed at supplying Turkey minimised environmental impact. How it works strategic linkages Proposed plants Black Sea Transmission line to other 4 large Powering businesses Weir Electricity supply is now more reliable countries in City by population size Penstock MW Tiblisi = 1.5 million for everybody – from households to Transports water the region.” 1,644 businesses – including these to the powerhouse Hydro plant (existing or planned) EBRD clients. Powerhouse 18 under negotiation 42 small-to-medium Enguri = 1,320 MW Tailrace Francis Malige Left: glass mould maker, Turkey Returns water EBRD Managing Director for to river Source: EBRD, USAID, Wikipedia, Right: baker, Georgia MW Eastern Europe and the Caucasus 644 609MW Hydropower.ge, Imagico.de

1.0 0.8 0.6 0.4 0.2 0.0 The project

As part of its major reform drive, the Georgian government The project, initially expected to cost €300 million and actually developed an energy strategy focused on developing the completed under budget at €276 million, received €260 million country’s hydropower potential, improving reliability of funding from international financial institutions. Of this, the supply and increasing electricity trade with its neighbours. EBRD provided an €80 million loan to the state‑owned Georgian State Electrosystem (GSE). €100 million was Early in the 21st century, a number of reports, including a committed by KfW, the German development bank, on behalf regional study by USAID and a feasibility study by USTDA, of the German Development Corporation and including concluded that by linking the Georgian grid to neighbouring the unfunded risk participation from the Development countries, most importantly Turkey, the country’s energy Banreformerk of Austria (OeEB). The European Investment sector could be transformed – increasing utilisation of Bank (EIB) provided €80 million to the Government of Georgia, hydropower capacity and export, improving reliability and for on-lending to GSE. The European Union’s Neighbourhood increasing the Caucasus region’s security of supply. From Investment Facility provided a grant of €8 million, while the a drain on the country’s economy and finances it could remaining amount was financed by the Georgian government. grow into a profitable sector driven by market forces and The transmission line became fully operational in 2014. the private sector. Such an investment would be a perfect match for the EBRD mandate, which is to help countries on their way to free markets, to support sustainable energy and energy security and to aid regional integration. Turkey was seen as an attractive market given its size, economic growth, and robust demand for power. Georgian exports were expected to be especially profitable in the spring and summer months, when Georgia has excess hydropower capacity and when Turkish electricity prices are at their highest because of demand linked to air conditioning. What was missing was infrastructure. The government of Georgia decided to embark on the project to build the Black Sea Transmission Line – its largest infrastructure project at that time. Specifically, the project would consist of a 315 km 500 kV line stretching from the existing substations of Gardbani, located near Tbilisi in the east, to Zestaponi in west Georgia. It would also include a new back-to-back DC (direct current) link substation at the town of Akhaltsikhe, close to the Turkish border and connected to the Turkish grid through a 400 kV line.

CREATING THE REGULATORY FRAMEWORK ATTRACTING PRIVATE CAPITAL The EBRD funded from its Shareholder Special Fund the To date, the Black Sea Transmission Line has attracted over creation of an action plan for the Georgian Ministry of Energy US$ 750 million in committed foreign direct investment in which sets out clear rules of operation the Georgian energy generation sector, all of it private. to support renewable energy Investors have come from all around world, including producers. The action plan to from Norway, South Korea, Turkey and the USA. improve regulations, which is now being put into practice, gives priority access to Investing for Change renewable energy EBRD Business Forum producers and at the Twenty-Fourth defines clear Annual Meeting of auction rules in the the Board of Governors event of line congestion. USAID is currently building on Tbilisi, Georgia these principles and providing further 14–15 May 2015 regulatory assistance in this area. www.ebrd.com/am

ENERGY SECURITY CLIMATE CHANGE AND ENVIRONMENTAL SUSTAINABILITY Electricity shortages and blackouts, a plague of the 1990s still remembered bitterly by many, are now almost entirely a The new hydropower plants built or under construction so far thing of the past. The line has made the grid more reliable by are estimated to cut over 500,000 tonnes of CO2 per annum. providing a back-up for east-west capacity on what has, until This figure will grow as new projects to generate renewable now, been a single transmission line. For example, there were hydropower energy are developed by private companies. 16 total and partial outages in Georgia in 2005, compared There are currently over 650 MW of new HPPs under to only three partial outages in 2013, once the alternative development, all catalysed by the line. transmission route from east to west was commissioned. At the end of 2014, Georgia celebrated the commissioning of In addition, all greenfield projects are required to sell their Paravani – the country’s first private large-scale hydropower power domestically during three winter months, when the plant on the eponymous river near the Turkish border, and the country is most dependent on imported thermal power. first significant new hydropower generator since independence. Paravani is only the first one. A string of hydropower plant projects are being built and planned by domestic and foreign investors. The EBRD is a lender to most of these projects, notably to the 87 MW Paravani plant which is already operational, the Dariali (100 MW) and Shuakhevi plant (185 MW) which are under construction, and several smaller plants totalling 20 MW which are at an advanced stage of development. According to Georgia’s government, a total of 4,000 MW of new hydropower capacity is expected to be commissioned by the year 2022, involving a total projected investment of US$ 6.9 billion. The majority of the generated electricity will be exported to Turkey. Greenfield hydropower plans financed by the Bank so far will replace 200 TWhs out of the 950 TWhs of electricity generated on average by thermal power plants annually between 2008 and 2013.

STATE POWER UTILITY REFORM When the EBRD first considered the project, Georgia had already embarked on a process to privatise the energy sector. In addition to building the high-voltage line, the project also set out to transform the state-owned transmission company, Georgian State Electrosystem (GSE), into a commercialised entity. As a result of sector restructuring and privatisation, GSE had inherited all past liabilities accumulated over the last twenty years in the power sector. Pending the settlement of these liabilities which had been converted into debts from the Ministry of Finance, GSE had been placed under administration. Improved commercialisation of GSE was to be implemented over five years as part of the EBRD‑sponsored regulatory action plan. New transmission tariff methods were to be adopted, dispatch functions were to be separated from other GSE activities to improve GSE’s finances and perceived conflicts of interest were to be removed. Since the signing of the loan, GSE has launched a programme of reforms. Its operational cash flows have steadily increased and are expected to continue to do so. Further improvements and refinements to cross-border regulations are also expected. Analysis, Appraisal and Previous Rate of Return Approaches The economic rate of return of the transmission line, taking into account Comprehensive technical and The EBRD also arranged and financed quantifiable benefits, is estimated at economic analysis of the Georgian an Environmental Impact Assessment 23 per cent. Further benefits, such high voltage network was carried out (EIA) of the project and a review of as the system stability, its reliability in 2006 and 2007 by the Government the existing regulatory framework. and reduction of system outages, are of Georgia with the support of USAID Thanks to all of these studies, the Black difficult to financially quantify but have and USTDA. These studies confirmed Sea Transmission Line became the a direct positive effect on the business that a 500 kV link between east and first transmission project in Georgia to environment for investors. The project west Georgia is essential for the implement international best practice improved energy security, increased reliability of a high-voltage network in the areas of regulation, environment, utilisation of existing hydro capacity operation. It further indicated that procurement, and technical standards. as well as enabled the new capacity an interconnection with the Turkish to be built and, as a result, reduced network, in the form of a “back-to-back” greenhouse gas emissions. Ex-post station (ie. without synchronisation of evaluation of the economic rate of the network), would provide sufficient return has not yet been performed. capacity for cross-support between However, at this point there is no the Caucasus and Turkish systems reason to believe that the actual in case of emergency, and open up economic rate of return will deviate the potential for energy trading. substantially from the forecast level.

Beneficiaries LIGHTS ON JOB CREATION While Georgia is frequently cited as the top reformer in the region and The Black Sea Transmission Line has made remarkable progress according to recent editions of the World project benefited the whole of Georgia’s Bank’s Doing Business survey, much still has to be done in the fight against population by stabilising the energy unemployment and poverty. Most of the population still exists through transmission system. Before the line subsistence farming. So every new job, especially a qualified and decently was built, the transmission network paid one like building and operating an electricity line, is of Georgia did not comply with the valuable. There were 1,100 jobs (9,000 man/months) almost universally accepted reliability created to build and 50 permanent jobs to criteria for power transmission operate the line and substation, of which systems. The project improved the the majority are Georgian nationals. A reliability of electricity supply by more significant contribution to job creating an important alternative creation however will come from the transmission route to the large demand flurry of new hydropower stations centres in the east of the country. being developed in its wake. The Black Sea line led to the creation of approximately 2,400 (15,000 man/months) new private sector jobs during the HPP construction period. 200 permanent jobs are being added to operate the new HPPs, and there will be more jobs to come as new hydropower capacity is developed. Monitoring and Operational and Environmental/ Evaluation Social Risk Mitigation EBRD monitoring of the project captured Hydropower plants built in connection Then, even though all permits had all critical aspects, namely: the physical with the Black Sea Energy Transmission been received for this new shorter construction of infrastructure in Georgia; Line are constructed according to the route, organisations within the assistance to Georgian authorities best international standards and are government sought a grant from the EU for the development of a fair and generally ‘run-of-river’ plants (which do Neighbourhood Investment Facility that transparent regulatory environment for not require much or any water storage allowed for a technically challenging access to export infrastructure; and and so have minimal impact on nature redesign (including associated technical cooperation between the counterparts and communities). Hydropower is the studies) of the route to reduce the of the two countries – GSE (Georgia) best option for Georgia as solar is Park crossing even further, to 4km. and TEIAS (Turkey’s electricity relatively more expensive and wind, transmission company) – since an Extensive biodiversity surveys were which is beginning to be considered, is upgrade to the transmission network also undertaken in the Park to technically more demanding on the grid. in Turkey was also necessary. minimise any impact on important The EBRD started its participation in examples of local flora and fauna. An independent consultant, funded by the project by providing €300,000 The EBRD’s input not only helped to the European Union’s Neighbourhood to finance the Environmental and raise the level of mitigation but also Investment Facility, was in charge of Social Impact Assessment (ESIA) contributed to the biodiversity literature the project design, the preparation back in 2008. The ESIA complied with – scientific information available of the tender documents, the tender EBRD and EIB Environmental and on biodiversity – in the National process and, acting as an Independent Social Policies, the European Union’s Park and other protected areas. Engineer, the project supervision. The Environmental Impact Assessment consultant also provided quarterly Areas affected by the construction Directive, the Aarhus Convention (the progress reports to the EBRD. have been replanted with new grass UN convention establishing rights of the and trees; rigorous monitoring will As part of the project preparation, the public with regard to the environment be undertaken to ensure that this EBRD arranged and financed from its in Europe), and the Law of Georgia vegetation is self-sustaining. Shareholder Special Fund a review of on Environmental Impact Permit. the existing regulatory framework. The The Bank was also involved in a An initial plan had envisaged that consultant – US-based law firm Pierce comprehensive process, led by the a 46 km stretch of the line would Atwood LLP – devised an action plan project operator, of interaction with pass through the - (detailed earlier). The EBRD Shareholder local and international stakeholders, National Park, one of Europe’s largest Special Fund then arranged support including local communities and NGOs. parks which comprises 6.7 per cent for the Georgian authorities in the of the territory of Georgia and is an It was with the support of these implementation of the developed action area of outstanding natural beauty. broad-based assessments and plan and for an evaluation into whether far‑reaching consultations, that the steps being taken are in line with However, as a result of the assessment, the project preparation addressed best international practice. the route through the park was and dealt with potential social significantly cut back, to and environmental issues. 17km. The Georgian State Electrosystem (GSE) was In addition to minimising the an enthusiastic supporter environmental impact, the positioning of all the efforts to reduce the of the transmission line was also crossing, and worked with the designed to minimise the social Agency for Protected Areas and park impact. Only four households had to be administration to select mutually physically resettled with compensation agreeable routes and mitigations. replacing the full value of lost assets. Full compensation, in line with EBRD policies and going beyond the national law, was paid for the use of land, the lost plots and the cut trees necessary for the contstruction of several hundred electric tower sites.

A large habitat of the red fox (Vulpes vulpes) was protected by drastically reducing the tranmission line route (from 46 to 4km) through the Borjomi-Kharagauli National Park. the new project may replicate the Lessons Learned technologies to be used to reinstate Partnerships land (revegetation, reseeding, erosion The Black Sea Transmission System and Applied control). Another important experience is a great result of cooperation The Black Sea Transmission Line is integration of the EBRD performance between many stakeholders, from provided a benchmark for future requirements in the implementation the government itself to international transmission projects, particularly in the of the expropriation procedure used financial institutions and civil society. ways the project handled environmental to make land available for projects. sensitivities, procurement, and It could not have materialised without regulatory issues. Since the signing of the analytical work funded by USAID the Black Sea project, the EBRD has and USTDA, who were involved with provided financing to several other Sustainability both the regional transmission study transmission lines. These include The EBRD is closely monitoring the and the project feasibility study. transmission lines in Georgia, Moldova, environmental impact of the Black Sea USAID remains actively engaged Montenegro and Ukraine. In addition, line on a quarterly basis. To date, GSE’s in the sector, particularly in the the EBRD is currently preparing other environmental performance has been area of hydropower regulation. cross-border transmission lines in exemplary. In addition, the Bank has The project had a total estimated cost Croatia and Moldova which will also also provided funding for sustainable of €300 million, of which the EBRD, EIB, draw lessons from the Black Sea line. hydropower development, in particular KfW, and EU Neighbourhood Investment strategic environmental assessments The Black Sea Transmission Line Facility provided a total of €268 million. for the and Paravani river basins. has also had a clear demonstration Firms involved in various stages of effect in terms of its environmental Lastly, the Bank is engaging in the project include the US companies and social aspects. Its experience is policy dialogue with authorities and Kuljian Corporation, the energy now being used to prepare another other donors about the future of the services company, and Pierce Atwood, high-voltage electric line project in power sector, in order to develop a the law firm, as well as Fichtner, the Georgia, the -Khorga Transmission Strategic Environmental Assessment German engineering consultancy. Line project. Among other things, for Georgia’s electricity sector.

Resources of Georgia; the Head of the The Black Sea Transmission Line Dissemination EU Delegation to Georgia; HPP project won the EMEA Finance Award for The EBRD and other partners, including developers; representatives of the Best Infrastructure Project in 2009. the Georgian governments, have kept energy sectors of Turkey, Azerbaijan the public well informed about the Below is a selection of English- and Russia; representatives of project. Especially well covered by language coverage in the Georgian and the US Embassy, USAID and other the media was the commissioning international media. More coverage diplomatic missions; and partner IFIs. ceremony on 11 December 2013. It was in Georgian, Turkish, Russian and The EBRD Director for the Caucasus, attended by the Prime Minister and Vice other languages can be provided by Bruno Balvanera, delivered a speech Prime Minister of Georgia; the Minister the EBRD Press Office on request. alongside the Prime Minister of Georgia, of Energy of Turkey; the Ministers of the Minister of Energy of Turkey and the Economic Development, Infrastructure, Head of the EU Delegation to Georgia. Environmental Protection and Natural

Turkey to transmit Georgian Transmission line substation EBRD lends €80 million to power to EU opened in Akhaltsikhe Georgia for transmission line Hurriyet Daily News, 12 December 2012 The Messenger Online, Global Transmission Report, http://bit.ly/17DK9iW 12 December 2013 18 March 2010 http://bit.ly/1FQhbeE http://bit.ly/14VFvLq Georgia completes work within Black Sea Transmission Network project Transmission line to Turkey and VIDEO: Construction of 500 kilowatt Transmission and Distribution World, substation at Akhaltsikhe to open electricity transmission line to begin 6 March 2013 Deutsche Wirtschafts Vereinigung, (TV report in Georgian with text http://bit.ly/1y7xYX9 11 December 2013 summary in English) http://bit.ly/1xkvOMQ Channel 1, 19 March 2009 Georgian transmission line http://bit.ly/1CefCBm infrastructure to be improved Georgian and Turkish power Georgian Journal, 17 March 2011 transmission line opened Georgia: Enguri dam keeps http://bit.ly/1ALNWnI Global Energy Network Institute, the power flowing 11 December 2012 EBRD.COM, Georgia’s section of 500 KV http://bit.ly/1u2UB8g 5 July 2013 transmission line almost complete http://bcove.me/ Georgia Today, 23 November 2012 6bljlans http://bit.ly/1Cef7Y4