Power Sector OverviewGeorgia

December 2016

1© 2016 KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Georgia.

The purpose of this research is to give the reader a general understanding of the current market structure in the power sector of Georgia, become more aware of the regulatory environment, get introduced to the key players in generation, transmission and distribution, understand the potential of the future development of the Georgian power sector and introduce KPMG’s experience and capabilities in the field

For over the past decade, the Government of Georgia has been actively promoting the development of the power sector, with various incentives and favorable terms offered to investors. As the power sector has been one of the key strategic development areas for Georgia, the Ministry of Energy, in cooperation with the Georgian National Energy and Water Regulatory Commission (GNERC) has developed Georgia’s Energy Strategy for 2016-2025, oriented mainly at liberalization of the market, switching to EU standards and modernization and development of the transmission and distribution infrastructure

International investors’ interest towards Georgia has been increasing over the past decade resulting in the energy sector being the second largest sector according to the flows of FDI. Starting from 2011 till Q3, 2016 the power sector has attracted more than 1 billion US Dollars of foreign direct investments, representing 17% of total FDI, surpassed only by transportation and communication sector

Executive summaryPower Sector Overview

A liberalised and deregulated market allows renewable energy generators to operate freely on the Build-Own-Operate (BOO) principle, with investors being free to choose the market they wish to operate in

Local energy demand is forecast to grow steadily in line with the GDP of the country, with further opportunities to export to neighbouring countries suffering from structural power deficits or expensive power generation. Over the past nine years electricity generation in Georgia has increased by more than 30%, while demand increased by 33% during the same period

As of today, most of Georgia’s hydro power potential is yet untapped (around 75%) with more than 60 potential hydro power projects being at the pre-feasibility study level. Currently, there are more than 70 power stations with total installed capacity of 3,724 MW, out of which 75% comes from hydro power plants

Important notice:

In preparing our research, we relied on the information available on public sources, as well as on public information obtained via interviews.

This Report was prepared solely for provision of information regarding the power sector of Georgia and should not be considered as an investment recommendation.

2© 2016 KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Georgia.

Contents

page

Market overview:

Electricity generation in Georgia 4

Transmission and Distribution 5

Tariffs and regulation 7

Development potential 9

KPMG capabilities 12

Market overview

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Electricity generation in Georgia

There are five types of electricity generating companies operating in Georgia:

— Regulated stations – those operating under regulated tariffs and licenses

— Semi-deregulated seasonal stations - operating under ceiling tariffs and licenses set by the regulatory body (Georgian National Energy and Water Regulatory Commission)

— Deregulated stations – operating under free tariffs and licenses issued by a regulatory body

— Guaranteed reserve sources (thermal stations) – operating under two tariffs and licenses issued by a regulatory body

— Small stations – operating without licenses and regulated tariffs

According to The Ministry of Energy of Georgia and the Electricity System Commercial Operator (ESCO), there are more than 40 power generating companies in the country, of which 14 companies are generation licensees (according to the local regulation the companies with installed capacity below 13MW do not require licensing). While most of the companies are privately owned, state companies generate 57% from the total generated volumes

Most of the companies operate hydro power plants (HPPs) with only four thermal power stations (TPPs) with total installed capacity of around 852MW. TPPs are used as a Guaranteed Capacity (GC) providers and ESCO has the exclusive right to conduct the trading with the GC providers

Electricity generation in GeorgiaMarket overview

Power Generating companies

Enterprise Power Plant Owner Type capacity (MW)

1 "Engurhesi" Ltd Engurhesi State HPP 1,3002 JSC "Energo-pro Georgia" Private 590

Shaori-Dzevula cascade HPP 119Lajanurhesi HPP 114Airturbina ("Gpower" Ltd) TPP 110Gumati cascade HPP 70Rionhesi HPP 50Mtkvari cascade HPP 39Zahesi (JSC "Zahesi") HPP 37Iori Cascade HPP 27Atshesi HPP 18Chkhori (JSC "Zahesi") HPP 6Kinskisha (JSC "Zahesi") HPP 1

3 "Mtkvari Energy" Ltd Gardabani Energy Block #9 Private TPP 3004 "International Energy Corporation of

Georgia" LtdTbilsresi; others Private TPP,

HPPs308

5 "Gardabani Thermal Power Plant " Ltd Gardabani Thermal Power Plant State TPP 2316 "Vardnili Hydroplant Cascade" Ltd Vardnilhesi State HPP 2207 "Vartsikhe 2005" Ltd Vartsikhehesi Private HPP 1848 "Georgian Water and Power" Ltd Zhinvalhesi; others Private HPP 1469 JSC "Khramhes-1" Khrami-1 Private HPP 113

10 JSC "Khramhes-2" Khrami-2 Private HPP 11011 "Georgia-Urban Enerji" Ltd Paravanihesi Private HPP 8712 "Eastern Energy Corporation" Ltd Khadorhesi Private HPP 2413 "Energy" Ltd Larsihesi; Shidahesi Private HPP 2414 "Saknakhshiri (GIG Group) " Ltd Tkibuli Thermal Power Plant Private TPP 13

Other (with installed capacity below 13 MW)

91

Total 3,740

Source: Ministry of Energy of Georgia, ESCO, Energo-Pro Georgia

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JSC "Energo-Pro Georgia"

JSC "Energo-Pro Georgia" is one of the largest electricity transmission companies in the Georgian energy market, owning high (110kv) voltage, medium (35-110kv) voltage and the low (6-0.4kv) voltage networks in most of Georgia, except Tbilisi and Kakheti regions

The main features of the company’s activities include distribution of electric energy, production of electric energy, electric energy transit and technical service of its subscribers

Energo-Pro Georgia distributes generated energy power to 850,000 subscribers (40% of electric energy use in Georgia)

JSC "Telasi"

JSC "Telasi“, second largest electricity transmission company in Georgia, owning high, medium, and low voltage networks in and around the capital city

The main features of company activities include distribution and transit of electric energy, technical service to the consumers and billing and payment service of other service organizations

JSC Telasi distributes to 416,500 subscribers in a year

JSC "Kakheti Energy Distribution"

JSC "Kakheti Energy Distribution" is the only distribution company in theKakheti region owning also high, medium and low voltage networks

The company distributes generates electricity to 117,058 customers

Transmission

Two power transmission licensees are operating within the Georgian territory "Georgian State Electro System” JSC and “Sakrusenergo” JSC

GSE assets include the major part of transmission facilities. By virtue of the license issued and the tariff established by the Georgian National Energy Regulatory Commission, electricity transmission licensees are allowed to deliver the locally produced or imported electric energy to the distribution energy companies, direct consumers or the neighbor country`s energy systems without the right to sell and purchase electricity

Transmission and Distribution (1/2)Market overview

Energo-Pro Georgia

62%

Telasi33%

Kakheti Energy Distribution5%

Market share

Source: GNERC

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Georgian State Electrosystem

JSC Georgian State Electrosystem (GSE) is a 100% state-owned company providing transmission and exclusive dispatch services to about 50 eligible companies in Georgia

GSE carries out technical control over the entire power system to ensure the availability of the system for an uninterrupted and reliable power supply. Georgia’s transmission network operates at 500/400/330/220/110/35/10/6 kv voltages.

Georgian grid is connected to power systems of neighboring countries through 500/400/330/220/110kV transmission network.

Georgian State Electrosystem and its subsidiary company Energotransowns in total 141 lines of 500/220/110/35 kv with the total length of 3,350 km.

Transmission and Distribution (2/2)Market overview

Dispatching

The National Control (Dispatch) Centre, or NCC, of Georgia is located at GSE headquarters, in the center of Tbilisi. The NCC provides control over the operations of Georgian power system and ensures overall system reliability and proper operation of 500/330/220/110/35 kvtransmission facilities under the normal operational mode, as well as in emergencies. The NCC is equipped with state-of-art technologies and enables Dispatch to get the system information online, ensure remote control and efficient restoration after incidents. The dispatch is able to get accurate information from substations and, as a result of upgraded data base, operatively reacts to any system faults or emergencies

Customers distribution

GSE has three types of customers: distribution companies (83% share from the total generated volumes), direct consumers (11% share from the total generated volumes) and export markets (6% share from the total generated volumes)

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Regulations

As of today, Georgian electricity market has one regulatory body, namely, Georgian National Energy and Water Supply Regulatory Commission (GNERC), which regulates the electricity, natural gas and water supply sectors. Regulatory Commission issues the generation, transmission, dispatching and distribution licenses. It is worth mentioning, that hydro power plants with capacity up to 13 MW do not require license to operate

Starting from 2008 Georgia has liberalized and deregulated energy market. Renewable projects are based on Build-Own-Operate (BOO) principle

Trading

Starting from 2006, Electricity System Commerical Operator plays crucial role in successful operation and development of Georgian electricity market. Balancing electricity, which is traded via ESCO, accounted for only 10% of total electricity trading. the remaining 90% of the electricity trading was based on direct contracts. In direct contract trading, electricity producers sign bilateral contracts with large electricity consumers or distribution companies

Main functions of ESCO:

— Purchase and sale of balance Electric Power (capacity) (including by means of conclusion of middle-and long-time import/export agreements)

— Trade with Guaranteed Stand-by Capacity as per the Law of Georgia on Power Industry and Natural Gas and Electric Power (Capacity) Market Rules

Tariffs and regulation (1/2)Market overview

Electricity Trading Balances by countries:

Million kwh 2010 2011 2012 2013 2014 2015Jan-Jul

2016

Tr. balance with Turkey 303 219 79 0 236 419 167Tr. balance with Azerbaijan 4 (17) (86) (17) (176) (102) (23)Tr. balance with Armenia 89 117 68 73 138 (16) 89Tr. Balance with Russia 905 141 (148) (90) (447) (341) (207)Total trading balance: 1,301 460 (87) (34) (249) (40) (26)

Source: ESCO

Trading (continued)

— Inspection of meters used in wholesale trade

— Setting up of a unified data-base on wholesale purchase and sale, including creation and management of a unified registry of reporting

— Establishment of actual volumes of electric power from sellers, and buyers on the basis of electric power sold and/or bought or received (consumed), and submission of information on the final settlement

— Facilitation of construction of new electric power plants

— Carrying out other procedures determined by the law

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Tariffs

Georgia currently has no special legislative acts to regulate the use of renewable energy sources. There are no tariffs set for newly built HPPs, and investor is free to choose market and negotiate price. No fee is required for the connection to transmission grid. No license is required for export with new HPPs having priority access to the capacity on the new interconnection to Turkey. Generation and export activities are exempted from VAT tax.

Regulations apply only to social customers, while direct customers are deregulated

Small HPP operators with capacity up to 10 MW, have the opportunity to sell electricity directly to consumers at tariffs negotiated bilaterally or even to export without the need for an export license

Investors can benefit from the incentives provided by the state such as, new Hydro Power Plants up to 100 MW are offered a guaranteed purchasing agreement with ESCO for the first 10 years of operation in which the tariff can be negotiated between the company and the Georgian National Energy and Water Supply Regulatory Commission (GNERC)

Production regulation

All new HPPs are also fully deregulated, meaning that the company can choose the market to operate in and negotiate the price without any intervention from the regulatory body

Electricity producers are free to carry out economic activities independently signing short-term (one year) or long term (5 years) direct contracts on sale and purchase.

Market overview

Tariffs and regulation (2/2)Market overview

6.6

7.8 7.8 9.0

12.3 11.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2011 2012 2013 2014 2015 2016

Tetri

/Kw

H

Average tariffs of Balancing electricity sold by ESCO

Source: ESCO

However electricity producers are obliged to have reserve power amounted to 10% of its capacity (minimum 5% of this amount should be supplied by local sources) for ensuring energy security of the country, the 10% required reserve quota will be raised to 15% during 2016-2019

9© 2016 KPMG Georgia LLC, a company incorporated under the Laws of Georgia, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Georgia.

— Cascade of Namakhvani HPPs - with the installed capacity of 450 MW and generation of 1,670 million KWh

— Faravani HPP - with the installed capacity of 78 MW and generation of 425 million KWh

— Cascade of HPPs on the rivers: Chorokhistkali, Lukhuni, Tekhura, Gubazeuli, Mtkvari, Bakhvistskali and etc. totally 21 HPPs (total installed capacity of 1,583 MW and generation of 5.5 billion KWh) are under construction agreements

— Nenska HPP - expected to go online in 2019, have a 280 MW capacity and will have the potential to produce an annual 1.2 billion kWh output

— Shuakhevi HPP (AGL) – with installed capacity of 187 MW— Oni Cascade – with installed capacity of 172 MW

Solar PowerTaking into consideration geographical location the effective radiation of the sun is rather high in Georgia. In fact, according to the research done by local consulting firm PMCG, Georgia has one of the highest sunshine levels of all European countries. In most regions of the country annual duration of solar shining ranges from 250 up to 280 days amounting to approximately 1900-2200 hours. The total solar energy potential is evaluated at 108 MW

Hydro powerHydro resources take the first place among the natural riches of Georgia. There are 26,000 rivers on the territory of the country. Their total length is approximately 60,000 km. The entire fresh water supply of Georgia, which is made up of ice, lakes and water reservoirs, is 96.5 km3. Around 300 rivers are significant in terms of energy production; their total annual potential capacity is equivalent to 15,000 MWGeorgia is one of the top countries in terms of water resources per capita and it is logical that today 80% of total electricity is generated from Hydro Power Plants (8.3 TWh), being the main energy resource. Despite this, there still is vast untapped potential, as only 25% of economically feasible Hydro potential is exploited todayGeorgia could produce an additional 24 TWh annually with hydro resources aloneConsidering the peculiarities of Georgian rivers, which are characterized by distinct seasonality, these resources can be distributed only by building hydro power stations with regulating water reservoirs in the short and long term perspectives. However, from the ecological point of view, such kind of construction is problematic. This is one reason why hydro power stations with small reservoirs are more common. The Government of Georgia has approved the State Program – “Renewable Energy 2008” which includes the list of potential greenfield projects and rules for construction of new renewable energy sourcesSome of the projects which are being built under the aforementioned program are: — Khudoni HPP – with the installed capacity of 700 MW and annual

generation of 1.5 billion KWh

Development potential (1/3)Market overview

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Wind power

Georgia has significant wind potential through which average annual electricity generation is evaluated at 4 billion KWh and installed capacity of 1,500 MW. According to the wind energy potential the territory of Georgia is divided into high, mean and low speed zones where the wind speed fluctuates from 2.5 m/s up to 9.0 m/s. The work lifetime amounts to 4,000-5,000 hours annually. The most favorable places for wind farms are identified including the whole territory of Georgia

The works are being carried out for the preparation of feasibility study for prospective wind farms which can be placed in:

— Laghluja mountain range (45 MW, 110 million. KWh)

— Mta-Sabueti – (100MW, 370 million KWh)

— Samgori upland (45 MW,130 million KWh)

— Gori –Skra section (90 MW, 250 million KWh)

— The nearby territory of Kutaisi (90 MW, 225 million KWh)

— The gorges of the rivers Faravani and Chorokhi with 120 and 30 MW installed capacity and 336 and 90 million KWh electricity generation.

Thermal power

Thermal Power Plants (TPP) are the source of guaranteed electricity supply in Georgia. Usually, TPPs are in standby mode, ready to supply the system when needed, typically in winter period. In 2015 TPPs accounted for 21.9% of total generation, meaning they are vital to Georgia’s electrical stability. Because of this, even when in standby mode TPPs receive payment to cover maintenance and fixed costs

As of today, there are four companies operating thermal power plants and working as Guaranteed Capacity Suppliers:

1. Mtkvari Energy LLC – with installed capacity of 300 MW (Block #9)

2. Georgian International Energy Corporation LLC – with installed capacity 270 MW

3. G-Power LLC – Airturbine thermal power plant with installed capacity of 110 MW

4. Gardabani TPP LLC – installed capacity of 231 MW combined cycle thermal power plant financed by Partnership Fund and Georgian Oil and Gas Corporation. Currently, Georgian Energy Development Fund is working on another 250 MW combined cycle thermal power plant project to be commissioned in 2019

Development potential (2/3)Market overview

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Development potential (3/3)Market overview

Our capabilities

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Siberian Generating Company (RU) Kievenergo (UA)

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Rosatom group (RU) DTEK (UA)

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