The Role of ESCO in Wholesale Trade of Electricity (Capacity)

(REVIEW OF WHOLESALE TRADE OF ELECTRICITY)

KUTAISISeptember, 2012

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MAIN LEGAL ACTS THAT REGULATE WHOLESALE TRADE OF ELECTRICITY (CAPACITY)

LAW OF GEORGIA ON “ELECTRICITY AND NATURAL GAS”

“ELECTRICITY (CAPACITY) MARKET RULES” (ORDER No:77 OF THE

MINISTER OF ENERGY DATED AUGUST 30, 2006)

GNERC RESOLUTION No:33 ON “ THE ELECTRICITY TARIFFS”,

DATED DECEMBER 4, 2008

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ELECTRIC ENERGY SECTOR PLAYERS

MINISTRY OF ENERGY

GEORGIAN NATIONAL ENERGY AND WATER REGULATORY

COMMISSION

ELECTRICITY SYSTEM COMMERCIAL OPERATOR

DISPATCH LICENSEE

TRANSMISSION LICENSEE

QUALIFIED ENTERPRISES

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QUALIFIED ENTERPRISES

ELECTRICITY SYSTEM COMMERCIAL OPERATOR;

GENERATION LICENSEE;

DEREGULATED POWER PLANT;

– SMALL CAPACITY (UP TO 13 MW) POWER PLANT;

– POWER PLANT BUILT AFTER AUGUST 1, 2008;

DISTRIBUTION LICENSEE;

DIRECT CONSUMER;

IMPORTER;

EXPORTER.

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GENERATION LICENSEE

REGULATORY POWER PLANT;

PARTLY DEREGULATED HYDRO POWER PLANT;

PARTLY DEREGULATED THERMAL POWER PLANT;

GUARANTEED CAPACITY SOURCE.

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GENERATION LICENSEE — REGULATORY POWER PLANT

The activity is subject to licencing (Generation Licence).

The Committion determines fixed selling tariff of electricity.

Sells the electricity for fixed tariff based on the direct contract.

Regulatory power plants are Enguri HPP and Vardnili HPP.

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GENERATION LICENSEE — PARTLY DEREGULATED HYDRO POWER PLANT

The activity is subject to licensing (Generation License).

The Commission determines fixed upper marginal selling tariff.

Sells the electricity within the rate of upper margin of generation tariff,

based on the direct contract.

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GENERATION LICENSEE — PARTLY DEREGULATED THERMAL POWER PLANT

The activity is subject to licensing (Generation License).

The Commission determines fixed upper marginal selling tariff.

Sells the electricity within the rate of upper margin of generation tariff,

based on the direct contract.

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GENERATION LICENSEE – GUARANTEED CAPACITY SOURCE

The activity is subject to licensing (generation license).

The commission determines:

- Guaranteed capacity cost;

- Upper margin of electricity generation tariff of the

guaranteed capacity source;

Sells the electricity within the rate of upper margin of

generation tariff, based on the direct contract.

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DEREGULATED SMALL CAPACITY POWER PLANT

The activity is not subject to licensing.

The Commission does not determine the tariff of electricity sale.

Sells the electricity:

- Based on the direct contract — for a free price;

- Directly to the retail consumer.

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DISTRIBUTION LICENSEE

The activity is subject to licensing (Distribution License).

Has upper marginal tariff on selling the electricity to the retail customer.

Buys and/or receives the electricity:

- From other qualified enterprises, based on direct contracts, for the

contract price;

- ESCO;

- From own means of generation.

Is obliged to transmit the electricity through own grid for those individuals,

who are entitled to selling the electricity directly to the consumers (making the

grid available for the third party).

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DIRECT CUSTOMERS

The activity is not subject to licencing.

Shall be allowed to wholesale trade of electricity (capacity) if annually consumes

not less than:

- 7 M kWh electricity - 2010-2012;

- 3 M kWh electricity – 2013-2015 ;

- 1 M kWh electricity - 2016-2017;

- 1 M kWh electricity – 2017.

Buys and/or receives the electricity:

- From other qualified enterprises, based on direct contracts, for contract

price;

- From ESCO;

- From own means of generation.

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IMPORTER

The activity is not subject to licensing.

Possession of the direct contract, registered with the dispatch

licensee, on selling the imported electricity to the other qualified

enterprise or consuming for own needs is necessary for starting the

activity.

The Commission determines fixed upper marginal tariff for selling the

electricity.

The importer:

• Sells the imported electricity to other qualified enterprise, based on

the direct contracts, within the rate of import tariff.

• Uses the imported electricity for own needs.

• Sells the imported electricity to ESCO.

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EXPORTER

The activity is not subject to licensing.

Possession of the following contracts, registered with the dispatch licencee:

- Direct contract on buying the electricity, intended for the export

qualified enterprise(s) or the application on exporting own electricity;

- Direct contract on transmitting the electricity and dispatch service.

Electricity selling (for export) tariff is not established.

Buys and/or receives the electricity:

- From other qualified enterprises, based on direct contracts, for the

contract price;

- From ESCO;

- From own means of generation.

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SYSTEM COMMERCIAL OPERATOR

ESCO was founded on August 7, 2006 and started functioning on

September 1, 2006.

ESCO represents Entrepreneur Legal Entity of Private Law.

Organizational-legal form — Joint Stock Company.

ESCO is 100% state owned. The Ministry of Energy of Georgia manages

the share, based on Presidential Decree No:1051, dated November 10, 2010.

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ESCO FUNCTIONS

Selling/buying balancing electricity (capacity);

Signing medium and long-term contracts on import/export;

Trading with guaranteed capacity;

Registering qualified entreprices;

Creating and maintaining unified database on wholesale selling/buying;

Determining the quantity of sold and purchased electricity and submitting the

information for settlement;

Creating and maintaining unified register of accounting;

Inspecting the metering system;

When performing its activities, ESCO is guided by main principles of state policy.

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MAIN SOURCE FOR FINANCING ESCO

ESCO service fee is determined by GNERC Resolution No:33 «About the

Tariffs of Electricity», dated December 4, 2008.

ESCO service fee is 0,019 Tetri per kWh.

Every Qualified Enterprise pays the service fee — per generated,

consumed, imported and exported kWh.

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MODELM MODEL OF WHOLESALE ELECTRICITY TRADE

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GENERATION

DISPATCHER

DISTRIBUTION

DIRECT CUSTOMER

TRANSMISSION

WHOLESALE TRADE OF ELECTRICITY

BASED ON DIRECT CONTRACTS

• BILATERAL DIRECT CONTRACTS ARE SIGNED BETWEEN THE QUALIFIED

ENTERPRISES

• CONTRACT PRICE DEPENDS ON STATUS OF QUALIFIED ENTERPRISES (REGULATORY,

PARTLY DEREGULATED AND FULLY DEREGULATED)

• DIRECT CONTRACTS REQUIRES REGISTRATION BY THE DISPATCH LICENSEE

THROUGH ESCO (BALANCING ELECTRICITY)

• ESCO TRADES THE BALANCING ELECTRICITY WITH STANDARD CONDITIONS OF

DIRECT CONTRACT, WHICH:

• IS REGISTERED WITH DISPATCH LICENSEE

• REPRESENTS PUBLIC DOCUMENT

• IS STANDARD FOR ALL THE PARTICIPANTS

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MAIN PRINCIPLES OF WHOLESALE TRADE OF ELECTRICITY

Calculation period is one calendar month.

Only the generator and the importer are the electricity sellers.

The electricity is sold on the seller's busbar. Accordingly, the transportation

related expenses are imposed to the electricity buyers. Transportation related

expences are:

Dispatch service fee;

Transmission service fee ;

Transit (if applicable) service fee;

Actual average loss in the network.

Only distribution licensee, direct customer and exporter are the electricity

buyers. The generator represents the electricity buyer only for ensuring own

consumption.

Balancing electricity trade is possible only through ESCO.

Re-selling the balancing electricity to ESCO by distribution licensee, direct

customer and exporter is prohibited.

Balancing electricity trade is not a profit-making activity for ESCO. 20

FINANCIAL MODEL OF WHOLESALE ELECTRICITY TRADE

21DIRECT CONTRACT

ESCO

BALANCING ELECTRICITY

GENERATION

IMPORTER

DISTRIBUTION

DIRECT CONSUMER

EXPORTER

BALANCING ELECTRICITY Balancing electricity represents:

In case of electricity buyers:

- Is the difference between the electricity delivered by the

electricity generator to the busbar and the electricity sold (delivered) by the electricity generator,

based on the direct contract (except, when ESCO exports this electricity).

- Is the difference between the electricity imported by the

importer (including ESCO) and the electricity sold (delivered) by the importer, based on the

direct contract.

- The quantity of electricity delivered to the busbar by the newly

constructed hydro power plants and bought by ESCO as an obligation (except, when ESCO

exports this electricity).

In the event of electricity purchaser:

- The difference between the electricity consumed (including the

actual average loss) by the distribution licensees, direct customers and exporters and the

electricity purchased by them based on the direct contracts.

COST OF THE BALANCEING ELECTRICITY SOLD TO ESCO

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NEWLY BUILT POWER PLANT

DURING THE GUARANTEED PURCHASE PERIOD – FOR THE PRICE CONTRACTED WITH ESCO

PARTLY DEREGULATED THERMAL POWER PLANT

WITH UPPER MARGIN OF GENERATION TARIFF

ESCO IMPORTER

WITH UPPER MARGIN OF IMPORT TARIFF

RAGULATORY POWER PLANT

WITH THE TARIFF FIXED BY THE COMMISSION

COST OF THE BALANCING ELECTRICITY SOLD TO ESCO

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IMPORTER

MAY-AUGUST

FOR THE LOWEST PRICE OF GENERATION

SEPTEMBER-APRIL

FOR THE HIGHEST TARIFF OF BALANCING ELECTRICITY SOLD TO ESCO BUT NOT MORE THAN IMPORT TARIFF

SMALL CAPACITY POWER PLANT

MAY-AUGUST

FOR THE LOWEST PRICE OF GENERATION

SEPTEMBER-APRIL

FOR THE HIGHEST TARIFF OF BALANCING ELECTRICITY SOLD TO ESCO

PARTLY DEREGULATED HYDRO POWER PLANT

MAY-AUGUST

FOR THE LOWEST PRICE OF GENERATION

SEPTEMBER-APRIL

WITH UPPER MARGIN OF THE TARIFF ESTABLISHED BY THE COMMISSION

COST OF THE BALANCING ELECTRICITY SOLD TO ESCO

GUARANTEED CAPACITY SOURCE

GENERATED ELECTRICITY

WITH THE UPPER MARGIN OF ELECTRICITY

GENERATION OF THE GUARANTEED CAPACITY

SOURCE

THE ELECTRICITY GENERATED DURING THE TESTING

TESTING REQUESTED FROM THE PLANT

WITH WEIGHTED AVERAGE PRICE OF THE BALANCING ELECTRICITY

BOUGHT BY ESCO, BUT NO MORETHE UPPER MARGIN OF

ELECTRICITY GENERATION OF THE GUARANTEED CAPACITY SOURCE

TESTING REQUESTED FROM THE DISPATCHER

WITH THE UPPER MARGIN OF ELECTRICITY GENERATION OF THE GUARANTEED CAPACITY

SOURCE

PRICE-FORMATION OF BALANCING ELECTRICITY SOLD BY ESCO

Selling price of balancing electricity is formed with the Weighted Average Price of

balancing electricity bought by ESCO

The Annual Weighted Average Price of Balancing Electricity Sold by ESCO (2007-2011)

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0.0000

1.0000

2.0000

3.0000

4.0000

5.0000

6.0000

7.0000

8.0000

9.0000

10.0000

7.13717.7337

6.84425.9077

8.0521

2007 2008 2009 2010 2011

Tet

ri/k

Wh

COST OF THE BALANCING ELECTRICITY BOUGHT FROM ESCO

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EXPORTERMAY-AUGUST

WITH WEIGHTED AVERAGE PRICE OF THE BALANCING ELECTRICITY BOUGHT BY ESCO

SEPTEMBER-APRIL

WITH THE HIGHEST TARIFF OF BALANCING ELECTRICITY SOLD TO ESCO

ESCO EXPORTER

WITHIN THE LIMITS OF CONTRACTED PRICE ON EXPORT, WITH THE HIGHEST TARIFF OF BALANCING ELECTRICITY SOLD TO ESCO

DIRECT CUSTOMER

WEIGHTED AVERAGE PRICE OF THE BALANCING ELECTRICITY BOUGHT BY ESCO

DISTRIBUTION LICENSEE

WEIGHTED AVERAGE PRICE OF THE BALANCING ELECTRICITY BOUGHT BY ESCO

INDICATORS OF WHOLESALE ELECTRICITY TRADE

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2007 2008 2009 2010 2 011

1386.14 1386.14 1210.56 1434.632159.15

7238.94 7542.31 7347.62

8706.558223.99

M kWh

BALANCING ELECTRICITY DIRECT CONTRACTS

TRADE WITH GUARANTEED CAPACITY

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The players of guaranteed capacity trade are:

Guaranteed capacity sources;

ESCO;

Guaranteed capacity buyers.

Guaranteed capacity sources are determined by the Decree No: 193 of July 15, 2010 of the Government of Georgia.

Guaranteed capacity provides for the stability, safety and reliability of electric energy system.

Electricity delivery-consumption is balanced (when required) by guaranteed capacity.

Guaranteed capacity trade is carried out in a centralized manner through ESCO, by standard condition of the contract:

With the registered dispatch licensees;

Represents public document;

Is standard for all the players;

Selling of guaranteed capacity is not profit oriented activity for ESCO.

GUARANTEED CAPACITY TRADING MODEL

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GC Source ESCO GC Purchaser

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SOURCES OF GUARANTEED CAPACITY

GAS TURBINE NO: 3 UNIT OF GARDABANI TPP

NO: 4 UNIT OF GARDABANI TPP

NO: 9 UNIT OF GARDABANI TPP

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GUARANTEED CAPACITY PURCHASERS

DISTRIBUTION LICENSEE

DIRECT CONSUMER EXPORTER

Guaranteed capacity buyer is obliged to compensate the cost of

guaranteed capacity in proportion with its actual consumption in total

consumption or export.

SUPPORT OF CONSTRUCTION OF NEW POWER PLANTS

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– According to the Law of Georgia «On Electricity and Natural Gas», the agreement

about the construction of new power plant(s) is signed between the Georgian

Government, the investor and ESCO:

– The agreement defines the obligation of ESCO on guaranteed purchase of

electricity

The agreement also defines the price of the electricity to be bought

SUPPORT OF CONSTRUCTION OF NEW POWER PLANTS

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The Decree No:107 (dated April 18, 2008)of Georgian Government «State Program «Renewable

Energy 2008» about the Approval of Rule on Construction of New Sources of Renewable

Energy in Georgia»:

Applies to the power plant (cascade of power plants) with less than 100MW capacity as well as to the power plants that are not included in the list of potential sources of renewable energy.

The Memorandum of Understanding about construction of new power plant is signed between the Government of Georgia, the investor and ESCO.

During the winter period (three months) within ten years after putting the power plant into service, the electricity generated by the power plant remains in the country.

The electricity shall be sold by the investor choice:

To any buyer available in Georgia — with free tariff or

To ESCO – with the price determined by the Memorandum

According to current information, signed 20 memorandum, where the ESCO represents the third side of memorandum and undertakes to purchase electricity generated by the compulsory purchase of newly built power plant.

WWW.ESCO.GE

THANK YOU FOR YOUR ATTENTION!