The country of Georgia has significant hydro power potential but many of its small hydro plants had been decommissioned or neglected in the later years of the Soviet Union. Although these were either operating well below design capacity or not operating at all, many were considered to be good candidates for rehabilitation and in some cases expansion. The US Agency for International Development (USAID), which has been providing energy assistance to Georgia for over a decade, saw an opportunity to change this by demonstrating the commercial viability of such projects. This proved to be a great challenge in a post-Soviet country where project finance was an unknown mechanism, independent power generation was a new concept, and banks did not understand project risks or how to mitigate them.

USAID’s answer has been the Rural Energy Programme (REP), a US$11.5M programme implemented by Winrock International under a cooperative agreement, designed to increase energy supply in rural areas, strengthen private interest in renewable energy development, and strengthen the ability of Georgian agencies and companies to promote clean energy development. This has been one of the principal energy activities supported under the US Government’s assistance programme in Georgia.

The programme is focused on areas that offer the greatest potential to meet local energy demands:

• Increasing the supply of grid-connected and off-grid renewable energy in rural areas.

• Improving management of local renewable energy production.

• Building in-country capacity in rural energy and renewable energy applications.

• Promoting sustainable natural resource management.

• Creating a favourable policy environment for rehabilitation, development, and financing of small hydro power plants.

Increased hydroelectric generation capacity is seen as a key factor in Georgia’s energy security, given the location of key generation plants in conflict zones, and partial reliance on power imports from Russia. The USAID-supported programme was also designed to provide assistance to the government in the elaboration of energy policies that promote development and investment in hydro power.

The unknown

In 2005, USAID made a commitment to the Government of Georgia to assist in the rehabilitation of numerous mothballed or degraded small hydro power plants. Most of the candidate sites were originally built in the 1950s and 1960s and many had not been functioning for years. Because USAID aims to support sustainable economic development based on market principles, the programme focused on small hydro plants that were privately owned and whose rehabilitation could be commercially viable. To maximise resources, USAID limited its direct contribution to no more than 25% of the total project rehabilitation cost, and in most cases its financial contribution was much less than that. The balance of the investment funding needed to come from owners’ equity and/or loans.

REP started by identifying and screening potential projects. After technical and financial evaluation, several sites were selected for detailed feasibility study and design. These projects were fully privatised and commercially viable, were under committed ownership with sufficient equity, and were located in rural communities with a need for more reliable electricity supply to stimulate economic development and job creation.

Two projects were initiated but were not completed. One project was terminated after financing had been approved because of the owner’s non-performance under his grant agreement. The other project withdrew after selection due to a change in ownership structure.

REP provided technical assistance to the project owners on project design and the development of business plans. Then REP worked on identifying and securing financing opportunities for the projects. The owners also needed assurance that they would be able to sell their power to the grid at fair and commercial rates, so REP worked with the government to ensure that appropriate power purchase agreements and tariffs would be in place. To accomplish this, legislative and regulatory changes needed to be made by the Government of Georgia, key among them market rules allowing the system operator to purchase all small hydro generated energy at a short-term average cost. The success of the programme depended on this change as without it there were not sufficient guaranteed revenues for projects to be commercially viable.

In 2006, Georgia’s energy sector was in a state of flux. The government had passed an amendment to the Law on Electricity and Natural Gas, deregulating all small hydro power plants (<10MW). This meant that there was no guaranteed offtake by licensed energy sector participants, and that small hydro would be permitted to sell to anyone, including licensed sector companies and private electricity users at freely negotiated prices. Unfortunately, with few potential industrial customers and issues of their creditworthiness as customers, the only viable customers would be electrical distribution companies and the independent market operator.

In addition to deregulation, Energo-Pro, Georgia’s largest electrical distribution company, was also in the process of being privatised. The privatisation included six hydro power plants providing Energo-Pro with a dominant market position in distribution and generation.

The deregulation of small hydro power plants was intended to open the market for these producers, but instead constricted it to the point of impracticality by forcing the producers to compete with existing hydro plants with low tariffs.

A number of donor organizations, including USAID, helped convince the government that if it was serious about achieving energy security and reducing dependence on imported electricity and natural gas, it would have to find a way to make small hydro viable.

During the summer of 2007, meetings were held between the Ministry of Energy, energy sector regulators, and energy sector companies, with REP representing the interests of small hydro operators. These meetings reformulated the relationships between all sector participants. The outcome was that new market rules included provisions for the independent market operator, ESCO, to purchase all unsold small hydro output at a rate representing the weighted average of the month’s balancing electricity purchases. This would then provide rehabilitated small hydro guaranteed revenue to repay their loans.

Financing for these projects can be broken down into two phases. In Phase 1, USAID would provide limited financial assistance to complete financing needs. In addition, REP expanded training to owners and potential investors in Georgia’s energy sector in an effort to create market conditions under which projects would be possible without grant assistance (Phase 2).

Phase 1 included the creation of a loan facility supported by the European Bank for Reconstruction and Development (EBRD), which made the full loan amounts available to Georgian banks for on-lending. The ideal financing equation was to be 40% owner’s equity, 40% commercial loans, and 20% USAID grants. It was agreed that any losses would be equally shared by EBRD and its Georgian partner.

The Bank of Georgia was the first bank to consider financing for small hydro projects. While there were delays as the two institutions worked out differences in evaluation criteria and approval schedules, the Lapota and Okami projects eventually were financed through this agreement. The success of these two projects raised the confidence of the Bank of Georgia, and the interest of other banks.

The project next approached banks who expressed an interest in making energy related loans. Georgia’s TBC Bank financed the next two projects – Misaktsieli and Machakhela.

In 2008, USAID announced that there would be no more grant money available for small hydro projects. It was time for REP to attempt to finance Sulori through pure equity and debt project financing. In the end, Cartu Bank, which was also working with EBRD loans, was compelled by the project’s financial potential and provided a loan to the owners of the Sulori plant which succeeded in meeting the objective of pure project finance.

USAID believes that this phased approach was one of the keys to the success of the programme. It also believes this model would be applicable for financing energy and other infrastructure projects in developing countries where investor confidence levels need to be raised substantially to attract investors to the market.

Demonstrating project finance

While the scene has been set to develop the remaining 4-7000MW of untapped hydro generation in a country rich with hydro resources, REP is no longer accepting new projects. The project was never intended to assist with the rehabilitation of all non-working small hydro in Georgia, only to demonstrate that it would be possible to actually enable rehabilitation based on project finance. That was proven with the completion of the Sulori small hydro plant.

Under the auspices of the REP, local business consultants have been trained in how to prepare business plans and funding proposals to assist future developers. Bankers, other financial institutions and investors have been trained in the art of understanding what energy projects are, how to assess risks and when to make loans.

Unfortunately, due to the disruption to the Georgian economy in the aftermath of the August 2008 conflict, political instability within the country and the global economic crisis, few new rehabilitations have been initiated at this time.

There is some interest in investing in Georgian hydro generation by foreign investors who would rely on energy exports for a significant portion of their revenues. The export market is currently restrained by transmission capacity to Turkey. With this in mind, Georgia is working on a new 500kV transmission line that is expected to come on line in 2013.

Nikolas Okreshidze, Senior Energy Engineer, USAID/Georgia,

Horst U Meinecke, Chief of Party, Rural Energy Program, Georgia, Winrock International,

The US Agency for International Development is the principal foreign assistance mechanism of the US Government, working in 85 countries worldwide on projects ranging from economic growth and energy development, to education and health improvement, and the strengthening of democratic governance systems (

Winrock International, the implementer of the Rural Energy Program under a USAID Cooperative Agreement is an independent, nonprofit organisation that works with people in the US and around the world to increase economic opportunity, sustain natural resources, and protect the environment (

Georgia’s REP small hydro projects

The projects fall into three different categories:

* Rehabilitation of small hydro plants with partial US Government funding (Five Projects): Kabali (1.5MW), Kakhareti (2.8MW), Lapota (2MW), Misaktsieli (2.6MW), and Okami (1.6MW)). These projects were financed with owners’ equity, USAID grants and commercial debt. These projects are complete and in commercial operation.

* Rehabilitation of small hydro facility with no US Government funding (Two Projects): Algeti (0.25MW) and Sulori (0.8MW)). These project were financed with owners̢ۉ㢠equity and commercial debt. Both projects are complete and in commercial operation.

* Installation of micro hydro power plants (Three projects): Gadamshi micro hydro, a 40kW, off-grid installation supplying a small village in Western Georgia which had been without electricity for 15 years. Shenako (50kW) and Kekhmor (80kW) in the high mountainous region of Tusheti are also off-grid installations which supply nine high altitude villages which are now only occupied during the summer months. These latter two projects are financed by grants from USAID and the World Bank, and in-kind contributions from the communities of labour, supplies and construction materials.