1. The Role of ESCO in Wholesale Trade of Electricity (Capacity) ( REVIEW OF WHOLESALE TRADE OF ELECTRICITY) KUTAISI September, 2012 1

2. 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 2

3. ELECTRIC ENERGY SECTOR PLAYERS MINISTRY OF ENERGY GEORGIAN NATIONAL ENERGY AND WATER REGULATORY COMMISSION ELECTRICITY SYSTEM COMMERCIAL OPERATOR DISPATCH LICENSEE TRANSMISSION LICENSEE QUALIFIED ENTERPRISES 3

4. 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. 4

5. GENERATION LICENSEE REGULATORY POWER PLANT; PARTLY DEREGULATED HYDRO POWER PLANT; PARTLY DEREGULATED THERMAL POWER PLANT; GUARANTEED CAPACITY SOURCE. 5

6. 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. 6

7. 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. 7

8. 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. 8

9. 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. 9

10. 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. 10

11. 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). 11

12. 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. 12

13. 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. 13

14. 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. 14

15. 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. 15

16. 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. 16

17. 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. 17

18. MODELM MODEL OF WHOLESALE ELECTRICITY TRADE 18 GENERATION DISPATCHER DISTRIBUTION DIRECT CUSTOMER TRANSMISSION

19. 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 19

20. 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

21. FINANCIAL MODEL OF WHOLESALE ELECTRICITY TRADE 21 DIRECT CONTRACT ESCO BALANCING ELECTRICITY GENERATION IMPORTER DISTRIBUTION DIRECT CONSUMER EXPORTER

22. 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.

23. COST OF THE BALANCEING ELECTRICITY SOLD TO ESCO 23 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

24. COST OF THE BALANCING ELECTRICITY SOLD TO ESCO 24 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

25. 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

26. 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) 26

27. COST OF THE BALANCING ELECTRICITY BOUGHT FROM ESCO 27 EXPORTER MAY-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

28. INDICATORS OF WHOLESALE ELECTRICITY TRADE 28

29. TRADE WITH GUARANTEED CAPACITY 29 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.

30. GUARANTEED CAPACITY TRADING MODEL 30 GC Source ESCO GC Purchaser

31. 31 SOURCES OF GUARANTEED CAPACITY GAS TURBINE NO: 3 UNIT OF GARDABANI TPP NO: 4 UNIT OF GARDABANI TPP NO: 9 UNIT OF GARDABANI TPP

32. 32 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.

33. SUPPORT OF CONSTRUCTION OF NEW POWER PLANTS 33 – 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

34. SUPPORT OF CONSTRUCTION OF NEW POWER PLANTS 34 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.

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