Why do we care about competitiveness in energy markets? And, what are the benefits of increased competition from the supply side of the electricity market?

The main reason for the additional social surplus derives from increased energy consumption at lower prices. Increased competition in the electricity market is expected to translate into fewer market distortions – be they simply due to the abuse of market power or to the survival of inefficient firms – and, therefore, increased efficiency.

Increasing the level of competitiveness in the electricity market is also a requirement of the international commitments accepted by the Georgian government. In October 2016, Georgia became a member of the Energy Community, which was an important step towards the synchronization of Georgian legislation with European Union laws covering the Energy sector. In addition, Georgia has several obligations under the Association Agreement, signed alongside the EU. Consequently, the development of a competitive, transparent and efficient electricity market in each stage of electric power provision is one of the main requirements.

Currently, the chief electricity generators are large thermal power plants (TPPs- Mtkvari, Tbilsresi, G-power, and Gardabani TP), and regulatory and seasonal hydropower plants (HPPs). Among the regulatory HPPs, the main providers are Engurhesi and Vardnilhesi. In total, according to the most recent data, there are 5 thermal power plants, 7 regulatory, 17 seasonal, and 60 deregulated small HPPs (up to 40 MW) operating within the electricity generation market.

The major players in the Georgian power generation market are the state, the Georgian International Energy Corporation (GIEC), Energo-Pro Georgia, Georgian Water and Power (GWP), and Telasi. The Georgian state owns 43% of the total installed capacity of power plants, while GIEC and Energo-Pro Georgia own 15% and 14% of the total capacity, respectively. While the rest of the installed capacity is shared by GWP (4%), Telasi (5%), and the remainder belongs to small individual power companies.

We have devised the Hirschmann-Herfindahl Index (HHI) to evaluate the evolution of the competitiveness of the Georgian electricity generation market. The index is an easily estimable indicator, which offers the opportunity to compare our market structure to that of other – developed – markets and to learn from their experiences in developing less concentrated markets.

The HHI measures how concentrated the markets are by calculating the squared proportion (in percentage) of each market player. It is noteworthy that the HHI varies between zero and 10,000; where, concentrated markets are characterized by monopolistic power (HHI=10,000 pure monopoly), while un-concentrated markets exhibit a high level of competition (HHI=0 perfect competition).

Conventionally, a market is:

• highly concentrated when the level of HHI is above 2500;

• moderately concentrated where the level of HHI ranges from 1500 to 2500;

• un-concentrated when the level of HHI is below 1500.

In November 2018, the Georgian electricity market was modestly concentrated, with an HHI value of 1648, approaching the threshold, of 1500, for an un-concentrated market. Whereas, in October 2018, the electricity market was moderately concentrated, with an HHI value of 2053, which is between the threshold for an un-concentrated market, 1500, and that of a highly concentrated market, 2500. Hence, the HHI decreased by 20% in November 2018, compared to the previous month. While in comparison to November 2017, the HHI in November 2018 is noticeably lower (with an HHI value of 2188 in November 2017, the Georgian market was much closer to being classified as concentrated).

Figure 1. HHI over the last year

Over the year, the HHI for November 2018 (figure 1) represented its lowest value, slightly below the second lowest, achieved in March 2018. November’s HHI is the lowest recorded value, even when calculating the values for the month of November within the 2011-2018 period (Figure 2). On a yearly basis, the second-lowest HHI value was achieved in November 2014.

Figure 2. HHI in November over years (2011-2018)

It is possible to initially observe the key reasons behind the low HHI value in 2014, similar to that in November 2018, seeing as in 2014 the now state-owned Gardabani TPP had not been built. Moreover, Tkibuli TP and Kartli WPP, which are owned by the big players within the generation market, were also not operating in that period. Furthermore, some small HPPs owned by large-scale generation companies were also not yet on the market. In addition to these factors, the reduction of generation by regulatory and seasonal HPPs also contributed to the lower HHI value. The low value of the HHI, consequently, was hardly surprising.

Since 2014, five independent seasonal HPPs and fifteen small HPPs (out of which only three belong to GWP) have entered the market. Even though the state-owned Gardabani TPP, Kartli WPP, and the GIEC owned Tkibuli TP, joined the electricity market within 2014-2018, the increasing number of newly built private independent HPPs, together with the reduced generation of seasonal and regulatory HPPs, owned by the main players with stronger market powers, contributed to the historically lowest HHI value for November during this seven-year period.

What can one say of Georgia’s decreasing trend in generation within market concentration? For the moment, there is evidence of a moderately concentrated market, which bodes well for upcoming electricity trading. The less concentrated electricity generation is, the less likely any market participant develops market power and subsequently uses it to affect electricity prices. Will this trend persist in the long run and will it be reflected by lowered electricity tariffs? While it is impossible to answer these questions right away, observing the trends over the coming years will reveal the realities. If the newly announced initiative of a public-private partnership program for financing new HPPs with pension funds turns out to be economically justifiable and becomes realized, it is likely to affect market competitiveness and HHI values in the future, hopefully in a positive way.