The Georgian Electricity Distribution Market is becoming more concentrated

The Georgian Electricity Distribution Market is becoming more concentrated

The FINANCIAL -- In April 2018, Georgian power plants generated 1,064 mln KWh of electricity. This represents a 30% increase in total generation, compared to the previous year (in April 2017, total generation was 817.2 mln. kWh). On a monthly basis, generation increased by 7% (in March 2018, total generation was 997 mln. kWh). Consumption of electricity on the local market was 981 mln. KWh (+5% compared to April 2017, and -12% with respect to March 2018).

Total electricity consumption in Georgia came from Energo-Pro Georgia (49% - 485 mln. kWh), Telasi (24% - 237 mln. kWh), Abkhazia (15% - 149 mln. kWh), and direct customers (11% - 109 mln. kWh) (Figure 2). Annual demand from Energo-Pro Georgia increased by 16%, compared with 9% from Telasi and 1% from Abkhazia. Demand from direct consumers decreased by 14%. 

Figure 1. Electricity Consumption by Type of Customer (mln. kWh)

Energo-Pro Georgia is the largest consumer of electricity. The share of electricity consumed by Energo-Pro Georgia has been increasing over the years (See Figure 3). In April 2018, it had the highest share in comparison to previous years (in the same month).

Figure 2. Share of Electricity Consumed by Energo-Pro Georgia

One of the main reasons for such a large increase in the share of electricity consumption coming from Energo-Pro Georgia is that in August 2017, Energo-Pro Georgia bought Kakheti Energy Distribution and became the only supplier of electricity in the regions. After this merger, Energo-Pro Georgia serves more than 1,200,000 consumers and its service area covers 58 846, which is about 85% of the total area of the country. To see how this merger affected the competitiveness of the electricity distribution market, we calculated the Hirschmann-Herfindahl (HHI) Market Concentration Index (see figure 4). The HHI is the sum of the squares of the percentages of market shares of distributor companies and measures how competitive the market is. HHI has a maximum value of 10,000, which means that a market is a perfect monopoly. Higher values for HHI implies that the market is more concentrated and less competitive. There are two main factors driving HHI: the number of participants on the market and how market shares are distributed. A low number of participants and unevenly distributed shares both contribute to an increase in the Index value.

Figure 3. Hirschman-Herfindahl Index for Electricity Distribution

According to the available data, since 2011, the Georgian electricity distribution market has consistently been highly concentrated.3 This is not surprising, because between 2011 and 2017, there were only four distributor companies (plus direct consumers, who had 15-25% of market share), whose market shares were not evenly distributed (for example, Kakheti Energy Distribution had 2-3% of the market, while Telasi and Energo-Pro Georgia covered 25-40 % of the market in this period).

HHI significantly dropped from 2014 to 2015. One of the main reasons for such a big drop was the fluctuation in market shares (with market shares of larger operators shrinking and those of smaller operators increasing). Before 2014, Energo-Pro Georgia was consuming more than half of available electricity (51%-52%). During 2015-2017, Energo-Pro Georgia’s share dropped to 47%-48%, while Telasi’s share increased to 25%-26% (from 22-23%). After 2017, there was a significant increase in HHI, mainly because of the merger between Energo-Pro Georgia and Kakheti Energy.

Kakheti Energy Distribution’s share was usually about 2-3%. Therefore, if consumption remained more or less the same, Energo-Pro Georgia’s share would be currently around 44-45%, (still less than 49%). This implies that not only has the size of the company increased, but demand for electricity from the regions has also increased. Indeed, in April 2017, 417 mln KWh of electricity was supplied to Energo-Pro Georgia and Kakheti Energy Distribution, while in April 2018 (after merging these two electricity distribution companies), 484.5 mln KWh of electricity were supplied to Energo-Pro Georgia. One of the reasons, why electricity consumption has increased, may be the increased bitcoin mining4.

How can more concentrated markets affect the consumers?

Having monopolies on the electricity distribution market of the regions means that consumers do not have freedom of choice to decide which supplier to use. Therefore, suppliers have market power and can set higher prices than in competitive markets. However, the merger of these two distributor companies has not changed the situation for consumers living in the Kakheti region. Before August 2017, they still had only one supplier (Kakheti Energy Distribution) and they could not get electricity from other companies. As for prices, Georgian National Energy and Water Supply Regulatory Commission controls them, so that monopolists cannot get as much benefits from monopolistic power, as they could get in other (non-regulated) industries. This highlights how important is to have a competent and efficient Regulatory Authority in place.

With good regulation, consumers could even get benefits from the merger, if Energo-Pro Georgia generates efficiency savings or improvements in the quality of service greater than those that would have been experienced by smaller distribution companies and the regulators transferred part of the gains to consumers by setting lower tariffs.

1. 1. Junior Researcher, EEPRC - ISET PI.

2. Professor, ISET and ISET PI.

3. The US Department of Justice considers an HHI of 2,500 or above to be highly concentrated and an HHI of 1,500–2,500 to be moderately concentrated

4. According to World Bank data, 5% of Georgian households are involved in the bitcoin mining process.