Dechert OnPoint: Construction of Power Plants in Georgia

Dechert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ruslan Akhalaia and Irakli Sokolovski, as well as Ana Kostava and Ana Kochiashvili, is partnering with Georgia Today on a regular section of the paper to provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

The Ministry of Energy of Georgia (the “Ministry”) has recently released Georgia’s Energy Strategy for 2016-2025 (the “Strategy”) that sets out the national energy policy of Georgia for the next decade. The Strategy focuses on the potential of the country to effectively exploit the existing hydro, wind, solar, biomass and geothermal resources. By attracting domestic and foreign investments, the Strategy aims to reduce the dependence on imported energy resources and to increase export potential in order to transform Georgia into a regional hub for clean energy production and trade.

This OnPoint article reviews the rules and procedures of expression of interest for construction, ownership and operation of power plants in Georgia.

EXPRESSION OF INTEREST

On 7 September, the Government of Georgia (the “GoG”) introduced amendments to the Decree of the GoG on Approval of the Rule of Expression of Interest for Technical and Economic Feasibility Study, Construction, Ownership and Operation of Power Plants in Georgia (the “Decree”) in order to attract investments into the energy sector.

According to the Decree, a list of potential power plants approved by the Ministry is published on its official web-page along with basic information about each power plant (the “Approved List”). Based on an investor’s initiative or application, the Ministry makes a decision to announce the expression of interest for a particular project (the “EOI”) from the Approved List. The terms and conditions of EOI shall be published on the official web-page of the Ministry, covering details of the requirements, including but not limited to the technical parameters, the estimated investment costs and the terms for the commencement and commissioning of the power plant.

According to the Decree, an interested party shall submit an application to the Ministry with the relevant information and documentation requested by the terms and conditions of the EOI. The applicant shall also submit its proposed price for electricity to be sold to the state-owned Electricity System Commercial Operator (“ESCO”) and financial model, which determines financial indicators, including investment expenditures, corresponding to the suggested price (the “Financial Model”).

Additionally, the interested party shall present a bank guarantee in favour of the GoG in accordance with the total installed capacity of the power plant in the amount of USD 5,000 or equivalent in Euros per MW (the “Preconstruction Guarantee”). The Preconstruction Guarantee shall be issued by a bank licensed in Georgia and/or by a member of the Organization for the Economic Co-Operation and Development. The total amount of the Preconstruction Guarantee shall not exceed 15% of the share capital of the issuing authority.

SELECTION OF THE WINNER

Only a legal person or a consortium of legal persons is eligible to apply for the EOI. The application, the submitted documentation and the Preconstruction Guarantee of an interested party shall comply with the terms and conditions set out in the EOI.

The winner of the EOI (the “Winner”) is determined by resolution of the GoG. If the number of applications submitted in accordance with the terms and conditions of the EOI does not exceed one, the GoG may declare such participant as the Winner. In the event that more applications are submitted, the GoG shall announce as Winner the applicant that proposed the lowest electricity price based on the corresponding Financial Model. If there are two or more applications with equal lowest prices and corresponding financial models, the GoG shall grant applicants additional time to submit improved proposals and then select the Winner based on the same criteria.

At the end of the selections process, the Ministry shall return Preconstruction Guarantees to all participants of the EOI, except the Winner. Based on a resolution of the GoG, a memorandum of understanding will be executed between the GoG, ESCO and the Winner (the “Memorandum”).

The GoG is also authorized to conclude a Memorandum regarding the power plant that is not included in the Approved List based on the interest of the investor. Terms and conditions of such proposal are set out by an individual administrative act of the Ministry.

MEMORANDUM OF UNDERSTANDING

The Memorandum is composed of two phases: (i) a Preconstruction Phase; and (ii) a Construction Phase.

In the Preconstruction Phase, in addition to the obligations set out in the Memorandum, the Winner shall complete the technical and economic feasibility study of the project and environmental impact assessment report.

In the Construction Phase, in addition to the obligations set out in the Memorandum, the Winner shall: (i) obtain the right to use the land within the area of the project; (ii) obtain any and all necessary permits for the implementation of the project; (iii) commence the construction of the power plant; (iv) conduct the construction works in accordance with the construction, environmental and safety regulations of Georgia; (v) complete the construction works; and (vi) commence operation in accordance with the respective rules of Georgia.

At the same time, in the beginning of the Construction Phase the Winner shall submit a construction guarantee in favour of the GoG (the “Construction Guarantee”) for either (i) USD 100,000 or its equivalent in Euros per MW for the power plant with 100 MW or less total installed capacity; or (b) USD 50,000 or its equivalent in Euros for the power plant with more than 100 MW installed capacity. The submitted Construction Guarantee shall meet the criteria set forth for the Preconstruction Guarantee.

MANDATORY SALE OF ENERGY

The Winner shall have the obligation to sell to ESCO the full volume of electricity generated in the January-March and the September-December periods of each year for ten consecutive years from the commissioning and commencement of the operation of the power plant.

In other words, for a period of 7 months per year, ESCO is obliged to buy and the newly build power plant is obliged to sell to ESCO full amount of generated electricity.

After three months from commencement of operation of the power plant, the Winner shall ensure, at its own cost, the preparation of an audit report carried out by an audit company approved by decree of the GoG (the “Audit Report”). The Audit Report shall estimate reasonable investment expenditures related to the construction and commissioning of the power plant (the “Reasonable Expenditures”). The Winner shall reflect such Reasonable Expenditures in the Financial Model.

The Winner shall sell the energy to ESCO in accordance with the price suggested during the EOI. In accordance with the Reasonable Expenditures, the Audit Report may suggest lower price for mandatory sale of energy. After reflecting Reasonable Expenditures in the Financial Model, the Winner shall assess the profitability of investments over a period of time through the internal rate of return. The price shall be reduced once if the Audit Report suggests a lower price and internal rate of return of the project remains the same. The Memorandum shall be amended respectively.

* * *

Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

Dechert’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice.

Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.