Monica Ellena in Tbilisi -

The 2,000 or so inhabitants of Khaishi, high up in Georgia's montainous Svaneti, pride themselves on having never been conquered. Even during Soviet times, the Svans managed to preserve their customs, traditions and land holdings. But that could end if the long-planned Khudoni hydroelectric power plant (HPP) is built, which will flood the area where they live, meaning they must be resettled.

Trans Electrica, an Indian company registered in the Virgin Islands, signed an agreement with the Georgian government in 2011 to implement Khudoni, a large HPP with a price tag of $1.2bn. The scale of the project is huge: a 200-metre high dam will be built about 34 kilometres upstream from Enguri, which is Georgia's largest HPP. The affected area will cover 1,538 hectares, with a flooded reservoir area of 528 hectares. The capacity of the plant will be 702 megawatts (MW), with annual power generation reaching 1.5bn kilowatts per hour (kWh). In the government's view, Khudoni will revolutionise the country's power supply.

But this potential boon for the Georgian economy has turned into a battle. Opposition to the dam is fierce. In a sign that they mean business, irate Svan residents have sworn on a sacred icon to stop the construction. A coalition of NGOs is also calling for a halt to the project, citing geological risks, socio-economic uncertainty and a lack of transparency in the project.

Old problems anew

The controversy is not new: the Soviet government started a similar project in the late 1980s, but environmental concerns led to mass protests by the then-independence movement and construction was halted in 1989. Abandoned, half-built cofferdams, abutments and buildings stand testimony to what might have been.

The project was revived in 2005 by the former Georgian president Mikheil Saakashvili, whose government focused on hydropower in an effort to stop electricity shortages and make Georgia a net energy exporter to the region.

The new government is also adamant it must go ahead. "Khudoni is a very important project and it will be implemented one way or another," insists Deputy Energy Minister Ilia Eloshvili. "The question is whether the government should participate and how, without violating both the investor's and local population's rights. People will be certainly treated according to the highest international standards, as set by the World Bank."

But the residents' fate is not the only issue at stake. "Khudoni is planned in a seismic area," stresses Manana Kochladze, chairman of Green Alternative, one of Khudoni's leading critics. "We haven't seen any full geological study, or any detailed environmental socio-economic assessment, and there is no clear plan of how Khudoni will benefit the community."

According to Kochladze, the flooded area will directly affect 184 households, over 700 people. But an assessment conducted by the World Bank in 2008 put at 2,000 the number of residents that will have to be resettled due to the loss of social infrastructure like schools and health care. As such, NGOs are advocating for small HPPs for both environmental and social reasons. 

Joachim Gauber, a renewable energy expert who has been advising companies and governments for over 25 years, agrees on the value of small installations. "If properly designed, small-scale hydropower plants are the better option, not least because the value chain remains mainly in the region," he says.

Water, water all around

Georgia's electricity sector has come a long way from the constant blackouts and cold winters that were a feature of life a decade ago. Today, Georgia has an electricity surplus, mainly thanks to its primary natural resource: water.

The country's resources – rivers, lakes, water reservoirs, ice, underground water, bogs – rank high among the world's hydropower resources per capita. Georgia has long tried to exploit this potential. Ever since opening its first hydropower plant in 1898, Georgia has built and operated over 50 plants, including the 272-metre tall Enguri dam, which is the world's second tallest concrete arch dam and started operating in 1978. There are currently 27 small HPPs in operation, with a total capacity of 900 MW.

Currently, hydropower meets 75% of Georgia's power needs, which increased from 8.6bn kWh in 2007 to 10bn kWh in 2012, growing at an average of 3-4% per year. "Most of our hydropower comes from run-of-rivers and snow melts," explains Deputy Energy Minister Eloshvili. "For nine months of the year, we are self-sufficient, and in summer the production is so high that we can export power. The problem is winter, when the water flow is low that we have to import."

In 2012, Georgia imported 615m kWh of electricity. Most of it came from Russia, but Georgia also imported from Turkey and Azerbaijan. The same year, Georgia sold 528m kWh to Russia, Turkey, Armenia and Azerbaijan. But in 2010, thanks to the heavy rains Georgia was able to export 1.5bn kWh. The export potential is clear, should Georgia be able to stabilize its year-round production. "That can only be achieved by a reservoir," explains Norberto Pignatti, professor of energy markets at the Tiblisi-based International School of Economics (ISET). "The issue is not really big versus small; it is reservoir versus run-of-rivers. The latter don't make a difference as far as the winter gap is concerned: one year with low rain and your potential is over. The reservoir is more flexible and it allows you to balance the electricity supply even in years with low rain."

Eloshvili has no doubt that small HPPs cannot solve Georgia's challenges. "We need big plants with dams. We can't store electricity, but we can store water, and storing water will ensure the energy independence Georgia needs."

Long-term opportunity

According to official statistics, Georgia currently realizes only 25% of its total hydropower generation potential, which leaves plenty of room for growth and opportunities for investors.

Even so, caution is warranted. "Investors face two major challenges in Georgia: a small market and low prices," explains Giorgi Chikovani, deputy chief of party for the USAID-funded Hydropower and Energy Planning Project, which advises potential investors about the sector's opportunities and procedures. "Since investors need to have a clear cash flow forecast, export is essential to make the investment viable."

Eloshvili maintains that the internal market will improve. "Prices will increase, of course we understand that, but we are trying to keep them low for the next two to three years before the economic situation will improve," he says.

Analysts consider that the Turkish market can absorb Georgia's extra electricity production, especially in the summer. Due to high demand for air conditioning, Turkey's electricity consumption peaks in summer. That is when Georgia's hydroelectric generation reaches its high point, even as Georgian consumption falls. "We have a long-term plan for infrastructure development. We know exactly which lines we have to build internally and externally every year, to Russia, Turkey, Armenia, in order not only to attract but also to motivate investors to build the HPP," states Eloshvili.

Even so, the government's policy, the so-called BOO – which means that companies build, own and operate HPPs themselves – is controversial. "That policy means that investors pocket all the profits, with no benefit to Georgia," complains Kochladze.

Analysts have proposed a shift in policy to balance foreign investment and country benefits. "Some governments introduce a transfer in state ownership after X number of years," explains Pignatti. "It doesn't necessarily have to be for free, parties can agree on financial compensation."

He also maintains that there must be clarity in the company's status and registration. "A BOO agreement with a company registered abroad does not bring much financial benefit to the government."

Whether the Khaishi protestors will be able to win the day against the Khudoni HPP remains unclear. Both government and experts agree that controversy is a normal part of big infrastructure projects. "The debate around Khudoni is certainly heated. But energy investors are used to resistance to large-scale projects, in energy as well as roads. What they want to see are clear rules and procedures being followed and implemented," Chikovani says.