Leasing New Way of Energy Independence or Something Similar
By Vakhtang Berishvili
Georgia is an energy importer - our energy balance is negative, which means that we consume more energy than we produce. To fill up the difference, energy is imported.
Energy production in Georgia is important in several respects. First, access to local energy is essential to meet the growing demands of the economy in general – ever-increasing import is associated with certain technical difficulties. If the economy faces a deficit, among other drawbacks, an additional increase in energy prices may be a consequence.
In addition, the development of local production as one of the business sectors is important by itself. This means more investments, more wealth, and more employed people.
Finally, it is not good when a country's energy and therefore its economy depends on the policies and decisions of other countries. Even if it is a friendly neighbor, not to mention a hostile neighbor. Energy security is an important factor for the development of the country and should be (and, mostly, is) properly addressed by various stakeholders.
However, unfortunately, Georgia has no or has a very small amount of fossil energy sources. At first glance, the solution is to generate renewable energy. A deeper analysis shows that Georgia will not become a net energy exporter (in total and not at any point in time) in the coming years.
Of the five major sources of renewable energy (wind, solar, biomass, geothermal, and hydro), each is characterized by a specific problem that is often beyond our control.
Wind energy requires very large investments per generated unit of energy and therefore it is almost impossible to get a normal (for Georgia) level of return on investment. To develop this direction, it is necessary to mobilize large volumes of grants or other cheap/free financial sources. This is possible but very difficult to accomplish.
Solar energy production is becoming cheaper and cheaper, but even in this case we face a situation similar to wind energy. It is impossible to get a more or less normal return on investment without financial aid. Generating solar energy is profitable for private consumption or for small business (heating and hot water). Also in cases when the customer does not have access to the grid.
Theoretically, Georgia has a large biomass resource, but studies show that this resource is not sufficient for industrial-level energy production due to geographical dispersion, lack of infrastructure, and difficult landscape conditions. And the cultivation of energy plantations is unprofitable. However, it should be noted that biomass energy is cost-effective and is intensively used for small local needs (heating, cooking).
At first glance, the use of geothermal energy is easy for local purposes, but due to legislative and financial barriers, the use of this type of energy is also quite limited.
Luckily, hydropower gets a lot of attention in Georgia, the country is rich in this type of resource and considerable results can be achieved. We face other types of problems in this sector. The main ones are the low interest of investors (with a few exceptions) and difficult social and political factors. Therefore, for Georgia becoming an energy exporter only using this energy is not feasible in the near future.
There is another way out of the impasse. Energy saving is the solution. However, saving not at the expense of development, but through energy efficiency.
Simply put, energy efficiency means using less energy to provide the same level of energy services. For example, it is possible to obtain and maintain a comfortable temperature in an energy-efficient building at the expense of much less energy; or energy-efficient transport can deliver the same amount of cargo over the same distance, compared to non-energy-efficient, at the expense of less fuel.
We have to pay for energy efficiency. Nevertheless, with the right equipment and project design, the energy savings usually outweigh the costs invested in the improved technology.
Equipment and transport vendor companies are actively offering the latest energy-efficient equipment to their customers. But, despite their efforts, old technologies and used equipment still make up the bulk of sales.
This fact seems to contradict the logic, but if we take into account that energy-efficient features increase the purchase price by at least 5-10%, and often by 20-30%, Georgian consumers’ behavior becomes clear. Due to the low availability of financial sources, companies are trying to minimize the initial investment cost. Available volumes of equity and debt often are not sufficient to cover even small additional charges, and the first part of the project that is sacrificed is energy efficiency – operating costs will increase considerably, but more limited initial investments decrease.
A solution exists - financial leasing, or often simply called, leasing.
In the case of loan financing when purchasing energy-efficient equipment, the customer is required to provide collateral, mainly in the form of real estate. Even companies that have such property often use it to secure other loans, or plan to do so in the future. Consequently, energy-efficient technology is an additional financial burden that businesses either cannot or do not consider appropriate to bear.
In the case of leasing, everything is different. The leased equipment is itself collateral. Even if a company does not possess any real estate, the purchase of equipment is not a problem. And if it owes some, it is free to obtain additional financing in the form of a loan for other purposes with this pledge.
The leasing company will buy desired equipment for you and transfer it to you for use in exchange for periodic payments. During the leasing period, the equipment will be used by you, as the client, but is still owned by the leasing company. However, this fact does not limit you in terms of having all benefits from equipment usage. When the lease expires, the equipment automatically becomes your property and you can continue to use or sell it.
Leasing is a financial resource that will help businesses get more yields and grow faster, and the country - to reduce energy consumption, and thus increase the level of energy independence. In the post-pandemic period, the country's self-sufficiency becomes even more important.
To promote innovative methods (including leasing) in energy-efficient projects financing, the European Union’s Horizon 2020 research and innovation program funded the E-FIX project (Energy financing mix in order to activate private sector finance for increased investments in sustainable energy project) in 2018.
Fourteen partner organizations from six European countries are participating in the project. The project partners from Georgia are Energy Investment Consultants, Georgian Leasing Company, and Caucasus University.
Numerous activities have been performed since the start of the project: researches have been conducted, training materials have been prepared, stakeholders (equipment suppliers, academics and the public sector) have been mobilized and many of them have agreed to become ambassadors of innovative approaches to energy efficiency and financing. Georgian Leasing Company is already successfully financing energy-efficient projects. Study and training materials prepared are used in the educational process at Caucasus University. Innovative methods such as crowdfunding and energy performance contracting are being tested and promoted in partner countries. The knowledge and experience accumulated in the project will be available to everyone.
Interested parties can find information about the project and prepared materials on the project website http://www.energyfinancing.eu.
Vakhtang Berishvili is the Assistant Professor at Caucasus University and the Financial Expert of the EFIX project