RONDELI BLOG

Trade of Electricity: Successes of 2016, Reality of 2017 and Future Prospects – the Impact of Bitcoin (Part One)

2018 / 03 / 12

Author: Amb. Valeri Chechelashvili, Senior-Fellow at Rondeli Foundation

 

Negative external trade balance is a significant macro-economic challenge facing our country. Mostly, this is due to the formation of the liberal economic model coupled with the fact that after the collapse of the Soviet Union, for a multitude of political and economic reasons, the economy of Georgia collapsed as well. These reasons can be a topic of a separate study. Here, we shall address a very important issue – the accelerated growth of exports.

For the first time in the history of independent Georgia, in 2017 exports, excluding re-export, exceeded USD 2 billion and amounted to USD 2,063 million. Together with re-export it came close to the record data of 2013, amounting to USD 2,727 million, falling just USD 183 million short of 2013 indicator.

Exports in 2017 increased by 29% as compared to 2016, whilst imports increased by 9%. This is a serious step forward. The growth of exports and imports in absolute numbers were also almost equal (exports – USD 614 million, imports – USD 685 million). There was a better situation only in 2013, when exports increased by USD 534 million whilst imports reduced by USD 34 million (Source:  http://www.geostat.ge).

One could list a number of directions for both export growth as well as import substitution. The subject of this paper is one of such promising directions – trade of electricity. The sector of electric energy possesses impressive export development potential. It is widely acclaimed that one of the priorities for Georgia is to develop energy and particularly a specific sector of it – hydroelectric energy. It is interesting that in 2010, export of electricity amounted to USD 36.5 million, becoming one of the largest export positions, together with ferroalloys (USD 264 million), cars (USD 227 million), copper ore (USD 75 million) and natural wine (USD 41 million) (Source: http://www.geostat.ge/?action=page&p_id=133&lang=geo). In the same year, net exports amounted to USD 23.5 million.

Georgia’s Trade of Electricity (USD Million).

 

2010

2011

2012

2013

2014

2015

2016

2017

Exports

36.5

32.6

18.6

14.0

29.5

26.0

22.3

18.2

Imports

13.0

24.4

32.5

30.3

51.0

43.8

21.8

66.7

Balance

23.5

8.2

-13.9

-16.3

-21.5

-17.8

0.5

-48.5

Source:  http://www.geostat.ge/?action=page&p_id=133&lang=geo

Unfortunately, the trend could not be maintained. Moreover, the success of 2016 (after 2011, our country once again became a net exporter of electricity) was cancelled out in 2017, when an unprecedented amount of money was spent on electricity imports – USD 66.7 million with net imports amounting to USD 48.5 million. The table below will attempt to explain this phenomenon.

Comparisons of the Growth of GDP of Georgia with the Consumption of Electricity, in Percent

 

2010

2011

2012

2013

2014

2015

2016

2017

GDP Real Growth (%)

6.4

7.2

6.4

3.4

4.6

2.9

2.8

4.8*

Electricity Consumption Growth (%)

10.4

9.6

1.3

3.3

4.9

2.0

6.2

N/A**

*Preliminary.

**Not available at the moment.

Sources:  http://gnerc.org/files/wliuri%20angariSi/ANNUAL%20REPORT%202016_opt.pdf

http://www.geostat.ge/?action=page&p_id=118&lang=geo

The two indicators presented in the table move more-or-less in sync after the saturation of the individual consumption market in 2013-2015, which is entirely logical. In 2016, the growth of the consumption of electricity (6.2%) far exceeded the real GDP growth (2.8%), whilst the additional demand was covered through increased production of electricity (7.2%). As a result, after a four-year pause, Georgia once again assumed the status of a net electricity exporting country.

As already pointed out above, such a state could not be maintained in 2017. Georgian National Energy and Water Supply Regulatory Commission has not yet published the 2017 Report; however, we can assume with high likelihood that the growth of the consumption of electricity has significantly exceeded its production, which caused the necessity of a record amount of electricity imports in the independence period, with the value reaching about USD 66.7 million.

Presumably, the growth of the consumption of electricity exceeded 10% in 2017, as opposed to 6.2% growth in 2016. Since this was not corresponded with equivalent GDP growth, there has to be another explanation for this occurrence, for example, the growth of the volume of electricity used for Bitcoin mining.

This problem has already appeared in Iceland. The growing demand on electricity resulting from Bitcoin mining already created problems within the energy system. Local energy experts started talking about the danger of energy crisis. Already today, the amount of electricity spent on mining Bitcoin in Iceland is twice as much as the volume of individual consumption (See:  http://www.bbc.com/news/technology-43030677).

Currently, Iceland has a lively debate about putting Bitcoin mining within comprehensive legal framework. Icelandic MP, Smari McCarthy (https://twitter.com/smarimc), is actively working on this issue. He argues that those who mine Bitcoin should themselves be interested in having coherent and transparent rules of play, so as to avoid any misunderstandings that might arise in the future. It is difficult to disagree with this opinion.

China is also seriously discussing the issue. For example, People’s Bank of China plans to impose certain restrictions on the companies occupied with mining Bitcoin. These measures include abolishing the preferential regime for these companies in the fields of electricity supply, land usage and taxes (See:  https://www.bloomberg.com/news/articles/2018-01-03/china-is-said-to-curb-electricity-supply-for-some-bitcoin-miners;https://www.caixinglobal.com/2018-01-04/china-clamps-down-on-preferential-treatment-for-bitcoin-mines-101193622.html).

How do these trends reveal themselves in Georgia’s reality and what solutions can be found, taking the interests of both businesses as well as the state into account? We shall attempt to answer these questions in the second part of our blog. 

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