[ANALYSIS] Going for gas

Labour’s got the country talking about its energy policy. But the biggest question mark remains: will the private sector component become a reality to bring Labour’s plan into fruition, an expert asks?

Dr Edward Mallia
Dr Edward Mallia

Dr Edward Mallia, a retired physicist, brings a dose of pragmatism to the political football brought about since the unveiling of Labour's energy proposals - a natural gas terminal for a 200MW gas-fired power station.

"Clearly this project is not something that the Maltese government can undertake on its own. The private component is vital. Without it this project is a non-starter," Mallia says, referring to Labour's claim that it can rope in private sector support to finance the power station, together with a 10-year agreement for the supply of natural gas.

"What the PL is actually saying is that once the contract with the private company is in place, it will be in a position to subsidise energy bills. This is why Labour stated that prices for families will come down within a year and those for industry within two," Mallia said.

Mallia has however expressed his doubts over the need for Malta to invest in the manufacture of ships specifically for the Maltese project, as claimed by finance minister Tonio Fenech.

"The Mediterranean already has an established shipping fleet insofar as liquefied natural gas goes. Egypt and Algeria are both established hubs, therefore it would be very easy for Malta to become a customer for LNG carried by these ships. I cannot understand why Fenech is claiming that Malta would have to buy these ships. There is absolutely no need for this."

Mallia is also questioning the cost of 8c7 per unit for energy produced from the gas pipeline - a project still at pre-application stage for the government - that was calculated by Labour consultants DNV Kema. "The consultants stated that the pipeline is the cheapest option. I cannot fathom how this is the case: are they factoring in funding from the EU to bring down the costs?"

So has anyone asked if a LNG link qualifies for EU aid? The solution to the puzzle may lie in the statement made by Muscat that the natural gas option he is proposing was chosen to shorten the time-frame to go for gas, since the pipeline project would take up to seven years to complete.

But gas prices are susceptible to regional factors, making them vulnerable to endogenous fluctuations. Connecting Malta to Sicily via a natural gas pipeline would expose the island to the geopolitical tension that exists between the north and south shores of the Mediterranean and, more distant, to tension between Russia and Western Europe.

"Italy has had to struggle occasionally to maintain its own gas supplies, so much so that the Italian government has felt the need to diversify its supplies through the use of re-gasification terminals: one at La Spezia on the west and one in the northern Adriatic. The go-ahead has just been given for a third, at Porto Empedocle in Sicily," Mallia says.

Mallia pointed out certain inconsistencies that have emerged in the government's own energy policy, just published by the ministry for resources and rural affairs before the start of the election campaign.

"The government is now claiming that the gas pipeline to Sicily is the most viable option. Tonio Fenech seems to be unaware that his colleague George Pullicino's ministry described the LNG terminal as the favoured option in a study quoted in the draft NEP published just after the rejection of the 2013 budget."

Mallia also clarified the fact that hooking up the national power grid to Sicily via a cable is no panacea, and brings its own risks.

"If an alternating current link (HVAC) is established with the Sicilian mainland, any changes in frequency, be they due to a natural disaster or any other reason would result in the supply to Malta being cut off.

"The best method for connecting to Sicily is via a high voltage direct current (HVDC) link - again this is the conclusion reached in the draft national energy policy - yet Malta has adopted a high-voltage alternating current link. Internationally it is common practice for links in the 100km range to run on direct current, as is the case between France and the UK," Mallia said.

"The maximum output of the cable can be increased by 50MW to 250MW, but this increase can only be kept up for two hours. Any longer would run the risk of burning the cable."

Mallia also points out the fact that the debate on energy has come down to a decision that will be in the hands of voters to take, perhaps sacrificing energy policy to the political expediency of both parties. "It is a great shame that the debate on the use of wind energy has been pushed to the side. All avenues are worth exploring, especially for a tiny island like Malta."

Furthermore, silence has descended on the problem of financing Enemalta's debt via the special purposed vehicle. "The SPV issue is vital to Enemalta, without it the whole situation could blow up. Politicians seem to have forgotten about this."

What about water?

Another forgotten issue seems to be that of water policy.

Hydrologist Marco Cremona expresses concern at the taciturn approach towards water policy being taken by the Labour Party.

"I was present for the business breakfast in which the party's electricity and water tariffs were presented. The majority of the presentation and ensuing discussion was on the PL's energy proposals, with water being relegated to part of a slide at the end of the presentation," Cremona said.

"The PL is banking on the fact that any benefits from the gas project will automatically trickle down to the Water Services Corporation as savings in water production, to the extent that WSC will end up in a slightly better financial situation than it is today, even after reducing the water tariffs by 5% overall. While this is correct, it is a very simplistic way of looking at the much more complex water sector."

The singularity of this approach is a particular bone of contention for Cremona, who says Malta needs tens of millions of euros to implement numerous water-saving projects that can provide an alternative and more sustainable source of water to groundwater and desalination, such as the recovery of water from sewage and from rain.

"The Water Services Corporation's only source of income stems from water tariffs. Now that Labour has fixed future water tariffs to 95% of current levels, and has ruled out the introduction of a sewage tax, there is no income stream to implement these capital projects. I wait with bated breath for the PL's water policy, which now has to work within these unnecessary constraints."

The lack of debate on water stemming from both political parties is also a concern according to Geoffrey Saliba, EU LIFE+ project manager at the Malta Business Bureau, which has championed water-saving measures for businesses.

"With an election round the corner, it would be the ideal time for political parties to discuss the water issue. Malta is one of the ten driest countries in the world," said Saliba.

Water policy is not only a local problem, certain obligations exist under EU law.

"All EU member states are obliged to ensure that water pricing recovers costs of production, includes a resource and environmental cost, and ensures that it acts as an incentive for efficient use.

"Billing inefficiencies mean that 31% of the water supplied by the WSC is not billed. If these inefficiencies were to be addressed, the WSC's costs would remain the same but revenue would increase," Saliba said.

 "National policy requires refining to meet the Commission's expectations. Political manifestos for the 2013 elections omit mention of whether or how policy changes are planned to meet these targets - clarifications from the political parties would be welcomed," Saliba concluded.

Michael Briguglio, chairperson of the green party, Alternattiva Demokratika, points out that Malta's water policy requires further diversification, with the 100% dependence on reverse osmosis a major weakness not highlighted by the PL's plans.

"In the case of a man-made disaster such as an oil spill off the Maltese coast, Malta's supply of fresh water could potentially we wiped out overnight."

Briguglio also expressed doubt over the timeframes mentioned in the PL's energy policy for a 200MW natural gas-powered power station. "Tenders take time, even at local council level let alone on a project of national importance. Likewise, the right of appeal can be a lengthy process. It is not the correct procedure if the PL already has a favoured company. The tendering process needs to be competitive," Briguglio said.

The Malta Developers Association (MDA) has come out generally in favour of the PL's proposals.

"These proposals are a positive development because the lowering of these tariffs could be the key to a stronger, more vibrant Maltese economy. The positive effect of cheaper tariffs on the scale indicated by the Labour Party on the Maltese economy would undoubtedly be enormous and would stimulate the business sector to contribute further for the good of Maltese society and its further progress."

But Tancred Tabone, the president of the Chamber of Commerce, has declined to comment on Labour's proposal - and while the Malta Employers Association has come out in favour of the Labour projects, it is of note that the Chamber's fence-sitting may be a clue that the business community cannot possibly object now to a project that seems to offer industry the hope of reduced energy bills.

Final food for thought

Coal-fired power plants are enjoying somewhat of a resurgence in Europe, and profits from such plants are set to almost double over the coming years.

10,600MW of coal-powered energy is expected to be added in Europe, compared to 1,600MW of new natural gas capacity. As an indicator, German utilities were on average set to lose €11.70 per megawatt of gas-generated energy, as opposed to a profit of €14.22 per MW on coal burning.

It would therefore require a very large commitment by a private company to sign a 10-year contract when greater returns to scale are available elsewhere.

Despite this, Konrad Mizzi is adamant that such a commitment is possible. "Fixed price contracts are being done for 10 years because the operator will enter into a gas supply agreement with a supplier, guaranteeing the purchase of a set volume of gas for a number of years."

By way of example, Bulgaria recently signed a 10-year contract with gas exporters Gazprom. The contract offers the possibility of price renegotiations after the 6th year. Earlier in June 2012, EnBW Energy - Germany's third-largest power supplier - signed a 10-year gas contract with an unidentified foreign gas producer with a value of €600 million a year, something that confirms that big volume hedges are possible against imponderables in gas supply.

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Re: By way of example, Bulgaria recently signed a 10-year contract with gas exporters Gazprom .. it is indeed a 10 year contract yet it is also fair to say that it is by far not a fixed price contract as the link to oil prices remains (albeit it will be at a discount to current prices given Bulgaria's agreement to invest with Gazprom in the South Stream pipeline)
Edward Mallia qal f'kummenti f'gazzetta, li Tonio Fenech qed jigdeb meta jghid li jekk ikun hemm xi leak tal-gas frizat dan jimxi fuq l-bahar sakemm jikkawza spluzzjoni! Edward qal li jekk ikun hemm leak, dan jevapora 'l fuq! Dan il-gideb kollu x'taghmel bih Tonio? Waqajt ghac-cajt int,waqqajt ghax-xufjett lil PN, u qed twaqqa ghac-cajt l-inteligenza u id-dibatitu politiku tal-kampanja ta l-elezzjoni! Tkun kredibli kieku gibt xi kritika bis-sens, imma sens minghandek ma tantx hemm tama li nistennew given li l-froga tal-finanzi ta l-EneMalta u 40% tad-dejn kollu li Malta ghandha ghamiltu INT! Se ddum tigdeb u tharref?
@Mike Farrugia. Profs Mallia knows what he is talking about and his comments are food for thought. As to your suggestion who is talking about building ships except the PN. Have a look at this link to view the world LNG carrier fleet http://shipbuildinghistory.com/today/highvalueships/lngactivefleet.htm
Profs Mallia, I know of a company operating from Malta with international investors who has installations in Italy and two other countries, produces electricity and sells it to Enel (The Italian electricity company) and the equivalent of Enel in the two other countries. Yes I believe there will be private interest to generate electricity if the unit tariff is right.
Question. Rather than building the tanks and considering that small ships have to be built, does it make sense to do without the tanks and build three 20K ships? One ship can be used to feed the power station directly while the other two are refilling with LNG.