Government defends energy deal: Gas hedging provided price stability, lower tariffs

Enemalta did not have cash to enter directly into gas hedging agreements at the time and opted to hive off that operation to any company that won the gas power project, government says as it reacts to The Daphne Project

Former energy minister Konrad Mizzi was responsible for transforming Malta's energy generation to gas
Former energy minister Konrad Mizzi was responsible for transforming Malta's energy generation to gas

Electrogas won the gas power project tender because their offer was 20% cheaper than the second-placed bidder, the government said on Wednesday evening.

In a lengthy reaction to the latest revelations from The Daphne Project, the government said the project, including a gas hedging agreement, enabled Enemalta to make substantial savings over its previous oil-fired operations and lower electricity tariffs by 25%.

The government disputed the conclusions reached by the Times of Malta, a partner in The Daphne Project, which ran with the headline ‘Malta losing tens of millions from ‘poor’ $1 billion Azerbaijan energy deal’.

It also pointed out that the Times of Malta report failed to say that the information presented did not suggest wrongdoing by any of the parties involved, unlike another newspaper that forms part of The Daphne Project.

The latest stories from The Daphne Project are based on a leaked cache of documents from Electrogas that journalist Daphne Caruana Galizia was working on in the months before her assassination.

Open competitive process

The government insisted that the contract was awarded to Electrogas following an open competitive process which analysed the final result on the basis of “a long run average price offered by the bidders”.

For the purposes of awarding the contracts, it was not important whether the difference in price proposed by the bidders was due to any particular component of the project, the government said.

“The criteria determined by Enemalta for assessment and evaluation of the offers received were available to all interested parties who were free to bid for the project and related contracts,” it added, indicating that detailed explanations were given to the questions posed by The Daphne Project.

Describing the news report as “a negative story based on flawed analysis”, the government insisted that consumers were today paying significantly lower energy tariffs than they did under the previous Nationalist administration.

“The large reduction in tariffs has been made possible by the Delimara power and gas project and Enemalta’s corporate transformation,” the government said.

It explained that the tender was based on a power purchase agreement and a gas supply agreement. Both agreements could not be decoupled, the government said.

This meant that the winning bidder was responsible for the infrastructure and the supply of electricity and liquefied natural gas.

Gas hedging provided stable prices

Government said Enemalta did not, and still does not, have the necessary capacity or technical capabilities of managing and administering LNG supplies, which is why it opted for a model that hived off these processes to the winning bidder.

The government explained that given Malta did not have a diversified energy generation capacity like larger countries – it only has two power station that run on gas and an interconnector to Sicily – the LNG supplied to Electrogas would fulfill 65% of the country’s energy requirements. This means that any fluctuation in international gas prices would have a significant impact on utility tariffs, similar to what had been happening with oil before 2014.

The government said it had opted for stability in energy prices for a period of five years and tasked Electrogas to engage in the hedging process.

Had Enemalta opted to enter into direct hedging agreements with suppliers it would have had to provide significant cash guarantees two years before the coming into force of fixed prices, the government said, adding the company could not afford this at the time.

Enemalta turned a profit

The government said Enemalta exceeded the previously estimated €143 million annual cost-savings emanating from the power and gas project.

These savings include €80 million which was used to reduce electricity tariffs by 25% for all residential and commercial customers, and an additional €85 million, offsetting the 2012 losses of €48 million and leaving Enemalta with a profit of €37 million for 2017.

“This represents cost savings of €165 million. The success of this turnaround has in fact been attested to by all the major credit rating agencies which have consistently improved Enemalta's credit rating for the past few years,” the government said.

In its reply, the government made no mention of Nexia BT’s Brian Tonna on the selection board that chose the preferred bidder.