The economics of electricity

Every day Marsa power station burns about €400,000 worth of heavy fuel oil to produce our electricity. Delimara power station also consumes €250,000 worth of heavy fuel oil and €150,000 worth of gas oil. These figures seem incredible until one realises that these represent more than half the fuel imported in Malta, more than all fuels used in transport, aircraft, industry and households put together.

The significance of these figures lies in the fact that even a minor change in the efficiency of the plant will mean a saving or loss of many thousands of euros a day. Efficiency in this case is used in the engineering sense, meaning, basically, how many units of electricity can be generated from a tonne of fuel (this is in contrast to the use of the term in the KPMG report where the use of low-sulphur fuel oil instead of the cheaper high-sulphur oil was termed inefficiency).

Delimara burns fuel oil with an efficiency of 32 per cent as against Marsa's 27 per cent, which means that if the Marsa plant were modernised to be at par with Delimara's the savings would be €27 million a year.

So the suggestion by the Chamber of Small and Medium Enterprises - GRTU of postponing the modernisation of the power station plant to save money does not make sense.

But that is exactly what the government has been doing for several years.

Enemalta's finances are in a dismal state, especially since the establishment of the electricity surcharge system, where the government subsidises part, but only part, of the surcharge is not paid by the electricity consumers. The rest has to come from Enemalta funds and, since Enemalta does not make any profit, it has to come from loans.

There is simply no money to carry out modernisation projects. In fact, the period 1998 to date has been the longest period since 1952 when no project for the installation of new generating plant was under way.

It is common to blame rising oil prices for Enemalta's plight but it is significant that in other European countries energy companies are making record profits. So how did this come about?

Former minister Josef Bonnici, who was responsible for Enemalta from 1998 to 2003, wrote a valedictory article on not being elected saying that he had faithfully complied with the target set by his Prime Minister to keep electricity and water prices unchanged in all circumstances. International fuel prices were rising and, year after year, the Enemalta electricity division made a loss and had to borrow to be able to pay for the oil.

It was during that period that the farce of having the electricity prices set by the MCESD was instituted. By right, Enemalta could apply to the Malta Resources Authority for an upward revision of tariffs but, since both these bodies are controlled by the government, this did not happen and Enemalta was not even represented at the MCESD.

Prof. Bonnici's replacement, Austin Gatt, reversed the former's objection to hedging (and who is now laughing loudly) but maintained the freeze. Until the rises were so high that the government had to intervene to foot part of the cost. The surcharge was born. The conditions set for the system were such that Enemalta was not permitted to make an operating profit as long as the price of oil remained above the base figure of the 1999 level.

But, as if this were not enough, more expensive impositions were placed on Enemalta. The government decided to sell off the fuel trading part of Enemalta, which was the only division making any profit.

The Carbon Dioxide Trading Directive of the EU is estimated to cost Enemalta €15 million a year for not reducing the carbon dioxide emissions below the 1990 values. The emissions directives required that the Marsa power station closes down between 2012 and 2015, depending on its running hours. With the heavy dependence on the Marsa plant it is more probable that it will be 2012. So Enemalta was forced to apply to the European Investment Bank for a loan to install a new generation plant at Delimara.

There the bubble burst. The EIB had to be convinced that Enemalta will start making a profit and there was no other way except for the consumers to pay in full for their electricity and for the loans which had been taken on their behalf for keeping their bills low.

So, in the long run, did the public benefit from the long freeze of electricity prices? In my opinion it did not because it was financed by loans which will have to be paid back with interest. As Finance Minister Tonio Fenech explained, it is bad economics to take loans for consumption.

Is there a solution for this mess other than the ones proposed by the government? My solution would be for the government to continue to subsidise electricity consumption as now but not as a subvention to Enemalta but directly to the consumer. This would be similar to the rebate in the water bill. But, otherwise, Enemalta should be permitted to operate at a profit so that it can invest in efficient plant and pay back the loans.

In this way government spending would be within the budget and the European Investment Bank would be happy. Of course, the public will have to pay more for its electricity but not so much as with the total elimination of the subsidy.

In the long run, Enemalta will produce electricity more efficiently and the MRA will see that the consumer is not charged excessively. This would lead to a normal situation which should have been there in the first place.

Mr Pace is an engineer by profession