How can Muscat lower rates?

Electricity rates are hot stuff and whoever touches them risks burning his fingers. From the fuel crises in the 1970s to 1996, no one dared changing them until Prime Minister Alfred Sant raised them in his first budget in the expectation that elections were still far away.

He was proved wrong and Eddie Fenech Adami won the 1998 election with the promise of lower tariffs. He kept his promise and the new rates remained untouched until 2005 when a surcharge was added following a huge rise in fuel costs for Enemalta.

In 2008, the Gonzi government scrapped the surcharge and raised electricity and water rates at the start of his legislature. The argument was that taking loans for consumption was unsustainable and subsidies would be better spent on health or education. With the approaching election this attitude was softened earlier this year, and the Government started subsidising Enemalta for increases in fuel costs to keep the price of electricity from rising further.

Low electricity rates not only benefit the domestic consumers but also keep the costs for industry and businesses low and therefore competitive in the export market, so in the long run Malta’s economy will profit. The downside is that such low rates are at the expense of Enemalta, which has to absorb the increases in fuel prices, its major expenditure. How could this be done?

The solution of Fenech Adami and his minister Josef Bonnici (now Governor of the Central Bank) was through loans. By judicious shopping around, Enemalta succeeded in borrowing money at the average rate, which is good so long as the loan is eventually repaid. However, fuel costs kept rising and the size of the loans rose to €678 million by the end of 2010 and it is reported that it is now nearer €800 million.

Since 2008, when Tonio Fenech took over as minister, Enemalta has been making an operating profit so it can start repaying the loans. However, it has also embarked on large projects which are necessary because of the obligation to close down the Marsa power station. The 2009 report on the National Strategy for the Reduction of Greenhouse Gas Emissions states that Enemalta needs to spend €1.2 billion by 2020 in projects to achieve the required reductions.

With an operating profit of €40 million per year, as in 2010 (the last published report), this can hardly be done, considering that 40 per cent of the operating profit goes to pay interest on the loans. So, Joseph Muscat’s solution for lowering electricity rates cannot be by taking out more loans. Such loans are unavoidable for the capital projects but borrowing to subsidise consumption is madness.

I think Muscat’s secret weapon is the new Delimara plant.

Operating profit in the case of Enemalta is basically the difference between what consumers pay for their electricity and what Enemalta pays for the fuel to produce the electricity. Converting the fuel to electricity is what power stations do, and this can be done in various ways.

Marsa power station does it with an efficiency of 27 per cent while the plant at the first phase of Delimara does it at 32 per cent. The BWSC plant has an efficiency of 47 per cent. The laws of physics dictate that most of the energy in the fuel has to be rejected as heat, so that 47 per cent is a big achievement indeed. What does this mean in real terms?

Supposing the BWSC plant operates at a 60 per cent load factor, it will produce 750,000 megawatt hours of electricity per year. At 47 per cent efficiency the savings in fuel compared to Marsa will amount to some €60 million per year, more than doubling Enemalta’s operating profit. This is not enough to solve Enemalta’s problems but part of this profit may be given back to the public in the form of lower tariffs.

The other big Enemalta project is the cable to Europe, where electricity is available at a lower cost than can be produced in Malta. No costings have yet been published but savings comparable with those of the BWSC plant are probable.

Closing down Marsa will save manpower costs as Delimara needs fewer staff. It is not known how the Government will deal with the problem of excess personnel but it is hoped that the end result will be a leaner and more efficient corporation. Privatisation of Enemalta has been mentioned, but this requires the Government to absorb the outstanding loans as in the case of the Drydocks, which may run counter to EU laws on state aid.

Subsidising Enemalta from public funds is also illegal. However, it is possible for the Government to provide a subsidy direct to the consumer. Still, as in the case of gas, privatisation does not lead to lower prices to the public.

I do not believe the Sargas project of creating a floating power station in front of Delimara power station in Marsaxlokk Bay is feasible at all. It would interfere with the existing station and would certainly result in frequent power cuts. The solution to the high electricity rates lies elsewhere.

John Pace is a former Enemalta manager, generation.