In virtue of the Electricity Supply Directive – concerning measures to safeguard security of electricity supply – Malta has implemented an ongoing strategy, which to date appears sound. This notwithstanding, such developments, while encouraging, raise questions concerning the future dynamics of Malta’s electricity market.
The approach taken to revamp Malta’s energy sector largely consists of four measures: grid interconnection with Sicily; the promotion of domestic and commercial scale investment in solar energy based on the Renewable Energy Directive; the development of a new gas power plant; and the conversion of the BWSC power plant to gas from heavy fuel oil.
With the interconnector to Sicily recently coming online, Malta’s power generation profile moved from isolation to interconnection with all the corresponding benefits that potentially ensue therefrom. Meanwhile, investment in small- and large-scale solar energy installations is steadily increasing each year with some optimists claiming that Malta is still on target to achieving its 10 per cent renewable energy targets by 2020.
The next and more significant stage of this transition is to move from an oil-based system with limited renewable energy contributions to one where gas dominates. This transition shall be in line with the parameters of the Common Rules for the Internal Market in Natural Gas Directive (NGD), which amongst others, provides for a cooperative platform between the member states for natural gas trading.
But how will this eventual power generation profile function in practice between the various stakeholders; or more specifically, what are the rights and obligations agreed to between the various stakeholders and Enemalta regulating or guaranteeing the uptake of their installed generation capacity?
Most of the agreements executed between the various electricity market players and Enemalta are not publicly available and little is known of their content; yet the manner in which they interact is essential for the proper and efficient functioning of Malta’s electricity market. This lack of transparency is incompatible with the requirements of market liberalisation in terms of the EU third energy package for liberalisation of the electricity market.
With both the development of a new gas power plant and the conversion of the BWSC power plant still underway, the interplay and potential conflicts that may ensue between these competing stakeholders is still an uncertainty
The agreements referred to include: the power purchase agreement (PPA) between Enemalta and Electrogas concerning electricity supply via the new gas power plant; the PPA between Enemalta and D3 Power Generation Limited (D3P) concerning electricity supply via the converted BWSC power plant; and the framework agreement executed between Enemalta and Enel Trade concerning electricity supplied via the interconnector.
While Malta heretofore had obtained a derogation from the implementation of certain aspects of the Electricity Directive concerning common rules for the internal market in electricity - as a result of which Malta was not obliged to promote a free market structure due to its “small and isolated” character - the agreement with Enel Trade and the coming online of the interconnector effectively ends Malta’s privileged status, binding the market to allow a higher degree of competition.
Traditionally, Malta’s power generation was limited to a monopoly held by Enemalta. Liberalisation of the electricity market in 2007 brought about partial competition in the form of limited solar photovoltaic uptake on a priority grid access basis.
However, it is only now, with the introduction of the interconnector, the impending development of a new power plant and the conversion of the existing BWSC power plant, that we will begin to witness further competition in the market in electricity generation with Enemalta continuing to act as the sole distributor of electricity to consumers. Solar energy uptake is still too low to affect the dynamics of the electricity market so this is being omitted from the scope of this article.
Assuming reductions in the cost of energy production are passed on to consumers, increasing competition is vital to reducing electricity prices whilst also increasing security of supply; however, maintaining a healthily competitive system is not a straightforward affair, lesser still in Malta’s micro electricity market which does not benefit from economies of scale.
Large-scale power generation is a capital intensive business and power generation companies will be concerned with two fundamental risks: market demand risk, and price risk. PPAs are essential in this respect, being the agreements which typically regulate these risks in virtue of minimum purchase commitments, which are provided for a predetermined - although usually extendable - period of time. The purpose of the PPA is to instil investor confidence by encouraging stakeholders to invest in power generation projects with the attraction of receiving a fixed and regular cash flow in return.
Publicly available information on the PPA between Enemalta and Electrogas is somewhat conflicting, with certain information suggesting that there is no contractual agreement to purchase predetermined units of electricity, while concurrentlystating that the PPA has been executedfor a period of 18 years at a fixed tariff and that Enemalta has the ultimate rightto optimise its various sources of power generation unilaterally.
This scenario would be inconsistent with the general notion of a PPA and indeed it would be unusual for a power-generating company to agree to develop a power plant without addressing electricity demand risks through minimum purchase requirements. After all, the provision of a fixed tariff over a prolonged period of time does not provide certainty to an investor unless minimum electricity supply commitments are not simultaneously guaranteed.
Unlike Electrogas, Shanghai Electric Power Co. Ltd’s (SEP) interests in Malta go beyond power generation and its partnership with Enemalta is said to include investment in renewable energy power projects as well as the creation of facilities for servicing electricity generation and distribution plants in Europe, the Gulf and Africa.
However, while SEP’s risk may be more diluted than that of Electrogas, with the Chinese company expecting a return on investment from more than one intended activity, one would still expect D3P’s PPA with Enemalta to also incorporate minimum electricity purchase requirements (D3P is the owning company of the BWSC power plant, which in turn is almost wholly owned by SEP).
With SEP also having a 33.3% stake in Enemalta and as a result partially owning the distribution system operated by Enemalta, one would also expect SEP to demand higher percentages of electricity supply to be sourced from the BWSC power plant so as to maximise the latter company’s profits.
However, with both the development of a new gas power plant and the conversion of the BWSC power plant still underway, the interplay and potential conflicts that may ensue between these competing stakeholders is still an uncertainty, particularly in light of the application of the NGD which contains provisions with a view to achieving a competitive, secure and environmentally sustainable market in natural gas.
The third potentially major source of electricity supply is Enel Trade (the official partner selected by Enemalta to operate the interconnector for five years) which is responsible for sourcing electricity from Italy on Enemalta’s behalf. In spite of limited publicly available information on the framework agreement signed between Enemalta and Enel Trade, it is expected that this third source of electricity supply will take on a subsidiary role to electricity generated by the new Electrogas power plant and the BWSC power plant.
Having a capacity of approximately 200 megawatts, the potential of sourcing electricity through the interconnector will be limited due to the PPAs executed with the other stakeholders; more specifically, due to minimum electricity purchase commitments assumed by Enemalta. Indeed it is expected that the interconnector will be sidelined to largely cater for peak load requirements, particularly in the summer periods, with base load electricity demand shouldered by the new Electrogas power plant and the BWSC power plant.
Once the converted and newly built gas power plants are up and running and the shift to gas complete, the next consideration in electricity market competition will be that concerning increased gas-to-gas competition, further enhancing the diversity of Malta’s gas supply. Meanwhile, increasing renewable energy contributions will continue to play a significant role, the principal issues in this respect being how to balance the presently more expensive renewable energy uptake against established PPAs that capture most of Malta’s electricity demand while maintaining low electricity prices.
This article is not intended to offer professional advice and you should not act upon the matters referred to in it without seeking specific advice.
Peter Grima (Fenech & Fenech Advocates) specialises in energy law and policy.