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The great energy debate

This past week feels like the general public has endured a specialised seven-day crash course on LNG, heavy fuel oil, power purchase agreements, hedging, LNG storage tanks and LNG ships, and unfortunately the issues at stake have not gotten any simpler. In fact, matters have become much more complex, incredibly politicised, and have left many still wondering if we are any closer to the truth. The comments I pose for further reflection are a result of events that have unfolded over the past week.

The interconnector between Malta and Sicily should provide us with the first ever opportunity to import cheaper electricity- Alexander Tranter

The 10-year fixed price power purchase agreement has now been further clarified as being composed of a mix of a long-term gas supply agreement, which is certainly possible, coupled with a long-term hedge on gas energy prices.

As I said in my article last Sunday, the problem with the latter is that one doubts very much whether such a long-term hedge is indeed feasible. A more realistic long-term hedge could be one for five years.

The longer the hedge, the more significant are the guarantees and cash flow risks required by the buyer and seller to hedge, which will no doubt be reflected in a much higher hedge cost.

The proposed 24-month timeframe to complete the building of a new 200MW combined cycle plant, a new LNG terminal and new LNG gasification plant at Delimara was challenged last week by a number of local and foreign experts. Consensus seems to indicate that a three- to five-year term is more realistic.

Project timing is a critical factor. If the 24 months become 36, 48 or 60 months, the decision of an immediate LNG investment at Delimara will not remain a feasible one.

The reason for this is that as the timeframes for both the construction of an LNG terminal and the gas pipeline get much closer, experts agree that the latter would provide Malta not only a cheaper source of energy but will also eliminate the need to have on-shore storage gas tanks at Delimara.

Any investment in new generating infrastructure will have a direct effect on Enemalta’s current workforce. Enemalta personnel know very well that the closing of the inefficient Marsa power station will bring change to the corporation. More modern generation infrastructure will require a lower number of personnel to operate and maintain these assets. Irrespective of any future energy plans, the redeployment of personnel working at the Marsa power station will need to be considered as soon as the interconnector is switched on.

Any future government needs to have an immediate plan of action supported with training schemes and mentoring programmes that seek to utilise effectively the very valid and highly experienced Enemalta personnel I have worked with during my role as chairman of the corporation.

The issue of supply of LNG has brought about an in-depth public debate on the type, size and location of the LNG storage tanks, as well as the method of delivery and discharge. Malta’s energy needs for LNG are a drop in the ocean when compared to the capacity other larger countries consume.

It is a well-known fact in energy circles that the bigger the generating plant, the better the chances one has in negotiating a more aggressive price for the supply of LNG because of the bigger volumes.

Malta unfortunately does not have huge volumes to consume, so similarly to what happens at the moment with the delivery of heavy fuel oil and gas oil, the transportation of LNG by sea will need smaller LNG carriers, and not many of these exist worldwide according to local experts. This creates a critical supply chain issue not only from a price point of view but also from the method of discharge to be adopted.

Further research will be needed if ship-to-shore discharge does not occur at the quayside as underwater discharge of LNG at -160˚C from the ship-to-shore will most likely increase the incidence of risks.

The current national energy debate seems to be degenerating into a ‘how-low-can-you-go’ price competition. This is not the reality of the energy world. National energy decisions are long-term commitments which not only involve significant capital investments but will commit the country to a particular energy source for many years.

In addition, the environmental effects and social issues must be analysed in depth prior to taking any energy decisions. Seeking to lower electricity rates too soon and too fast could push national energy decisions into being short-sighted, expensive and ultimately wrong decisions.

In this regard, certain long-term energy decisions taken a number of years ago are expected to reap benefits. In 2013, Enemalta should register significant annual fuel savings and reduced emissions, running the newly built, more efficient generating plant at Delimara.

Enemalta should also increase revenue as a result of the higher number of installed smart meters which should reduce the levels of electricity theft.

In 2014, the interconnector bet­ween Malta and Sicily should provide us with the first opportunity to import cheaper electricity from the European electricity grid and further reduce the physical emissions into our local environment.

These are the three key contributors that can realistically fulfill any promise to lower electricity tariffs over the next 24 months and have a cleaner environment.

Alexander Tranter is a former chairman of Enemalta.

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