Gas supply price conundrum

Gas supply price conundrum

Putting Enemalta on a sound financial footing ought to have been and, to a great extent, is a feather in the Labour government’s cap. However, the project has unfortunately been mired in great controversy from the start. True, the country now has gas-fired plants and the government has been able to reduce domestic and commercial power tariffs but lack of transparency has characterised much of the project as it evolved from the drawing board to the actual installation of the power-generating facilities and the importation of gas.

The subject, relegated to the backburner for some time, is now back in the news with a bang following the publication of a leaked report that shows that, were Enemalta not obliged to buy gas from Electrogas, the economic incentive for the state-owned company would be to use the interconnector.

The conclusion has been drawn by the company’s own consultants, which means it carries weight.

Analyses of the gas contracts have shown that Malta has paid close to double the market price last year, a matter which, if correct, ought to lead to a review of the contracts as these could bring down the energy tariffs even further. However, judging by the government’s reaction, it does not seem there is any intention of doing so, at least at this stage.

A British newspaper, The Guardian, has given an extensive insight into what it correctly describes as the convoluted chain in the purchase and supply of gas. It concludes that the Azerbaijan’s state-owned company, Socar, last year made an estimated profit of $40 million out of its deal with Electrogas. Socar buys the gas for the Malta plants from Shell and sells it to Electrogas, which, in turn, sells it to Enemalta.

Socar, which has a financial stake in Electrogas, has disputed the $40 million profit figure but, like the government, it has not been exactly liberal with giving all the relevant information about the deal.

Enemalta’s own consultants have calculated the cost of power generation at both the D3 and Electrogas plants, excluding fixed costs, at about €72/MWh. This was more expensive than the €58/MWh average cost of electricity bought through the interconnector in 2015. The average cost of buying from the interconnector from January to September 2016 was €46/MWh.

According to the leaked contracts, the price at which Electrogas buys gas from Socar is fixed at $9.40 per unit for five years, until April 2022.

The first question that comes to mind, therefore, is why the gas is not being bought directly from Shell. Benchmarking exercises have revealed that Enemalta is paying a significantly higher rate than similar purchases negotiated by Greece, Italy and Turkey in 2015.

All this comes as a bitter pill, more so when considering that this is not the first time Enemalta has had a raw deal with Socar. The first was when it lost $14 million from a hedging agreement. Enemalta has made huge savings from the new power generation/interconnector set-up, making it possible for the government to reduce the power tariffs. The government has a good point in stressing the importance of security of supply and price stability but if its own consultants are right, would it not make sense to review the contracts, hopefully in as transparent a manner as possible?

This is a Times of Malta print editorial

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