‘Bitter’ and ‘bluff’ was how the Prime Minister and the Opposition Leader respectively labelled each others’ budget reaction speeches. The two political leaders this week traded barbs, insults and grossly incongruous statistics to reflect their own takes on the how the country and its economy have been performing.
Much of the real meat of what the two leaders had to say was lost in this partisan repartee, in the obfuscating numbers games that is played out every autumn in the halls of parliament.
There was, however, one major policy announcement from the opposition that stood out from the rest: the Opposition Leader’s pledge to purchase electricity from wherever it is cheapest. Out of context, the statement is something of a no-brainer. After all, what government would not constantly seek to purchase the cheapest electricity available on the market for its citizens and businesses? The Maltese government, apparently.
Should the new and improved, gas-fired power station come to fruition and the power supply agreement which the government has struck with the consortium of companies responsible for its construction and operation go according to the original plan, the country will be bound to purchase electricity from the new Delimara plant for the next 18 years, and at a fixed price for the five years following the plant’s inauguration.
Should matters go according to that plan, the country’s consumers face the prospect of being placed in an 18-year straightjacket, with fluctuations in the international price of gas, when favourable, benefitting only the producer and not the end consumer.
The country will be obliged to purchase the bulk of its energy from the new Delimara plant at a higher rate than it could get elsewhere, such as from the interconnector or the Chinese-owned BWSC power plant.
In parliament, the Opposition Leader pledged to purchase electricity from the cheapest of these sources if and when elected to power - a move that could see a future government default on its predecessor’s agreement with the private sector. Litigation would certainly follow and it will remain to be seen what kind of financial penalty the government could incur were it to withdraw from the Electrogas agreement.
In the meantime, the European Commission appears to be taking an awfully long time to weigh in with its verdict on the Security of Supply Agreement the government has struck with Electrogas. In the meantime and without Brussels’ stamp of approval on the SSA, the government has guaranteed a €360 million bank loan Electrogas has taken out from a group of banks.
Both matters are currently under the EC’s scrutiny. As far as approving state guarantees for financing power station construction is concerned, this is nothing new. It has been done and has been approved by the EC in the UK, Finland, France and elsewhere.
In the meantime, the government has hinted that the EU may tweak the Security of Supply Agreement, without specifying what tweaks were actually under discussion. The government and the Delimara consortium are both involved in talks with the EU over the matter, and the EU’s previous practice in such cases, if applied to this particular case, could be expected to be met with resistance from the consortium, which may explain the delay in the Commission’s verdict.
Last October, the EC gave the green light to a similar situation in the UK. The Commission had assessed both a UK state guarantee as well as a price support mechanism that ensures the operator receives stable revenue for a 35-year period. Both are parallels with the Maltese government’s state guarantee and the 18-year power purchase agreement.
In the first case, the Commission ruled that the private sector’s fee payable to the state for its guarantee had to be significantly increased. The Maltese government has said that ElectroGas Malta paid the government a “market-orientated” loan guarantee fee of €8.8 million on the €360 million guarantee, and Brussels could now be seeking to have that amount raised further.
As regards the price support mechanism, safeguards were added that ensured any higher profits from the project than those expected will be shared with the British public.
Two so-called “gain-share” mechanisms were put in place: The first of which is triggered if the construction costs are lower than expected; while the second kicks into action if the operator’s overall profits are higher than forecast. The final agreement was that if such extra profits materialise, they would be shared between the plant operator and the public entity - the latter through a decrease of the price paid by the public entity to the operator per unit of electricity generated.
As such if the European Commission fails to intervene in the power purchase agreement to be signed between the government and the power station consortium, the country will be placed in an 18-year straightjacket when it come to its power purchases.
On the other hand, if the EC intervenes as it has done in the UK, which it is most likely to do, the Opposition Leader may not have to make good on his threat after all.