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Network News • 2023-12-14

An RFP to receive competitive bids on a power purchase agreement

Author: George Mangion - Senior Partner at PKF Malta
Published on Business Today: 14th December 2023

 

Growth in the use of renewable energy sources (RES) has diverse benefits for society such as mitigating climate change, reducing the emission of air pollutants and improving energy security.

The concept is topical given that the EU formally adopted an update of the Renewable Energy Directive. This paves the way for commercially produced hydrogen – that is hydrogen separated from oxygen in water, through solar-powered electrolysis. Naturally as was the case in the past decade with the polemical Electrogas electricity plant built by a private consortium, readers may now be familiar with the drill.

This power purchase agreement involves a huge infrastructure investment and requires years before revenue starts to flow.  Most are aware about wind and solar initiatives by the number of countries and corporates that have committed to back a ‘green recovery’.

But too often, these operators are being undermined by lack of funds and problems with project bureaucracy and state permits. Renewable power plants require larger upfront investments than fossil fuel equivalents, albeit their main advantage is lower running costs. This also means investors in renewables have to wait far longer to see returns.

Consider for example, Hyphen, a German-led consortium, is planning a $9.4bn investment in a solar and wind-powered green hydrogen plant in Namibia, after the German government provided financial backing.  Another case is that of the UAE.

It has promised $4.5bn to develop 15 GW of clean energy capacity in Africa by 2030 and guide investors in its potential for long term returns. The UAE also launched the Gulf region’s first Green Bond in 2017, encouraging individuals and institutions to provide $587m of upfront finance for green projects in return for regular interest payments.

Let us recall how the private sector in Malta financed the Electrogas electricity plant in 2014, fired by LNG supplied from a floating vessel. It is a 215MW producer equally owned by Siemens Project Ventures GmbH, Socar Trading SA, and GEM holding Limited.  Faced with loan difficulties, the State provided a bankers guarantee to the consortium, first on an €88 million bridge loan, and later on a major €360 million loan.

With hindsight, a default on the consortium’s part could have left the government with a large hole in its pocket. But the project did not default and the guarantee itself generated €12 banking fees for the State.

Another guarantee which Konrad Mizzi as Energy Minister signed with Azeri gas supplier SOCAR for the State was to cover any debts left by Electrogas. A critical report investigating the entire process of adjudication procedure which nominated Electrogas as the winning consortium was conducted and published by the National Audit Office.

So far, based on published accounts, we note how Electrogas registered a positive result of €19million profit which comes after four consecutive years of losses, including €56 million in 2021, €15 million in 2019, €32 million in 2018, and €23 million in 2017.

Now, let us examine the scenario leading to a offshore wind and solar project located in EEZ, with the aim of generating hydrogen in pressurized canisters set for export.  Quoting an engineer from Energy ministry, he explained that the six zones for hire in the EEZ, were identified during a preliminary consultation with stakeholders.

Several factors were taken into account including: airport buffer zone and harbour approaches, aquaculture farm boundaries, submarine cables and pipelines, exploratory oil wells and potential oil and gas prospects, fishing aggregation devices zones, marine facilities and marine and bird species in the area. 

Considering our highly mobilized community, the advent of a booming tourism industry and our 100% dependency on fossil fuels, it is about time that stakeholders in Malta wake up and seriously start investing in renewable sources with the eventual generation of Green Hydrogen.  With serious planning, and tax incentives, one can imagine visions of a green hydrogen-fuelled future, the liquified fuel that powers everything from cars to aviation and heavy machinery with zero emissions.

In this vision, the sheer scale and variety of export demand means that the supply question solves itself: investors will be happy to finance schemes to generate green hydrogen, because they are confident there will always be buyers. For now, Malta has been a laggard as regards renewable energy reaching a mere 12% mainly on home use of PV panels.

Most ask: would the electricity produced by solar panels and wind turbines be cheap enough to compete with coal or gas?  The answer is yes.

Now that we saw the end of the pandemic tunnel, economies are facing new obstacles to growth.  Both the Russian and Middle East wars have distorted commerce in Europe and racked up consumer prices. However, apart from the atrocities of war, Europe faces huge uncertainty of supply chains caused since the start of hostilities. 

At the latest COP28 conference, one is noticing a global drive to fight climate change amid new incentives to activate de-carbonisation policies.  Major oil producers have been wary of the turbulence in the markets and prudently did not seek new upstream projects resulting in a spill over effect on the production of natural gas, which is often a by-product of drilling for crude.  Still this is no panacea for renewables future as some governments started getting cold feet before allocating huge sums.

This is one reason for the shortfall in finance due to government inaction. Previously, wealthy countries pledged $100bn per year in 2009 to help fund climate change mitigation in poorer countries, but this money has not fully materialized.

To fast-track the shift to a resilient net-zero economy, a new framework on climate finance is needed, alongside crucial reforms that match the magnitude of climate finance required. Pledged commitments, meanwhile, must be met with international co-operation, a global shift to a green economy could create a net 18m jobs.  Another bottleneck to financial flows has been the failure to catalyse private capital flows for the net-zero transition.

The global financial system is not fully geared with climate action in mind, consequently international financial institutions and multilateral development banks (MDBs) need to take bold steps to use public finance more effectively to unlock private capital flows to where these are most needed.

As had happened locally for Electrogas’ nuanced selection saga, next year one expects the finance ministry to issue an RFP in a call to attract competitive bids on a power purchase agreement.

Author: George Mangion - Senior Partner at PKF Malta
Published on Business Today: 14th December 2023

 

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