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Cyprus Energy

Suspect schemes for wind farms

Insufficient reasoning, missing documents and seemingly arbitrary government decisions are just some of the findings in an Audit Service report released this week on government subsidies for renewable energy sources (RES), focusing primarily on wind farms.

The report, which was the result of an administrative probe, found that final government decisions on the subsidy schemes, under which the state has undertaken to subsidise all of the electricity produced by licensed investors in RES at fixed prices for anywhere from 15 to 20 years, deviated from the suggestions of experts almost invariably in favour of the investors, often without reasonable justification.

The subsidies are, in part, funded by a ‘green tax’ of 0.5 cents per kilowatt-hour (kWh) on electricity consumption, collected by the state-owned Electricity Authority (EAC) and paid into the state’s RES fund. The rest of the subsidy is financed by the EAC in the form of its ‘avoidance cost’, which is basically what it costs the power company to produce a kWh in any given month. Obviously, the lower the EAC’s cost of production (that is, the avoidance cost), the more strain is placed on the RES fund, as it has to cough up more to investors producing ‘green’ electricity.

Thus, with the EAC’s avoidance cost at very low levels due to unusually low oil prices (unofficially estimated at 5 cents per kWh for 2016, down from over 11 cents – considered the viability threshold for the RES fund – and a peak 16 cents in July 2012) the RES fund now has a €22 million shortfall, which the government wants to cover by temporarily almost tripling the ‘green tax’ on electricity bills to 1.35 cents per kWh consumed.

The main decisions for the schemes in question were made in late 2008, following a March 2007 European Union decision for member-states to produce 20 per cent of their energy needs through RES by 2020. A study by Athens Metsovian Polytechnic professor Arthouros Zervos in November 2007 proposed, among other things, subsidy levels for wind farms and photovoltaic parks.

For wind farms, the study recommended subsidies from 10.8 to 14.2 cents per kWh, depending on the sums of own-money invested (i.e. excluding borrowed capital), in order to meet the goal of 12 per cent internal rate of return (IRR), set by the European Union.

For PV parks, given similar parametres, the proposal was for subsidies to range from 41.2 to 48.9 cents per kWh.
Following months of deliberations, a cabinet decision in December 2008 set feed-in tariff rates – subsidies per kWh – for various RES schemes (contracts valid for 20 years) at 16.6 cents for wind, 36 cents for PV up to 20 kW and 34 for PV from 21 to 150 kW, 26 cents for solar thermal, 13.5 cents for biomass, and 11.45 cents for biogas.

Auditor general Odysseas Michaelides
Auditor general Odysseas Michaelides

But crucially, auditor-general Odysseas Michaelides’ report said a previously proposed clause for the reduction of the wind-farm tariff by 0.5 cents every four years was left out of the cabinet decision – meaning the wind-farm price was locked at 16.6 cents for the entire duration of the 20 years.

“According to the Permanent Undersecretary of the Energy ministry, a signed copy of a study on the creation of a plan to support RES electricity-production systems, prepared by a ‘group of experts’ in September 2008, could not be found (an unsigned copy was found), nor is it known which individuals comprised the group, other than the fact that they represented the ministries and departments involved, nor were any minutes from the group’s sessions found,” Michaelides said.
“Not keeping this essential information on file, on such a crucial issue, is unthinkable and unacceptable.”

This study’s proposals were used as the basis for a ministerial committee’s final recommendation to the cabinet, which was subsequently adopted in full – minus the 0.5 cents reduction every four years in wind-farm tariffs.

“The crucial difference of the cabinet’s decision with the ministerial committee’s recommendation relates to the feed-in tariff for wind-farms, since it does not include the clause for a tariff reduction of 0.5 cents every four years,” Michaelides said.
“No document supporting the removal of the clause has been found in department files. It is our view that the handling of an issue as serious as this was substandard, since the recommendation of the group of experts was removed without any argumentation.”

Additionally, Michaelides found a clause initially recommended by the experts capping subsidized wind-farm power production at 1,500 kWh per year, with renegotiation of the terms of the subsidy deal every four years if annual average production exceeded the cap, was amended in the final cabinet decision, raising the cap to 1,750 kWh and limiting any renegotiation to a possible minimum of 1,500 kWh. In other words, renegotiation can only be permissible if a wind farm produces more than a per-year average 1,750 kWh after four years, and the new deal cannot limit the subsidy to less than 1,500 kWh.

“The amendment of the renegotiation clause in the final subsidy scheme has effectively tied the RES fund to paying 16.6 cents per kWh for 20 years for the sum total of energy produced by wind farms, since only one (out of six licensed and operational) has exceeded the cap of 1,750 kWh per year,” Michaelides said.

Meanwhile, the only argument backing the government decisions found by the Audit Service was that the scheme had to be attractive enough for investors to take on large projects, as previous efforts to encourage wind farms as early as 2004 had failed to attract interest.

However, Michaelides found, the main reason for the previous scheme’s failure had been the fact that by 2008 the Cyprus association of wind-farm energy (SAEK) had “made overtures to have the feed-in tariff increased”, and thus “all interested investors waited for the new subsidy schemes before investing, which would have brought them more profits”.
In light of these findings, the auditor-general suggested that the only way out of the ironclad contracts signed might be the actual rate of return the wind-farm owners enjoy on their investments, which, in about half of the cases exceed the “12 to 13 per cent” mark the European Union set as a reasonable return before approving Cyprus’ subsidy scheme.

“I couldn’t say – if there were overtures to anyone, I wasn’t part of them,” wind-farm owner Makis Ketonis told the Cyprus Mail.

“But, anyway, there is nothing wrong with the government listening to stakeholders on any given issue.”

Ketonis feels that the Michaelides report has unfairly focused on wind energy, painting a misleading picture.

“Photovoltaics, which I love and believe could be the answer to future energy needs, actually cost the RES fund four times as much as wind energy does – per kilowatt hour,” he said.

“Why the auditor-general has chosen to attack wind energy like this, I have no idea. But it’s generally easy to judge after the fact, in hindsight.”

Personal and professional indignation notwithstanding, the RES fund has a big hole in it, and the money needs to be found somewhere. In a letter dated July 2, 2009, approving Cyprus’ proposed subsidy scheme, the European Commission said that “if the funds raised through the [‘green tax’] levy should prove insufficient to finance the scheme, the State will cover the balance”.

“We want everything for nothing in this country,” Ketonis said.

“Everyone is asking why Germany or Italy don’t have shortfalls in their RES funds. But Germany has a green tax of 7.5 cents per kWh, and we have half a cent.”

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