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Catastrophe in the making for Cyprus electricity users

comment ellinas main

The plan to switch to gas-fired power generation seems subject to even more delays with consequent EU fines

 

I was in the middle of writing this article when the Auditor General released his explosive report confirming in the worst possible way the very serious concerns that I have expressed repeatedly in this newspaper since the start of the tendering process for the LNG import project in 2019.

It is imperative that his report is taken very seriously and acted upon. The project is far from complete and, given its history so far, it is very likely that we have not yet seen the end of its problems.

The project will be completed only when electricity production switches from oil to natural gas. Not when the FSRU is delivered and ready, not when the jetty and facilities at Vasilikos are ready, but when gas is physically delivered to the EAC and the EAC is ready to use it.

There are many steps still to be completed before we reach that position. In the meanwhile, the delay is costing Cypriot electricity consumers dearly. Expediting completion and switching to gas-powered generation as soon as possible should be the top priority. It is a matter of national importance.

comment ellinas auditor general odysseas michaelides
Auditor General Odysseas Michaelides

Firefighting

In terms of energy, everywhere we turn Cyprus is firefighting. There is a lot of talk, but little in terms of actual delivery. Getting anything off the ground takes an inordinate amount of time because of time-consuming procedures and a huge amount of bureaucracy.

Our tendering process is antiquated, with award of almost every significant project contested, often ending up in courts with tenders cancelled and re-tendered, causing immense delays. And then too many projects end-up with a single bidder and, in effect, are awarded without competition. The LNG import project is an unfortunate example. The whole procedure needs complete overhaul.

EAC is firefighting. The latest emergency is to rapidly modernise the Dhekelia power station if Cyprus is to avoid power cuts next year. But given experience so far with Cyprus’ approval and tendering process, will this be achieved? There are serious doubts that it will.

 

Prometheus FSRU

This is another project experiencing problems and going from one delay to another. We are told that this is ‘ready’, but due to technical problems identified during testing, delivery is being delayed. Apparently, most of these have been rectified, but there are still doubts that all operational and safety problems have been satisfactorily addressed. Commissioning is a crucial stage, as is ‘third-party’ certification. It is only after these have been completed and the vessel is independently certified that it can be safely delivered to Cyprus.

This will probably happen during the next months, but there is no firm date yet. And when it comes, the terminal at Vasilikos will not be ready to accept it. The deadline for its completion is July this year. But there are serious doubts that it will actually be ready by then, hopefully before the end of the year.

As a result, the energy minister has been making various suggestions about the use of the FSRU in the interim period. These include leasing it to other countries or using it, with some temporary infrastructure, for trials and testing EAC’s generators in the use of natural gas.

This is loud-thinking rather than serious planning. My understanding is that EAC is not quite ready to accept gas as the required modifications have not been completed. It is hoped that these will be ready by the summer.

And the idea of temporary infrastructure is challenging. This will include transfer pipelines that need to be constructed, tested and certified, something that takes time. Given that we have not yet been able to start construction of the pipeline network that will connect the terminal to the power plants, how are such facilities going to be ready in a matter of a few months?

In all of these developments the key word appears to be ‘hope’. In other words, we are not in control.

As and when the FSRU is ready and the terminal is completed, it will be followed by hook-up of the FSRU, trials and commissioning of the transfer of gas. This is another time-consuming process and by no means straight forward.

The conclusion is that it is not possible that the complete project, ie an LNG regasification terminal at Vasilikos ready to deliver gas to the power plants, will be ready by July or even by the end of the year.

comment ellinas the prometheus fsru is also facing delays
The Prometheus FSRU is also facing delays

Pipelines

This is yet another debacle. DEFA has not even awarded design and construction of the pipelines to deliver gas to the power plants even though the tendering process started, late, in September 2022.

The contract to design the pipelines was awarded last year to KPMG and Asprofos, but the rival consortium of DEFSA and Hill International launched an appeal against this decision. This was upheld, raising the likelihood that the tender may have to be re-launched, with all that entails in terms further inordinate delays.

Another surprising twist was that while all this was happening, the government replaced DEFA’s board of directors.

As a result of these delays, in December the European Commission rejected a grant of €10million that DEFA is entitled to receive from the EU Recovery and Resilience Programme with the risk that unless a contract is awarded imminently the grant may be lost permanently.

Without completion of these pipelines, the two independent power producers, PEC and Paramount Energy, cannot operate their plants that are being planned at Vasilikos. And neither could the 160MW 6th combined-cycle unit of EAC at its power plant at Vasilikos, designed to operate with gas. This was scheduled to be put into operation later this year to cover the demand for electricity during peak periods in 2024, but it is now ‘hoped’ that it will be ready some time in 2025.

These delays put into doubt the likelihood that the use of natural gas for power generation will be achieved any time soon, even by 2025.

One option that merits serious consideration is to assign construction of the entire gas pipeline network to EAC, PEC and Paramount Energy based on DEFA’s specifications. It is in their interest to complete this project as soon as possible and they have the capability to do so.

A consequence of these inordinate delays in the LNG import project is prolonged exposure to the EU’s emission allowance prices. These are forecast to average about €90/tonne CO2 in 2024, with the total cost of emission allowances to Cyprus likely to exceed €350million in 2024. It will be even higher if switching power generation to gas is delayed beyond 2024, which now looks likely. Somebody needs to account for this.

 

Dr Charles Ellinas is Senior Fellow, Global Energy Center, Atlantic Council

 

 

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