The Coming Crash in the Green Energy Sector in Greece

8/3/2019 The Coming Crash in the Green Energy Sector in Greece

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The Coming Crash In The Green Energy

Sector In Greece

http://seekingalpha.com/article/313258-the-coming-crash-in-the-green-energy-sector-in-

greece

by: Philip Atticus December 12, 2011

Since George Papandreou came to power in the October 2009 elections in Greece, acentral policy priority has been the promotion of green energy. As part of this policy,between EUR 10-15 billion in renewable energy (RE) projects have been licensed. These

include large, industrial-scale wind and photovoltaic projects, as well as smaller

installations of up to 1-5 MW.

A further, large-scale project called Helios is being considered, which would cost afurther EUR 20 billion, and generate up to 10 GW of power through photovoltaic

installations across Greece. The Helios project is supposed to export its electricity to

Germany, although it is difficult to see how this will be technically feasible. Despite thefact that a complete feasibility study is not yet ready, Helios has already become a

condition of a second bail-out package for Greece, with the government promising to

allocate revenue from Helios to repay the second bail-out.

As with many initiatives launched by the Greek government, the medium-term economic

consequences of this policy have apparently been ignored in favour of short-termbenefits. This is seen by the method in which the licensing procedure has been

implemented.

Investors have been invited to submit proposals for renewable energy generation. Underthis plan, each investor is able to sell the power either directly to consumers or consume

it for their own use, or (more frequently) sell the power to the Public Power Company

(PUPOF.PK), at a feed-in tariff set by the Greek Regulatory Energy Authority (RAE).

Unfortunately, there has been no prior control over either the number or location of the

applications permitted, nor has there been a cap on the energy generation capacity

licensed. As a result, investors have responded in far greater numbers than imagined.

The process has not been without its political clientilism. In an effort to appease farmers,

for instance, the Ministry of Agriculture made extraordinary efforts to get farmers toapply for RE production licenses, with many public assurances that their applications

would be approved. As a result, thousands of farmers responded, with the result that the

number of applications is at least double the original forecast. These farmers already
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benefit excessively from EU Common Agricultural Policy subsidies, and will soon

increase their reliance on the state through renewable energy generation.

Besides the overcapacity in applications, a second problem is the magnitude of the price

difference between electricity generated by hydrocarbons and renewable sources. In

2010, for instance, PPC's average price per kwh for electricity generation from all energysources (mainly lignite, natural gas and petroleum) was between 9-10 euro cents per kwh.

The equivalent generation costs for wind energy are typically budgeted at 25 cents/kwh,

while the generation cost for photovoltaic energy are budgeted at 50 cents/kwh.

Although photovoltaic prices will fall due to falling prices of solar panel production, thefeed-in tariff has been set by law and does fall over time, but not nearly enough, and

certainly nowhere near the price of conventional energy generation.

The ultimate irony in all this is that the government will not pay for these investments at

all. The costs of the investment will be passed onto the Public Power Corporation, who in

turn will pass it on to the consumer. So in a recession, Greek consumers are going to behit by yet higher electricity prices, in order to pass on economic benefits to a small

minority of renewable energy entrepreneurs.

So far, although thousands of projects have been announced, few have actually broken

ground and fewer still have been commissioned due to a lack of working capital,

regulatory delays and other factors. But the impact of adding higher-cost, renewable

energy to the grid will not be long in making itself manifest.

In January 2003, for instance, total production capacity from RE totally 206 MW. In

January 2010, this had reached 1200 MW. In October 2011, this had reached 1,840 MW.

Wind installations remain the largest installed power source, followed by photovoltaics.

This is not to say that renewable energy investments should not be a long-term goal. But

like everything else, any investment should take into account a wider strategy frameworkand proceed based on an understanding of financial equilibrium in the sector. Any major

investments in this sector should be implemented taking into account the following

factors:

a. The installed lignite-fired stations and means of transforming these into gas CHP units

or alternate technologies to avoid carbon dioxide emission fines from 2013 onwards.

b. Positioning renewable energy stations around installed distribution capacity andensuring that investments in distribution are sufficient to match the new energy output.

c. An annual cap on new licenses in order to avoid either a capacity or a pricing shock as

the new capacity comes online.


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d. Flexible pricing of feed-in tariffs to reflect changes in producer prices, particularlygiven that solar panel production prices have been dropping dramatically (they have

fallen by nearly 50% in the last 12 months) due to overcapacity.

e. Learning from the experiences of Germany and Spain, who have both been forced to

cut the feed-in tariff both due to overcapacity as well as due to changing producer prices.

Allowing anybody and everybody to apply for licenses looks good in attracting

investment or burnishing Greeces green credentials, but will be disastrous for theconsumer, particularly since the government is now using electricity bills from PPC as a

tax collection device.

This is all coming to a head in the next month, because as Kathimerini reports, PPC hasasked to a price increase of 19% in electricity charges to consumers from 2012 onwards.

This price increase is due to the following issues:

a. Any increase of 15% or below will be insufficient to reimburse alternative energyproducers for the cost of selling their electricity to PPC.

b. The cost of electricity generation from natural gas has increased by 15% in 2011 due to

the governments decision to raise the tax on natural gas generation.

Although the price increase will be far smaller than what has been asked for, PPC is not

in a favourable financial position. EBITDA in the 9 months of 2011 fell to EUR 794.7mln, a decline of 35% over 2010. PPC attributes this to an increase in energy input prices

by 15%, together with a decline in demand of 5%. This EBITDA will hardly be sufficient

to implement the companys investment programme, which calls for a large-scale

increase in RE generation to offset the future fines for carbon dioxide emissions. This hasbeen estimated by some sources to cost PPC between EUR 0.91.2 billion per year from

2013 onwards.

As a result, there is a typically confusing situation in the Greek energy sector:

PPC is being used as an instrument of social policy and tax collection, while at thesame time being called upon to implement a complex transition from high-carbon

power generation to low-carbon generation under Greeces commitments to EUpolicy.

Although fuel feedstock costs and taxes on natural gas are increasing, PPC cannotpass on these cost increases to consumers due to regulatory constraints. At thesame time, it is committed to buying a growing share of third-party generate RE

electricity at high prices.

The change in the power generation mix requires added investment in electricitydistribution, the investment for which will have to be undertaken in the next 5

years. Adding Helios to the equation increases transmission costs dramatically.


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All this is being done at a time of an inflationary contraction in Greece. It isinflationary primarily due to the impact of higher taxes. It is a contraction of

unprecedented dimensions in Greece, perhaps last seen in World War II. Adding

higher energy prices to Greek consumers will exacerbate the situation.

Besides popular unrest and a wont pay movement, PPC's troubles arecomplicated by the fact that its own unions are against the levy of the new real

estate tax on PPC, and by the fact that part of the companys assets will probably

be put up for privatisation.

In a normal economic system, dealing with this situation could be solved by a mix oflow-cost funding from the European Investment Bank, public-private partnerships

between PPC and third-party investors, and a strategic energy investment plan. Thiswould require a single management authority for energy, staffed by competent personnel,

able to form a consensus between different stakeholders.

It would require an investment vision and plan on a 15-20 year basis, using a mix of basecase and worse case financial forecasting. It would require the depoliticisation of energy

policy and management. It would require comprehensive planning of ancillary factors,such as increasing biogas generation to deal with organic waste; the planning of energy-

intensive investment zones; a reasonable import replacement and export generation

policy; and a proper labour market planning system designed to assure self-sufficiency in

human resources needed to implement the plan.

A further issue which has to be finally acted upon is hydrocarbon exploration in Greece.

Although this has been announced, there has been very little movement in licensing and

exploration. Yet oil and gas reserves are almost certainly there, given similar geology in

the Adriatic and eastern Mediterranean basins.

In such a system, many of PPC's union concerns can be adequately addressed, provided

they are included in the planning process, and the planning process is transparent and

means-tested. Although labour costs and privatisation are an issue at present, over the

long term there are several options for a fair solution to these issues.

For instance, the replacement of lignite-fired stations by gas CHP stations is a definite

possibility, maintaining employment while improving efficiency and lowering thegeneration cost while also meeting emissions targets. PPC and its unions have already

shown flexibility in their joint ventures for renewable energy: there is no reason the same

flexibility could not be shown for far larger gas-fired plant investments.

For obvious reasons, it is difficult to hope such a change will occur soon given the

political constellation in the country. Nevertheless, there are a number of signs ofprogress, and it is hoped that further progress is forthcoming. Before these will manifest

themselves, however, it is almost certain that overcapacity in the RE sector will create a

pricing problem or contract renegotiation.


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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any

positions within the next 72 hours.

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The Coming Crash in the Green Energy Sector in Greece