Aegean islands
Keeping the lights on: if Greece leaves the euro, power cuts could be widespread with many Aegean islands particularly vulnerable because of their heavy dependence on local oil fired plants

Whether Greece stays in the euro or leaves, its power sector has a key role to play in rebuilding the country’s shattered economy and could even provide a crucial engine for regeneration.

As Greece’s economy continues to plunge to uncharted depths, its power sector is reeling from a mountain of unpaid bills and a lack of investment.

A euro exit would send fuel, capital and equipment costs skyward, causing extensive power cuts, bankruptcies and unpaid debts. However, the power sector could also act as a crucial engine of regeneration, and pressure is growing to sell off state assets and encourage overseas and European Union (EU) investment in green energy for export – both of which could make a major contribution to recovery.

So far, Greece has lagged in efforts to introduce competition and private investment into its power sector. The 50 per cent state-owned Public Power Company (PPC) remains dominant, with a limited number of relatively small-scale overseas investors also present, including Enel, Gamesa and EDF.

Its renewable sector is in its infancy, although development has accelerated recently, with a trebling of solar capacity in 2010, followed by the addition of another 200 MW (and 300 MW of wind) in 2011.

However, like the slow move towards greater competition, this is more a product of reluctant and late adherence to EU policy directives than any peculiarly Greek initiative.

A collapse in bill payment linked to a new tax property collection role imposed by the state on PPC almost caused the whole system to grind to a halt earlier this year, requiring an urgent €250 million ($315 million) bail-out to fend off catastrophe, using part of the fateful tax receipts it collected. PPC is by far the biggest client for independent power producers, which represent about 23 per cent of production. Shrinking demand and high fuel costs are making PPC’s record losses worse.

Against this background, former energy minister George Papaconstantinou had begun talking about the country’s ability to start exporting solar energy into the European market by 2015. The sudden optimism came after a meeting between former Greek prime minister Lucas Papademos and European Commission (EC) president José Manuel Barroso introduced the prospect of up to €12 billion in unspent EU structural funds.

solar power
If Greece is to revive its economy following its euro disaster, solar power could play a key role, with much depending on the multi-billion Helios project and the already operational Volos solar park (pictured) Source: Conergy

Former prime minister Papademos had been very keen on green energy investment for economic growth, claiming Greece was aiming to become the EU’s largest exporter of green energy, which he added will help other EU countries meet their renewable targets in the process.

But EC energy spokeswoman Nicole Bockstaller told PEi that at this stage: “No decision has been taken regarding the possible utilisation of financing from EU Structural Funds” for the Greek renewable sector. Nevertheless, the financial services firm Guggenheim Partners has been attracted by the prospect, and if the money is forthcoming, Greece could begin in earnest projects like the giant Helios solar farm.

Faith in Helios

In the 1930s the US clawed its way out of depression with the help of massive renewable power projects such as the Tennessee Valley Authority (TVA) hydro developments and the Hoover Dam. Could solar do the same for Greece and the EU?

Helios will have an initial capacity of 2 GW, rising to 10 GW by 2020 – making it the largest solar photovoltaic park in the world, ideally located where solar radiation is high. Bockstaller says the EC sees Helios as a “flagship project to advance European co-operation, develop the EU’s renewable energy potential and to make greater use of the co-operation mechanisms of the Renewable Energy Directive”.

Greek and German ministers were both involved in the €20 billion project’s conception and early planning, with Germany expected to be its main buyer of power. Chancellor Merkel’s policy of closing her country’s nuclear reactors by 2022 has led to consideration of various options to make up the difference – which represents almost a quarter of Germany’s power production.

But recent massive domestic solar development means solar imports from Greece would add to a heavy and growing German midday output, and Germany now appears to be cooling on the idea, despite the EC’s and Greece’s continued enthusiasm.

“Imports of electricity from solar collectors in Greece will only add to the German programme,” German environment minister Peter Becker recently told the German press. Rapid domestic growth has already prompted Germany to cut its own solar feed-in-tariffs, and German ministers also point to the need for improved north–south transmission links throughout Europe to handle additional flows before renewable energy projects such as Helios go ahead.

The 200 km2 of land necessary to complete the mammoth Helios project centres on old lignite strip-mined areas in the mountainous terrain of the northern Greek region of Kozani. The project makes the most of a cheap brownfield site in a region of high sunshine and unemployment, and could bring many thousands of desperately needed jobs.

Bockstaller said the Helios project could contribute to Greek economic recovery, if part of a “broader strategy to develop a renewable sector across the value chain of electricity generation”.

Along with solar and wind, Greece has considerable geothermal potential, and has earmarked projects worth about €350 million for private investors. Its suitability for green power has already meant two small islands in the Aegean, Agios Efstratios and Lipsi, have been able to switch entirely to become “green islands”, and many similar plans had been on the table for upcoming years.

With International Energy Agency (IEA) encouragement, Greece is also managing a nationwide project to install 60 000 smart meters for large-consumption users and 160 000 meters for low-volume ones, under a joint programme with the EU. This opens a new market for the industries that will supply these systems, which are spreading at a rapid rate across Europe.

The IEA believes the Greek economy would be boosted by increasing competition and reducing the role of the state in Greece’s energy sector. “Reforming Greece’s electricity and gas markets is a policy imperative that should add efficiency and dynamism to the Greek economy. This, in turn, should help generate self-sustained employment and prosperity for the country,” IEA executive director Maria van der Hoeven said recently.

PPC still dominates both the wholesale and retail markets, along with owning all transmission and distribution assets and has a huge stake in the operator for the transmission market.

The plan is to privatise such assets, but the timetable has come under pressure because of concerns over poor market conditions and lack of preparation. The EU and International Monetary Fund (IMF) have also been pressuring Athens to introduce more retail competition by deregulating electricity prices and abolishing PPC’s monopoly over cheap and plentiful domestic coal reserves.

Van der Hoeven
Van der Hoeven: Electricity reform is ‘policy imperative’

In addition to the power and coal assets being lined up for sale, a new agency has been set up to issue research and exploration licences for oil in Greece, which has crude reserves estimated at about 500 million barrels. The Greek government also wants to sell off 35–40 per cent of its 65 per cent share in national gas company, DEPA, which is owned with semi-state oil company ELPE (Hellenic Petroleum). Both ELPE and the Public Gas Corporation are also due to be sold off.

Greece is also beginning to make the most of its geographical position as an entry point to Europe for Middle Eastern energy supply, which should improve availability of gas for power generation in particular. Project deals include lines from Azerbaijan and major links with all its neighbours, as well as moves to create a trading hub around a gas depot in the region near Kavala in northern Greece.

Gas will also become available from Russia via the 30 billion m3 per year South Stream pipeline, where the main driving forces are Gazprom along with buyers in Italy, France and Germany.

In 2010, the Turkish power system was synchronised with the interconnected power systems of Continental Europe and commercial energy exchange between Turkey and Greece and Bulgaria started in 2011.

But the system has already come under pressure. Last winter cold weather caused Bulgaria to stop exporting electricity, which had quickly risen to about 4 per cent of Greece’s needs, almost plunging the country into darkness. A shortfall in gas shipped through Turkey made the situation worse, highlighting growing Greek dependence on costly energy imports.

Action not words

Asked whether the EC was satisfied with the speed of Greek energy sector deregulation and privatisation, Bockstaller notes Greece had adopted a new energy law opening up production, transmission and distribution to private investment last August, which was “an important step towards further liberalisation”.

On paper, it brings Greece into line with other EU member states, under the third Internal Energy Market Directive. But on the ground, she says the new rules “were not translating into action” and more effort was required on “practical implementation”. The IEA’s Van der Hoeven said the legislation was “fundamentally sound and can help the economy grow”. “The government’s key focus should now be on implementing this law in full without delay,” she states, adding that a “strong and independent regulator” was needed to be given the necessary power and independence to reduce the market power of PPC, and remove its monopoly positions, which has not yet been achieved.

Meanwhile, Bockstaller says the EC was specifically calling on Greece to “certify transmission system operators (TSOs) [under EU unbundling rules], adapt tariff structures, implement a more market-based congestion management on the gas interconnectors, and implement a co-ordinated congestion management method on all EU-borders”. Structural measures are important to ensure the Greek market’s efficient functioning based on economic principles, she says.

PPC’s financial woes

Following the bail-out, the temporary aid is shoring up PPC, allowing it to maintain operations and reimburse other suppliers of electricity and natural gas, removing the risk of a financial chain reaction which, according to regulators, was threatening to bring down Greece’s entire electricity system.

Former energy minister Papaconstantinou former prime minister Papademos
Former energy minister Papaconstantinou (left) and former prime minister Papademos (right) had struggled to contain an escalating crisis

Although PPC has refused further involvement in the property tax (with government acquiescence), it is unlikely that everyone who stopped paying will quickly start again. Unpaid bills in the first quarter of the year are believed to total around €1 billion, although officials claim PPC’s cash situation will improve later this year as people begin settling their debts.

Financial support from Greece’s IMF and EU partners should give the government time to implement further reforms, but the strong support for anti-bail-out parties as Greece heads for new elections in mid-June threatens to scupper the plan – along with other credit-dependent areas of the Greek economy.

Brokstaller says the €250 million bail-out simply addressed “the immediate financial stress on PPC” as well as market operator LAGIE and transmission system operator ADMIE. But because the problem is linked to underlying structural problems, as well as to temporary unpaid bills, it will not be enough to “represent a permanent solution”. Additional money will have to come from the international bail-out package, she adds.

But creditors are not happy with recently increased renewable feed-in tariffs, which along with shortened and simplified licensing procedures and stronger incentives for local acceptance, had been designed to encourage renewable energy projects and help generate the economic growth needed to reduce debt. The changes had been welcomed by the IEA, which emphasised the need for them to remain stable to attract investment – something even Germany has found difficult to achieve recently.

An earlier request from Greece for a €350 million loan for PPC was blocked by the creditors, who demanded Greece first reverse the feed-in tariff hikes and raise retail prices from July 2012 – which left the Greek government with little choice but to use €250 million of the property tax PPC collected to bridge the gap; after all, possession is nine tenths of the law.

Given such pressures, the Greek government’s efforts to introduce a 20 to 25-year fixed renewable tariff to help attract investors look futile right now.

Euro Exit?

If Greece does have to leave the euro, its whole energy sector is likely to be badly hit. The country is dependent on oil for 55 per cent of its domestic energy needs, and almost all its oil and gas are imported, leaving it very exposed to the downside of devaluation.

euro
If Greece leaves the euro, it may also exit from the EU, which adds to uncertainty over the country’s climate-change and competition obligations

Greece currently pays around 5 per cent of its GDP for oil – a level that would have to rise for an economy denominated in devalued Drachma. Casualties would also include overseas investors and lenders. Natural gas use in power generation had been expected to surge as the country switches from cheap domestic coal to cleaner imported gas over the next few years. But this is likely to be delayed if Greece were to leave the euro because the gas would need to be imported.

If it exits from the euro, Greece may or may not choose to remain in the EU, creating uncertainty over the country’s climate-change and competition obligations, undermining investment prospects further.

Power cuts could be widespread, and many Aegean islands would be particularly vulnerable because of their heavy dependence on local oil fired plants. Greece wants to upgrade the networks connecting the mainland with these islands but it will take at least until 2020. Although funding from the EU is likely to materialise, sourcing the remainder from state subsidies and private investments currently looks problematic.

Nevertheless, for overseas investment targeting electricity exports, a Greek euro exit could open opportunities by reducing costs, as well as leaving Greek authorities little choice but to properly open up their country’s power sector to competition and private investors, if it can find them. And, no doubt, once the dust settles, interest will recover.

On the other hand, if Greece decides to stay in the euro, there is likely to be more of the same for some time. Certainty over Greece’s place in the monetary union will be slow to come. This uncertainty is perhaps the worst of all situations, with investors hamstrung by risk. The sooner the situation plays itself out, the better for Greece, its economy and its power sector – and if there were ever a good time for spending EU structural funds, it is probably now in Greece.

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