The Coming Crash of the Green Energy Bubble in Greece

10 December 2011 | Philip Ammerman

Since George Papandreou came to power in the October 2009 elections in Greece, a central 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 a further 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 the fact 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-term benefits. 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. Under this 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 DEH, the Public Power Company, 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 to apply 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 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, DEH’s average price per kwh for electricity generation from all energy sources (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, the feed-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 be hit 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 framework and 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:

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
Positioning renewable energy stations around installed distribution capacity and ensuring that investments in distribution are sufficient to match the new energy output
An annual cap on new licenses in order to avoid either a capacity or a pricing shock as the new capacity comes online
Flexible pricing of feed-in tariffs to reflect changes in producer prices, particularly given that solar panel production prices have been dropping dramatically (they have fallen by nearly 50% in the last 12 months) due to overcapacity
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 Greece’s green credentials, but will be disastrous for the consumer, particularly since the government is now using electricity bills from DEH as a tax collection device.

This is all coming to a head in the next month, because as Kathimerini reports, DEH has asked to a price increase of 19% in electricity charges to consumers from 2012 onwards. This price increase is due to the following issues:

Any increase of 15% or below will be insufficient to reimburse alternative energy producers for the cost of selling their electricity to DEH.
The cost of electricity generation from natural gas has increased by 15% in 2011 due to the government’s decision to raise the tax on natural gas generation.

Although the price increase will be far smaller than what has been asked for, DEH is not in a favourable financial position. EBITDA in the 9 months of 2011 fell to EUR 794.7 mln, a decline of 35% over 2010. DEH 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 company’s investment programme, which calls for a large-scale increase in RE generation to offset the future fines for carbon dioxide emissions. This has been estimated by some sources to cost DEH between EUR 0.9 – 1.2 billion per year from 2013 onwards.

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

DEH is being used as an instrument of social policy and tax collection, while at the same time being called upon to implement a complex transition from high-carbon power generation to low-carbon generation under Greece’s commitments to EU policy.
Although fuel feedstock costs and taxes on natural gas are increasing, DEH cannot pass on these cost increases to consumers due to regulatory constraints. At the same 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 electricity distribution, the investment for which will have to be undertaken in the next 5 years. Adding Helios to the equation increases transmission costs dramatically.
All this is being done at a time of an inflationary contraction in Greece. It is inflationary 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 “won’t pay” movement, DEH’s troubles are complicated by the fact that its own unions are against the levy of the new real estate tax on DEH, and by the fact that part of the company’s assets will probably be put up for privatisation.

In a normal economic system, dealing with this situation could be solved by a mix of low-cost funding from the European Investment Bank, public-private partnerships between DEH and third-party investors, and a strategic energy investment plan. This would 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 base case 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 DEH’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 the generation cost while also meeting emissions targets. DEH 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 of progress, 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.

Philip Ammerman