news | 29 September 2017 | ServPRO Accountants & Consultants

Cyprus – It is time to produce electricity!

The Natural Gas Public Company (DEFA) has been given permission to proceed with the retention of consultants to finalize plans for Liquefied Natural Gas (LNG) imports. DEFA’s plan is to be able to import LNG by the end of 2019 so that electricity production in Cyprus can switch to gas-fired power generation early 2020.

The plan is to award two contracts by next year, one for gas supply and another for construction of the required infrastructure. LNG imports will be through a floating storage and regasification unit (FSRU) to be based at Vasilikos. The estimated investment is €340million.

The urgency to proceed with this project is dictated by the serious carbon emission penalties, to be imposed by the European Commission, if Cyprus continues burning HFO and diesel for power generation. This would, of course, be passed to EAC and its customers.

Another reason for urgency is that, by 2018, EU member states must make climate change commitments in support of new, more ambitious, EU targets of at least 40% cuts in greenhouse gas emissions, at least 27% share for renewable energy and at least 27% improvement in energy efficiency, to be implemented in 2020 and to be achieved by 2030. Cyprus, however, is nowhere near these targets and will not be able to achieve them without switching to gas and liberalizing renewables for power generation.

The project will involve a jetty at Vasilikos, addition of a breakwater, support facilities to accept and shelter a Floating Storage Regasification Unit (FSRU) and pipelines to link this to Electricity Authority of Cyprus’ (EAC) power plant. The plan is that the FSRU will start operations in January 2020 and will continue until the end of 2039.

A grant application will be submitted as part of the upcoming call for funding for the 2017 Connecting Europe Facility-Energy’programme. It is anticipated that EU support could reach 75% and given the current status of the global LNG market, with a persistent glut of LNG supply, such a project should attract considerable interest.

In theory, global LNG prices are low, and will probably stay low for the longer term, but given the small quantities of gas that will be needed by Cyprus during the 20-year duration of the project, 0.7-1.0 bcm/yr, such a scheme is likely to be quite expensive.

In a similar situation, Egypt opted for leased FSRUs and also opted to buy its LNG by placing periodically short-term supply tenders in the open market. In a buyers’ market this is a sensible approach, but this flexibility has paid-off. Now that Egypt is about to become self-sufficient in gas, it has reduced its LNG imports by 30% and plans to phase them out by 2019. It also plans to terminate one FSRU lease by next year and the other by 2019.

Adopting a scheme similar to Egypt could have given Cyprus the flexibility to respond to changes in the global LNG market and potential penetration of renewables, however, the scheme proposed by Cyprus will commit it to fixed costs for at least 10-years. This means that the potential investor will be safeguarded for the first 10 years of the project, through guaranteed income derived from a fixed annual charge regardless of the quantities of LNG delivered and re-gasified. However, such a scheme is bound to add cost to the project, which inevitably will be passed to the Cypriot consumers of electricity.

This is a contract of massive public interest and requires transparency and disclosure of information to Cypriot citizens as to what they will be paying for electricity between 2020 and 2039.

Cooperation Partners