Myths and realities of the Interconnector

As we get closer to critical decision-making deadlines, there is no end to debates about the viability and future of the Great Sea Interconnector. But sadly, often these are not well informed and feed on hearsay. This is a follow-up to my article early July where I wrote about the historical evolution, viability and the importance of the project, as well as what should follow next.

In this article I am reviewing the main risk to the project and I am dispelling some of the myths with realities about the cost of GSI to consumers.

The Turkish factor

The main risk to the project is not technical or regulatory, but entirely political. It is the possible risk posed by Turkey to the installation of GSI. Turkey has already given an indication of its potential intentions. On 23 July Turkey mobilised its navy to an area near the island of Kassos where an Italian vessel was carrying marine surveys associated with the GSI route selection.

Even though the problem was resolved at political level between Greece and Turkey and the surveys were completed, the incident has been seen as a warning and a precursor to future problems, unless the parties to this come to a diplomatic solution.

Turkey and Libya’s Government of National Accord (GNA) signed a maritime Memorandum of Understanding (MoU) in 2019 establishing respective exclusive economic zones in the Mediterranean Sea. Other than the GNA and Turkey, nobody else recognises this MOU and both the EU and the US have called this provocative.

Even though the purpose of this MoU was to claim rights to seabed resources, Turkey is using it to claim control over the Mediterranean Sea expanse between its mainland and Libya, in clear violation of international law. Nevertheless, Turkey appears to be fully prepared to support these perceived unilateral rights through the use of its navy.

This could pose an unacceptable risk to GSI. It is not the role of the Cypriot and Greek energy regulators, Cera and RAE, to deal with this and it is not appropriate to expect electricity consumers to foot the bill should Turkey intervene and make installation and operation of the GSI untenable. Cera has already decided that such cost will not be passed to Cypriot consumers, but it is under pressure to reverse this decision.

Instead of pressing Cera, ADMIE should address political risk to the Cypriot and Greek governments, the European Commission (EC) and the EU. So far, they have been sitting on the fence, not addressing the problem, even appearing to suggest that if the project is aborted as a result of Turkey’s actions, the electricity consumers should foot the bill.

Some even talk about the need for a provision for compensation guarantees, in case GSI is cancelled for political reasons.

This is clearly unacceptable. No major project obtains a final investment decision and proceeds to construction before all serious risks are identified and dealt-with satisfactorily.

Much of the pressure to proceed with the project, even threatening to withdraw its financial support, comes from the EC. And yet, so far, the EU has been unwilling to confront Turkey and obtain its undertaking not to endanger the project.

Advocating for ADMIE, the Greek government is also pressing the Cypriots to expedite approvals. But neither it, nor the EC and the EU, appear to be ready to grapple with the elephant in the room: Turkey.

There is a golden opportunity to do just that when the Turkish foreign minister Hakan Fidan attends the informal meeting of EU’s foreign ministers on August 29 in Brussels. He should be pressed to confirm that Turkey will act lawfully and that it has no undue demands on the GSI.

Even though Turkey has not, so far, taken any direct action to dispute GSI, it has succeeded in creating a climate of uncertainty that puts its security into question. This must be confronted and dispelled.

If the EC, EU, Greece and Cyprus do not address and deal with this but carry on pressing Cera to give the necessary approvals for the project to proceed to the next stage, then they should take full responsibility for all political risk-related costs. As long as this issue remains unresolved, there will be a risk that the project may not go forward.

In the meanwhile, and understandably so, the cable contractor NEXANS is threatening to halt fabrication of the cable if it does not receive all outstanding payments this month. Given the large demand for electricity interconnector cables globally, industry sources estimate that such a drastic action could set GSI back by as much as three years and add more to costs.

Myths and realities

What is really the cost of GSI to electricity consumers? Assuming no further delays, the cost of the project will be about €2 billion, with €657million contributed by the EC. Cyprus, ADMIE and other equity holders are expected to contribute €300 million – €400 million as equity participation. The remainder will have to be borrowed.

The capacity of this phase of GSI will be 1000MW and with 500MW kept in reserve, 500MW capacity will be available to its users. Used fully, this can transport about 4,4TWh electricity annually. The users of the interconnector, and through them their clients, will be paying the GSI operator about 1,6cents/kWh. This will ensure an income of €70 million per year and about €2,1billion over its 30-year lifetime.

The regulators, Cera and RAE, have endorsed a net profit margin of 8.6%. It is only if there is substantial underutilisation of the interconnector and an under-recovery that general electricity consumers will be charged a fee to recover the shortfall, at a 63 per cent – 37 per cent ratio to Cypriot and Greek consumers. Otherwise, the cost of GSI will be paid by its users.

The importance of GSI

The existence of GSI will ensure the future energy security of Cyprus.

Its importance is demonstrated by the concerns this week that the adequacy of the electricity supply to respond to seasonal demand is marginal, necessitating calls by EAC to consumers to limit consumption. One headline said “we have been playing with fire for a while now”, and this is likely to continue being a problem into the foreseeable future, especially if there are any damages to the electricity system. Had GSI been in operation, such limitations could have been overcome quite easily. This is one of the advantages offered by the project.

Undoubtedly, once GSI is built, it will introduce competition in Cyprus’ currently high-priced renewable energy market, bringing prices down.

In Cyprus the two public institutions with most knowledge of this project since its inception are Cera and the ministry of energy. After much controversy, verging on bullying, ADMIE submitted to both the information they require to make decisions key to the future of the project by the new deadline of 26 August. I believe that both are best-placed to safeguard Cyprus’ interest and their decisions should be respected.

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