Capture the market in Malta

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It’s a small island nation, but Malta’s new energy policy may offer big opportunities for utilities to secure a captive market that is forecast to grow. Rudolph Mifsud Saydon, Gilbert Guillaumier and Chris Meilak report.

The Mediterranean island, an EU member state home to about 420,000 people, is under pressure to:

  • Cut its 100% dependence on fossil fuels
  • Decrease energy costs
  • Increase the usage of renewable energy sources in line with its EU commitments under Energy 2020

Supplying small islands with stable, clean and affordable energy is always a challenge. Malta has no natural resources of its own and is not currently connected to mainland Europe electricity networks or any gas pipelines.

Shift to natural gas

Earlier this year, Malta’s ruling Labor Party unveiled its new energy policy, aimed at cutting power tariffs and boosting the country’s use of renewable energy. The policy will shift the country’s power plants, which currently operate on heavy fuel oil (HFO), toward natural gas.

The private sector is critical to the success of the move. In April, the Government issued a call for expressions of interest and capability (EOICs) for a long-term power purchase agreement and gas supply agreement that will be in place by March 2015.

The plan will see Malta’s primary energy provider, Government-owned Enemalta, entering into two agreements with private investors:

  1. To purchase approximately 200MW electricity from the new, privately owned power station
  2. To purchase liquefied natural gas (LNG) to supply its existing power station

Two likely short-term infrastructure options to deliver the LNG supply are an onshore storage facility or floating gas storage system. The projects are estimated to cost about €300m (approximately US$388m).

A high-voltage submarine cable is currently being laid between Malta and Sicily to connect Malta to the Mainland European Grid, which is expected to be operational by mid-2014.

Small but strong economy

The Government is confident of attracting the necessary investment and has declared the project a “safe investment for the private sector.”

The EOIC indicates that both the power purchase and gas supply contracts will last for a period of 18 years, with a fixed price for a minimum of five years, followed by an indexed price for the remaining period. Both contracts are seen as relatively long-term agreements in the current energy environment.

Leading international energy companies submitted 19 proposals before the call closed. A contract with the successful bidder is expected to be finalized by September 2013.

The EOIC suggests the Government would prefer one dominant energy partner, for both gas and electricity, to build, own, operate and maintain both plants and provide the supply required for the two separate contracts.

While Malta’s market may be small, it is one of the few in Europe with consistent growth and a positive long-term outlook:

  • Malta’s political environment is stable, with both major political parties committed to the overhaul of the country’s energy sector.
  • The average growth of the Maltese economy (relative to historical averages) has been the best in the euro area since the beginning of the financial crisis.
  • Its unemployment rate remains one of the region’s lowest.1

Be ready for risks

Despite the opportunities, potential investors in Malta’s energy sector should be ready to assume some risks.

The country’s growing energy consumption lessens risks surrounding future demand, but fluctuating LNG prices could pose potential risks to private investors in supplying gas at a fixed price.

Malta’s current lack of a permanent gas supply also adds complexity, although long-term government plans to build a gas pipeline between Malta and Sicily would bring greater stability and offer another opportunity for investors.

As with many countries, Malta has its own unique cultural distinctions. Potential investors should partner with local advisors to navigate the business and political environment, avoid unnecessary delays, reduce costs and enhance their chances of success.

Big opportunities

With an ambitious program to meet its EU targets, Malta must attract major private investment to:

  • Fund the conversion of its power plants to LNG
  • Secure its LNG supply
  • Pursue other sustainable energy initiatives, such as solar energy to generate 10% of its energy from renewable sources by 2020 (currently 0.4%)

Few countries in the world offer utilities the opportunity to secure a captive market in an economy tipped to grow. Investors should seriously consider Malta’s unique situation and prepare their bid carefully, with local advice and an eye on the risks.

We have a strong presence in Malta and extensive experience in its power and utility sector. Public-private partnership (PPP) projects are increasingly gaining traction in Malta, and professional support may be required from different angles, such as:

  • Regulatory support
  • Transaction support
  • Business modeling
  • Tax structuring
  • Local insights
  • Negotiations and liaison with government representatives and bodies

We have advised Malta’s authorities on PPP projects and also provide insights, support and local knowledge to potential investors in the country. For more information on how we can work with you to explore opportunities in Malta, please contact us.

  1. 1 Source: The International Monetary Fund’s concluding statement to its Article IV monitoring of the Maltese economy,  http://www.imf.org/external/np/ms/2013/051313b.htm, released 15 May 2013.