12° Nicosia,
30 May, 2024

EuroAsia interconnector seeks alternative funding

Debate heats up as controversy surrounds viability of Cyprus' electricity project amid financing struggles

George Kakouris

George Kakouris

The developer of the EuroAsia Interconnector is seeking alternative funding avenues to construct Cyprus' electricity interconnection with the European Union, following the European Investment Bank's rejection of a loan request. According to a statement from the developer to K, they are exploring options with a European governmental institution and international financial organizations to secure the necessary funds. Despite the setback, the project's promoter, a private initiative, believes that the EIB matter is not closed. They plan to engage in consultations with stakeholders, the Cypriot government, and the European Commission, followed by discussions with bank representatives in September to address the EIB's concerns.

The European Commission spokesperson mentioned that the €675 million funding from the Connecting Europe Facility is meant to stimulate resource mobilization from various sources, both public and private. Additionally, the confirmed €100 million from the Recovery Fund is intended as loan support, contingent upon achieving certain milestones. The operator highlights that the EIB's decision was primarily based on economic considerations. The investment bank had proposed battery installations as an alternative solution, which the operator contends was an assessment not publicly disclosed. However, the operator emphasizes that the EIB recognizes the project's economic viability and its potential benefits to both Cyprus and the EU.

The EuroAsia Interconnector project aims to establish an electricity interconnection between Greece, Cyprus, and Israel. The discussion on EU co-financing pertains to the first phase of the project, linking Korakia in Crete with Kofinou.

Blurred landscape and competition

Amid a hazy landscape and heightened competition, the debate surrounding the project's viability raged on last week. Former finance minister Konstantinos Petridis stirred controversy by asserting that the Commission had greenlit the funding based on political considerations, contingent on securing funds from alternate sources. The matter is set to be deliberated by the Parliamentary Committee on Commerce, Industry, and Tourism on August 29, with a particular focus on DISY's stance. DISY's involvement and the staunch objections raised by Petrides add intrigue to the situation.

Information from "K" indicates an urge for the EIB to reassess the project's financial feasibility. Among the concerns cited by the same sources are the absence of guarantees or equity participation support, alongside lingering questions regarding the project's technical specifications. Originally projected at €1.57 billion, the total project cost has surged to €1.9 billion recently due to global market conditions.

As previously reported by K, the developer has sought state assistance (across previous and current governments) via guarantees amounting to €600 million. This backing is intended to facilitate borrowing for covering the remaining expenses. The government, on the other hand, is exploring multiple avenues, including the option of not supporting the project. Another state possibility involves participating in the project's equity, a concept the Energy Minister brought up in mid-July during media discussions.

The Commission's criteria

When questioned about the European Investment Bank's decision to withhold a loan for the project, a spokesperson from the Commission declined to offer direct commentary on EIB determinations. However, the spokesperson emphasized that the project holds the designation of a Project of Common Interest. This designation entails the Commission's evaluation, confirming a positive outcome from the cost-benefit analysis. Furthermore, prior to approving the €675 million allocation from the Connecting Europe Facility, the Commission meticulously assessed various criteria, encompassing project maturity and proposal quality, indicative of financial viability.

Nonetheless, it is reiterated that funding originating from this mechanism serves solely as a co-financing tool, incentivizing investment from alternate sources, whether public or private.

Regarding the €100 million allotment from the Recovery Fund, the same spokesperson verified its nature as a prospective loan. Disbursements from the Recovery Fund, the spokesperson elucidated, occur after a member state's request and subsequent Commission evaluation of milestone achievement, factoring in input from the relevant technocratic group within the EU Council. He highlighted that all construction-related milestones must be attained by August 2026.

Specific to the EuroAsia Interconnector, the spokesperson added that Cyprus' National Recovery Plan encompasses three unassessed milestones, which will undergo assessment upon Cyprus' request for fund disbursement. Nonetheless, in terms of Recovery Fund funding, the Cyprus National Recovery Plan stipulates that borrowing will proceed "provided that the project secures the necessary financing from the Connecting Europe Facility and essential funding from the EIB and/or other financial institutions."

Disagrees with alternative

In correspondence with K, the entity restates the argument presented in a recent press release, underscoring the EIB's assessment's primary focus on economic aspects. The EIB's considerations encompassed alternative approaches, such as employing battery electricity storage, a solution the promoter deems insufficient for Cyprus' requirements and lacking comparable qualitative advantages. Particularly, the promoter highlights that within the loan request evaluation process, the EIB acknowledged the project's economic viability, yet "contrasted the implementation of the electricity interconnection with other potential alternatives (counterfactual scenarios)."

The EIB's suggested alternative, according to the institution, entailed "the extensive deployment of batteries, encompassing 1350MW with a duration of 4 hours, distributed across Cyprus." In rebuttal, the operator contends that the EIB's assessment disregarded the factor of battery degradation, typically 2.6% over time. Additionally, it was assumed that these batteries would be utilized at 100%, although practical utilization typically stands at 90%.

The operator outlines that the battery lifespan is 15 years, distinctly shorter than the 40 to 50 years for the electrical interconnection. Therefore, it's argued, "the analysis should have accounted for up to 3 mass battery replacements (as opposed to the calculated 2)." Furthermore, the operator underscores that in the event of a system failure or blackout, the batteries can power Cyprus' electricity for a mere four hours, exclusively if fully charged. In contrast, the electrical interconnection can deliver uninterrupted power as needed.

Emphasizing the point, it asserts, "This EIB assessment is purely economic and does not account for the significant qualitative, operational, and environmental advantages of implementing the Electric Interconnection compared to the incomparable solution of deploying batteries only." According to the operator, the EIB assessment recognizes the project's economic viability and the benefits it offers to consumers, amounting to €300 million annually, leading to reduced bills where economic gain outweighs project costs.

The operator further asserts that unaccounted benefits encompass the termination of Cyprus' energy isolation, the project's geopolitical implications, the enhancement of renewable source penetration in the energy mix, and the bolstering of energy security.

Petrides' objections

Regarding former Finance Minister Konstantinos Petridis' perspective, he addressed the matter last Monday in response to the K newspaper's article on the EIB's decision. Following the loan request's rejection, Petridis firmly stated that "there can no longer be any question of the government's participation, either through equity or by providing guarantees." He advocated for transparency regarding the EIB's rationale and findings, particularly given the considerable media attention the project has garnered, noting instances where this transparency "was sometimes not done in a proper manner." Petridis underscored that the Commission's funding approval was "based on political criteria, with the condition that sustainability would be ensured by other sources of funding." He pointed out that the Commission itself does not conduct sustainability studies.

It is essential to mention that the Commission has not conducted a viability study but has funded studies within the scope of Projects of Common Interest. Petridis further conveyed that while a provision of €100 million from the Recovery and Resilience Fund was designated for the project, it is "the only project for which provision was made for (potential) borrowing and not a subsidy, due to doubts about the project's viability and outcomes." He believes that the loan will not be utilized at this point. In mid-July, when concerns arose about the potential loss of EU funding due to unmet milestones (such as cable procurement), Petridis inquired whether investors had been secured for the project following the state's political endorsement, and if not, urged an explanation for this absence.

[This article was first published in the Kathimerini Sunday edition and translated from its Greek original]

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