Switching on for electricity shake-up
Lenders’ demands for sale of PPC units herald big turnaround for government and local energy market
ANALYSIS It is a strange quirk of fate that Prime Minister Alexis Tsipras – should his government reach an agreement with the institutions in the coming days – is set to preside over the greatest ever deregulation of Greece’s electricity market.
SYRIZA came to power in 2015 with a very clear aim to keep the Public Power Corporation (PPC), Greece’s energy giant, in public hands. Tsipras appointed the hardleft Panayiotis Lafazanis as energy minister, underlining his desire to avoid liberalization of any kind in this sector.
Times have changed since then, though, and Tsipras now finds himself having to agree to the sale of 40 percent of PPC’s electricity-production units – possibly only those fired by lignite (a form of coal mined locally) – to satisfy the country’s creditors. The liberalization of the electricity market became a pressing issue for the lenders, particularly the Europeans, after previous efforts to open it up to greater competition had limited results.
At the end of the first program review completed by the ruling coalition last summer, a supplemental memorandum of understanding was drawn up and one of the commitments it included was that PPC’s share of the wholesale and retail market should be reduced by 20 percentage points by 2017 and below 50 percent by the end of 2020.
This represented a decisive attempt by the institutions to force open a market in which PPC was the dominant player. Eurostat data show that in 2014 the only eurozone member states where the largest generator of electricity in the market had a bigger share than in Greece were Cyprus, Malta, France, Estonia and Slovakia.
However, the SYRIZA-Independent Greeks administration, just like governments before it, was less than wholehearted in its efforts to liberalize the market. Although Lafazanis’s successor Panos Skourletis was replaced as energy minister by the more compliant Giorgos Stathakis last fall, little progress was made in creating the conditions for greater competition.
According to the latest official figures published by the Hellenic Electricity Market Operator (LAGIE), PPC’s market share in the retail market stood at 88.58 percent in February, compared to 89.83 percent in December 2016 and 95.63 percent at the end of 2015.
The government had hoped to chip away at PPC’s dominance by adopting an auctioning system similar to one used in France, known as NOME. The aim was for the auctions to provide third parties with access to PPC’s low-cost lignite and hydroelectric sources. However, the lengthy process involved in preparing the necessary legislation, which was passed through Parliament last year, meant that the first auction was not held until last October.
The government tried to convince the creditors to allow more time for the auctions to work but they were not willing to wait any longer. In truth, though, the waiting period was more than a few months. Laws have been in place to liberalize the wholesale electricity market in Greece since 2001, with negligible impact. PPC was politically-charged for so many years, with some decision makers fearing its militant GENOP workers’ union and others using it as vehicle for their own ends, that it became virtually untouchable.
Another reason that the European lenders pushed for more drastic measures now is that Greece recently lost an appeal against a European Commission decision from 2008, which found that the EU’s competition regulations were being contravened because state-owned PPC had “quasi-exclusive” access to lignite through its mines in northern Greece, giving a virtual monopoly and bolstering its dominant position in the electricity market.
“Customers are denied the benefits of competition in the electricity sector when one operator controls virtually all access to Greek lignite reserves, which currently represent the cheapest source of power generation in Greece,” said the then competition commissioner Neelie Kroes.
Of course, the energy mix driving Greece’s electricity market has changed somewhat over the last decade and lignite is not as dominant as it was. Currently, 29.4 percent of electricity is produced by Renewable Energy Source (RES) units, 28 percent natural gas, 23.5 percent lignite and 19.1 percent comes from hydroelectric units.
Nevertheless, a pledge to sell 40 percent of PPC’s lignite-fired units is a significant development for the country’s electricity market. It appears that the institutions do not want to waste any more time and have asked for tenders to begin this summer.
The first question that will have to be answered is what kind of interest these tenders will attract. The sale of a 24-percent stake in power grid operator ADMIE to China’s State Grid in December for 320 million euros suggests that there is in- terest from investors in Greece’s electricity market.
One of the factors interested parties will have to weigh up (and this represents the next challenge that will be posed) is whether the economic conditions on the ground are favorable enough. The crisis has led to a drop in demand for electricity in Greece, while the number of paying customers has dwindled.
Unsurprisingly, electricity generation has fallen steadily in Greece during the crisis. According to Eurostat data, from a peak of 53,900 gigawatt hours (GWh) in 2011, generation plummeted to 46,700 in 2014, which was actually lower than the figure for 2000, a year before Greece joined the euro.
During this time, PPC has seen its financial woes multiply. PPC chairman Manolis Panagiotakis told MPs in early March that the volume of unpaid bills has risen to 2.6 billion euros. It stood at 1.7 billion euros at the end of 2015. The executive added that around 85,000 PPC customers owe more than 3,000 euros each.
On February 9, ratings agency S&P placed PPC’s “CCC-” rating on CreditWatch and warned there is a risk the company might not be able to meet its debt payments if it is unable to finalize a 200-million-euro two-year facility with Greek banks. The electricity company said last month that it has received an initial approval from the lenders. PPC repaid bonds worth 100 million euros on February 24 but has a redemption of 200 million coming up on May 1.
These are all factors that any newcomers to Greece’s electricity market will have to ponder but it seems that the sector is in line for some momentous changes. For many years, such a development seemed unlikely. Just a couple of years ago, it looked impossible.