Filenews 18 December 2024 - by Chrysanthos Manoli
Following the recent publications of Fileleftheros and Filenews on the main conclusions of the legal due diligence study for the electricity interconnection between Cyprus and Crete, which was carried out for the benefit of the Ministry of Energy by the American firm Curtis, Mallet-Prevost, Colt and Mosle LLP, we publish today the serious concerns of the designers for the feasibility of the project, as planned.
Curtis, Mallet-Prevost, Colt and Mosle LLP point out in a separate chapter that the documents received by IPTO do not provide reliable evidence that the project is economically feasible, as provided for by the CBCA (Cross-Border Proportional Cost Sharing) Agreement.
The first CBCA agreement was signed in 2017 (when EuroAsia Interconnector was still the implementing entity) and provides that:
(i) the total cost of the project would amount to €1.5 billion;
(ii) the total grant from the EU CINEA mechanism would amount to €750 million; (iii) a request for a 50% loan for the project would be made by the EIB (European Investment Bank). (iv) Financing from commercial banks would be provided at 20% of the cost.
Nothing has been fully implemented
Almost none of the above individual plans were implemented exactly.
In the seven years since then:
(i) the projected capital cost of the project has increased by €500 million (and is currently estimated at €1.94 billion);
(ii) the grant from CINEA is €93 million, €658 million lower than initially envisaged
(iii) EuroAsia's request for a loan of 50% of the requirements for the project (excluding the EU grant) has been rejected (while a new request to the EIB from IPTO for a loan of approximately €500 million has not yet been answered)
iv) the project promoter (initially EuroAsia and since October 2023 IPTO) have not attracted a commitment from investors to participate in the interconnection; nor commitments from lenders.
The geopolitical risk
Interestingly, Curtis, Mallet-Prevost, Colt and Mosle LLP is concerned about the technical and geopolitical challenges that call into question the completion of the project.
In addition to other significant technical challenges (such as the 1,000 km long and up to 3,000 meters depth of the submarine cable route between Crete and Cyprus) and economic challenges (such as the need to attract sufficient investment and financing without high returns that would jeopardize the objective of reducing electricity prices), the project faces the peculiar risk of possible (hostile) actions by Turkey. either to prevent work from advancing, or to destroy project assets.
"Addressing this risk (Turkey) is probably the main challenge facing the Great Sea Interconnector (as promoter) to secure funding to advance the project.
Does IPTO load the risks elsewhere?
The American researchers then point out that through the Concession Agreement of the project, from ADMIE to GSI, which ADMIE submitted to CERA for approval, the Independent Power Transmission Operator of Greece requests the transfer of the risks mentioned above to GSI. In which ADMIE will probably retain a limited part of the share capital and in which the Republic of Cyprus is likely to participate, with a 30% stake.
While ADMIE will remain the owner of the electricity interconnection and will be able to influence GSI's decisions to a decisive extent, it asks investors participating in GSI to ensure "adequate insurance against partial or total damage or destruction of the project, including the risk of political violence."
But Curtis, Mallet-Prevost, Colt and Mosle LLP note that acquiring insurance is not an effective way to address the risks threatening the electrical interconnection. They add that geopolitical risk in particular (Turkey) is not an insurable risk, at least not at a reasonable cost.
And the researchers conclude that investors would not invest in a company (GSI) burdened with an obligation that cannot be fulfilled and exposed to the risk of termination.
In short, while many on the side of ADMIE, the Greek Government and the Cypriot Government tried last summer to present as exaggerated and unfounded the concerns of technocrats, political executives and public opinion in Cyprus and Greece about the risk of Turkey reversing or cancelling the plans (with a serious burden on electricity consumers in the two countries, without any energy or pricing benefit), the US House brings geopolitical risk back to the fore and even attaches great weight to it.
Addressing the "Turkey" risk
The most recent amendment to the CBCA Agreement (cross-border proportional cost sharing), dated September 30, 2024, seems to aim to address geopolitical risk by transferring 100% of the cost from project termination without the responsibility of the promoter to Greece and Cyprus (50% for each country), "in case of delay or cancellation/termination of the project due to external factors beyond the control of the Project Promoter and/or its contracted suppliers/sellers and contractors'.
This development is a more sensible risk management effort, but still not sufficient to effectively mitigate risk unless it is precisely defined how and when allocated costs will be paid if geopolitical risk materializes, and how GSI can actually implement this commitment if needed.
Difficult to finance
At some points in the multi-page study, Curtis, Mallet-Prevost, Colt and Mosle LLP point to their serious reservations about the ability of GSI — and the project, as promoted — to attract strategic investors. Especially on the basis of the Concession Agreement that ADMIE requests to be approved by CERA. But also given – as scholars believe – the geopolitical risk.
In addition, however, the researchers point out that so far ADMIE has discussed possible loan terms only with the National Bank of Greece and – according to Curtis – does not have a financial advisor to support fundraising efforts.
This is unusual, especially considering that ADMIE granted the Full Notice to Proceed (final binding order for the 1.4 billion contract for the cable) a year ago. Recent information, however, indicates that IPTO has not granted FΝtP to Nexans.
