Capture the market in Malta

The Mediterranean island, an EU member state that is home to about 420,000 people, is under pressure to cut its 100% dependence on fossil fuels, decrease energy costs and 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 gasEarlier this year, Malta’s ruling Labour Party unveiled its new energy policy, aimed at cutting power tariffs and boosting the country’s use of renewable energy. At its heart, 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 and, 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 projects will provide Malta with 200 megawatts (MW) of new capacity and liquefied natural gas (LNG) supply. Two likely short-term infrastructure options to deliver the LNG supply are an onshore storage facility or floating gas storage system. All told, the projects are estimated to cost about €300m (approximately US$388m).

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

1. To purchase electricity — approximately 200MW — from the new, privately owned power station

2. To purchase LNG to supply its existing power station

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 economyThe 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.

Interest has certainly been keen to date, with leading international energy companies submitting 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, and its unemployment rate remains one of the region’s lowest.1

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.

Capture the market in Malta

1 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.

2 | Capture the market in Malta

Be ready for risks Despite the undeniable 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 around their commitment to supply 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 around supply and offer another opportunity for investors.

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

Big opportunitiesIt may be a small country, but the opportunities available in Malta are not insignificant. 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 and 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, among others. 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.

Chris Meilak Valuation and Business Modeling, Malta chris.meilak@mt.ey.com + 356 2134 2134

Chris Meilak is a manager in Ernst & Young’s Valuation and Business Modeling team in Malta and has eight years’ experience advising public and private sector clients within the Transaction

Advisory Services practice. Chris’ experience is within the project finance sector, advising companies in relation to their investment appraisal.

Rudolph Mifsud Saydon Transaction Advisory Services, Malta rudolph.mifsud-saydon@mt.ey.com + 356 2134 2134

Rudolph is a senior manager in our Transaction Advisory team and is based in Malta. He has more than 16 years of experience in assurance, business risk services and transaction advisory services

and joined Ernst & Young in 2000. Rudolph assists clients in carrying out due diligence exercises, cost analysis, business plans, bid proposals, investigations, feasibility studies and also regulatory work.

Gilbert Guillaumier Transaction Advisory Services, Malta gilbert.guillaumier@mt.ey.com + 356 2134 2134

Gilbert is a senior manager in our Transaction Advisory Services team based in Malta and has been supporting clients in due diligence (buy side and sell side), restructuring and advisory

engagements for more than 10 years. Gilbert has also worked on several transactions in Malta, the UK, Italy, Switzerland and Greece, with a diverse range of clients in the financial services, private equity, technology and manufacturing sectors.

3 | Capture the market in Malta

Ernst & YoungAssurance | Tax | Transactions | Advisory

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

About Ernst & Young’s Advisory Services The relationship between risk and performance improvement is an increasingly complex and central business challenge, with business performance directly connected to the recognition and effective management of risk. Whether your focus is on business transformation or sustaining achievement, having the right advisors on your side can make all the difference. Our 25,000 advisory professionals form one of the broadest global advisory networks of any professional organization, delivering seasoned multidisciplinary teams that work with our clients to deliver a powerful and superior client experience. We use proven, integrated methodologies to help you achieve your strategic priorities and make improvements that are sustainable for the longer term. We understand that to achieve your potential as an organization you require services that respond to your specific issues, so we bring our broad sector experience and deep subject matter knowledge to bear in a proactive and objective way. Above all, we are committed to measuring the gains and identifying where the strategy is delivering the value your business needs. It’s how Ernst & Young makes a difference.

© 2013 EYGM Limited. All Rights Reserved.

EYG no. DX0187

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

ED None

EMEIA Marketing Agency1000177