Friday, October 28, 2011

Repaying Greece's Debts with Tomorrow's Sunlight

Some days the economic news seems to emanate from the Twilight Zone. When the official summit document from Wednesday's meeting of EU leaders seeking to avert another financial crisis includes a reference to repaying a portion of Greek debt with the output of a huge PV array that might not be completed for several decades, if it is built at all, I don't know how else to describe it. And that's before considering the perplexing economics behind the Helios scheme, which apparently entails Germany or other EU members investing or lending--after lenders have just agreed to take a 50% haircut on previous Greek debt--up to €20 billion to build a 10 GW PV installation in Greece to generate power that would be sent to central Europe via transmission lines that don't all exist yet. Either I'm missing a key element of the plan, or the EU ministers didn't quite grasp the details involved.

Let's start by stipulating that the idea of generating solar power in a sunny location like Greece and sending it to darker northern countries like Germany probably makes a lot more sense than investing billions of Euros installing additional solar in the latter, where it will be lucky to produce annual output equal to an average of 10% of its nameplate capacity, compared to 25% or more in an ideal location. That's the same logic behind the much larger and better-known Desertec plan, which would accomplish much the same goal from installations in North Africa and the Middle East, if it ever gets built. The problem in the case of Helios, as the Greek project is called, isn't the basic engineering concept but the financial one necessary for it to function in the manner suggested in the EU document.

In order for Helios to generate significant value to offset part of Greece's borrowings from the European Financial Stability Facility (EFSF) and other EU institutions, it would follow that Greece should actually own either the Helios installation or the rights to most of the power it would generate. Yet it's also clear that Helios could only be built with massive non-Greek investment of either equity or debt. If equity, then wouldn't the foreign investors own most of Helios and its output, leaving Greece little from which to repay its debts? And if debt, wouldn't that mean Greece was repaying one debt with the proceeds of another, rendering this scheme just a circuitous form of rollover?

Perhaps the Greek government assumes it will end up with a large carried interest in the project merely from contributing the land upon which it would sit, and for streamlining the permitting process for building it. But what proportion of most PV projects is attributable to land, especially in competing, high-sun regions such as those involved in Desertec? I'd think it was pretty low compared to the value of all the solar and electrical hardware, which Greece can't afford to buy on its own. And once we determine how much of the project Greece would actually own, then we would need to calculate the revenue out of which debt repayment could be remitted. If they're counting on power prices close to today's German feed-in tariffs, which were just slashed again, I think they're going to be very disappointed at the end of the day. My guess is the power would be worth no more than around 10 €-cents per kWh at the source, to allow it to compete in the German wholesale market after accounting for transmission costs. At that rate a 100% share of twenty years of 10 GW of PV under Greece's average temperature-adjusted insolation might generate an undiscounted €25 billion, but that's before repaying the project's up-front investment and all other expenses.

Not so long ago the prospects for projects like Helios were mainly determined by the interaction of oil prices and climate policy, with strong global economic growth essentially a given. That proposition has recently been inverted, with oil prices, climate policy and energy development all being driven or constrained largely by economic factors. In this context Helios looks potentially useful as a development project that could provide some construction jobs and eventually generate some corporate tax revenue for Greece on the profits from exporting green electricity to the project's effective owners in central Europe. That could give the Greek economy a bit of a boost. However, the line in the EU communique in which , "Greece commits future cash flows from project further reduce indebtedness of the Hellenic Republic by up to €15 billion with the aim of restoring the lending capacity of the EFSF," seems to reflect the same sort of thinking that brought Greece to its current situation.

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