election dossier 2008 - doi-archived.gov.mt · 10 swot analysis..... 105 10.1 an overview of the...

Enemalta Corporation Dossier

Date 6th Mach 2008 Version 07

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Table of Content Page No

1 INTRODUCTION ................................................................................................................. 1

1.1 Background .................................................................................................................................. 1 1.2 Organisational Set-Up of Enemalta Corporation ...................................................................... 2 1.2.1 Head Office structure .................................................................................................................. 2 1.2.1.1 CEO’s Office ............................................................................................................................ 2 1.2.1.2 Finance Department ................................................................................................................ 2 1.2.1.3 Human Resources and Corporate Services Department ........................................................ 2 1.2.1.4 Chief Information Office ........................................................................................................... 2 1.2.2 Electricity Division ....................................................................................................................... 3 1.2.3 Petroleum Division ...................................................................................................................... 3 1.2.4 Gas Division ................................................................................................................................ 3 1.3 Management Infrastructure ........................................................................................................ 3 1.3.1 Strategic Sourcing and Procurement .......................................................................................... 3 1.3.2 Programme, Services and Facilities Management ..................................................................... 4 1.3.2.1 Performance Management and Monitoring ............................................................................. 4 1.3.2.2 Service Call Centre .................................................................................................................. 5 1.3.3 Health and Estate Services Management .................................................................................. 5 1.3.4 Office of Strategy and Regulatory Affairs ................................................................................... 5 1.3.4.1 Quality Assurance Unit ............................................................................................................ 6 1.3.4.2 Research and Innovation Unit ................................................................................................. 6 1.3.5 Office of the Chief Information Officer ........................................................................................ 6 1.4 Unbundling the Corporation’s Organisation ............................................................................ 7

2 REGULATORY AND EU FRAMEWORK AT ENEMALTA CORPORATION ................................... 9

2.1 Introduction .................................................................................................................................. 9 2.2 The Enemalta Act ......................................................................................................................... 9 2.2.1 Recent amendments to the Enemalta Act .................................................................................. 9 2.3 The Electricity Supply Regulations (ESRs) ............................................................................. 10 2.4 Other relevant legislation .......................................................................................................... 10 2.5 Legal Issues and Enemalta’s Positioning ............................................................................... 10 2.5.1 Office of Fair Trading (OFT) ..................................................................................................... 10 2.5.2 Courts of Justice ....................................................................................................................... 11 2.5.3 Arbitration Centre ...................................................................................................................... 12 2.6 EU related Directives and Impacts on Enemalta Corporation .............................................. 12 2.6.1 Rules Concerning the Internal Market in Electricity .................................................................. 12 2.6.2 Environmental Matters .............................................................................................................. 14 2.6.2.1 Directive 2003/87/EC (L.N. 140/2005) : Greenhouse Gas Emissions Trading Scheme ....... 15 2.6.2.2 Directive 2001/80/EC (L.N. 329/2002): Large Combustion Plant .......................................... 15 2.6.2.3 Directive 2001/81/EC (L.N. 232/2004): National Emission Trading Scheme ........................ 15 2.6.2.4 Directive 1996/61/EC (L.N. 230/2004): Integrated Pollution Prevention and Control ........... 15 2.6.2.5 Directive 1997/265/EC ........................................................................................................... 16 2.6.2.6 Directive 1996/82/EC & Directive 2003/105/EC: Control of Major Accidents / Hazards. COMAH (Sevaso) Directive .................................................................................................................. 16 2.6.2.7 The 1999 Gothenburg Protocol ............................................................................................. 16 2.6.2.8 Renewable Sources of Energy .............................................................................................. 17 2.6.2.9 Energy Efficiency ................................................................................................................... 17 2.6.2.10 Draft Industrial Emissions Directive (IPPC Directive) .......................................................... 17

3 THE HUMAN RESOURCES FRAMEWORK OF ENEMALTA CORPORATION ............................. 19

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3.1 Overview ..................................................................................................................................... 19 3.2 Collective Agreements .............................................................................................................. 21 3.3 Side Agreements and Work Practices ..................................................................................... 23 3.3.1 Aviation Work Practice .............................................................................................................. 24 3.3.2 Generation Section Work Practice ........................................................................................... 25 3.3.3 Moving towards a Position Based Organisation ....................................................................... 25

4 THE FINANCIAL FRAMEWORK OF ENEMALTA CORPORATION ............................................ 28

4.1 An Overview of the Financial Framework of the Corporation ............................................... 28 4.2 The Finance Department of the Enemalta Corporation ......................................................... 29 4.2.1 Overview ................................................................................................................................... 29 4.2.2 Functions .................................................................................................................................. 29 4.2.3 Human resources ..................................................................................................................... 30 4.3 Funding strategy ........................................................................................................................ 31 4.4 Risk Management ...................................................................................................................... 32 4.4.1 Finance Committee ................................................................................................................... 32 4.4.2 Internal Audit Committee .......................................................................................................... 32 4.4.3 Fuel Procurement Advisory Committee .................................................................................... 32 4.4.4 Risk Management Committee .................................................................................................. 32 4.4.5 Fuel Procurement Committee ................................................................................................... 32 4.4.6 Tender Sub-Committee ............................................................................................................ 33 4.5 The Corporation’s Financial Position ...................................................................................... 33 4.5.1 Profit and Loss Analysis ........................................................................................................... 33 4.5.2 Cash flow, Loans and Debt Management ................................................................................ 34 4.6 Draft 2008 Estimates and 5 years forecast ............................................................................. 35 4.7 External Audits .......................................................................................................................... 36 4.8 Cost and Revenue Centres ....................................................................................................... 37 4.9 Internal audit .............................................................................................................................. 37 4.10 Dependency on Water Services Corporation ....................................................................... 37 4.10.1 The Debtor Portfolio ................................................................................................................ 38 4.10.2 Larger debtors ........................................................................................................................ 38 4.10.3 Credit issues and policy .......................................................................................................... 39 4.11 Applications for Financing Under the ERDF Funding Cohesion Policy: 2007-2012 ........ 40 4.11.1 Feasibility Study and Implementation of Prototype Offshore Renewable Energy Solution .... 40 4.11.2 400kWp Rooftop PV Project ................................................................................................... 40 4.11.3 Study on a Submarine Electricity Interconnection between Malta and Sicily ......................... 41 4.11.4 132kV and fibre-optic cables between Delimara PS and Marsa South Distribution Centre ... 41 4.11.5 Kappara 132kV Distribution Centre ........................................................................................ 41

5 PRICING, TARIFFS, SURCHARGE AND HEDGING CONSIDERATIONS ..................................... 42

5.1 Pricing strategies ....................................................................................................................... 42 5.1.1 Tariffs ........................................................................................................................................ 42 5.1.1.1 Electricity Division .................................................................................................................. 42 5.1.1.2 Petroleum Division ................................................................................................................. 43 5.1.1.3 Gas Division ........................................................................................................................... 44 5.2 Contribution by Product ........................................................................................................... 44 5.3 Surcharge and Subventions ..................................................................................................... 46 5.4 Hedging ....................................................................................................................................... 47 5.4.1 Hedges in Place ........................................................................................................................ 48 5.5 Retailed Petroleum Product forecast ...................................................................................... 50 5.6 Surcharge forecasts .................................................................................................................. 50 5.7 The Oil Market ............................................................................................................................ 51

6 THE INFORMATION, TECHNOLOGY AND COMMUNICATIONS FRAMEWORK .......................... 54

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6.1 Introduction ................................................................................................................................ 54 6.2 The IUBS Solution ..................................................................................................................... 55 6.3 Information Systems Application within the Corporation ..................................................... 59 6.4 SCADA ........................................................................................................................................ 60 6.5 e-Services ................................................................................................................................... 61 6.6 ICT Infrastructure Backbone .................................................................................................... 62 6.7 ICT Literacy within the Corporation ......................................................................................... 64

7 THE ELECTRICITY DIVISION ............................................................................................. 65

7.1 Introduction ................................................................................................................................ 65 7.2 The Generation Set-Up .............................................................................................................. 65 7.2.3.1 Base Load Plant .................................................................................................................... 70 7.2.3.2 Two Shifting Plant .................................................................................................................. 71 7.2.3.3 Peak Plant ............................................................................................................................. 71 7.3 The Distribution Set-Up ............................................................................................................. 74 7.3.2 Distribution Operations ............................................................................................................. 77 7.3.2.2 Feeder Redundancy .............................................................................................................. 77 7.3.2.3 Redundancies of Power Transformers .................................................................................. 78 7.3.2.4 Switchgear ............................................................................................................................. 78 7.3.2.5 Load Growth Forecast ........................................................................................................... 79 7.3.2.6 Distribution substations .......................................................................................................... 80 7.4 Strategies to Meet Electricity Demand .................................................................................... 80 7.4.1 Enemalta Generation Plan........................................................................................................ 80 7.4.2 Transmission Plan .................................................................................................................... 83 7.4.3 The Sub-Sea Interconnector .................................................................................................... 86 7.4.4 Natural Gas Supply ................................................................................................................... 89

8 PETROLEUM DIVISION ..................................................................................................... 90

8.1 Introduction ................................................................................................................................ 90 8.2 The Installation Operations ...................................................................................................... 90 8.2.1 31st March 1979 Installation, Birzebbugia................................................................................. 90 8.2.2 Wied Dalam Depot .................................................................................................................... 92 8.2.3 Has-Saptan Installation ............................................................................................................. 93 8.2.4 Ras Hanzir Installation .............................................................................................................. 93 8.2.5 Luqa Airport Installation ............................................................................................................ 94 8.2.6 Security Oil Stocks .................................................................................................................... 95 8.3 Commercialisation of the Petroleum Division ........................................................................ 95

9 GAS DIVISION ................................................................................................................. 97

9.1 Introduction ................................................................................................................................ 97 9.2 The Installation Operations ...................................................................................................... 97 9.2.1 Stock of Cylinders ..................................................................................................................... 99 9.2.2 Production Process of Cylinders .............................................................................................. 99 9.2.3 Maintaining Supply of Gas ...................................................................................................... 100 9.3 Relocation of Qajjenza Plan .................................................................................................... 101 9.4 Distributors............................................................................................................................... 102 9.5 Commercialisation of the Gas Division ................................................................................. 102

10 SWOT ANALYSIS ......................................................................................................... 105

10.1 An Overview of the Corporation’s Strengths and Weaknesses ....................................... 105 10.1.1 Strengths............................................................................................................................... 105

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10.1.2 Weaknesses ......................................................................................................................... 105 10.2 An Overview of the Corporation’s Opportunities and Threats ......................................... 107 10.2.1 Opportunities ........................................................................................................................ 107 10.2.2 Threats .................................................................................................................................. 108

1 APPENDIX – ENEMALTA ACT 1977 ................................................................................. 1

2 APPENDIX – ELECTRICITY SUPPLY REGULATIONS ........................................................... 2

3 APPENDIX – MANAGEMENT ACCOUNTS AS AT 30 SEPTEMBER 2007 ............................... 3

4 APPENDIX – DRAFT ESTIMATES 2007/2008 .................................................................... 4

5 APPENDIX – 5 YEAR PROJECTIONS (2006-2011) ............................................................ 5

6 APPENDIX – ANNUAL REPORT AND FINANCIAL STATEMENTS 30 SEPTEMBER 2006 (DRAFT) ................................................................................................................................... 6

7 APPENDIX – BENGHAJSA LAND – IMPAIRMENT ISSUES .................................................... 7

8 APPENDIX – ANNUAL REPORT AND FINANCIAL STATEMENTS 30 SEPTEMBER 2005 (AUDITED) ................................................................................................................................ 8

9 APPENDIX – ELECTRICITY GENERATION PLAN 2006-2015 .............................................. 9

10 APPENDIX – TRANSMISSION PLAN 2006 - 2015 ............................................................ 10

11 APPENDIX – INVITATION TO TENDER: PETROLEUM DIVISION (TO BE HANDED OVER UPON REQUEST) ..................................................................................................................... 11

12 APPENDIX – STANDARD & POOR’S 2007 FULL REPORT ................................................ 12

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Tables Page No Table 1: Years of Service with the Corporation ............................................................................... 19 Table 2: Enemalta Corporation Employees by Gender ................................................................... 19 Table 3: Classification of the Corporation’s employees ................................................................. 19 Table 4: Enemalta Corporation Aging Population ........................................................................... 19 Table 5: Instances of Negative Increment Reports ......................................................................... 20 Table 6: Membership Representation in Unions.............................................................................. 20 Table 7: Profit and Loss Analysis ..................................................................................................... 33 Table 8: Debt Position ........................................................................................................................ 34 Table 9: Cash generation, Capex and debt since 1994 ................................................................... 35 Table 10: Aged debtors (Lm).............................................................................................................. 38 Table 11: Larger Debtors .................................................................................................................... 39 Table 12: Electricity Tariffs ................................................................................................................ 42 Table 13: Retailed Petroleum Products ............................................................................................ 43 Table 14: LPG Prices .......................................................................................................................... 44 Table 15: Contribution by Division .................................................................................................... 44 Table 16: Fuel Costs, Surcharge and Government Subventions ................................................... 46 Table 17: Government’s Payment ..................................................................................................... 46 Table 18: Hedges done in recent years - Products ......................................................................... 48 Table 19: Electricity hedges in place ................................................................................................ 49 Table 20: Petroleum product hedges ................................................................................................ 49 Table 21: Petroleum Product forecast .............................................................................................. 50 Table 22: Surcharge forecast ............................................................................................................. 50 Table 23: Investment in ICT by the Corporation since 2004 ........................................................... 54 Table 24: Plant mix .............................................................................................................................. 66 Table 25: Installed generating plant at MPS ..................................................................................... 67 Table 26: Installed generating plant at DPS ..................................................................................... 68 Table 27: Expected Peak Loads (natural growth only) ................................................................... 68 Table 28: Expected Peak Loads (incl. planned developments) ...................................................... 69 Table 29: Transformer ratings in distribution centres .................................................................... 75 Table 30: Localities in each Region .................................................................................................. 76 Table 31: Peak Demand Growth Forecast ........................................................................................ 79 Table 32: Sale of Gas Between 26th January 2008 to 19th February 2008 ...................................... 98 Table 33: Hour Production of Gas Cylinders ................................................................................. 100

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Figures Page No Figure 1: Organization Structure ........................................................................................................ 2 Figure 2: IPE Brent Crude from January 2004 to January 2008 .................................................... 51 Figure 3: Electricity consumption by Sector .................................................................................... 66 Figure 4: Power Generation in Gwh .................................................................................................. 66 Figure 5: Yearly Power Generated ................................................................................................... 72 Figure 6: Monthly Generated Power ................................................................................................ 73 Figure 7: Seasonal Variations in Peak Demand .............................................................................. 73 Figure 8: Power Generated ................................................................................................................ 73 Figure 9: Typical Daily Load Charts ................................................................................................. 74 Figure 10: Transmission System ....................................................................................................... 76 Figure 11: Power Generated in Gwh ................................................................................................. 82 Figure 12: Predicted Load .................................................................................................................. 82 Figure 13: Gas Cylinders Sales Between January 2004 and January 2008 .................................. 97 Figure 14: Gas Sales from 1st December 2007 to 19th February 2008 ............................................ 98 Figure 15: Total Number of Cylinders ............................................................................................... 99

1 Introduction This Dossier is prepared in order to provide a new Government and a new Board of Directors with a comprehensive overview of the Corporation in terms of state of play, issues and recommendations. 1.1 Background Enemalta Corporation is a 100% Government entity established by an Act of Parliament (The Enemalta Act 1977 Chapter 272 of the Laws of Malta). Enemalta is vertically integrated and operates in three energy related divisions, namely electricity, petroleum and gas. A Head Office structures overseas the three operational activities. The Electricity Division was recently “unbundled” into generation and distribution, while Petroleum and Gas Divisions include of importation, storage and distribution activities of petroleum and LPG products. The Electricity Division utilizes the billing function of another fully owned Government entity (namely Water Services Corporation - WSC) while the Petroleum and Gas Divisions utilize 3rd party retailers and distributors as their interface with consumers. Enemalta is one of the largest organizations in Malta with turnover of Lm190 million, assets of Lm294 million, debts of Lm142 million and 1,700 employees. The Corporation is managed by a semi-executive Chairman (currently Ing Alexander Tranter) and a Board of Directors (all appointed by the Government). At executive level the Corporation is managed by a Chief Executive Officer (Mr. David Spiteri Gingell) and a Board of Management consisting of the Chief Finance Officer (Mr. Joseph Pandolfino), the Chief Technical officer (Ing Peter Grima) and the Chief HR & Corporate Services (Mr. Anthony Bonello). A position of Chief Information Officer is currently vacant as is the position of Chief Internal Auditor. Executive Management is supported by various Managers and Assistant Manager that are responsible for line activities (Generation, Distribution, Development, Petroleum and Gas) and support functions such as Finance, Legal, HR, Corporate Services and HR. At a lower level the Corporation employees a number of professional, technical, administrative and support staff. Enemalta is closely linked and significantly influenced by Government. It currently falls under the Ministry for IT & Investments and is primarily regulated by the Malta Resources Authority. Secondary ministries include the Ministry for Finance, the MRES and the MRAE, while Authorities such as MEPA and the ADT play influential roles. The Corporation is closely linked to the WSC in view of joint billing, the Department of Contracts for purchasing and more recently MITTS for IT related services. The Corporation is currently at a cross-road. Strategically Government has decided that Enemalta should focus on electricity and that its petroleum and gas businesses should be commercialized (i.e. sold). The divestment of petroleum and gas will allow the Corporation to focus its resources on the electricity segment that is also in a transitional stage, both due to EU directives in this area as well as the significant investments forecast for the coming years. The Corporation has an investment grade rating of BBB+ stable by Standards and Poor’s reflecting strong Government support, not a stand-alone basis.

1.2 Organisational Set-Up of Enemalta Corporation The Corporation consists of support services at Head Office and the three operational Divisions. 1.2.1 Head Office structure Head Office consists of the CEO’s office together with 3 main departments. 1.2.1.1 CEO’s Office The CEO Office includes the CEO and his PAs, together with a Special Projects. The Special Projects Office is responsible for the afore mentioned commercialisation process. There are another 36 staff employed in various other functions within the Corporation that report to the CEO. 1.2.1.2 Finance Department This department is responsible for financial management, procurement, credit control. There are 58 employees in this department. 1.2.1.3 Human Resources and Corporate Services Department This department is responsible for Industrial Relations, Personnel Administration, Training, and Corporate Services. This department has 163 staff. 1.2.1.4 Chief Information Office This Office is responsible for ICT support to both the core business and support functions. There are 18 employees in this Office. The organisation chart bellows depicts the Corporation’s structure: Figure 1: Organization Structure

1.2.2 Electricity Division This Division is responsible for the generation of electricity through the Marsa Power Station and the Delimara Power Station; and distribution through its multi-tier high and low voltage cable network, and overhead lines, connected through Distribution Centres and Sub-Stations. The Electricity Division constitutes the largest organisational element of the Corporation. A detailed review of the Division is captured in Chapter 7. This Division has staff as follows: - Marsa Power Station 436 - Delimara Power Station 227 - Distribution 351 - Development 159. 1.2.3 Petroleum Division This Division is responsible for the procurement of fuel, diesel et al and for the supply of fuel in the inland market, Enemalta Corporation, and the Aviation Unit of the Corporation. This Division is effected by the liberalisation of the inland market introduced in October 2007. A detailed review of the Division is captured in Chapter 8. This Division has 163 staff. It is pertinent to note that the Government through the Privatisation Unit and MIMCOL is at ITT stage in the commercialisation process of this Division. An articulation of the commercialisation process is captured in Chapter 8.3 1.2.4 Gas Division This Division is responsible for the storage, filling and distribution of gas to Gas Distributors. Although this Division is small in terms of staff, it is a strategic division given that it must on a ‘just in time’ basis ensure a continuous supply of gas – for which demand has increased considerably over the past years. A detailed review of the Division is captured in Chapter 9. This Division has 39 employees. It is pertinent to note that the Government through the Privatisation Unit and MIMCOL is at an advanced stage in the commercialisation process of this Division. An articulation of the commercialisation process is captured in Chapter 9.5. 1.3 Management Infrastructure The Board of the Corporation in August 2007 discussed the management support infrastructure. The Board concluded that sustained efforts are required to establish a fundamental management support infrastructure backbone that reflects the complexity of the Corporation. The following are the essential organisational and management grafting that the Board agreed to implement. 1.3.1 Strategic Sourcing and Procurement The Corporation procures on a strategic and level of scale that is probably unrivalled in Malta. Despite this, the sourcing and procurement leadership must be strengthened. The Corporation is way too much bogged down to control expenditure below Lm2,500 that strategic procurement and sourcing is at times neglected. The understanding of how to work within the technicalities of the law, exploit the existing procurement legislation, secure the most appropriate procurement medium, and establish strategic partnership and a proper functioning relationship with the Department of Contracts is a critical requirement. Moreover the success of the transmission and generation plan, and ultimately the Corporation’s ability to manage the supply of electricity effectively is directly correlated to its ability to manage its strategic sourcing programme – the building of new generators or elements of the distribution network on time, within budget, and with the best maintenance and supporting framework. In this regard the Procurement Section should be set up as a separate Department to be titled Office of Strategic Sourcing and Procurement.

Major Issue Consideration Establish an Office of Strategic Sourcing and Procurement. In addition the Corporation should either ameliorate its relationship with the Department of Contracts or else severe them completely. The Office of Strategic Sourcing and Procurement should also be responsible for stock management. Stock management is currently the responsibility of the core line departments. This, it is strongly argued, is not correct as it does not allow for checks and balances; and thus effective governance. Functionally re-aligning stock management to this new Office would require the establishment of management positions for the myriad of stock centres managed by the Corporation. Major Issue Consideration Functionally re-align responsibility for stock management with the Office of Strategic Sourcing and Procurement and establish appropriate designated responsibility holders for stock centres. 1.3.2 Programme, Services and Facilities Management The Corporation has no central capacity to coordinate, measure and secure delivery of services and projects. Whilst projects and services should be carried out by the core line departments, the centre should be in a position to ensure that projects are delivered on time, within budget and to the determined quality; and services are delivered to predetermined benchmarks. In this regard it is believed that an Office for Programme, Services and Facilities Management is constituted. The Office will report to the Chief Executive Officer. Major Issue Consideration Establish an Office of Programme, Services and Facilities Management. This Office will be supported by two primary functions: 1.3.2.1 Performance Management and Monitoring A Performance Management and Monitoring Unit within the Strategy and Communications Department with responsibility for:

- establishing an infrastructure for project and services monitoring; - ensuring projects plans are in placed and periodic project reports are issued; - ensuring that service KPIs and KPTs are in placed and measured; - identifying problem areas; - provide intelligence reporting; - introduce the Balanced Score Card Methodology within the Corporation. Major Issue Consideration Establish a Performance Management and Monitoring Unit.

1.3.2.2 Service Call Centre The Corporation has no proper service call centre – that is directed to monitor incidents, provides interactive service, and acts as a first line of support. Whilst it may be argued that the Service Call Centre is an operational activity it is strongly believed that given the new culture that such a set-up will bring to the Corporation in terms of service delivery, benchmarks and monitoring that the Centre should at the outset be established under the sponsorship and championing of the Chief Executive Officer. Over the summer, the Corporation took steps to introduced limited call centre services beyond the existing Service Dispatch Centre. It is never the less argued that the role of the Service Call Centre should be broadened to enable the Call Centre to: - act the only port of call for electronic interactions with the Corporation; - act as first line of support vis-a-vis the management of immediate reaction to arising electricity

issues; - act as the intelligent interface between the client and the Corporation until such time that

Enemalta Corporation places all of its interactive client process on an e-services platform. Major Issue Consideration Establish a Service Call Centre. 1.3.3 Health and Estate Services Management Health and safety is crucial given the environment within which staff at the Corporation operate in. To the extent possible, the Corporation must be able to anticipate risks in order to take preventive measures, as against reacting once disasters occur. Whilst line departments must be responsible for operations maintenance and issue management, a governance function that is independent of the line should be in place. This exists in the form the Health and Safety Unit within the HR department. In this regard, it is argued that the profile of health management (defined to encompass health, safety, rescue, and fire) should be a key performance objective of the Corporate – and thus its profile raised. It is pertinent to add that in essence the Corporation has no corporate services. House keeping and estate services management (on a holistic basis) is non existent. Given the property owned by the Corporation the current state of play is not tenable. The end result is one of shabbiness (at best) and standards that fail to positively compare with the Public Service and other government entities let alone the private sector. Major Issue Consideration Establish an Office of Health and Estate Services Management. 1.3.4 Office of Strategy and Regulatory Affairs The Corporation has a weak strategic and planning infrastructure. In this regard preliminary steps have been taken by appointing an internal graduate officer to the position of Corporate Strategist. Further to this an EU and Regulatory Affairs Office is in place, which currently reports to the Chief Technical Officer. A far more robust structure needs to be put into place. In this regard, an Office if Strategy and Regulatory Affairs is to be appointed – where-in the Office will assume a proactive stance in terms of strategic and business planning as well as in undertaking horizon scanning in terms of regulatory changes and reforms.

Major Issue Consideration Establish an Office of Strategy and Regulatory Affairs. The Office will be supported by two primary functions: 1.3.4.1 Quality Assurance Unit The Corporation does not have a quality assurance function. ISO9001:2000 has been achieved in only one area of the Corporation – the Aviation Department. The need to introduce quality standards stems primarily from the fact that the application of such standards act as a leverage for process transformation, rationalisation and change. The marquee attained by the Corporation in becoming ISO compliant is, in essence, a secondary goal. The Corporation requires a Quality Assurance Unit that will seek to:

- improve operational safety, reliability and effectiveness of services aimed at maintaining its high competitiveness at present and in future;

- create the Corporate Quality Management System based on the EFQM methodology, complemented by ISO 9001:2000 certification;

- establish the Environmental Management Systems, meeting ISO 14000 certification for minimising environmental impacts;

- centralise any other quality measures underway at the Corporation within the Quality Assurance Unit.

Major Issue Consideration Establish a Quality Assurance Unit. 1.3.4.2 Research and Innovation Unit The Corporation has no locum of responsibility for research and innovation. Research and innovation in environment technologies as well as in alternative energy is of fundamental importance to the Corporation. Moreover the National Strategy for Research and Innovation approved by Cabinet last year designates the Corporation as strategic entity which should set capacity for Research and Innovation, and which should invest 0.25% of its budget or turnover whichever is the highest for such research and innovation. Major Issue Consideration Establish a Research and Innovation Unit. 1.3.5 Office of the Chief Information Officer The Office of the Chief Information Officer, together with a strategic HR department, should be the Corporation’s change agent. It is, however, currently structured as an ICT technical shop. The bias of the Office of the Chief Information Officer must be skewed towards change management.

The Corporation is caught in a business process and culture time-wrap. For an aggressive process of change and transformation to be adopted skilled capacity within the Corporation must be grafted. Major Issue Consideration Re-orientate the Office of the Chief Information Officer into a business and transformation change agent by grafting the appropriate skills and capacity. 1.4 Unbundling the Corporation’s Organisation The Corporation has taken steps to meet relevant EU directive (LN511 of 2004) to unbundle its accounting in relation to distribution and generation; as well its other business and supporting operations. The unbundling of accounts has allowed for apportionment of costs and the elimination of cross-subsidisation across the various business units. The Corporation needs to determine whether it should also proceed with the unbundling of generation and distribution on an organisational basis. What would need to be undertaken is effective managerial and financial unbundling, whereby the management of the distribution system operates, in practice, isolated from the generation and supply operations. In order to achieve this: - The persons responsible for the management of the distribution system may not participate in

company structures of the integrated electricity undertaking responsible directly or indirectly for the day-to-day operation of the generation or supply of electricity.

- Appropriate measures must be taken to ensure that each operation is capable of operating

independently. - The distribution system operator must have effective and independent decision-making rights

with respects to assets necessary to operate, maintain and develop the network. The Corporation, as the ‘parent company’ would only exercise economic and management supervision rights e.g. approval of annual financial plan and ensuring that the operations of the distribution system do not exceed allocated budget. This would entail separate, distinct, management ‘cores’ including an independent financial controller, not only for the distribution system operator but also for generation and supply. Substantial restructuring of management – senior and intermediate – would therefore become necessary. Services such as human resources, legal, laboratory and other common operations can continue to operate as is – possibly with a proportion of the costs of each being allocated to the various divisions. An internal report carried out in 2006 recommends an organisation structure that seeks to secure such unbundling. The report recommends the constitution of a holding organisation which will be responsible for back-office and support functions and the divestment of the Electricity Division into two separate organisational structures: one for generation and one for distribution. The Corporation has not, to date, proceeded with this organisational re-design. A decision to re-design the organisation should not be limited solely to organisational structures and legal representation but rather with a holistic overview directed to create business units that are efficient, effective, economic and responsive to clients and the environment respectively.

Major Issue Consideration The Corporation has designed options to organisationally unbundle distribution and generation to secure ring fenced separation of these structures in response to appropriate EU directives. Whilst a decision to proceed with such fundamental organisational re-design is yet be taken, the process of organisational change should not be limited solely to organisational structures and legal representation but rather with a holistic overview directed to create business units that are efficient, effective, economic and responsive to clients and the environment respectively.

2 Regulatory and EU Framework at Enemalta Corporation 2.1 Introduction Enemalta is primarily governed by the Enemalta Act 1977 Chapter 272 of Laws of Malta. The Electricity Supply Regulations issued under the Enemalta Act are also very important since these regulate the Corporation’s relationship with its consumers. The Corporation is also subject to various others laws and EU directives that are briefly covered in this chapter. 2.2 The Enemalta Act Prior to the establishment of the Malta Resource Authority, the Enemalta Act was also the act that covered regulatory aspects of the various energy sectors. The Enemalta Act is currently largely intended to govern the operation of the Corporation. The main sections of the Enemalta Act are the following: - Part I. Preliminary - Part II. Constitution, Functions and Composition of Enemalta - Part III. Financial Provisions - Part IV. Transfer to Enemalta of certain undertakings - Part V. Management Committees and Officers and Servants of Enemalta - Part VI. Contracts and Power to acquire or dispose of property - Part VII. Miscellaneous Provisions A copy of the Enemalta Act is attached as Appendix 1. 2.2.1 Recent amendments to the Enemalta Act The Enemalta Act has been amended various times with the most recent amendment being done in September 2007. The amendments are premised on the fact that changes in the regulatory and operational set-up within the energy, gas and petroleum markets require a new legislative framework for the Corporation. The following are the main amendments: - On MRA’s advice new definitions relative to “energy audits”, “ energy efficiency”, “energy

service” etc have been introduced in the Enemalta Act with a view to directing the Corporation to foster a more efficient and intelligent use of energy and resources.

- Change of financial year end to reflect calendar year. - The widening of the Corporation’s functions so as to render the Corporation’s activities within

a market open to competition more flexible and wide ranging. - Further strengthened the obligation of the Corporation to abide by the requirements of the

Malta Resources Authority Act. - Established the office of Chief Executive Officer, who reports to the Board of Directors and is

be responsible for the executive and administrative conduct of the Corporation. - Board of Directors to be responsible for the formulation and the implementation of the policy

and the strategy of the Corporation. - In line with Government’s policy in this sector the requirement to establish a Works Council

has been introduced.

The said works council will be substituting the post of worker director. - Enemalta’s exemption from the payment of stamp duty has been removed. - Enemalta’s discretion to request overdraft has been raised from Lm200,000 to Lm1,000,000. - Enemalta’s procurement procedures have been specifically tied to LN 178 of 2005, Public

Procurement of Entities Operating in the Water, Energy, Transport and Postal Services Sectors Regulations, which deals specifically with the procurement of utilities. In fact enemalta (and wsc) is actually included in one of the schedules to this Legal Notice.

- The transfer of immovables by Enemalta has been linked to the Disposal of Government’s

Land Act. 2.3 The Electricity Supply Regulations (ESRs) The Electricity Supply Regulations govern the relationship between the Corporation and its consumers with respect to the provision of supply. Important aspects include application for services, supply and load requirements, fees, payments and responsibility for bills, tariffs, meters, readings, suspension and termination of services amongst other matters. A copy of the Electricity Supply Regulations is attached as Appendix 2. Major Issue Consideration The ESRs require an overhaul. 2.4 Other relevant legislation Apart from the Enemalta Act, other important primary legislation includes the following:

- Chapter 7 - Coal (Sale) Ordinance Chapter 22 - Water Supply Ordinance

- Chapter 25 - Petroleum (Importation, Storage and Sale) Ordinance - Chapter 81 - Utilities and Services (Regulation of Certain Works) Act - Chapter 356 - Development Planning Act - Chapter 423 - Malta Resources Authority Act - Chapter 424 - Occupational Health and Safety Authority Act - Chapter 435 - Environment Protection Act

Various secondary legislation that concern Enemalta include the EElleeccttrriicciittyy SSuuppppllyy RReegguullaattiioonnss,, Electricity Regulations (LN511/04), Commencement Notice of the Crude Oil and Petroleum Products (Minimum Security Stocks and Crisis Management) Regulations 2002 (LN 237 of 2002), Public Contracts Regulations 2005 (LN 177/2005) and Public Procurement of Entities in the Water, Energy, Transport and Postal Services Sectors Regulations 2005 (LN 178/2005) 2.5 Legal Issues and Enemalta’s Positioning The Corporation is involved in a number of Court cases and proceedings in other Courts which may have a significant impact, whether financial and / or operational, on the Corporation’s activities. The following list purports to delineate those which are believed to be important: 2.5.1 Office of Fair Trading (OFT)

i) Complaint on methodology followed to compute surcharge and on discrimination

relative to capping of certain entities such as hotels and factories.

The OFT is investigating this complaint and has requested the Corporation to provide certain information which is presently being compiled. The Corporation has denied any discrimination in the calculation of the surcharge and the capping of activities which was introduced on direct instructions of Government as reflected in the 2005 Budget Speech.

Major Issue Consideration Should Enemalta lose this case it could potentially have to refund the surcharge above the cap to non-capped consumers. This would sum into the millions.

ii) Complaint by Attard Services Limited (ASL) / Shell relative to an allegation by the

said entities that the Corporation is creating a barrier for entry in the airport’s ground handling sector by imposing a fee, for the use of the infrastructure, which is not objective and transparent as requested by law. The Corporation, as comforted by a report compiled by PriceWaterhouseCoopers, is adamant that the fee requested is fair and reasonable.

Parallel to this case the Corporation has instituted Court proceedings in the First Hall of the Civil Court to impugn a decision of the Resources Appeals Board (as confirmed by the Court of Appeal) on the grounds of breach of the principle of Audi Alteram Partem and has filed a warrant for proihibitory injunction to suspend the execution of the said decision by the Malta Resources Authority.

2.5.2 Courts of Justice

(i) Pisani Brothers vs. Enemalta Corporation (Rent Regulation Board)

This case regards the rental of warehouses by plaintiff to the Corporation. Plaintiff contends that due to a change in use of premises and extensive structural changes the rent agreement should be rescinded. Parties to the case are attempting to solve case amicably. Plaintiff has forwarded his proposal in virtue of which he has offered either an outright sale of the premises for Lm400.000 or an increase in the rent to Lm12,000 pa. (current rent Lm500pa).

(ii) Ragonesi & Company Limited vs. Director of Contracts and Enemalta Corporation

(First Hall Civil Court)

Plaintiff has instituted two separate proceedings regarding alleged irregularities in the award of public tenders. Plaintiff is claiming damages due to the fact that he contends contract should have been awarded to his company. Court has been requested to establish amount of damages. The Corporation and Director of Contracts have strongly objected to these claims.

(iii) Baldacchino vs Kummissarju ta’ l-artijiet and Enemalta Corporation (Court of Appeal

Superior)

This case, which relates to a request for damages by plaintiffs against Government and the Corporation in view of the erection of the Delimara Power Station in the proximity of his residence, was decided on the 31st January 2007 and damages of Lm550,000 were awarded. The Government and the Corporation appealed the decision.

(iv) Attard Joseph vs Prim Ministru (First Hall):

Former Malta Electricity Board employees who were transferred to the Corporation filed this case against the Government and the Corporation. The claim is based on the fact that the said former government employees were not given the same benefits

that are available to other employees and are claiming discrimination and compensation. The Corporation and the Government have strongly objected to these claims.

(v) Peralta vs Meilaq et (First Hall):

This case, which was filed in 1992, relates to the purchase of coal and amounts awarded may be significant as claim relates to over Lm200,000.

(vi) Ventura vs Fenech: (Court of Appeal Superior)

The case was decided in favour of the Corporation awarding a payment of approximately Lm244 000, with interests and expenses. Defendant filed an appeal to the decision. It is also worth noting that a number of cases filed by Micheal and Alfred Fenech against the Corporation (and vice-versa) in 1988 have been reappointed for hearing. The said cases relate to transactions in the petroleum markets and certain decisions may be significant although not exorbitant.

2.5.3 Arbitration Centre

i) General Soft Drinks vs Enemalta Corporation is involved in arbitral proceedings against General Soft Drinks Limited relative to the onus of bearing expenses related to the shifting of a vital underground electricity cable. The said exercise was estimated at Lm317,580.60, however one cannot exclude that the said estimate will vary due to unforeseen circumstances. In fact the arbitration proceedings which were filed in 2006 will decide who will be bearing costs and will not liquidate the said costs.

ii) Enemalta vs Regency

This case relates to recovery of dues for consumption of electricity within a development in Valletta amounting to Lm 92,000. 2.6 EU related Directives and Impacts on Enemalta Corporation 2.6.1 Rules Concerning the Internal Market in Electricity This Chapter also looks at the EU related Directives, the impacts on the Corporation, and actions taken by the Corporation where so relevant. The Corporation is subject to Directive 2003/54/EC concerning rules for internal market in electricity, as transposed into local legislation by the Electricity Regulations 2004, issued by MRA (Legal Notice 511 of 2004). Malta’s current situation under this Directive: i. Malta’s electricity system qualifies as a ‘small isolated system’, because of its annual

consumption and the fact that none of its consumption is obtained through interconnection with other systems. In fact Malta can import up to 5% of its consumption through interconnection and still qualify as a ‘small isolated system’.

ii. Under the current situation Enemalta’s generation sector is open to competition whilst its

distribution system remains classed as a natural monopoly and is not open to competition. iii. Malta is also currently eligible for derogations from a number of chapters and/or obligations

under Directive 2003/54/EC. Interconnectivity of more than 5% of consumption may render Malta subject to these new obligations.

Amendments to this Directive are currently under review. The Directive introduces a number of obligations to the different players in the business of electricity transmission and distribution: In terms of a Transmission System Operator (TSO) Malta does not have a significant (bulk) transmission system because its network is too small. In reality, there is only a distribution system and hence no transmission system operator has been designated. With or without an interconnector this situation is not expected to change under the current regulations. In terms of a Distribution System Operator Malta is obliged to designate a distribution system operator, which is the Corporation by virtue of Legal Notice 511 of 2004 - the Electricity Regulations. The obligation of financial unbundling of the Corporation’s accounts already exists. Accounts for generation and distribution are shown separately in order to ensure transparency allowing MRA to ensure/oversee fair competition practice. The issue of unbundling the Distribution System Operator to be independent from the generation organisational structure has been discussed in 04.3 above. In terms of third party access and market opening and reciprocity, the MRA is empowered to ensure the implementation of third party access to the distribution network based on published tariffs applicable to all eligible consumers and applied effectively and without discrimination between system users. These tariffs do not exist in either practice or fact. Refusal of access to third parties due to under-capacity is permitted, but the distribution system operator shall, against a reasonable fee, provide necessary information on measures that would be necessary to reinforce the network. Malta may decide (under Article 3 of Directive) not to apply the measure above insofar as its application would obstruct the performance, in law and in fact, of the obligations imposed on Enemalta insofar as the development of trade would not be affected to such an extent that it would be contrary to the interests of the community. The issue of market access is problematic in view of Malta’s application for a derogation from the liberalisation of supply – sale and resale of electricity – to consumers. What the Corporation could eventually end up facing is a multitude of suppliers – each selling to a number of consumers, electricity purchased from the Corporation itself. Malta has applied for derogation from obligation as already stated, but interconnectivity possibly renders the granting of such derogation dubious. The existence of independent suppliers would impact the Corporation’s operations. Of overall concern however remains the issue of tariffs – MRA has the responsibility of issuing tariff structures which, under competition / State-Aid laws must reflect actual cost. The Enemalta Act (Art. 20) itself has provisions which state that tariffs must reflect cost as well as such factors as resources for future development. The current tariff structure does not reflect actual costs let alone provide for investment into the development of the system. Major Issue Consideration The issue of tariffs which under competition and State-Aid laws must reflect actual true cost is a matter of concern. A competing generator - even selling directly, through direct lines to its subsidiaries and eligible customers, would certainly invoke the above issues. This problem could easily also apply to suppliers, who might not be able to operate competitively due to the fact that tariffs may not reflect actual costs. Competition issues would certainly have to be addressed following new entrants to the electricity market. The Commission’s package of 19 September puts forward two options for achieving the aim - agreed by EU leaders at their March 2007 summit - of ensuring effective separation of network operations from production and supply activities. The first, commonly known as ownership unbundling, involves forcing vertically-integrated energy companies to sell off their transmission businesses. The second, termed the Independent System Operator (ISO) approach, would allow firms to maintain ownership of

their transmission assets but transfer management to a separate ISO, responsible for taking investment and commercial decisions. The arguments put forward against these proposals by the Franco-German led group of eight - including Austria, Bulgaria, Greece, Luxembourg, Latvia and the Slovak Republic - are varied and complex, but their basic claim is that they are unnecessary, that the two so-called ‘options’ are too alike to be considered real alternatives and, moreover, “ownership unbundling” runs counter to constitutional law and the freedom of movement of capital. As disquiet over the Commission proposals surfaced at a Council session of Energy Ministers on 3 December 2007, the Council President asked dissenting Member States to propose a workable alternative, which led to the 29 January 2008 “third way” proposals from the eight. This third way rests on two pillars, the first concerning how the internal governance and organisation of the TSO entity would be organised; and the second detailing how grid investments, market integration and the connection of new power plants would be fostered. The first pillar items set out how the assets, staff, financial resources and identity of the TSO would be separated from the parent. It also provides for a compliance regime to separate TSO top-management from that of the rest of the company. Regarding investment and new entry, the national regulatory authority “will have the power to oblige” a TSO to make necessary investments or to hold a tender where the TSO “is not willing” to build infrastructure as deemed necessary in the relevant national network development plan. Whilst these considerations do not apply to Malta, as it has no transmission system, the ever increasing powers of the Commission, the creation of an ‘Agency’ to regulate the national regulators and the increasing trend by the Commission to use “comitology” to modify and re-interpret Directives well beyond their original intent and scope are worrying as they could eventually be applied to Malta, either through ‘harmonisation’ of the definition of transmission and distribution or if a sole DSO becomes classed as equivalent to a TSO. Major Issue Consideration Whilst considerations relating to a Transmission Service Operator do not apply to Malta at present, concern exists that the Commission may in the future, through the use of ‘comitology’ modify or re-interpret the Directives in such a manner that the rules relating to the TSO will become applicable to Malta. 2.6.2 Environmental Matters Malta ratified the United Nations Framework Convention on Climate (UNFCCC) as a non-Annex I party on 17th March 1994, subsequently also ratifying the Kyoto Protocol on 11th November 2001. To date, Malta has maintained its non-Annex I party status, even after accession to the European Union (EU) on 1st May 2004. Under this status, it does not have any binding obligations to limit or reduce greenhouse gas emissions under the Protocol. Neither does it have any limitation or reduction targets under the ‘burden-sharing agreement’ (Council Decision 2002/358/EC of 25 April 2002 concerning the approval, on behalf of the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder, ) currently in effect. However, Malta is now bound to adopt and implement policies and measures under the EU environmental acquis.

The following Directives impact the Corporation: 2.6.2.1 Directive 2003/87/EC (L.N. 140/2005) : Greenhouse Gas Emissions Trading Scheme

a) Reduction of GHG Emissions

The EU has set a target for a reduction of GHG emissions of 20% below 1990 levels by 2020. The emission levels allocated to the Corporation are to be established by the Second National Allocation Plan which is still being discussed with the EU Commission.

b) Emission Trading Scheme

Directive 2003/87/EC transposed by Emission Trading Scheme (LN 140/2005: European Community greenhouse gas emissions trading scheme regulations).

Capping of CO2 emissions from power plants in national allocation plans (NAPII) this is not finalised because it is dependant on the second National Allocation Plan being formally approved by the Commission.

2.6.2.2 Directive 2001/80/EC (L.N. 329/2002): Large Combustion Plant

a) Emission limits for large combustion plats

Directive 2061/80/EC on the limitation of emissions of certain pollutions into the air from large combustion plants, transposed into Maltese legislation by LN 329/2002.

This legislation sets limits on the amount of NOx and SO2 which may be emitted by generating plants. In the Corporation’s case these limits only apply for Delimara Power Station because for Marsa Power Station, the Corporation applied the facility granted by Article 21 (a) of the Directive where a written declaration was submitted not to operate the plant for more than 20,000 hours starting from first January 2008 and ending no later than 31 December 2015. Furthermore, in early 2008 the Government accepted the Corporation’s recommendations to redefine the scope of the definition of ‘diesel engines’ within the said LN; and a LN was issued in this regard

The Corporation whilst not compliant at present is in the process of complying with the limits through upgrading of its generating plant at Delimara Power Station.

2.6.2.3 Directive 2001/81/EC (L.N. 232/2004): National Emission Trading Scheme

a) National Emission Ceiling

LN 291/2002: National emission ceiling for certain atmospheric pollutants regulations). Directive 2001/81/EC transposed by. Emission ceiling for acidifying and eutrophying pollutants and ozone precursors. Enemalta will attempt to comply with the limits in accordance with these regulations, however this will require completion of the proposed modifications to the steam plant at Delimara Power Station.

2.6.2.4 Directive 1996/61/EC (L.N. 230/2004): Integrated Pollution Prevention and Control

a) Integrated pollution prevention and control

Directive 96/61 as amended; 2003/85 transposed by LN 234/2002 : Integrated pollution prevention and control regulations) which relates to consideration of climate

change issues in policy-making and in environmental impact assessments and rules for the prevention and control of pollution including release of atmospheric pollutants, from large industrial establishments. Due consideration of the effect on emission of greenhouse gases arising from the implementation of policies and developments to be taken into account when formulating policies in other areas and assessing environmental impacts of major developments and measures. The Corporation is in process of applying for IPPC permits for both the Marsa Power Station and Delimara Power Station installations and this is being reviewed by MEPA.

2.6.2.5 Directive 1997/265/EC

The EMAS Directive is not binding on EU Members States and it has only been adopted by a few energy companies. The Corporation issued a request for proposals for consultancy services for arguing ISO-2001 Clarification in Environment Management Systems. Adjudication has been completed and the results have been submitted for review by the Tender Sub-Committee.

2.6.2.6 Directive 1996/82/EC & Directive 2003/105/EC: Control of Major Accidents / Hazards.

COMAH (Sevaso) Directive

Directive 96/82/EC on the control of major-accident hazards as amended and extended by Directive 2003/105.

This Directive applies to Delimara Power Station, three installations at the Petroleum Division (B’Bugia, Has Saptan, Ras Hanzir) and the Gas division. Internal emergency plans for all these installations have been prepared and discussions are being held with the CPD for the finalisation of their external plans.

Malta had originally asked for a 4 year transition period for the gas plant, but withdrew this during negotiations, and decided to close down the Qajjenza Plant and to build a new plant in line with the Directive at Bengħajza

The decommissioning of Qajjenza is intertwined with the Gas Division commercialisation process which is discussed later in the Dossier.

No actual dates can be given because it all depends on when MEPA issues the necessary permit.

2.6.2.7 The 1999 Gothenburg Protocol

The 1999 Gothenburg Protocol, also known as the Convention on Long Range Transboundary Air Pollution, sets national emissions ceilings for Sulphur Dioxide, Nitrogen Oxides, Ammonia and VOC’s, based on a progressive reduction of emissions from 1990 levels. Allocations for Malta have not yet been determined. It also imposes limit values for emissions from power generating plant, which are similar to those of the Large Combustion Plant Directive, with the following exceptions. The provision for existing plant which is non compliant to the limit values given to operate for 20,000 hrs as from 1st January 2008 is not allowed. The limit values for existing plant come into force as soon as the protocol is ratified. The exclusion given to stationary diesel (compression ignition) engines from the provisions of the LCPD are not allowed in the case of NOx emissions, where a limit value of 600mg/Nm3 at 5% O2 content is stipulated for new plant.

2.6.2.8 Renewable Sources of Energy The Commission presented Malta with a binding target for energy from renewable sources in final energy consumption of 10% by 2020 and a binding 10% target for the share of renewable energy in transport, etroleum and diesel. The Corporation is conducting studies on the use of wind energy. The Corporation, as is discussed later in the Dossier, has also applied for ERDF financing of a R&D&I marine generation prototype. 2.6.2.9 Energy Efficiency Demand-side management (LN 62/2002: Efficiency requirements for new hot-water boilers fired with liquid or gaseous fuels regulations; LN 63/2002: Energy Efficiency requirements for household electric refrigerators, freezers, and combinations regulations; LN 100/2002 : Energy Efficiency requirements for ballast for fluorescent lighting regulations) - all transposing relative EU Directives. The Commission has also taken measures to reduce demand and improve end-use efficiency such as energy efficiency measures in buildings (Directive 2002/91/EC, more energy efficient industrial practices (Regulation No 761/2001 allowing voluntary participation by organisations in a Community eco-management and audit scheme - EMAS), energy efficient appliances. 2.6.2.10 Draft Industrial Emissions Directive (IPPC Directive) This draft Directive seeks to incorporate various Directives within the IPPC Directive. These include the Large Combustion Plant Directive and the Waste Management Directive. The draft directive goes further and proposes the use of mandatory limits based on Best Available Technology (BAT). This is expected to be subject to widespread opposition from the industry. Enemalta does not agree in principle with the proposals as (a) it reflects a ‘one size fits all attitude’, and (b) the use of BAT is tied in to ‘best reference’ plants, which do not reflect the actual operating requirements of the different utilities.

The proposal for the new IPPC directive is expected to come into service as from 1 January 2016 (After the 20,000 hr period for old plant expires) and affects the various types of generating plant operated (or contemplated) by the Corporation as follows: Gas turbines: As from 1/1/2016 the proposed NOx limit for gas turbines has been lowered to 90mg/Nm3 from 120 mg/Nm3. There is also a limit on the emission of CO which has to be measured. These limits are also expected (proposed) to apply to Enemalta’s existing gas turbines for post 2015 operation. Diesel Engines: The phrase "plants powered by diesel...............shall not be covered by this directive" which excludes Diesel engines from the provisions of the LCPD has been removed. There are new limits inserted for gas engines. However, no limits have yet been proposed for diesel engines operating on liquid fuels. Boilers. For operation of DPS boilers post 2015, the limits are comparable to present day BAT. Operation of plant to present day LCPD limits will not be allowed after 1/1/2016. The impact on generation plant, and future demand, are uncertain due to: - The new Industrial Emissions Directive. - The NEC Directive 2020 targets.

The outcome of discussions on EU greenhouse gas reductions, renewable energy targets and EU. Emissions Trading Scheme phase 3.

- The potential for carbon capture and storage (CCS).

3 The Human Resources Framework of Enemalta Corporation 3.1 Overview The Corporation is one of the largest employers in Malta. The current staff complement is that of 1,659 personnel – down from 1775 employees over 2005. Whilst figures may denote an extensive large number of employees, the fact is that the Corporation has a weak middle management structure and, as discussed earlier, limited management support infrastructure. The Corporation is static – and has been so for decades. Between 2005 and 2007 only 70 recruitments have taken place (18 in 2005; 30 in 2006; and 22 in 2007). To a large part the recruitment relates to new engineers – which is the strata that experiences the highest turnover. The Table below shows the years of service of the employees with the Corporation: Table 1: Years of Service with the Corporation Years of Service %

0 to 3 years 59 3.55% 4 to 10 years 126 7.59% 11 to 20 years 889 53.58% 21 to 30 years 522 31.46% 31 to 40 years 58 3.49% Over 41 years 5 0.30% The gender population within the Corporation is as shown in the following Table: Table 2: Enemalta Corporation Employees by Gender Males 1538 92.70%Females 121 7.86%

The Table below shows the classification of the Corporation’s employees. Table 3: Classification of the Corporation’s employees % Engineers 83 5% Other Professional 18 1.08% Technical 1342 80.89% Administration 216 13%

As shown in the Table below the Corporation has an aging population. Only 23.85% of the population is 35 years of age or younger. A considerable 12.8% is over 56 years of age; and 29.59% are between 46 and 55 years of age. Table 4: Enemalta Corporation Aging Population

Under 25 26-35 36-45 46-50 50-55 Over 56

All Personell 49 338 575 302 189 206 Percent 3.55 20.3 34.6 18.2 11.39 12.8

Generation 25 111 257 128 73 64

Percent 1.5 6.69 15.49 7.71 4.4 3.85

Petroleum 1 25 50 50 23 13 Percent 0.06 1.5 3.01 3.01 1.38 0.78

Development 9 60 60 19 10 11

Percent 0.54 3.61 3.61 1.15 0.6 0.66

Distribution 8 77 101 61 37 60 Percent 0.48 4.64 6.08 3.67 2.23 3.61

Gas 0 5 8 6 6 14

0.3 0.48 0.36 0.36 0.84

The above has two impacts. First it will allow for a smooth attrition of staff at the same time that the Corporation moves onto modern technology which will require less employees to operate. Second, however, succession planning needs to be embarked upon embracing a 15 year horizon as the Corporation becomes devoid of skills and knowledge and expertise as well as an element of personnel that would need to be replaced. Promotions are insignificant – with only 109 promotions taking place over three years (35 in 2005, 19 in 2006, and 55 in 2007) – that is 6.5% of the Corporation staff. This is primarily the result that the Corporation is based on traditional organisational models – hierarchical and on a grade structure. The end result is that people move into dead-end positions relatively quick in their career and the issuance, or lack thereof, of call for applications becomes a major organisational political issue. Further to this, the Corporation has no mechanisms to award performance and to manage accountability. There is an increment review mechanism, which acts as a form of accountability check. The Table below shows the instances of ‘negative’ reports between 2005 and 2007: Table 5: Instances of Negative Increment Reports

No Increment Total Nr of Employees %

2005 419 1788 23% 2006 408 1730 23.50% 2007 307 1676 18.31%

The Corporation is highly Unionised. The two recognised Unions are the General Workers Union and the Engineers and Professional Officers Union. The Unjoni Haddiema Maghqudin is also present within the Corporation. Table 6 shows how membership is distributed: Table 6: Membership Representation in Unions GWU 1094 65.94%EPOU 64 3.85%UHM 306 18.44%Non Members 228 13.74%

Note: A person may hold membership in more than one Union The Unions have accrued a strong hold on the business of the organisation, to a large extent the result of a political leadership. The matter has been compounded by the fact that past Collective Agreements entrenched deadlock by means of interpreting “consultation” to mean:

“1.1.3 … that either party will submit proposals in writing to the other party and after allowing sufficient time, the minimum being two working days, for such proposals to be examined, relevant comments and observations will be exchanged, in order to reach mutual agreement.”

Moverover, entrenched working practices are difficult to remove due to, on the one hand an absence of an expiry date on the said Side Agreements – for example the Generation Side Agreement and the

Aviation Side Agreements were drawn up in 1994 and 1996 respectively and remain in force – an on the other hand an intransigence by the Unions to review with management such agreements due to the arising benefits stemming particularly from overtime as a result of fixed complements which must be resourced at all times. The Corporation, in truth, does not have a Human Resources (HR) function that acts to actively design strategy and policy, and implement accordingly. What exists is a personnel and industrial relations department. In fact of the 60 staff assigned with the Human Resources department, 8 (13%) carry out administrative personnel duties such as sick leave, vacation, redeployment et al; 12 (20%) carry out payroll related duties; 13 (22%) are involved in transport duties. Of the remainder 3 are assigned to the Industrial Relations Section; 6 to Health and Safety; 1 to Welfare; and 13 to the Training Centre. This is a major concern. A vibrant pro-active HR department is key to the success of the Corporation and to any transformation required. The HR department should be one of the key lead change agents within the Corporation by means of undertaking operations review, organisational design and development initiatives, et al. The HR department is currently limited in scope and strategic orientation. It is argued that given the transformation that is necessary, HR should be a strategic department in its own right. Moreover, the department requires a small cadre of executives that understand strategic human resource management and development. Major Issue Consideration Establish an Office of Human Resources and establish a cadre of executives that understand strategic human resources management and development. 3.2 Collective Agreements The Collective Agreements set out the main human resources framework for the Corporation – although in truth a substantial part of the Collective Agreement should be lodged within an Human Resources Policy Manual. Nevertheless, the Collective Agreement is a fundamental kernel and acts as either the leverage or obstacle for change. The Collective Agreements with both Unions expired at the end of 2005. Only now, in February 2008, has the Corporation managed to conclude 1 collective agreement (with EPOU) and is bridging the gap to reach closure with the GWU agreement. The incumbent Chief Executive Officer inherited a template Collective Agreement that was in discussion with the Unions since 2004. This presented little parameters for change to the fundamental concepts and principles that the new executive regime would have wished to secure as this would have meant a complete fresh start. Whilst mooted to the respective Unions this was considered as unacceptable. Thus the ambitions to leverage change were limited to the following principles stated hereunder: (a) In terms of Both Collective Agreements

The core principles applying to both Collective Agreements were: (i) The definition of consultation to reflect the definition as established in LN 10 of 2006.

This was agreed to by both Unions. (ii) The removal of all side letters or their renegotiation prior to the signing of the

Collective Agreements. The key concern to the Corporation was that the window of opportunity to reform inefficient work practices would be lost if the Collective Agreement is signed and monetary increases awarded. This condition relates particularly to the GWU as there are no Side Agreements that relate to the EPOU.

The GWU has refused this condition saying that by setting this parameter the Government and Corporation are showing that they do not wish to seek closure on the Collective Agreement. The GWU has proposed that discussions take place and are concluded within six months of signing of the Collective Agreement. Both the Government and the Corporation have not accepted this counter-proposal as there is no provision that leverages change in the event of failure to agree.

(iii) The introduction of an ethical code and value system for the Corporation and its

employees. (iv) The establishment to attain certification in the Investors In People marquee – which in

turn will demand change to the human resources framework. (v) The introduction of the Whistleblower concept for fraud. (vi) The introduction of flexibility; particularly in relation to the introduction of flexi-time. (vii) The introduction of the principle of multi-tasking; re-skilling et al to increase the

intrinsic and / or financial value of the position as the case may be to secure increased efficiency and productivity.

(viii) The introduction of the principle of Life Long Learning and the commitment to draw up

a Learning Plan during the term of the Collective Agreement. (ix) The introduction of family friendly measures established by Government. All the principles from (iii) to (ix) were accepted by the respective Unions.

(b) In terms of the General Worker’s Union

Further to the principle stated (a)(ii) above, the other fundamental issue related to the financial package. The officers from Scale 20 to Scale 14 are, approximately, Lm850 to Lm100 higher than similar grades in the Public Service. The Government policy as communicated to the Corporation was that (i) the relativity with the Public Service Scales are to be maintained; and (ii) all increases are to be inclusive of COLA.

Moreover, the Corporation was recommending that the positions between Scales 12 and 6 which are considerably lower than the Public Service Scales are placed in parity with the latter scales. This would result in a considerable increases for those employees occupying these scales.

Furthermore the Corporation is not considering any increases to the shift and on-call allowances respectively. In either case, these are already higher than shift allowances in the public service and the private sector. Moreover, the Corporation has no financial strength to absorb a considerable increased recurrent overhead.

The final position submitted by the Unions is the award of Lm1.5 per week to initially be provided as a ‘cash bonus’ within incorporation in the salary in the subsequent year for the period 2006-2011 together with considerable increases in the shift and on-call allowances respectively.

The final position that will be submitted by the Corporation together with the Central Bargaining Unit is the following:

- for scales 13 Lm1 per week outside of COLA to be incorporated in the salary scales

for years 2008 to 2010. - for scales 14 Lm1 per week outside of COLA to be incorporated in the salary scale for

year 2010.

a cash bonus of Lm1 per week for all salary scales from scale 13 to 20 for 2008 and

2009. - the integration of Lm1 in the salary scale for scales 15 to 20. - job evaluation of staff in grades 18 and 17 to upgrade as and where appropriate on a

personal basis. - an allowance for the attainment of higher educational qualifications on the same basis

as provided to the Public Service.

On 27th February 2008 the GWU informed the Corporation that the position presented to it is rejected.

(c) In terms of the Engineers and Professional Officers Union

- a restructuring of the existing grades of PO III, PO II, PO I and Project Officer to three categories: Category A – Senior Professional Executive; Category B – Professional Executive; and Category C – Associate Professional Executive.

- the removal of Grade IVA – with positions outside of the new structure to be issued

on the basis of a call for applications. - the drawing of a ‘line in the sand’ for automatic progression to Category A for new

employees as from date of signing – subject to arising vacancies and a call for applications. Incumbent officers as at date of signing who used to progress automatically from PO II to PO III will progress as per mechanism in place in outgoing Collective Agreement (2002-2005).

- a recognition of the engineering and professional strata as the core technical and

supporting class of the organisation and the need to have an attractive package (salary and benefits) to ensure that the Corporation is in a position to retain staff as well as to attract the best and the brightest.

It is recognised that given the new maximum salary for Category A, existing Assistant

Manager and Manager positions respectively would need to be reviewed. - The introduction of a Performance Management and Development Programme to

secure accountability and award performers to be introduced by 1st January 2009.

The members of the EPOU have approved the Collective Agreement as presented to them. The new Collective Agreement came into effect as from 21st February 2008.

3.3 Side Agreements and Work Practices The Corporation has a number of Side Agreements that determine work practices. These are: - Restructuring of Operating Grades in Generation - 14th July 1994. - Restructuring of Aviation Auto Mechanics at the Petroleum Division at the Airport – 1st

January 2004. - Production Replacement Staff Roster at the Gas Division – 27th July 2004. - Senior Technician Industrial Electronics Grade – 1st January 2007. - Restructuring of Distribution Grades – 11th July 1999. - Agreement of Recorder and Senior Recorder – 19th December 2002. - Restructuring of Works Overseers Section – 1st July 1999. - Restructuring of Aviation Grades – June 1996

Fuel Distribution Operator at the Petroleum Division – 21st November 2003. The main issues relate to the following Side Agreements: 3.3.1 Aviation Work Practice The Corporation in May 2005 drew up recommendations for reform and subsequently submitted a report to the General Workers Union in June 2006. The Union had rebutted the reforms proposed. The proposals drawn up by the Corporation were based on the conclusions of an independent consultant. The key recommendations were: - a severe reduction of the head count as follows: As at May 2005 Proposed

Airfield Operators 36 15 Aviation Inspector / Charge Hand 8 3 Mechanics / Senior Airfield Mechanics 6 4 Supervisors / Dispatchers 4 4 Storeman 1 1 Technical Officer 1 0 Total 56 27 - the introduction of a 3 shift system, introduction of overlap across shifts, and downsizing the

night shift to 2 personnel. The objections by the Union stemmed from the financial impact that this reform would have on its members as well as on how the downsizing was to be managed. A review carried out in October 2007 by the new Chief Executive Officer (Memorandum titled ‘Aviation: State of Play and Recommendations dated 5th October 2007) concluded that whilst agreeing with the 2005 report “that the night shift is an expensive and wasteful shift as it currently stands” it expressed that “the said report was purist in terms of the clinical conclusions reached” due to issues relating to equipment, technology, aging staff population amongst other matters. The 2007 review report also stated that circumstances have changed considerably since the 2005 report due to the increase of low cost carrier operations. In this regard, the Corporation proposed that the current shift composition as prescribed by the Agreement of 14th June 1996 required reform in order to allow the Corporation to reduce the amount of people during the night shift; increase the amount of pay during the core hours; and secure flexibility to be able to respond to a dynamic environment. In this regard, the Corporation in November 2007 provided to the GWU the following proposal: - three shift structure options to meet the objects stated above. - a one-off bonus of Lm500 to compensate for loss of future earnings arising from loss of

overtime. - the addition of wing service to the job description and the corresponding upgrading of the

position of Crewmen by 1 scale. The Union has rejected the shift structure options presented to it. It verbally informed the Corporation that would consider reducing the minimum complement of the night shift to 6 persons (below six to be replaced by bringing in persons on overtime); a two step salary increase for the Aviation Crewman for the assumption of wing services duties; and the one-off Lm500 bonus.

Major Issue Consideration The working practice of the Aviation Section as defined in the 1996 Side Agreement is inflexible and inhibits appropriate change to meet a dynamic environment and does not allow the Corporation to economically provide this service. There is no doubt that this practice must reformed. 3.3.2 Generation Section Work Practice The generation section, operations work practice is governed by the 1994 Side Agreement. In essence it establishes a minimum shift complement for the operation of the generating plant on the basis of a 4 shift system. A report drawn up in 2004 by the Corporation identified that: - due to the need to replace Senior Operators and Plant operators to meet the complement

levels Lm180,000 and Lm90,000 was being paid in annual overtime at the Marsa and Delimara Power Stations respectively.

- the 4 shift system is based on a 42 hour week, with the additional two hours being serviced

on the roster allowance – costing Lm82,000 and Lm43,000 annually at the Marsa and Delimara Power Stations respectively.

- the Corporation was paying Lm26,000 and Lm7,000 extra per annum at the Marsa and

Delimara Power Stations respectively to remunerate shift personnel who report for work on Sundays and public holidays.

To introduce a most cost effective work practice, the Corporation proposed the introduction of 5 shift system. It was estimated at the time that through re-organisation, the 5 shift system would have a neutral impact or possibly a surplus of operators. The report claimed that the 5 shift system would dramatically reduce the need for overtime to be paid to allow for vacation leave, sick leave, the 2 hours additional per week, Sundays and public holidays. Although the report is dated, and the situation has changed, the principles behind the introduction of the 5 shift system remains valid. In addition the report highlights the potential savings accruing from a reorganization of the current highly inefficient maintenance section. Basically the maintenance section work a form of shift based on 7-day per week attendance with shifts working 5.5hours/day followed by an 11hours/day followed by an off-day in rotation. No official breaks are given on these shifts. The report proposes a standard 40 hour week based on Monday-to-Friday attendance with a fixed daily break , and the possibility of a week-end roster and on-call for after hours faults. Major Issue Consideration The working practice of the operations of Generation as defined in the 1994 Side Agreement does not allow the Corporation to economically provide this service. There is no doubt that this practice must be reformed. 3.3.3 Moving towards a Position Based Organisation Enemalta Corporation applies a classification system that is primarily entrenched within a grading structure. This classification system has considerable deficiencies – which limit the ability of the Corporation to respond with a degree of flexibility to changes in the business environment. Amongst the issues that are faced are the following: - grades do not allow for a job within the grade to be up-graded in the event the responsibilities

change. The practice in Enemalta is that such up-grading can only be attained either through

what are termed ‘restructuring reforms’ which are Side Agreements to the Collective Agreement; or through the provision of allowances which create lack of transparency, speculation, accusations of unfairness et al.

- as persons are tied to grades and not to positions there is no distinction between the degree

of responsibilities within such a grade. For example an Accounts Officer, a general clerk, and an HR Officer carry the same compensation package even though an Accounts Officer has more responsibility than a general clerk.

- the fact that jobs are seen as grades as against positions renders it difficult for the

Corporation to manage recruitment. Given the current practice where calls for applications require authorisation from MIIIT, the Ministry of Finance, and the Rapid Response Action Team within the Office of the Prime Minister requests for a ‘large’ numbers of clerks, technicians, et al are refused as these are seen under one generic job function. In truth this is not correct: in a position based system these would be seen as different clusters of positions, and not jobs congregated by means of a grade.

- the fact that jobs are seen as grades, recruitment is a major issue within the Corporation.

People see call for applications, which do not happen regularly, as the only means of reward – and hence non issuance of a call for applications is seen as a quasi ‘infringement’ of their rights. In a position based system this is never the case. Once a position becomes vacant a call, following an assessment whether there still exists merit for the position, is issued. Call for applications thus becomes a routine practice.

The Board of Directors of the Corporation in January 2008 agreed that a holistic transformation programme to re-design the Corporation on the basis of positions and not grades should be embarked upon in 2008. In essence this would imply the adoption of the following: (a) The introduction of a standardised job evaluation tool. There are approximately 7 or so well

known and commonly used job evaluation systems which can be applied. A study would be required by the Enemalta Corporation to identify the appropriate job evaluation system.

(b) The introduction of a structured and consistent way of writing and evaluation position

descriptions. A structured methodology of writing position descriptions would need to be identified.

(c) The undertaking of Organisation Design and Development exercises within each functional

structure of the Corporation in order create the appropriate position based structure. (d) Following the above, position descriptions are articulated. Together with a structured

methodology mentioned in 02 above, reference tools for benchmarking would need to be identified. The ILO has such reference tools. Potentially international accreditations on power and energy related jobs exist. A further reference tool would be that of twinning the Corporation with another Corporation in Europe – ideally from an English speaking country.

(e) Once the position descriptions are articulated these will be evaluated. Ideally this process is

managed through a Panel which has a constituent core with representation as appropriate from the respective Divisions and functions.

(f) Following evaluation, a value is subsequently attached to each of the said positions. This

value will range with a minimum and a maximum figure which is determined by the importance the Corporation attaches to the position, market conditions, and the human resources budget.

(g) The next and final stage will consist of placing current employees in the positions identified;

as well as changing employment conditions to reflect the person’s worth within the value of the position. This would require a structured interview with each employee.

Major Issue Consideration The Corporation should undertake a holistic transformation programme to re-design the Corporation on the basis of positions and not grades.

4 The Financial Framework of Enemalta Corporation 4.1 An Overview of the Financial Framework of the Corporation Enemalta Corporation is 100% owned by Government. The institutional framework of the Corporation is a statutory one governed by the aforementioned Enemalta Act. The credit rating assigned by Standard and Poor in late 2007 for the Corporation is that of ‘BBB+ Stable Rating’. It is pertinent to underline that the primary reason for this rating is the Government underwriting of the Corporation’s finances. The following are the financial information for the Corporation as at September 2007:

- Turnover: Lm 190 million - Operating Profit: Lm 1.3 million - Loss: Lm 4.7 million (after Government subventions of Lm 18

million) - Assets: Lm 294 million - Debts: Lm 142 million - Capex: Lm 5.8 million (property transfer of Lm 19.1 million excluded).

The financial information for the operational arms of the Corporation are as follows – as at September 2007: Electricity Division

- Turnover: Lm 84 million - Operating Loss: Lm 974,000 (after subventions of Lm 15.9 million) - Units generated: 2,133,457 Mwh - Fuels consumed: 647,000 MT (68% of total) - Assets: Lm 198 million - Capex: Lm 4.8 million (property transfers excluded).

Gas Division

- Turnover: Lm 3.2 million - Operating Loss: Lm 442,000 (after subventions of Lm 2.1 million) - Cylinders sold: 1,088,000 - Fuels consumed: 19,000 MT (2% of total) - Assets: Lm 13 million - Capex: Lm 601,000 (property transfers excluded).

Petroleum Division

- Turnover: Lm 104 million (inter-divisional excluded) - 3rd party fuels sales: 281,000 MT (30% of total) - Operating Profit: Lm 2.5 million (after Government subvention of Lm x) - Assets: Lm 78 million - Capex: Lm 69,000 (property transfers excluded).

Enemalta’s financial management policies are influenced and determined by Government, through the appointed Board of Directors. They are also governed by Part III of the Enemalta Act that regulates areas such as borrowing, application of revenues, price setting, estimates, accounts and audits. Government Directives to the public sector also regulate Enemalta’s financial management. Enemalta’s overall financial management is hands on with little appetite for risk. The most important financial strategic aspects are funding strategy, pricing strategy and risk management.

4.2 The Finance Department of the Enemalta Corporation The Finance Division at Enemalta has a key role within the organization and its’ functions and responsibilities go beyond what can be strictly seen as traditional finance functions. This probably arises due to the absence of a commercial section at Enemalta that resulted with Finance taking over anything that is not strictly technical or HR related. 4.2.1 Overview The Finance Division is headed by Mr. P Pandolfino who acts as CFO, assisted by 2 Financial Controllers; Mr. S Caruana (Head Office & Electricity Divisions) and Mr. G Scicluna (Petroleum & Gas Divisions ) and Procurement Manager Mr. F Darmanin. 4.2.2 Functions The main functions and responsibilities of the Finance Division can be summarized as follows: - Financial Management – this includes overall financial management strategy and policy, long

term planning and forecasts and the annual budget (estimates) cycle. - Management and Audited Accounts – Management accounts are generally issued on a

monthly basis within 30 days from month end. Audited accounts generally take around 9 months to close. The main area of concern with respect to these accounts is estimation of the electricity sales figure.

- Treasury – Finance Division has an extensive Treasury function including relationships with

local and foreign banks, cash management, local and foreign loans and risk management activities.

- Accounting – the Finance section is responsible for the usual finance functions such as

account postings, trial balance, cash books, accounts payable and receivable, accruals and fixed assets. The Corporation utilizes Sage Pastel for accounting purposes, however requiring on a significant input from other sections. The current accounting package is far from satisfactory for Enemalta’s requirements. Various attempts by Enemalta to update have proved unsuccessful.

- Internal Controls – most internal controls are paper based and rely on significant manual

intervention. This gives rise to a significant risk of error or fraud. These risks are unfortunately further aggravated by the absence of an Internal Audit function.

- Procurement – Enemalta procurement is regulated by LN178/2005 Public Procurement of

Entities operating in the Water, Energy, Transport and Postal Services Sectors Regulations, 2005. Procurement authority is delegated to the various Sections up to a threshold of Lm 2,500. Purchases up to Lm 20,000 are approved by the Tender Sub-Committee. The TSC refers purchases above this limit to the Director of Contracts through the Ministry.

- WSC related Credit Control – Enemalta Credit Control supports WSC in the collection of bills

issued. The focus areas of Enemalta Credit Control are the larger debtors, delinquent debtors and suspensions. Given that Enemalta’s revenue’s from electricity is nearly ten-fold that of WSC, Enemalta should endeavor to either set up its own independent billing function or to take the lead role if joint billing with WSC s to continue. Numerous attempts by various Enemalta Boards to go down this route have proved futile.

- Insurances – insurances matters such as policy terms, renewals and claims are handled by

the Finance Division.

Fuel Procurement – fuel contracting, ordering approval, pricing declarations, demurrages and

other non-operational matters related to fuel procurement are generally handled by Finance Division.

- Pricing – Finance Division computes or is involved in the pricing of its products and services.

These include works order for sub-stations and similar works at electricity, tariffs and the surcharge and product prices. Note that tariffs, surcharge and product prices require Ministerial approval.

- Others functions – Finance is generally involved in a number of non-technical responsibilities

with a commercial nature such as temporary applications for services, rental agreements concerning Enemalta property, storage contracts, negotiations, etc.

- Liaison with 3rd parties – these include other Government Departments and entities,

regulators, the banking community, other utilities, fuel suppliers and the GRTU. 4.2.3 Human resources The Corporation has 5 qualified accountants (the CFO, the 2 Financial Controllers and 2 accountants) and a graduate in Banking & Finance. The remaining staff members, are generally not qualified (a basic accounting training programme was organized for the non-qualified Finance staff during 2006 & 2007). In 2004, PriceWaterhouseCoopers, in a report dated 4th November 2004 and titled ‘Finance Function Staff Resourcing’ stated that ‘one can note that there are only five qualified accountants in the Corporation. These include the recently recruited CFO and three long serving officers that occupy critical posts within the Finance Department. There is only one other qualified account at middle grade’. It is worrying to underline that the situation, quasi three years later to the date, has hardly improved. The accountant capacity constitutes of 1 CFO, 2 Financial Controllers for the respective Units, and 2 accountants. It is important to express that this state of play is not the consequence of lack of effort by the Corporation to rectify matters. In fact over time 5 new accountants were recruited, of whom only 1 continues to be employed by the Corporation. This attrition is the result of the constraining employment package the Corporation offers in what constitutes one of the growing services sectors on the Island. Enemalta Corporation – an entity with a turnover of quasi US$1billion should be expected to achieve the following functions as a basic minimum: - timely and accurate management accounts; - budget and estimate preparation; - comprehensive performance analysis reports; - perpetual cost measurement and cost reduction mechanisms; - comprehensive analysis of expenditure, consumption of materials, and sub contracting works; - ongoing and reliable vendor and inventory information to reduce wastage and to exercise

better control over procurement, overstocking and stock obsolescence; - analytical information to support business development initiatives and decision making. The Corporation with its current capacity is struggling to meet these basic accounting functions. Management letters by the Corporation’s external auditors on an annual basis take the Corporation to task for failing to institutionalise such mechanisms.

Further to the above basic financial management functions, the Corporation as a utility requires strong capacity in terms of: - regulatory reporting; - tariff accounting design; - procurement of fuel; - hedging on both oil stocks and foreign currency; - alignment to new demands relating to Emissions accounting, trading and auction; - alignment to the procurement of alternative energy power vis-a-vis benchmarks and penalties

set by the European Commission. With the exception of hedging and oil procurement, most of the above are hardly tackled by the Corporation. Tariff accounting design when demanded either by MRA or special circumstances such the commercialisation process has been outsourced at a high cost to the private sector. The Corporation with its high debt leverage, cash-flows and risk exposures (to currency, commodities and internal rates) also requires active Treasury Management The current capacity framework is of grave concern and curtail the Corporation’s Chief Executive, to assure the shareholder that efficiency, efficacy, and effectives is being secured let alone to prepare the Corporation to face future challenges of what is, undoubtedly, a fast changing regulatory and operating environment. It is pertinent to underline that the commercialisation process will not significantly impact the Corporation. This is for two primary reasons. First, the Corporation will continue to be responsible for the procurement of oil for its Electricity Division – which is currently carried out by the Petroleum Division and which constitutes approximately 68% of all oil volume purchases in any given year. Second, the Corporation is facing a new regulatory regime which will bring with it new demands for which the Corporation is not prepared: demands such as Emissions trading and auctioning; tariff accounting, et al. Major Issue Consideration The Finance department must be strengthened to ensure that it has the appropriate skills and capacity to meet its financing and accounting responsibilities; including the adoption of new energy accounting parameters (ETS, etc) and further resources in treasury management. 4.3 Funding strategy

The Corporation funds its requirements through a mixture of local and foreign banks. Debt portfolio duration is kept medium to longer term, while interest exposure is a mix of fixed and floating rates. The portfolio was significantly restructured in 2005 (duration, margins and currency) and all borrowing is now in Euro. The Corporation currently has debts of approx. €372 million of which €262 million are Government guaranteed. Generally speaking the Corporation seeks to fund large scale capital projects through fresh debt, while regular capital expenditure is funded from internal cash generation. Unfortunately it has not managed to do this in recent years due to very weak cash generation capability. Major Issue Consideration The Corporation has a very weak cash generation capability.

Looking forward Enemalta’s ability to raise capital without Government support (even if implied) is compromised due to the high level of borrowing. Enemalta borrowing requires Government approval to raise capital and this is always obtained. S&P have stated that “Enemalta's financial risk profile is highly leveraged and its debt and interest cover ratios are very weak in a European peer context.” Major Issue Consideration The Corporation is highly leveraged and its debt and interest cover ratios are very weak in a European peer context.

4.4 Risk Management Enemalta currently has a number of committees that manage the various financial risks inherent in the Corporation’s operation: 4.4.1 Finance Committee

The Finance Committee consists of the Chairman, 2 Board Members, the CEO and the CFO. The main function of the committee is to review the financial management within the Corporation.

4.4.2 Internal Audit Committee

This is not constituted as there is no Chief Internal Auditor and internal audit function. Various attempts have been made by the Corporation to identify an internal auditor. The last call for applications was issued in November 2007. This call has as yet not be concluded, and a recommendation made for the appointment of a Chief Internal Auditor.

Major Issue Consideration Consider the recommendation of the Selection Board for the appointment to the position of the Chief Internal Auditor. 4.4.3 Fuel Procurement Advisory Committee

The Fuel Procurement Advisory Committee consists of 5 members namely Mr R Chalmers (Chairman), Mr G Debono, Mr S Briffa, Mr G Cordina and Profs Falzon (all are external to Enemalta) . The main scope of the Committee is to advise the Board of Directors in fuel procurement and risk management matters.

4.4.4 Risk Management Committee

The Risk Management Committee consists of the Chairman, the Deputy Chairman, and external foreign Consultant (Mr. T Bjorkman), a representative of the Central Bank of Malta (), the CEO and the CFO. The main scope of the Committee is the implementation of strategies in the area of commodity, currency and interest rate hedging.

4.4.5 Fuel Procurement Committee

The Fuel Procurement Committee consists of the Chairman, an external consultant (Dr. G Debono), the CEO and the CFO. The main scope of the Committee is the procurement of all fuel products.

4.4.6 Tender Sub-Committee

There are two Tender Sub-Committee’s one dealing with procurement by the Electricity Division and the other by the Petroleum and Gas Divisions. The Electricity Division TSC consists of the CTO, the CFO or FC and an external consultant (Mr. H Attard Montalto) whilst the Petroleum/Gas Division TSC consists of the Manager (MPS), the CFO or Head of Procurement and an external consultant (Mr. H. Attard Montalto). The main scope of these Committee’s is the approval of procurement exceeding Lm 2,500 (excluding fuels). Purchases in excess of Lm 20,000 are then referred to MIIIT and the Director of Contracts for approval.

The Chairman and the Chief Executive Officer report to a Fuel Advisory Board that is chaired by the Prime Minister and includes as members the Minister for Investments, Industry and Investments, the Parliamentary Secretary for Finance, the Permanent Secretary for Finance, and the respective heads of the Prime Minister’s and the Minister MIIIT’s secretariats. 4.5 The Corporation’s Financial Position 4.5.1 Profit and Loss Analysis The following are key extracts from the Corporation Profit and Loss results for the last 3 years as well as provisional estimates for the period ending December 2008. Note that the period ending December 2008 is for 15 months since the Corporation has just changed its financial year end from 30th September to 31st December: Table 7: Profit and Loss Analysis Audited

Sept 2005

Lm’000

Man A/C Sept 2006

Lm’000

Draft Sept 2006

Lm’000

Man A/C Sept 2007

Lm’000

Estimates Dec 2008

15 months Lm’000

3rd party sales 156,390 190,609 195,879 190,915 273,004 Gov Subventions 8,311 21,336 21,336 18,012 45,921 Revenue 164,701 211,945 217,215 208,927 318,925Cost of sales (129,380) (172,572) (172,770) (168,763) (267,354) Gross Profit 35,321 39,373 44,445 40,164 51,571Commissions (5,813) (5,623) (5,038) (6,058) (8,351) Wages (14,550) (14,472) (14,437) (15,013) (18,915) Maintenance (3,260) (3,103) (2,917) (4,555) (5,036) Depreciation (11,084) (11,027) (11,084) (11,472) (15,300) Other expenses (5,477) (5,130) (3,995) (5,285) (6,551) Other income 3,603 4,094 4,204 3,519 4,142 Operating profit/(loss) (1,260) 4,112 11,178 1,300 1,560Interest expenses (5,399) (5,014) (5,205) (6,182) (8,867) Exchange profit/(loss) 131 793 0 157 0 Net profit/(loss) (6,527) (109) 5,973 (4,725) (7,307) Notes: Non-cash Subventions 6,511 12,658 12,658 4,396 90 Units generated Mwh 2,132,140 2,129,961 2,129,961 2,133,457 2,700,496 Electricity “loss” % 15.8% 17.5% 13.0% 15.8% 14.5% Petroleum Sales MT 277,268 266,213 266,213 281,368 351,915 Gas Cylinders sold 1,226,283 1,234,325 1,234,325 1,088,398 1,681,571 The significant increase in sales from Lm156 million in 2005 to Lm191 million in 2007 is not a result of an increase in demand but is fuel cost driven. In fact one can note that demand for electricity has remained fairly stable, that for LPG cylinders has actually declined, although a reversal is being witnessed this year, while the demand for petroleum products shows a slight increase. Apart from this increase margin most expenses are fairly stable.

Major Issue Consideration Whilst most expenses have been fairly stable over the period 2005 to 2007, a major impact on the Corporation’s Profit and Loss Account is the cost of fuel. A very important aspect is the electricity “loss” figure for unbilled units. As indicated above the latest available loss figure is 13% (2006 draft audited accounts) compared to 15.8% in the previous year and a 17.5% figure in 2004. The improvement in the loss figure from 17.5% to 13% has resulted in revenue of Lm 5.2 million that contributes directly to the bottom line. The full set of Management accounts as at 30th September 2007 is attached as Appendix 3. 4.5.2 Cash flow, Loans and Debt Management The Enemalta Act requires the Corporation generate sufficient revenues to meet recurrent expenses and loan repayments but also requires the Corporation to set aside funds to meet future capital expenditure and maturing loans. The cash generation by the Corporation during the last few years has been very weak and in certain cases been negative. During the last 5 years the Corporation generated Lm 4.9 million in cash in total while “regular” capital expenditure averaged Lm7 million per annum. This has resulted in a shortfall of Lm 30.7 million at a time when Corporation should have been reducing debt or building reserves for the very significant capital expenditure necessary as will be expressed later in this document. The main contributor to this shortfall is surcharge subsidies to the extent of Lm24 million over 30 months that have been settled in kind not cash. This has also resulted in the Corporation having to take out a loan of €45 million, not to meet capital expenditure but for recurrent purposes. Major Issue Consideration The Corporation has a cash shortfall of Lm30.7 million when it should be reducing debt and building reserves. To meet its recurrent purposes the Corporation has had to take a loan of €45 million. S&P in their 2007 analysis of the Corporation have stated that “cash flow debt protection was very weak in 2005, with negative funds from operations (FFO) interest coverage--because FFO is negative--and negative FFO to total debt. This is unprecedented among Western European utilities.” The Corporation currently has debts of approx. €372 million of which €262 million are Government guaranteed. The Table below gives a summary of the current debt position: Table 8: Debt Position Bank Facility

Limit Utilisation Collateral

Depfa Loan Loan

€210,000,000 €45,000,000

€210,000,000 €45,000,000

Gov. Gtee Gov. Gtee

Bank of Valletta GBF Loan

€25,000,000 €52,000,000

€18,000,000 €52,000,000

Unsecured Unsecured

HSBC GBF €25,000,000 €23,000,000 Unsecured APS GBF

Loan €5,800,000 €7,280,000

€5,400,000 €7,280,000

Unsecured Gov. Gtee

Volksbank GBF €2,000,000 Not yet approved

by BOD

Not yet approved by BOD

Unsecured

Totals €372,080,000 €360,680,000 €262,280,000

€109,800,000 €262,280,000 €98,400,000

Gov. Gtee Unsecured

The Table below summarises the cash generation, Capex and debt since 1994. Table 9: Cash generation, Capex and debt since 1994 Fin. Year

P&L Deprec. Surcharge shortfall

Cash Gen Capex Borrowing

2007 (4,725) 11,472 (4,561) 2,159 (5,865) 137,402 2006 (434) 11,049 (12,658) (2,043) (5,183) 137,278 2005 (7,830) 11,044 (6,511) (3,297) (6,539) 125,902 2004 (10,630) 10,602 0 (28) (6,862) 125,630 2003 (2,680) 10,790 0 8,110 (11,179) 121,622 2002 (3,377) 9,541 0 6.164 (5,758) 121,445 2001 (6,778) 9,340 0 2,562 (7,613) 122,244 2000 745 9,009 0 9,754 (7,813) 122,558 1999 6,248 8,104 0 14,352 (3,380) 138,470 1998 8,704 7,277 0 15,981 (9,195) 129,579 1997 (3,453) 7,244 0 3,791 (18,416) 124,386 1996 (1,535) 7,170 0 5,635 (19,314) 111,327 1995 2,637 6,693 0 9,330 (17,869) 85,506 1994 18,681 6,207 0 24,888 (6,528) 73,507 4.6 Draft 2008 Estimates and 5 years forecast The Corporation prepares its annual budget in the form of Estimates on a yearly basis ahead of its financial year. The estimates included anticipated demand for Corporation’s products, revenues and expenditure together with capital projects. Contributions from Government are also included. The Corporation’s estimates are presented to the House of Representatives and until recently sittings used to be held as soon as parliament reconvenes from the summer recess. However in recent years the tendency has been for the Corporation’s estimates to be presented to parliament well into the financial year. The estimates for 2008 have been prepared and cover a period of 15 months (October 07 to December 08). However they have not yet been approved by the Enemalta Board nor have they yet been presented to parliament. A copy of these estimates is attached as Appendix 4. At current price levels the Corporation is projecting a loss of Lm7.3 million over 15 months after Government subventions of Lm 46 million. This projection is based on the assumption that the investment required in the distribution, generation and ICT infrastructure will take place. The consequences of deferring or canceling investment in distribution and generation are discussed later in this document. The reality is that the Corporation cannot sustain this loss. Major Issue Consideration The draft 2008 Budget of the Corporation assumes continuity in the investment in distribution, generation, and ICT and projects a loss of Lm7.3 months over a 15 month period (October 2007 to December 2008). This loss is not sustainable. On the other hand there will be impacts in continuity of electricity supply if investment in distribution and generation is deferred or cancelled. In most cases Government contributions have not yet been paid. Apart the “normal” contributions received generally from Government, Enemalta estimates that it will be owed approximately Lm 18 Million by June 2008 to cover petroleum products and fuel surcharge shortfalls.

There is no doubt that the Corporation will face significant and grave financial difficulties if the dues by Government are delayed or not paid. Major Issue Consideration A considerable number of Government’s contributions to the Corporation have not been paid. There is no doubt that the Corporation will face significant financial difficulties if the dues are delayed. With respect to long term plans, the Corporation has prepared Generation and Transmission plans for the period up to 2015. These are discussed in Chapter 7 of this document. These plans, together with the anticipated disinvestment of the Petroleum and Gas divisions have been taken into consideration to prepare forecasts up to 2011. At current profitability levels the financial viability of the various projects raises concern. A copy of the 5 year forecast up to 2011 is attached as Appendix 05. Major Issue Consideration Projections up to 2011 show that at currently profitability levels the financial viability of investment required in relation to project investment related to distribution and generation raises serious concerns. The Corporation has initiated discussions with the European Investment Bank (EIB) to discuss project financing relating to the 100MW Generation Plant, the Sub-sea interconnector project; and the 132kV Cables between Delimara and Marsa, Distribution Centres. Preliminary discussions indicate a positive reaction on the part of the EIB to project finance the 100MW Generation Plant, and the 132kV Cables between Delimara and Marsa respectively. Major Issue Consideration The Corporation initiated discussions with the European Investment Bank for project investment of major infrastructure with preliminary discussions showing a positive reaction in terms of the 100MW Generation Plant, and the 132kV Cables between Delimara and Marsa respectively. 4.7 External Audits The Enemalta Act requires the Corporation to prepare Audited Accounts on an annual basis. The auditors are appointed by the Corporation but their appointment requires the Minister’s approval. PWC have been Enemalta’s auditors since 1999 and the current audit fee is Lm45,000. The audit for the financial year ended September 2006 (Appendix 05) is complete however still not finalised or approved by the Board of Directors. The 2 main pending items are Government contributions (that requires the input of the Ministry of Finance) and the Benghajsa property impairment issue (that requires an input from the Board and MIMCOL). A report prepared by Mimcol concerning the Benghajsa Land impairment issue is attached as Appendix 07. This has been forwarded to our Auditors but initial feedback seems uncertain. Audited accounts for the F/Y ended September 2005 and draft audited accounts for the F/Y ended September 2006 are attached as Appendix 08. The Corporation has not yet submitted accounts to the MRA as required by Article 16(3) of LN 511/2004.

Major Issue Consideration The draft audit accounts for 2006 are completed but not yet approved by the Board of Directors are two issues require resolution: Government contributions and Benghajsa property impairment. 4.8 Cost and Revenue Centres Enemalta has traditionally split its accounts into 3 main Divisions: Electricity, Petroleum and Gas. In view of regulatory requirements such as the unbundling regime of LN 511/2004 (Electricity Directive 2003/54/EC), the Corporation has taken steps to further segregate its operations at account level. Broadly speaking Enemalta’s accounts now consist of the following: a) Corporation – this is the aggregate of the various sub-divisions, netted for inter-divisional

transactions. The Corporation accounts reflect the position of the Corporation as a whole.

b) Head Office – this includes the Board & CEO’s Office, Finance, HR & Corporate Services and ICT. Expenses incurred by Head Office on behalf of a particular section are re-charged to the section while general Head Office expenses are apportioned to the various sections using pre-established allocations rates. Head Office also charges a capital cost to the various sections.

c) Electricity Division – this Division has now been unbundled as follows:

- Generation – this section is further split into Marsa Power Station and Delimara Power Station.

- Distribution – this section is further split up into the Consumer Services Section and the Development Section. The Consumer Services Section is split up into Districts.

d) Petroleum Division – this is again split up into various sub-sections including:

- Retailed products – largely done at the 31st March 1979 Installation at B’Bugia. - Aviation – largely at the MIA, but also Wied Dalam and part of Has Saptan facilities. - Storage activities –at the Has Saptan and Raz Hanzir installations.

e) Gas Division – this has no significant sub-sections. 4.9 Internal audit Currently Enemalta does not have an Internal Audit function. The function was outsourced to an audit firm during 2004/5 while an accountant was utilized for internal audit purposes. However the contract with the audit firm was stopped while the accountant left the Corporation. Enemalta has an Internal Audit Committee. Numerous attempts to recruit a Chief Internal Auditor have failed.

4.10 Dependency on Water Services Corporation Enemalta Coproration is dependent on the Water Services Corporation on two crucial matters: (i) billing; which includes the meter reading cycle (ii) management of debtors accounts. The Corporation’s strategy to address the issues stemming from (i) above was to secure smart metering and a new billing system through the Integrated Utilities Billing System (IUBS) solution. This is discussed in Chapter 6.2.

Given that Enemalta’s revenue is nearly 10-times that of WSC, various Enemalta Board have considered this arrangement as not making sense from an Enemalta perspective. 4.10.1 The Debtor Portfolio The following table summarizes the aged debtors position as at 30th September for the last 3 years: Table 10: Aged debtors (Lm)

Category September 2005 September 2006 September 2007 Hotels 1,462,905 2,633,587 3,326,108 Industrials 10,876,861 10,534,550 5,812,977 Commercial 3,028,851 4,972,947 2,551,015 Government Departments 1,611,650 2,018,659 2,323,696 Domestic - Malta 10,295,983 3,906,491 5,426,427 Domestic - Gozo 473,101 769,350 394,126 Farms 232,120 474,872 496,272

27,981,471 25,310,456 20,330,621

Commercial 17,212,387 20,634,616 14,510,069 Domestic 10,769,084 4,675,840 5,820,553 Credits (11,945,381) (19,071,826) (22,626,733) Current 19,638,821 17,088,556 16,145,598 3 to 6 Months 3,435,236 8,969,625 6,656,662 6 to 9 Months 2,408,840 3,042,066 5,825,252 9 to 12 Months 2,089,054 921,120 2,719,111 1 to 5 Years 6,591,119 7,944,737 7,592,999 Over 5 Years 5,763,783 6,416,178 4,017,732

27,981,471 25,310,456 20,330,621 < 9 months 13,537,515 10,028,421 6,000,779 > 9 months 14,443,956 15,282,036 14,329,843

One can note that the Lm value of older than 1 year debtors is fairly stable. Enemalta believes that a proper debtor portfolio assessment is required since this category has a high bad debt potential. 4.10.2 Larger debtors In terms of debt management, the Water Services Corporation handles approximately 280,000 debtor accounts. The Corporation seeks to assist the Water Services Corporation in the collection of the larger accounts (about 9,000 accounts). Areas of particular concern or that require further attention include: - Larger balances due – 4,164 accounts had due exceeding Lm 800 as at May 2007. - Agreements - over 2,000 have been signed (mostly by WSC) but follow up is poor. Since they

are previous defaulters risk is higher. - Unbilled accounts – 4,410 unbilled accounts with dues at WSC, with very little follow-up and

high risk of loss (time-barred). - Inactive accounts – large number of inactive accounts ignored for a number of years. Most of

these are doubtful. - Suspension – over 2,900 suspension notices issued in 4 months. Again higher risk accounts.

The Corporation has reviewed individually (desk-top and at a high level) debtors with dues exceeding Lm 800. Dues as at the end of May 2007 totaled Lm15.6 million over 4,164 accounts. These have been graded into 6 categories as follows: Table 11: Larger Debtors Description

Balance Lm Accounts

Government Very low risk 2,125,000 422 Regular Operate satisfactorily 3,878,000 930 Watch Require chasing but pay 2,649,000 677 Special attention With risk of default if ignored 2,784,000 541 Higher risk Bad debts possible 2,256,000 1,092 Doubtful Recovery unlikely 1,905,000 502 15,599,000 4,164 A high level review of the Doubtful accounts indicates that most of these accounts are overdue by years giving rise to high concern vis-à-vis recoverability. Higher Risk accounts also give rise to concern. The Water Services Corporation does not have the appropriate legal and back-up resources to ensure sustained, aggressive debt management. Although the Enemalta Corporation has set out to mitigate this risk by establishing a Credit Control function experience has shown that the Credit Control Section does not have the resources (quantity but more importantly quality) to adequately assess these accounts. Invariable, management is being asked to authorize write-off on the basis of inadequate reports, poor information and without the comfort of knowing that accounts have been thoroughly assessed. The risk of error is also considered extremely high. The situation is considered to be untenable. Given that 80% of billing and customer issues relate to the Enemalta Corporation there is no business or logical sense for the Corporation to be dependent on a third party entity. The Corporation is of the considered opinion that it must undertake the appropriate capacity to own its billing and debt management cycle. Major Issue Consideration The Corporation depends on the Water Service Corporation for its billing and debt management. Given the lack of capacity within the Water Services Corporation as well as the fact that 80% of billing and customer issues relate to the Enemalta Corporation there is no business or logical sense for the Corporation to be dependent on a third party entity. The Corporation is of the considered opinion that it must undertake the appropriate capacity to own its billing and debt management cycle. Repeatedly Enemalta Board have tried but failed to do this. 4.10.3 Credit issues and policy Enemalta has spent considerable efforts in last few years to contain debtors however the fundamental weaknesses remain. Some areas that give rise to particular concern include a small number of significant large debtors, a large number of very old debtors, unbilled accounts, inactive accounts, unread premises, “ex-social cases” accounts, abandoned and closed premises, etc. The debtor portfolio requires a clean up Enemalta and WSC do not have the resources and are not in a position to handle the more complicated accounts or take legal action in a satisfactory and timely manner. In addition the Corporations are aware that the billing data sets contain numerous inaccuracies.

The existing credit policy also has to be revamped and areas such as rented premises, body-corporate consumers, and foreigners require attention. 4.11 Applications for Financing Under the ERDF Funding Cohesion Policy:

2007-2012 The Corporation submitted five project applications under the 22nd February 2008 ERDF Funding Cohesion Policy call for applications. The applications were submitted under the theme ‘Operation Programme I – Investing in Competitiveness for a Better Quality of Life.” The following is a short descriptions of the project applications submitted. 4.11.1 Feasibility Study and Implementation of Prototype Offshore Renewable Energy

Solution The project was submitted under Priority Axis 1: “Enhancing Knowledge and Innovation”; Operational Objectives : “To explore the potential for RES and promote electricity produced from RES”. This project is based on the fact that Malta’s land territory is small – which in turn substantially minimizes the magnitude of savings that can be generated through terrestrial RES technologies. At the same time, the immediate waters surrounding the Maltese Islands are deep waters creating limitations of the application of RES technologies given that such deep water technologies are still in their infancy. Nevertheless, Malta has a large sea territory – which could provide potentially for expansion to enable mass applications of RES technologies thus resulting in potential significant impacts. The Corporation is aware of laboratory R&D&I in Europe as well as in the USA which is exploring marine based generation RES technologies that do not depend on sea bed shoring. The project objectives are the following: 1. To identify an appropriate offshore RE technology under development which has a strong

potential of serving Malta’s RE requirements for the future, and subsequently to partake in its proto-type development with a view of future deployment of the solution for large scale energy production.

2. To build local capacity in this technology sector for public, private and R&D entities and

individuals, as the first step in positioning Malta as a Centre of Competency in this field. 3. The project aims to disseminate information in this technology to public, private and R&D

entities. The Corporation is carrying out this project with the following local partners: EuroMedITI Ltd, Malta Enterprise, and the Malta Council for Science and Technology. The financing requested is €4,961,200. 4.11.2 400kWp Rooftop PV Project This project was submitted under P.A. 4: Upgrading Services of General Economic; Operational Objective: “To explore the potential for RES and promote electricity produced from RES”. The project consists in the installation of small PV systems on flat rooftops at Delimara Power Station and the distribution centres at Kappara, Xewkija (Gozo), Marsascala, Freeport, Kirkop, Tarxien, St. Venera, Armier and Valletta. Two highly visible medium-sized installations shall be installed on the slanting roofs of the workshop and turbine hall at Delimara Power Station. The overall objective of the project is to promote PV RES on rooftops for the reduction of greenhouse gas emissions caused by electricity generation using fossil fuels. Studies will be carried out on all the commercially available types of PV panels to establish the optimal installation, technical and maintenance requirements for various local conditions, and information will be disseminated.

The financing requested is Euro2,305.000. 4.11.3 Study on a Submarine Electricity Interconnection between Malta and Sicily This project was submitted under P.A. 4: Upgrading Services of General Economic; Operational Objective: “To study the viability of interconnection with mainland Europe & other means to securesupply (through, for example, large offshore RES farms), including, the expansion of thecurrent distribution system to cater, inter alia, for increased electricity”. The project consists of a study to be carried out by experts in energy economics and in technical and regulatory aspects of submarine interconnections. The overall objective is to study whether a submarine interconnection to Europe is viable for Malta taking into account security of supply, improvement in air quality, local development of large scale RES and the impacts on prices for consumers. The financing requested is Euro 1,000,000. 4.11.4 132kV and fibre-optic cables between Delimara PS and Marsa South

Distribution Centre This project was submitted under P.A. 4 – Upgrading Services of General Economic; Operational Objective : “To reduce airborne emissions resulting from electricity generation”. The project consists in connecting two new 132kV circuits between Delimara Power Station and Marsa South Distribution Centre. The distance is approximately 8km, mostly through a purposely constructed tunnel. Fibre-optic cable shall be laid to provide protection and control, and will form part of a backbone for information transmission in a nationwide SCADA system. The objective is to transfer more load from Marsa Power Station to Delimara Power Station, which being more efficient will reduce gaseous emissions, and reduce consumption of fossil fuel. The project is essential to lower technical losses, and strengthen the distribution network to ensure a more reliable supply of electricity for consumers. The financing requested is Euro 6,320,000. 4.11.5 Kappara 132kV Distribution Centre This project was submitted under P.A. 4 – Upgrading Services of General Economic; Operational Objective : “To reduce airborne emissions resulting from electricity generation”. The project consists in the construction and commissioning of a 132kV Distribution Centre at Kappara. The project will strengthen the electricity supply in a fast growing area, transfer load to Delimara Power Station, and would be the connecting point of a possible submarine interconnection to Sicily. The objective is to strengthen the 132kV distribution network and ensure a reliable supply to industry, commercial enterprises and residential consumers. The project will transfer load from Marsa to Delimara hence reducing emissions and consumption of fossil fuel. It will assist the integration of offshore windfarms by providing a connection point for a submarine interconnection to Sicily. The financing requested is Euro 25,018,772. Major Issue Consideration The Corporation is seeking to leverage the ERDF financing instrument to finance infrastructure and R&D&I projects to secure a reduction of emissions, explore and prototype new RES technologies.

5 Pricing, tariffs, surcharge and hedging considerations 5.1 Pricing strategies

Pricing policies are determined by Government. As is shown in this chapter the Corporation does not sell power and gas at its true cost. In essence, it is subsidising these services. Whilst it is understood that as a Government Corporation it is the shareholder’s prerogative to determine the social price of the sale of energy and gas there is no Public Service Obligation contract that governs the cost of subsidisation and the manner by which the Corporation is compensated by Government for such subsidisation. Major Issue Consideration There is no Public Service Obligation contract between Government and the Corporation that governs the cost of of subsidisation and the manner by which the Corporation is compensated by Government for such subsidisation.

5.1.1 Tariffs Tariffs and the surcharge are currently established by Government and significantly not cost reflective.

With respect to the surcharge this was subsidised in a “planned” manner to the tune of Lm 24 million for the 30 months up to December 2007. Property donations by Government to the Corporation have been utilised to settle this subsidy. The surcharge has also been fixed at 50% till the end of June 2008. The Corporation estimates that this will cost Government Lm18.2 million. The following are the tariffs charged by the Corporation: 5.1.1.1 Electricity Division Table 12: Electricity Tariffs Domestic Meter charge including 600 free units: € 27.95 p.a. Second block varies according to number of persons in the household: 1 person – 800 units @ € 0.0466 2 persons – 1,050 units @ € 0.0466 3 persons – 1,375 units @ € 0.0466 4 persons – 1,800 units @ € 0.0466 5 or more persons – 2,350 units @ € 0.0466 Third block up to a total of 6,400 would be at € 0.0932. The third block is equivalent to the difference between 6,400 units per year and the sum of the first and second blocks for each household. Consumption above 6,400 units per year is charged at € 0.1048 Above tariffs are inclusive of VAT at 5% Commercial Meter charge including 200 free units: € 55.90 p.a. Over 200 units – € 0.0862 per unit (hotels and guest houses € 0.0839 per unit) Customers with capacity of above 100 Amps per phase can opt to be charged on kVAh at € 0.0792 per kVAh (€ 0.0769 hotels) No free units are given on the kVah charge VAT at 5% is charged on the above rates Industrial

Meter charge including 200 free units: € 55.90 p.a. Maximum demand charge: € 18.63 per kw p.a. Consumption – € 0.0652 per unit Special night and kVA rates are available for heavy consumers exceeding 5 million kWh units p.a.: € 0.0582 per night unit plus € 15.61 / Lm 6.70 per kVA Customers with capacity of above 100 Amps per phase can opt to be charged on kVAh and kVA – rates: € 0.0606 per kVAh and € 17.47 per kVA p.a. Customers with special day / night tariff can opt for kVAh at € 0.0559 per day unit and € 0.0512 per night unit plus € 15.61 / Lm6.70 per kVA No free units are given on the kVah charge VAT at 5% is charged on the above rates Fuel surcharge A fuel surcharge on the billed consumption of water and electricity is added to the bill. This surcharge is to be revised on a bi-monthly basis to reflect international fuel price fluctuations. The fuel surcharge is capped for factories at Lm 21,000 and hotels based on consumption as follows:

(a) Lm10,000 p.a. surcharge capped at Lm6,300 p.a. (b) Lm20,000 p.a. surcharge capped at Lm8,400 p.a. (c) Lm30,000 p.a. surcharge capped at Lm12,600 p.a. (d) Lm40,000 p.a. surcharge capped at Lm16,800 p.a. (e) Lm50,000 p.a. surcharge capped at Lm21,000 p.a. (f) Lm100,000 p.a. surcharge capped at Lm25,200 p.a. (g) Lm150,000 p.a. surcharge capped at Lm29,400 p.a. (h) exceeds Lm150,000 p.a. surcharge capped at Lm33,600 p.a.

5.1.1.2 Petroleum Division Petroleum products are largely cost reflective and have been so since November 2001. Cross subsidisation between the products has ceased. However the current prices of retailed products at the pump have been fixed till June 2008 and also include an element of subsidy. This is estimated at Lm1.1 million by the Corporation. Table 13: Retailed Petroleum Products Petrol Products LRP Unleaded Diesel Kerosene Light Heating Oil Thin Fuel Oil 200 sec 450 sec 950 sec

€ 1.160 per litre € 1.090 per litre € 1.020 per litre € 1.020 per litre € 0.627 per litre € 371.54 per MT € 365.71 per MT € 356.39 per MT

Prices are adjusted on a monthly basis to account for price variations in the international market.

5.1.1.3 Gas Division The price of LPG has been fixed for the last few years notwithstanding the very significant increase in the cost of the product. At current LPG prices it is estimated that on average a gas cylinder has to increase by Lm2.10 to cover losses and by a further Lm1.56 per cylinder if Government subsidies of Lm2.1 million p.a. are discontinued. Table 14: LPG Prices Cylinder 10 Kg 12 Kg 15 Kg 25 Kg Bulk per Kg Bulk per Litre

LPG € 4.80 € 5.40 € 6.73 € 12.00 € 0.466 € 0.266

Propane Gas € 7.80 € 9.36 € 11.72 € 19.45 € 0.885 € 0.792

Tariffs for cylinders to be carried in flats / apartments: Entrance and 1st Floor - free of charge 2nd Floor - € 0.23 3rd Floor - € 0.47 Additional floors - € 0.12 Deposits on new gas cylinders: 12kgs gas cylinder - € 18.63 25kgs gas cylinder - € 27.95 LPG and Propane prices have been kept fixed for a significant time. 5.2 Contribution by Product The Table below shows the contribution by product. As can be seen there is a negative contribution, even when accounting of the subvention of Lm 0.0034 in electricity and Lm 1.6101 in gas. If the subvention is to be ignored the negative contribution would Lm 0.0221 for electricity and Lm 2.6857 in gas (for the 12kilo cylinders). Table 15: Contribution by Division Contribution by Product (2007/8 – Draft Estimates 15 months - Lm '000) Petroleum Gas Electricity Total Turnover 160,176 4,934 107,894 273,004 Government Subvention 795 2,625 43,296 46,716 160,971 7,559 151,190 319,720 Fuels & excise duty (146,335) (7,985) (113,034) (267,354) Commissions (7,338) (1,013) - (8,351) Gross profit 7,298 (1,439) 38,156 44,015 Other expenses (5,942) (1,470) (39,061) (46,473) Other income 1,368 25 2,625 4,018 Operating profit / (loss) 2,724 (2,884) 1,720 1,560 Financial costs (1,509) (483) (6,876) (8,867) Net profit / (loss) 1,215 (3,367) (5,156) (7,307)

Electricity Division Per UnitRevenue 0.0467 Subvention 0.0188 Income 0.0655 Fuels & duty (0.0490)Other expenses (0.0169)Interest cost (0.0030)Shortfall with subvention (0.0034) Shortfall ignoring subvention (0.0221) Gas Division (ex-VAT) 12kg tank Per KiloRevenue 1.9661 0.1685 Subvention 1.0755 0.0896 Income 3.0416 0.2581 Fuels & duty (3.2717) (0.2726)Commission (0.5800) (0.0346)Other expenses (0.6023) (0.0502)Interest cost (0.1978) (0.0165)Shortfall with subvention (1.6101) (0.1158) Shortfall ignoring subvention (2.6857) (0.2054) As already mentioned, but important to restate, in this regard the Corporation is not compliant with the requirements of Article 20(3) of the Enemalta Act – which states:

“(3) In prescribing tariffs, Enemalta shall ensure that the prices charged are adequate to provide sufficient revenue to Enemalta in any financial year – (a) to cover operating expenses, including taxes, if any, and to make provision for adequate maintenance, for depreciation, for interest payments on borrowings and for other interest payments; (b) to meet periodic repayments on long term indebtedness to the extent that any such repayment exceed the provisions for depreciation; (c) to create reserves to finance a reasonable part of the cost of future expansion, being expenses, repayments and reserves incurred or made by the Corporation in the exercise of its functions relating to electrical energy; and (d) to provide a reasonable return on investment and expenditure, and any such tariffs and agreements shall not give undue preference as between consumers similarly situated or make undue discrimination as between persons similarly situated having regard to the place and time of supply, the quantity of electrical energy supplied, the consumer load and power factor, the purpose for which the supply is taken and any other circumstance which could justify a preferential or discriminatory treatment.”

Major Issue Consideration The Corporation is not compliant with the requirements of Article 20(3) of the Enemalta Act in terms of the tariff policy adopted.

5.3 Surcharge and Subventions The Corporation has become increasing dependent on Government subsidies. The main reason for this is the Government’s policy direction for the Corporation not to pass on the full cost of fuel increases as onto the consumer. Given that the Corporation’s tariffs were already not fully cost reflective this policy directive has resulted in further losses to the Corporation. Major Issue Consideration Government’s policy directive for the Corporation to absorb the full cost of fuel increases has increased the dependence of the Corporation on Government subsidies. The following table summaries the position vis-à-vis the fuel costs, the surcharge and Government subventions (in respect of the surcharge) between 2005 & 2007. Table 16: Fuel Costs, Surcharge and Government Subventions 2004/5

Lm’000 2005/6

Lm’000 2006/7

Lm’000 Fuel Cost 53,648 77,985 70,979Surcharge 5,789 26,092 23,908Subventions – non-cash 6,511 12,658 4,396Subventions – cash 0 0 2,053 As regards the current surcharge, Government has committed a rate of 50% till June 2008. However the proper surcharge should not have been 50% but should currently have been established at 98% for the coming 2 months (and 90% for the previous 2 months). The cost of to Government of maintaining the surcharge at the established 50% is estimated at Lm16.1 million for the 9 months between October 2007 and June 2008. Major Issue Consideration The cost of maintaining the surcharge at the established 50% (when for the past and forthcoming two months respectively this should have stood at 98%) is estimated at Lm16.1 million for the period between October 2007 and June 2008. Government has to reimburse Enemalta. Looking forward for the next few months the surcharge is expected to be established in the region of 90% to 110%, however what will be charged to the consumer is not yet clear. Apart from the subventions being granted in respect of the surcharge, Government is also paying the Corporation a number of other subventions including a contribution towards gas products (Lm 2.1 million p.a.), the informal “PSO” (Lm 8.8 million p.a.) and settlement of the MIA throughput charge (Lm 600,000 p.a.). State aid considerations may arise. Major Issue Consideration The subventions provided in terms of gas products, settlement of the MIA throughput charge, and the “informal PSO” may lead to State Aid considerations. Government subventions have increased from nil in 2004 to a projected Lm 46 million for 2007/8. The table listed below shows all Government subsidies and payments. Table 17: Government’s Payment Payments by Government (year end September)

ENEMALTA CORPORATION - CORPORATION F/Y 04/05 F/Y 05/06 F/Y 06/07 F/Y 07/08

Note Lm Lm Lm Lm Payment for street lighting - included with Turnover

Payments in respect of Street lighting

1,450,000 1,950,000 1,950,000 1,950,000 Till Sep 08

Reduction for Mitts Core Services 0 -133,000 -133,000 - Net payment for street lighting 1,450,000 1,817,000 1,817,000 1,950,000 Government subventions Shortfall in surcharge rates - property 1 6,511,000 12,658,000 4,396,000 90,000 Till Sep 08 Shortfall in surcharge rates - cash 2 - - 2,053,000 16,150,000 Till Jun 08 Subsidy funded from Petroleum Adjustment - 1,881,000 619,000 - "PSO" payable by Government 2007/8 3 - 4,100,000 8,700,000 8,800,000 Till Sep 08 VAT on surcharge - 597,000 597,000 597,000 Till Sep 08 Subtotal 6,511,000 19,236,000 16,365,000 25,637,000 Petroleum division Government subventions - included with Turnover MIA fees (under Street Lighting by Government) 581,000 587,000 628,000 630,000 Till Sep 08 Reduction in profit margins 4 - - 1,476,000 1,125,000 Till Jun 08 GRTU 2.3 mils commission July / August 07 - - 85,000 - 581,000 587,000 2,189,000 1,755,000 Gas division Government subventions Subvention(paid under Street Lighting by Government) 1,800,000 2,100,000 2,100,000 2,100,000 Till Sep 08 Sea Malta Property Sea Malta Property transfer 5 - - 3,000,000 -

Total 10,342,000 23,740,000 25,471,000

31,442,000 Notes (1) Lm x.x million property not yet transferred (2) 2007/8 estimate up to June 2008 only (3) Original Lm 8.3 mln increased by Lm 500,000 (4) 2007/8 estimate up to June 2008 only (5) Value not yet determined subsidies. 5.4 Hedging The Corporation has been entering into hedging transactions since 2004. The Corporation initially hedged its exposure directly against the products that it purchases. However in recent months (and

particularly in view of the market structure) the Corporation is currently hedging against crude using a mixture of collars. 5.4.1 Hedges in Place A list of all hedges since 1998 is shown in the Table hereunder: Table 18: Hedges done in recent years - Products

Trade Date

Counterparty Trade details Hedged period Volume (MT/m) Fixed price

($/MT) 1998 SG Fuel Oil swap Feb 98 - Dec 98 20,000 70.00 1998 SG Jet Fuel swap Feb 98 - Dec 98 6,000 154.50 1998 SG Gasoil swap Feb 98 - Dec 98 10,000 142.50 1999 Rothschild Gasoil swap May 99 - Dec 99 10,000 126.00 1999 Rothschild Gasoline swap May 99 - Dec 99 4,000 160.00 1999 Rothschild Unleaded swap May 99 - Dec 99 3,000 155.00

01/07/04 Barclays Jet Fuel swap Jul 04 - Oct 04 8,250 350.00 07/03/06 Mitsui Fuel Oil swap Apr 06 - Jun 06 12,000 (20%) 330.00 08/05/06 Mitsui Fuel Oil swap May 06 - Jun 06 15,000 (25%) 338.00 13/06/06 Mitsui Fuel Oil swap July-06 40,000 (68%) 335.00 16/08/06 Barclays Fuel Oil swap Sept-06 15,000 (25%) 341.75 22/08/06 Mitsui Fuel Oil swap Sept-06 10,000 (17%) 335.00 23/08/06 Totsa Fuel Oil swap Sept 06 - Oct 06 10,000 (17%) 332.75 28/08/06 Totsa Fuel Oil swap Sep 06 – Nov 06 5,000 (9%) 329.25 28/08/06 Totsa Fuel Oil swap Oct 06 – Nov 06 10,000 (17%) 331.75 08/09/06 Totsa Fuel Oil swap Oct 06- Dec 06 10,000 (17%) 323.75 22/09/06 Totsa Fuel Oil swap Dec 06 – Feb 07 10,000 (17%) 317.00 22/09/06 Totsa Fuel Oil swap Nov-06 10,000 (17%) 291.00 22/09/06 Totsa Fuel Oil swap Dec-06 7,500 (13%) 305.00 06/10/06 Mitsui Fuel Oil swap Nov 06 7,500 (13%) 285.00 06/10/06 Mitsui Fuel Oil swap Dec 06 10,000 (17%) 296.00 04/01/07 Mitsui Fuel Oil swap Jan 07 30,000 (50%) 261.25 04/01/07 Goldman Fuel Oil swap Feb 07 10,000 (17%) 269.50 26/01/07 Goldman Brent swap (bbls) May 07 – Sept 07 60,000 (20%) 58.25 09/02/07 Mitsui Fuel Oil swap Feb 07 – Mar 07 20,000 (33%) 278.00 05/11/07 Goldman Gasoline swap Dec-07 7,800 (12%) 832.00 05/11/07 Goldman Gasoline swap Jan-08 7,800 (12%) 833.00 05/11/07 Goldman Gasoline swap Feb-08 3,900 (6%) 834.50 05/11/07 Goldman Gasoline swap Mar-08 3,900 (6%) 838.00 05/11/07 Goldman Diesel swap Feb-08 17,000 (17%) 828.50 05/11/07 Goldman Diesel swap Apr-08 16,000 (16%) 805.75 05/11/07 Goldman Diesel swap Jun-08 17,000 (17%) 795.00 27/11/07 Goldman Gasoline swap Mar 08 – Apr 08 7,800 (12%) 863.50

Trade Date

Counterparty Trade details Hedged

period Volume (bbls/m)

Buy call ($/bbl)

Sell put ($/bbl)

07/02/03 Goldman HSFO Option Feb03/Apr03 20,000 158.50 06/10/05 Barclays Fuel Oil ZCC Q4/05 7,000 360.00 310.00 11/08/06 Goldman Brent ZCC Q1-Q2/07 47,000 (15%) 85.00 72.00 22/09/06 Goldman Brent ZCC Q1-Q3/07 75,000 (23%) 85.00 64.00 22/09/06 Goldman Brent ZCC Q1-Q3/07 20,000 (6%) 75.00 58.00 03/04/07 Mitsui Brent Collar Q2/07 30,000 (9%) 72.00 62.00 03/04/07 Goldman Brent Collar Q3/07 30,000 (9%) 72.00 62.00 03/04/07 Goldman Brent Collar Q4/07 60,000 (18%) 72.00 62.00 03/04/07 Mitsui Brent Collar Q1/08 60,000 (18%) 72.00 62.00

The Corporation has a number of hedges in place going out up to the end of December 2009. Broadly speaking the Corporation is fully hedged till June 2008, 50% hedged till December 2008 and 20% hedged for 2009 with respect to electricity.

A summary of the hedged position as at the 29th February 2008 is as follows: Table 19: Electricity hedges in place

Apart from the above Enemalta has short term hedges on petrol/ diesel up to June 2008. Table 20: Petroleum product hedges

08/05/07 Goldman Brent Collar May07/Jun07 30,000 (9%) 68.00 60.00 08/05/07 Mitsui Brent Collar Q3/07 30,000 (9%) 66.00 60.00 27/07/07 Gold/Mitsui Brent Collar Aug07/Mar08 160,000(50%) 80.00 60.00 08/10/07 Goldman Brent ZCC Nov07/Dec07 160,000(50%) 82.00 71.30

01/11/07 Gold/Mitsui 3-way Collar Q1/08 80,000 (25%) 100.00/ 92.00 76.40

07/11/07 Goldman Brent ZCC Q1/08 80,000 (25%) 100.00 88.75 07/11/07 Goldman Brent ZCC Q2/08 160,000(50%) 96.00 88.55 27/11/07 Goldman Brent ZCC H2/08 64,000 (20%) 93.00 84.25 29/11/07 Goldman Brent ZCC Q2/08 80,000 (25%) 93.00 84.75 30/11/07 Goldman Brent ZCC Cal 09 32,000 (10%) 90.00 79.85 10/01/08 Goldman Brent ZCC H2/08 32,000 (10%) 93.00 87.50 15/01/08 Goldman Brent ZCC H2/08 32,000 (10%) 93.00 87.00 15/01/08 Goldman Brent ZCC Cal 09 16,000 (5%) 93.00 83.75 21/01/08 Goldman Brent ZCC H2/08 32,000 (10%) 93.00 81.50 21/01/08 Goldman Brent ZCC Cal 09 16,000 (5%) 93.00 79.90

Trade Period Trade Date Counterparty

Trade details (Brent)

Volume (MT/m)

Buy call ($/bbl)

Sell put

($/bbl)

MTM ($)

March (100%)

27/07/07 Goldman/Mitsui Cost Collar 160,000 80.00 60.00 3,187,878 01/11/07 Goldman/Mitsui 3-way Collar 80,000 100/92 76.40 477,562 07/11/07 Goldman Zero-cost 80,000 100.00 88.75 171,709

Q2/08 (90%)

07/11/07 Goldman Zero-cost 160,000 96.00 88.55 2,717,525 29/11/07 Goldman Zero-cost 80,000 93.00 84.75 1,951,880

H2/08 (50%)

27/11/07 Goldman Zero-cost 64,000 93.00 84.25 3,264,689 10/01/08 Goldman Zero-cost 32,000 93.00 87.50 1,481,716 15/01/08 Goldman Zero-cost 32,000 93.00 87.00 1,507,317 21/01/08 Goldman Zero-cost 32,000 93.00 81.50 1,734,621

Cal 09 (20%)

30/11/07 Goldman Zero-cost 32,000 90.00 79.85 4,172,230 15/01/08 Goldman Zero-cost 16,000 93.00 83.75 1,562,440 21/01/08 Goldman Zero-cost 16,000 93.00 79.90 1,756,030

23,985,597

Trade Period Trade Date Counterpart

y Trade details

Volume (MT/m)

Fixed Price ($/MT)

MTM ($)

March Delivery 05/11/07 Goldman Gasoline swap 7,800 836.25 145,890

April Delivery 27/11/07 Goldman Gasoline swap 7,800 863.50 199,851

The current hedged position has a positive mark-to-market as at 29th February 2008 of $ 28,102,873. 5.5 Retailed Petroleum Product forecast As explained above the Corporation has largely fixed petroleum product prices till June 2008. The following table provides an overview of current petroleum product prices as charged, un-subsidized prices and a forecast of prices based on current Platts prices: Table 21: Petroleum Product forecast Petrol Products LRP Unleaded Diesel Kerosene Light Heating Oil Thin Fuel Oil 200 sec 450 sec 950 sec

Prices Per Litre as currently charged

€ 1.160 € 1.090 € 1.020 € 1.020 € 0.627

€ 371.54 per MT € 365.71 per MT € 356.39 per MT

Prices Per Litre if not subsidized

€ 1.160 € 1.090 € 1.048 € 1.053 € 0.631


Prices Per Litre at current Platts prices

€ 1.197 € 1.127 € 1.123 € 1.116 € 0.717


5.6 Surcharge forecasts The following tables provides scenario forecast, of the surcharge based on current hedged positions as well as an unhedged position. Table 22: Surcharge forecast Surcharge Rates $85 $90 $95 $100 $105 $110 April to May 08 99% 100% 102% 102% 104% 104% June to July 08 101% 105% 110% 110% 109% 109% August to September 08 101% 108% 116% 119% 121% 124% October to November 08 98% 107% 116% 120% 124% 129% Un-hedged 97% 107% 117% 127% 137% 147% Fuel Costs Lm’ million $85 $90 $95 $100 $105 $110 April to May 08 90.1 90.8 91.7 91.9 92.2 92.6 June to July 08 91.5 93.0 96 95.8 95.1 94.4 August to September 08 91.1 94.7 98.7 100.2 101.6 102.8 October to November 08 89.4 94.1 98.3 100.7 103.1 105.5 Un-hedged 88.9 94.1 99.4 104.6 109.9 115.1 Cost to keep surcharge at 50% / Lm’

$85 $90 $95 $100 $105 $110

April Delivery 05/11/07 Goldman Diesel swap 16,000 805.75 1,888,423 June Delivery 05/11/07 Goldman Diesel swap 17,000 795.00 1,883,112

4,117,276

million April to May 08 24.9 25.6 26.8 26.8 27.1 27.4 June to July 08 26.0 27.9 30.8 30.7 30.0 29.5 August to September 08 26.0 29.5 33.5 35.1 36.4 37.5 October to November 08 24.5 29.1 32.9 35.5 37.9 40.5 Un-hedged 24.0 29.1 34.0 39.4 44.7 50.1 Cost to reduce surcharge to 25% / Lm’ million

$85 $90 $95 $100 $105 $110

April to May 08 37.7 38.4 39.6 39.6 39.9 40.2 June to July 08 38.8 40.7 43.6 43.5 42.8 42.3 August to September 08 38.8 42.3 46.3 47.9 49.2 50.3 October to November 08 37.3 41.9 45.7 48.3 50.7 53.3 Un-hedged 36.8 41.9 46.8 52.2 57.5 62.9 Notes

• A tolerance of at least 5% has to be allowed in respect of the above figures • Projections do not cater for a shift in operation from MPS Steam plant to DPS CCGT in view

of limited MPS life - adds an estimated 3%-4% to surcharge • Projections do not cater for a shift in 1% FO to 0.7% FO at DPS - adds an estimated 3%-4%

to surcharge • Other electricity subsidies include Lm 8.8 million ex-PSO and Lm 597k refund of domestic

VAT are not included • Crude oil to FO ratio taken at 83% • Projections do not take variances in cargo timing and pricing into consideration • All sales figures based on draft audited accounts for F/Y ended 2005/6

5.7 The Oil Market The major immediate issue that has transformed the landscape within which the Corporation is operating in has been the price of crude oil. Over the past few years crude oil prices have moved sharply higher as economic growth concerns have been trumped by the same long-term structural supply issues that have driven the energy price rally during the past decade. In fact when taking last year’s price scenario, oil prices have increased 55% in 2007, breaking through the $100 level at the beginning of 2008. In fact the price of oil, which has exceeded the US$100/bbl – which stands at the same level as 1981 taking into account inflation. Various schools of thought abound on the reasons behind the exponential increase in the price of oil. Identified influences on oil prices include that this is a supply concern rather than the increase in demand which recently came about from Iran’s dispute over its nuclear program, the persisting violence in Nigeria, the rapid economic growth in India and China, the Ukraine-Russia gas issue, and constant supply threats from key exporters. The weak dollar also seems to be the biggest catalyst for this boos in oil. According to the US Energy Information Administration (EIA) the outlook over the next two years points to an easing of the oil market balance in 2008. Higher production outside of the Organisation of the Petroleum Exporting Countries (OPEC) and planned additions to OPEC capacity should more than offset expected moderate world oil demand growth and relieve some of the tightness in the market. Despite prospects for slower oil consumption growth, EIA expects market fundamentals to remain relatively tight in the first half of 2008, as evidenced by the low level of surplus production capacity. Figure 2: IPE Brent Crude from January 2004 to January 2008

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Goldman Sachs believe that although demand growth has been weaker than expected, the structural supply issues driving long-dated prices have been stronger than expected. As both offset one another, they are maintaining their 2008 Brent price forecast of $93/bbl even as they reduce their 2008 demand growth outlook. Goldman Sachs Price Forecasts

Goldman Sachs Quarterly Price Forecasts

Retail prices for petroleum products are expected to be higher in 2008 than last year, due to higher average crude oil prices. Both motor gasoline and diesel prices are projected to average more than $3 per gallon in 2008. The monthly average gasoline price is projected to peak near $3.40 per gallon this spring. ICE Brent price path

One may also add that the significant increases in oil have occurred at a time when other commodities such as grains and metals have moved in the same direction, of particular concern to the Corporation metals, since the Corporation is a heavy user of this commodity in matters such as pipelines, cables, generation equipment, gas cylinders, etc. On the positive side is the significant weakening of the US Dollar.

6 The Information, Technology and Communications Framework 6.1 Introduction To meet a number of challenges brought by legislation, deregulation, rising fuel costs, competitive pressures, changing customer trends and the environment, the Corporation had signaled the importance of ICT as an enabler for transformation of the Corporation. In this regard a number of measures where taken: the setting up of a Chief Information Office and the appointment of a Chief Information Officer; and the drafting of a high-level ISSP in 2004 for the subsequent five years. The principles and technology direction within the 2004 ISSP were subsequently translated to the adoption of an architecture approach to establish an integrated utilities business framework (IUBS) in order to facilitate the deployment of Smart metering, Customer Relationship Management, Utility Customer Billing, Enterprise Resource Planning, Distribution Maintenance System and Geographical Information System. The solutions and reengineered business processes were intended to provide the Corporation with tightly integrated business processes modelled on international Utilities best practice, assuring a road map for the future. This approach intended to ensure integration between key systems and business process alignment with ICT. It was emphasised that the implementation modes should vary according to specific challenges pertaining to each thematic solution. The following modes of implementation were requested within the RFP: (1) Business Process Outsourcing; (2) Application Service Provider Outsourcing; (3) Systems Implementation and hand over (4) Business Process Transformation Services. The various implementation modes involve elements of risk-reward that would need to be determined and agreed to during negotiations with a selected partner. Several benefits were envisaged to accrue from this framework approach. The Corporation envisaged significant improvements along its meter-to-cash and customer relationship management processes. These improvements would enable the Corporation to reduce operational costs, increase annual revenue and react quicker to market needs by providing quality and sound business services. Such improvements would be enabled through the use of smart metering, a customer relationship management system and a billing system. Through the remote access and control of the meter, the Corporation would be able to improve drastically in operational efficiency. Through superior metering technology the Corporation would also be able to carry out operations and offer services which are currently not possible. Operational improvements would include remote connection and disconnection, power curtailment (percentage reduction of power remotely), reading and outage data meter storage. Additional services and options include differential contracts made possible by applying multiple tariffs (different tariffs for different periods) and prepayment. Smart metering would also provide the country with a technology platform to drive energy efficiency initiatives which should contribute to the reduction of CO2 emissions and may postpone investment in generation equipment. In distribution operations and supporting activities, the Corporation would achieve a significant increase in efficiency in terms of worker productivity and reduction in working capital requirements, which would eventually translate into improved customer response and service at a lower cost. It is pertinent to underline, that the IUBS, with some minor in-house back end applications and an externally procured Human Resources Management system, has been the primary focus for ICT in the Corporation. Table 25 below clearly shows this as it presents the investment in ICT by the Corporation since 2004. Table 23: Investment in ICT by the Corporation since 2004

2004/2005 2005/2006 2006/2007 Totals

Total Expenditure for Corporation 34,248,015 33,637,237 36,349,922 104,235,174

ICT expenditure for the Corporation 648,615 638,742 656,888 1,944,245 % of ICT expenditure 1.89% 1.90% 1.81% 1.87% Total Capex for the Corporation 5,358,983 5,307,303 5,439,111 16,105,397 IT capex for the Corporation 89,096 36,021 67,721 192,838 % of IT capex 1.66% 0.68% 1.25% 1.20% Total Opex for the Corporation 28,889,032 28,329,934 30,910,811 88,129,777 ICT opex for the corporation 559,519 602,721 589,167 1,751,407 % of ICT opex 1.94% 2.13% 1.91% 1.99% Total Opex for the Corporation 28,889,032 28,329,934 30,910,811 88,129,777 IT opex (excluding telecom costs) 464,941 448,505 413,575 1,327,021 % of IT opex 1.61% 1.58% 1.34% 1.51% Total Opex for Head Office 3,213,439 3,251,747 3,182,318 9,647,504 ICT opex 559,519 602,721 589,167 1,751,407 % of ICT opex 17.41% 18.54% 18.51% 18.15% Total salaries for the corporation 12,394,999 12,315,064 12,948,032 37,658,095 ICT salaries 164,612 207,505 205,207 577,324 % of ICT salaries 1.33% 1.68% 1.58% 1.53% Total salaries for the corporation 2,466,490 2,426,439 2,454,091 7,347,020 ICT salaries 164,612 207,505 205,207 577,324 % of ICT salaries 6.67% 8.55% 8.36% 7.86%

The consequence of this single focused objective means that in the event that the Corporation has to abandon the IUBS it remains an entity quasi in its exclusivity devoid of ICT. The situation becomes compounded by the fact that if the IUBS is to be abandoned, the adoption of another approach to ICT revolutionalise the Corporation will require mobilisation and lead time related to tendering. The outcome would be that the Corporation would lose between 18 to 24 months in securing an ICT revolution that is critical to its ability to transform itself into an efficient, effective, economic and service responsive organisation. Major Issue Consideration The Corporation has practically focused its resources to the IUBS solution. In the event that the IUBS solution is to be abandoned (discussion below) the Corporation would be quasi devoid of an ICT infrastructure; with a further period of 18 to 24 months required before any ICT capacity is grafted to enable the Corporation to transform itself into an efficient, effective, economic and service responsive organisation.

6.2 The IUBS Solution The following charts the chronology of the Corporation’s strategy to secure an IUBS solution: 08/11/2005: Enemalta issued a contract notice (E/E/T/84/2005) through an international request

for information which provided detailed information on the Utilities Blueprint and the

prerequisites that a candidate was expected to have in order to enter into a strategic partnership with both Enemalta and Water Services Utilities.

31/01/2006: Eight (8) bids - Accenture, Atos Origin, IBM, Logica CMG, Siemens, Soluziona, Tata and Telvent - were received on closing date.

Governance was set through: a) An evaluation and adjudication process document; b) Code of Conduct c) Setting up of an Adjudication Committee, Core Evaluation Committee and a Short

Listing Evaluation Committee.

17/08/2006: The Utilities shortlisted seven (7) Candidates - Accenture, IBM, Logica CMG, Siemens, Soluziona, Tata and Telvent - and presented the decision to contracts department;

11/12/2006: The seven (7) shortlisted candidates were presented with a detailed Request for Proposal and invited to tender

03/04/2007: Single Bid from IBM was received. The bid was presented through a 3-package open tender procedure. The first package was approved immediately by department of contracts.

10/05/2007: Adjudication committee approved an Evaluation Process for Package 2

The bid met all the mandatory criteria as well as a threshold marking stipulated within the RFP as the technical offer was deemed acceptable. Two site visits where carried out by the CEC, to ascertain technology and processes submitted in the bid had been successfully implemented elsewhere.

06/12/2007: Package 3 was opened for evaluation.

07/12/2007 Evaluation of Package 3 was initiated by the Core Evaluation Committee. The report is expected to be presented to the Adjudication Committee by the end of February 2008.

Apart from the real issues relating to the cost of the IUBS, the incoming Chief Executive Officer in a Board paper titled ‘Mobilising for the IUBS Tender’ dated 1st August 2007 identified a series of major concerns – which include:

- the strategic approach selected was ambitious and high risk as such approaches that transcends multiple disciplines and technical areas are complex and have a high incidence of failure.

- at the eve of the closure of the adjudication process the Corporation was not prepared to

manage a complex ICT reform of this nature. - a number of policy decision, particularly those relating to outsourcing, were still unidentified let

alone discussed and options identified. - no change management team was planned let alone in place.

that a parallel approach in the implementation of the 5 phases of the IUBS solution was not possible and a prioritisation exercise was necessary given that the Corporation would struggle to grapple with the implementation of one phase.

The financial package as presented by IBM, and currently under review by the Core Evaluation Team, is as follows:

Euro (Millions)

Core ERP Module 9.5

Optional ERP Modules 9.4

Purchase and Installation of AMI 57.1

Ongoing Maintenance and Meter Reading 16.8

Customer Care and RM 14.9

Billing 13.1

Integration 4.9

Debt Management and Collection 8.9

EMS Components 9.8

Travel and Expenses 5.1

Document and Information Management 1.8

Technical Integration and Change Management 3.6.

The total cost of the solution stands at Euro155 million – Lm66.57 million. Although the report of the Core Evaluation Team is still outstanding, the position of the Board is that at this price the procurement of the holistic IUBS solution is not an option for consideration.

Major Issue Consideration The position of the Board of the Corporation is that at the tender price of Euro155 million (Lm66.57 million) the procurement of the holistic IUBS solution is not an option for consideration.

The options for consideration are the following: (a) Adopt an ‘a la carte’ choice of the modules within the holistic IUBS solution. If this Option was

to be considered the considered opinion is that the AMI and Billing modules respectively are selected.

The ‘meter’ is the Corporation’s cash register. As stated earlier that Corporation has losses that exceed 14% of the power generation. International benchmarks show that state of the art networks would still incur losses of 4% to 5%. Assuming that the Corporation would continue to incur losses of 8% to 9% due to the state of its infrastructure, a reduction of 5% to 6% of losses would have a considerable positive impact on the cash generation position of the Corporation. In terms of Billing; the Corporation has no billing application per se and depends on the Water Services Corporation for its billing services. The Billing application is unwieldy with suspect data: simple querying of the database requires over 24 hours for the generation of the report; with a further mammoth manpower effort to ‘clean’ the data to remove suspect data.

In essence, the Corporation is not in a position to take a strong hold on its billing cycle – which in turn impacts its cash generation ability as outstanding dues cannot be handled seamlessly. The consequential impact is that debts age and credit risk is on the high side. In terms of the Financial Management system it is proposed that a non SAP ‘off the shelf’ application is procured. It is the considered opinion of the Office of the Chief Information Officer that the Corporation is not yet prepared to adopt a complex application such as SAP. In this regard an intermediary step would provide for a far less risky approach as this will allow the Corporation to manage the change management aspects without the added difficult of the technical complexities of implementing SAP. In terms of the Electricity Management System it is proposed that this is abandoned at this stage. As is discussed below, the Corporation still has to render the far majority of its Distribution Centres SCADA compliant. It is thus proposed that the Corporation embarks on a process of rendering its Distribution Centres SCADA compliant. The draft 2008 Business Plan identifies 3 such Centres to be rendered SCADA compliant in 2008. Further to this, a monitoring system to improve down time alertness and thus increase service response would be to apply a low cost SMS alerting system that would provide limited alert notification such as 11KV Supply OFF, 11KV Transformer OFF, outgoing 400v LV Feeders OFF and street lighting OFF at Substation level.

(b) The second option would be to abandon the IUBS bid completely and move with an integrated framework: where basically the required technologies would be procured as stand-alone applications and then integrated through the establishment of Management Information Integration.

Whilst this approach carries risk of potential non integration due to constraints imposed by proprietary applications, open standards and technologies such as XML and eXML have induced far greater leeway in terms of integration. In terms of SCADA and service management the same approach as that approached in Option A should be adopted.

Major Issue Consideration The Corporation needs to determine whether (a) it selectively procures the AMI and Billing modules from the IUBS solution and move with off the shelf procurement vis-a-vis the remaining applications; or (b) abandon IUBS totally and adopts an integrated framework approach where all applications are off the shelf procured and integrated on the basis of a Management Information Architecture.

In the event that the Corporation adopts option B it is proposed that the Corporation approaches MITTS Ltd to build or procure a debtor ledger to be grafted to the Water Services Corporation billing system. This would be a ‘throw away’ application designed to bridge the gap until an off the shelf solution is procured – thereby providing the Corporation with improved management information to allow it to control more effectively its debtor process.

Major Issue Consideration In the event that Option B is selected, the Corporation should, through MITTS Ltd, procure or build, as a throw away solution, a debtor ledger to be grafted to the Water Services Corporation to allow it to manage more effectively its debtor process until an Enemalta Corporation billing system is procured.

6.3 Information Systems Application within the Corporation The Corporation’s Information Systems application portfolio is limited at best; and is composed of small to medium silo interdepartmental systems which have been implemented to resolve functional shortcomings and automate administrative tasks, rather than transform end-to-end processes. The operation of such systems is still important to ensure internal department/ office/ store/ district operate as smoothly as possible. It is pertinent to add that the Corporation’s intention was to replace these IS applications through the ERP and CRM modules of the IUBS solution respectively. Notwithstanding, a number of information systems have been deployed or extensively upgraded within the last four years, which merit to be highlighted: - Sage Pastel Inventory and Financials is an off-the-shelf package application with functionality

pertaining to General Ledger, Sales and Purchasing Ledger, Cash Book and Fixed Asset Ledger. It has been recently upgraded from SAGE DOS version, to comply with the Euro currency.

- Service Management Portal is an in-house developed IS platform supporting end-to-end

processes providing electronic workflow management and automation functionality. The current Portal enables the registration as well as back-end automation in relation to New, Change and Removal of Electricity services to customers.

- Network Grid Geographical Information Web System is a web based application which stores

asset information and displays the information geographically, thus facilitating information access and data analysis.

- Human Resource Management and Payroll System is an off-the-shelve IS program which

was however tailored to the specific personnel requirements of the corporation which are in turn governed by a stringent collective agreement. This has led to extensive customisation to accommodate a large amount of working schedules and complex business rules relating to time and attendance and leave. The current solution also includes a distributed time & attendance logging system which is currently being deployed throughout the corporation. The solution promotes data entry of attendance at source, as well as the distribution of sick leave and vacation leave information to pertaining offices. The full implementation of this system to secure full utilisation of the benefits it provides is 2 years behind schedule. Up to recently only basic functions were in place. Since October 2007 a concentrated effort has been made to secure full implementation at the earliest possible.

- Case Management System original scope was to register and follow up electricity theft cases.

The scope was subsequently widened to manage all tasks to be carried out by meters section including the replacement of old meters, testing and surprise inspections.

- The Corporation’s Corporate Web site was launched six years ago. The objective was to

transition from a simple content provision site to subsequently one which would offer multiple electronic and interactive services. This has not materialised in full although Enemalta has committed to deploy an array of e-services during 2008.

- Fleet Tracking Management System is designed to enable continuous monitoring and control

of the fleets through the installation of tracking device in every vehicle and through a web based IS system which permits Enemalta personnel to access relevant fleet information on-line for appropriate fleet monitoring and control.

- The Corporation has a number of silo Office Automation Access Based Systems, developed

and installed within the corporation – Registry filing system, Customer Fault logging system, Meter and Seals Recording System, Generation Works Management System (OMEGA) and a Supplier Management System. These silo system provide the respective office, department

or business unit with a degree of automation and information querying. These IS solutions have being developed to reflect existing business practices rather than to streamline operations. This approach has caused fragmentation, potential duplication and is far from ideal to adopting the best approach to implement change. An element of administrative/ operational efficiency has been achieved at a departmental or office level, however total cost of ownership of these systems is high due to the increasing difficultly to maintain client server technology, as well as the large effort to integrate data from disparate systems.

- An Intranet Portal to act as the formal internal communication medium was launched in

February 2008. 6.4 SCADA The high voltage distribution network contains 17 distribution centres which deliver power at 11kV to some 1200 substations throughout Malta, Gozo and Comino. These distribution centres are the hubs of the network where power at 33kV and 132kV supplied by the power stations is converted to 11kV. They are also the switching centres of the network and any changes to the configuration of the network are done by operating the switchgear installed in these distribution centres. These distribution centres are a critical part of the network and any failure in the distribution equipment, especially switchgear, will result in wide spread interruption of supply. Only four out of these 17 distribution centres are equipped with a substation control system (SCS), which is a SCADA system that monitors the equipment of the DC, keeps records of events, alarms and loads, and permits remote operation of the DC from the Network Control Room at Marsa. Since the distribution centres are unmanned, the network operators have limited information on the current state of the distribution centre with regards to electrical loads, status of the switchgear and alarms from the equipment installed in DC without a SCS. Such information is usually insufficient for planning purposes since it does not show who the load varies throughout the day and throughout the year. The operators depend on periodic visits to distribution centres for the collection of information, which in any case only show the status of the DC during the visit. Furthermore, all switching operations from these DC have to be carried out manually by sending an engineer or technical officer to the DC. The plan is for the gradual installation of a Substation Control System in all distribution centres. This will carried out over a number of years since the development Section can only cope with three new installations per year. For 2008, it is proposed to install a SCS in Paceville DC, Bugibba DC and St Venera DC. The Substation Control System is an essential tool for Network Operation since such a system is continuously monitoring and collecting information from the distribution centres. This information is required by the network planning and operations engineers to plan short-term and long-term works including maintenance works and network reinforcement projects. The SCS also provides immediate indication of alarms and events that could result in interruption of supply or damage to the equipment unless remedial action is taken. Finally the SCS would permit remote operation of the switchgear in the distribution centres. With the SCS installed, an improvement in the supply restoration times is expected due to faster decisions arising from more information available to those taking the decisions on switching and from remote operation of the switchgear. There should be a marked improvement in restorations in case of load shedding due to problems in the network. The SCS will permit the network operators to have historical and current information on the status of the distribution centres, the load on the 33kV and 11kV cables connected to the distribution centre and any alarms or events that occur in the distribution centre. With the 33kV network operating close to its full capacity, the information obtained from the distribution centres would permit optimisation of the network configuration. The SCS will in future be integrated with the national SCADA system.

Major Issue Consideration The promulgation of a Substation Control System through SCADA across all the Distribution Centres is a critical requirement in order to enable the Corporation to manage its distribution network as seamlessly as possible; and in doing so reduce network outage, improve service delivery and minimize loss of opportunity cost to the business and commercial environments. 6.5 e-Services Over the past two years the Corporation has introduced two e-services to the public – a planned power suspension notification service (delivered through Enemalta web page and mobile) and a tender document procurement on-line service. The launch of its planned power suspension notification e-service has been the more successful, although take up till today has been less than anticipated (2000 service subscribers representing approximately 1% of customer base). Notwithstanding unconvincing results, the Corporation believes it can increase customer service value by collaborating with government within its drive to further improve service delivery through the use of e-Government services and alternative delivery channels. To develop a suite of e-services during 2008 with the following targets: a) Provide, where technically feasible, traditional services through electronic means and meeting

e-government service principles as articulated in the Government ISSP 2003 – 2005. b) Restructure the current e-service for Enemalta’s power notification system to provide

incorporate better functionality and improve usability. c) Investigate new services and operational efficiencies which can be achieved electronically. In later 2007, the Corporation approached MIIIT to partake in the e-Government Alliance so that the Corporation would be in a position to deploy a number of electronic services. In this regard, the Corporation, under the umbrella of the e-Government Alliance, has joined up forces with MIIIT, the sponsor, MITTS Ltd as the business process consultant, and 2i Ltd as the technology supplier (development and deployment). The programme has been split into two phases.; as follows: Phase I

- Public and submit e-service for notification of planned and unplanned power suspensions to

mobile. The solution also envisages the delivery of unplanned outages through a request and response mechanism (customer sends blank sms) and the retention of the current internet and mobile service for planned power suspension notification.

- Application of services on-line in relation to:

- Gaiter request service. - Switching request service. - Request for temporary supply. - Request for change in electricity tariff group. - Request for meter testing. - Application for connection of Photo Voltaic to grid. - Application for micro wind turbine connection to grid. - Rebate on solar water heater.

Whilst this Phase is at an advanced stage a number of process issues, particularly where these related to external agencies, are yet to be finalised. The intention is to apply e-Government solutions

as a leverage of change as against automating and transferring on-line existing processes. The resolution of process interaction with external agencies is proceeding at a slower pace than planned for. Phase 2 Phase II, which is yet to be scoped, includes the following: - Provision of a portal for public notaries and property negotiators for the settlement of utility

bills and the transferring of account between the buyer and seller. A policy and procedure framework needs to be determined in this respect;

- Application of services on-line in relation to:

- Application of new service supply. - Change of service supply. - Removal of service supply. - Deviation request service.

6.6 ICT Infrastructure Backbone In November 2007, the Office of the Chief Executive Officer carried out an ICT infrastructure review to examine the status and performance of the ICT infrastructure. The current state of play has developed in a piece meal manner over the past years and in most cases in silo approach. The current setup is not in a position to cater for the ICT environment that the Corporation must migrate to. The weaknesses of existing ICT infrastructure can be summarised in the below points: - Enemalta’s Wide Area Network is now becoming a bottleneck and is hindering deployment of

new tools such as new Information Systems, CCTV monitoring and VOIP. Moreover, data security needs to be improved and aligned to Government ICT policies.

- Numerous critical ICT equipment is scattered in various locations and housed in inadequate ambient environments. The absence of redundancy and facilities management visibility require greater consideration to avoid potential loss of valuable data.

- Data inconsistency is another issue that merits attention. Due to network bottlenecks, unavailability of centralised storage and users’ misuse, data is stored in various locations. This wrongdoing leads to numerous data replication which creates data inconsistency.

- Cost saving benefits arising from new technologies cannot be achieved, due to the lack of exploitation of recent improvements such as VOIP and consolidation. Furthermore, ICT policies and standards are required to achieve cost savings.

- The existing structured cabling systems in various Enemalta estates are limited to offer further expansion and do not offer flexibility to cater for voice communication over CAT 5 cabling.

In December 2008, the Board of Directors accepted recommendations submitted to it to overhaul the ICT unfrastructure. The end objective is to secure an integrated ICT and communications infrastructure that whilst securing a high level of redundancy for business continuity enables the achievement of a high-tech environment for the management of operations and security. The diagramme below portrays the long term functional schematic that is to be achieved between ICT and business operations.

This concept has various advantages namely: - The various “control” rooms and end users will be location independent. For example; one

can have the security control room in location X in day 1 and move it to location Y in day 2. This offers great flexibility and can run in parallel having two control rooms at any one time.

- Full convergence of the ICT infrastructure to maximise bandwidth use by various communications such as data, voice, CCTV and other future IT-enabled systems.

- Centralised environment which provides reduction in total cost of ownership (TCO) arising from maintaining various infrastructures, systems, facilities and personnel support.

- Enhanced physical security and procedures can be implemented and controlled better because of the centralised concept.

A decision on whether a second data centre is build or whether the Corporation hosts its back up systems at a third party – potentially MITTS Ltd – is yet to be decided. The following initiatives were embarked upon in late 2007: - MAGNET II connectivity for access to Government Corporate applications such as E-mail,

Internet and other Information Systems deemed necessary by the Corporatio Corporation. This is now in its final stages and should be concluded by March 2008.

- Upgrading of the Enemalta’s Wide Area Connectivity (WAN) to cater for higher performance

and greater availability. Moreover, this upgrade will pave the way to introduce enhanced voice communication system using VOIP technology and cover other key communications such as CCTV and electrical power monitoring over the same ICT infrastructure. VOIP technology will reduce both the number of direct telephone lines and the recurrent call charges for calls generated between Enemalta sites.

Two tenders have been published and are currently at adjudication stage. The WAN upgrade project is targeted to be completed in July 2008.

Setting up of a Data Centre at Central Administration Building, Marsa. Consolidation of the

entire ICT infrastructure in a purpose-built Computer room which is in line with today’s standards both in terms of availability and security. This is a key element of ensuring the highest ICT uptime is by having a solid and robust foundation at the Data Centre level which can be referred to as the heart of the overall ICT operations.

An area has being identified, designed have been completed and tenders are being published for the works in question. The Data Centre is targeted to be completed in July 2008.

- The installation of structured cabling system across all of the Corporation estates to cater for voice, data and other ICT services. This is a long-term project will span over an eighteen month period.

- To complement this electrical power infrastructure, Enemalta Corporation also intends to

implement a comprehensive fibre optic infrastructure to cover all of the 19 Distribution Centres. The challenging task of fibre optic implementation will be deployed in phased approach inline with the development of tunnels and high voltage cabling works.

The primary aim behind the fibre optic infrastructure is to provide a high speed and secure communication medium for data acquisition and control of the electrical power network. This is commonly referred to as SCADA. (Supervisory Control And Data Acquisition).

Other in-house systems such as High Voltage Power Lines Protection relays and internal ICT communication are also projected to use the same fibre optic infrastructure.

This project will be tackled in a phased approach and endure a number of years. A tender for the first phase is targeted to be published by March 2008.

6.7 ICT Literacy within the Corporation In general, ICT literacy and general ICT take-up within the Corporation is considerably low. There is a high level of ICT- literacy within specific professions, such as engineers, due to their level of education. Within such groups the deployment of ICT is considered as a facilitator to work, and is deemed to contribute positively towards the quality of their working life. Within administration ICT literacy level is low, although there has been an improved in the past year following specific ICT (ECDL) training courses. The cause for low ICT literacy in this respect may be attributed to an overall low level of education and the limited number of professionals within key functions such as Finance, Procurement, Human Resources, Health and Safety, etc. The penetration of ICT (30% of employees have access to a corporate desktop) is low within the whole organisation as a result of the physical nature attributed to the work, low investment in ICT, as well as a low level of education within a number of technical roles.

7 The Electricity Division 7.1 Introduction Enemalta Corporation is the state-owned energy utility responsible for providing electricity to the Maltese Islands, it was established in 1977 as a wholly Government-owned public Corporation. Enemalta is currently the major producer (generator) and supplier of electricity in Malta, and is the designated distribution system operator (DSO). Although generation has been liberalised since 2004, it is expected that Enemalta will remain the major generator over the short to medium term to 2015. At present, the Maltese electrical system is a small isolated one and consequently benefits from certain derogations from the Electricity Directive 2003/54/EC. The Electricity Division of the Corporation is organizationally split into the Generation and the Distribution Sections. 7.2 The Generation Set-Up 7.2.1 Overview Electricity demand in Malta has increased by more than 18% since 2000, and the Corporation is planning to decommission most of the generating plant at Marsa Power Station by 2015 in accordance with European legislation. Therefore Corporation must install new capacity to: (a) replace the capacity to be lost when the old plant at Marsa is decommissioned; and (b) to meet the demand growth and continue providing a satisfactory service to its consumers. Enemalta is currently undertaking a procurement process for the supply of new generating plant (minimum 100MW), and is also investigating the possibility of connecting to the European electricity grid by a submarine interconnection with Sicily. The increasing demand for electricity in Malta is occurring in an atmosphere of increasing environmental protection awareness and demands for increasing energy efficiency. Enemalta Corporation’s strategy is to meet this increasing demand safely, while meeting all related responsibilities. Consequently Enemalta Corporation is also considering the replacement of liquid fuel oil (HFO and gasoil) through the provision of Natural Gas to fuel its power generation equipment whilst retaining the option to use liquid fuel as a backup fuel. Enemalta Corporation operates two power stations with a total installed electrical capacity of 571 MW. The Generation section is organisationally split on the same lines as the two power stations with a Projects section which serves the needs of both stations. The Power Station at Marsa has a nominal capacity of 271MW, which is comprised of 230MW of steam plant and a 37MW open-cycle gas turbine. The Power Station at Delimara has a nominal capacity of 304MW, comprised of 120MW steam plant, 110MW Combined Cycle gas turbine plant and 74MW of open-cycle gas turbines.

The plant mix is composed of conventional steam units and gas turbine driven plant. A breakdown is shown in Table 24 below.

Table 24: Plant mix

Type of plant

Power output at MCR

Steam units 350 MWe Combined Cycle Gas Turbine Unit 110 MWe Open Cycle Gas Turbine Units 111 MWe Figure 3: Electricity consumption by Sector

Figure 4: Power Generation in Gwh

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• 29.1% domestic • 29.4% commercial • 23.5% industrial • 05.8% internal consumption • 13.0% unaccounted

EMC Internalconsumption

5.8%

Unaccounted13.0%

Industrial 23.5%Domestic

29.1%

Commercial29.4%

7.2.2 Generation Operations The nominal installed capacity is 571MW (Marsa Power Station - MPS = 267MW, Delimara Power Station - DPS = 304MW), however this is reduced due to several factors: - De-rating of plant during summer as a result of high ambient temperatures. This affects

negatively the capacity of the electrical equipment, particularly the generators (and cables) due to electrical insulation degradation if operated at high temperature, and the lower capacity of the cooling systems. The steam plant is also affected due to reduced capacity of the condensers resulting in less heat absorption and consequently higher steam condensing temperatures (and pressures) resulting in lower efficiency and even unit derating. Finally, the gas turbines are most affected with a reduction in nominal output of approx. 20% at 40 degC with respect to their rated output. T he capacity of the electrical distribution system is also derated significantly due to high summer temperatures and consequent reduction of heat absorbing capacity by the environment.

- Steam turbines 1 and 2 at Marsa (rated 10MW each) have been included in the nominal total

capacity of 571MW, however due to limitations in steam availability they are in reality only available as backups for failure of steam turbines 3 and 4, therefore the real total nominal installed capacity is 551MW.

Due to the age of the plant (even the ´new´ Delimara steam plant is already past half its design lifetime), faults resulting in plant derating or outages are inevitable. Due to the changing load demand profile, with peak loads occurring both in summer and winter, the periods available for plant outage have been reduced to April-June and September-November. This results in reduction of overhauls, with consequent risk of increased unplanned outages. It has been the policy in recent years to avoid planned maintenance during the peak months (summer and winter), however the average capacity loss due to faults (unplanned) is of the order of 70MW. It should be appreciated that the outage duration of a boiler to repair a major tube leak is of the order of 10 days. As a result of the above-mentioned factors the nominal capacity in summer is reduced to 495 MW since: - Marsa Power Station (MPS): The nominal capacity of 267MW is reduced to 225MW, since

20MW from T/A’s 1 & 2 not available, and the MPS Gas Turbine capacity is derated from 37MW to 30MW as a result of high ambient temperatures, and steam plant derated from 210MW to typically 195MW, also as a result of high sea water and air temperatures;

- Delimara Power Station (DPS): The nominal capacity of 304MW is reduced to 270MW, since

the combined cycle plant capacity is derated to 90 MW and the open cycle gas turbines are each derated to 30MW from 37MW.

An outage of a 60MW unit (boiler or turbine), i.e. one of the largest units currently in service, will reduce this summer capacity to 435MW. The following two tables show the installed generating plant at Marsa and Delimara Power Stations. Table 25: Installed generating plant at MPS Unit Commissioning

date1 Age of plant (years) 1

Nominal Rating (MW)

Actual Rating (MW)

Efficiency2 %

Remarks

Steam T/A 1

1965 41 10 - - Not in Service

Steam T/A 2

1966 40 10 8

Boilers and turbines on common steam

Steam T/A 3

1970 36 30 30

Steam T/A 4

1970 36 30 30 25

header

Steam T/A 5

1982 (1952) 24 (54) 30 30

Steam T/A 6

1983 (1952) 23 (54) 30 30

Steam T/A 7

1984 (1952) 22 (54) 30 30

Steam T/A 8

1987 (1959) 19 (47) 60 60 29

Gas T/A 1

1990 16 37.5 W 36.5 S 30

32 (at base load)

Typical efficiency at part loads <19%

Boiler 1 1964 42 20 - Given above

with steam turbine units

Retired Boiler 2 1964 42 20 - Retired Boiler 3 1969 37 35 25 In Service Boiler 4 1969 37 35 25 In Service Boiler 5 1982 24 35 25 In Service Boiler 6 1982 24 35 35 In Service Boiler 7 1984 22 70 70 In Service Boiler 8 1987 19 70 60 In Service 1 Figure in brackets represents original commissioning abroad for reconditioned plant. 2 Efficiency given is total unit efficiency (from combustion of fuel and includes auxiliary consumption). Table 26: Installed generating plant at DPS Unit Commissioning

date Age (years)

Nominal capacity (MW)

Actual Capacity (MW)

Efficiency %

Remarks

Steam Unit No 1

1992 14 60 60 32

Steam Unit No 2

1992 14 60 60 32

Gas turbine No1

1995 11 37.5 W 36 S 30

Part load efficiency 20%

Gas Turbine No 2

1995 11 37.5 W 36 S 30

Part load efficiency 20%

Combined Cycle Plant

1998 8 110 W 110 S 90

46 (at base load)

Efficiency of 39% at typical operation

The actual average increase in peak load over the last five years is approx. 12MW / annum. This represents a natural load increase and is considered as a low growth rate. Unless there are significant changes in electricity consumption, or other factors such as an extremely hot summer, the expected summer peak loads over the next eight years to 2015 are shown below. Table 27: Expected Peak Loads (natural growth only) Low Growth rate (3% of present peak)

(12MW/annum)

Expected Summer Peak Load (MW)

Reserve Capacity1 (Present plant) (MW)

2005 (actual) 411 84

2006 (actual) 404 79 2007 (actual) 434 61 2008 447 48 2 2009 459 36 2 2010 471 24 2 2011 483 12 2 2012 495 0 2013 507 2014 519 2015 531 1 Reserve capacity figures given assume no change in generation output capacity. 2 Reserve capacity figures lower than the rating of the largest generating unit. Given the projected effect of the following planned developments, the anticipated load demand can be expected to increase and is as shown below. These developments are the opening and operation of Mater Dei Hospital with an expected 12 MW net increase over St Lukes Hospital, between 2007-2008; MIDI (Manoel Island and Tigne), 14MW between 2006-2012; Pender Place, 8 MW between 2009-2012; and Smart City (Ricasoli), 30MW between 2009-2015. Table 28: Expected Peak Loads (incl. planned developments) Low Growth rate

(12MW/annum) + planned developments

Expected Summer Peak Load (MW)

Reserve Capacity1 (Present plant) (MW)

2005 (actual) 411 84 2006 (actual) 404 79 2007 (actual) 434 61 2008 462 33 2 2009 488 7 2 2010 511 2011 532 2012 551 2013 568 2014 585 2015 602 1 Reserve capacity figures assume no change in generation output capacity. 2 Reserve capacity figures lower than the rating of the largest generating unit. From the above two tables, and taking into account the projected load requirements of the new developments it can be seen that as from 2009, the outage of any plant during the summer peak months will imply power outages in a number of areas of the island, which might last more than 48 hours at one time until the necessary repairs are carried out on the generating plant. Action therefore needs to be taken either to reduce the peak demand or to acquire additional generating capacity before this date. In order to ensure a reasonable level of security of supply, it is necessary to have an adequate level of reserve capacity. There are two main methods of determining the appropriate level of reserve capacity: - Statistical methods based on a calculated probability of exceeding a specified duration where

loss of supply as a result of lack of generation capacity adequacy may affect part or all of the consumer base.

Fixed reserve capacity margins over peak demand, calculated as a percentage of peak demand. This calculation is based on historical availability records. A variant of this method is to calculate the reserve capacity as being equal to the capacity of the two largest units in the system, based on the reasonable assumption that planned outages should not reduce the reserve capacity to below the capacity of the largest unit, which could be subject to an unplanned outage – the so called N-2 criteria, (in our case 120MW). This method of determining the reserve capacity is usually used in the case of small systems such as Enemalta.

The average capacity loss throughout the year due to planned maintenance and faults is of the order of 114MW. However over the past years and for the foreseeable future it has been the policy of Enemalta to avoid planned outages during the peak load months, namely summer and winter. This has consequently allowed Enemalta to operate with reduced levels of reserve capacity during these periods, whilst maintaining a satisfactory level of supply reliability (security), albeit at the cost of reduced operational flexibility and reduced maintenance durations. However this situation is not sustainable as shown above, since as the demand increases, the available reserve capacity will fall to below the rating of the largest unit by summer 2008. Therefore assuming no plant retirement, an additional 120MW of generating plant is required by 2010, simply to be able to meet the load demand safely and reliably, ideally although this is no longer possible with 60MW being available before summer 2008. Major Issue Consideration In order to maintain continuity of supply an additional 120MW of generation plant is required by 2010. The steam plant at Marsa is classed as ‘existing plant’ under the Large Combustion Plant Directive and has been opted out of compliance with the emissions limit values applicable to ‘new’ plant. This effectively means that the stream plant at Marsa is permitted a maximum of 20,000 hours operation between the 1st January 2008 to 31st December 2015. Operation of the plant beyond the 20,000 hours will result in an infringement of the Directive. Steps are being taken to minimise the operation of the Marsa Plant as far as possible in order to extend the 20,000 hours as much as possible, but given the expected loads it is expected that plant will reach this 20,000 hour limit starting in 2012. Major Issue Consideration The Marsa Power Stations operates under the Large combustion Plant Directive – which contstraints the operating capacity of the Plant to 20,000 hours by 2015. Enemalta Corporation estimates that it will exhaust the 20,000hrs by 2012: which means that the closure of the Marsa Power Station is brought forward to 2012 which is dependent on investment relating to both generation or transmission; or the Marsa Power Station continues to operate in breach of the LCPD. 7.2.3 Environmental Factors Affecting Generation Electricity cannot be stored. Consequently, there is a need to match exactly the demand on the system by the amount generated. Enemalta’s operations are therefore characterised by plant operating at a range of different load factors, from base load plant (Steam units) running continuously throughout the year, to medium load plant operating in ‘two-shifting’ mode (CCGT) through to peak lopping plant (OCGT) operating a few hundred hours or less per year. 7.2.3.1 Base Load Plant This type of plant is used for a long continuous period usually in the region of more than 8000 hours per year. Such plant operates on the cheapest fuel available and is traditionally composed of steam units running on the cheapest available fuel on site. The generation plant in Malta is mostly composed of this type of plant and it is operated with HFO.

7.2.3.2 Two Shifting Plant This plant is capable of being switched on and off every day. Although in theory, every type of generating plant is capable of operating in such manner, special design features have to be incorporated in the plant in order to relieve the mechanical and thermal stresses associated with such an operation mode. In Malta, there is the CCGT unit at Delimara Power Station, which operates in this mode and which is operated using gasoil. 7.2.3.3 Peak Plant This type of plant normally operates for less than 1000 hours per year in order to cover peak demand periods. Such plant is also used for emergencies when the other more economical plant is off line for repair. This plant may also be used for black start up purposes after a total shut down. It is normal that for this type of plant, the units with the cheapest capital cost are chosen. Since the operation of these units is rather limited, capital cost rather than fuel efficiency considerations is the limiting factor. These units are gas turbines and are operated using gasoil. The dispatch of generating plant has to take into account a number of factors, some of which are conflicting: - Seasonal load changes. - Daily load changes. - Climatic predictions /changes on weekly, daily and even hourly bases. - Hourly load changes. - Technical Limitations. - Plant availability. - National / International activities. - Economic considerations. - Environmental considerations. - Legal obligations (20,000 hour rule for MPS). Dispatching is in fact not carried out, as on the continent, by having a separate Dispatching Centre. This is because of the small size of our network grid, the fact that there are only two power stations operated by a monopoly. However, this does not imply that its functions are ignored or not required. The work carried out by a dispatching centre, is in Malta being carried out by the Station Managers and the Operations Engineers. These people, similar to any dispatching unit, have to take into consideration all the aspects of availability, economics, reliability or better still quality of supply, when planning to meet load demand. Hard copies of monthly, daily and hourly load curves are readily available and archived and as from October 1999 this data and daily ambient temperatures are also being stored on computer. Consequently, both the Station Managers and the Operation Engineers have the required data readily available to assist them in their decisions. Every year the Station Managers decide on a plan to perform the overhauls on their respective units. This plan takes into consideration past experience, that is monthly load charts and other factors which may influence demand, mainly new infrastructural/national projects/activities. This plan is a coordinated effort between both managers, because each station has its on limitations, priorities and requirements. One however, must try and perform the overhauls in a fixed time frame and at the same time have enough available capacity to meet demand. This plan also caters for any forced shutdowns of the available /running plant or any sharp increases in demand growth. Once this month to month plan is established one may envisage which units will be available say in Spring etc. With this information in hand the next step is to plan on week to week basis. This is also carried out by the Station Managers. Knowing which machines are available, the station managers decide on which units to run. This is carried out by means of a software tool which was tailor-made in-house for our system. Hence, the most economical combination is established. The week to week program

mainly concentrates on the minor maintenance that needs to be carried out over the weekends, i.e. periods of low loads. The day to day and hour to hour planning is mainly done by the Operations Engineer on duty. The night duty operations engineers are the first to take a decision, because the trend of the load demand during the night more often than not reflects on the expected load during the day. Hence, a decision has to be taken to run a unit before/later then the normal time established, or run an extra unit to meet demand. This is discussed between both Stations Duty Engineers and a decision taken. Again the Day Duty Engineers will do the same to for the evening peaks. The load profile is plotted and watched constantly, because the engineers on duty have to decide if enough units are running to meet demand or vice versa. Hence, dispatching is a continuous process. Up to this point the measures taken were only performed by the dispatching unit to ensure that the load is met. However, having decided on the units to run and at what time extra units are run or shut down, the duty engineer has also the task of operating the plant at its best efficiency, or to be more precise at the best global efficiency, considering all units in service, for each load demand. To perform this task computer software tailor made for our system is utilised and the optimum combination and most economical solution of unit loading is worked out. Consequently, dispatching in Malta is performed by the Operations Duty Engineers of both Stations as described above. Other factors which were not mentioned but are also considered are the technical limitations. These technical limitations may vary from distribution network limitations, high sea water temperatures, limited number of feed-pumps available at Marsa station etc. The following graphs show typical load patterns and the seasonal variations in load. Figure 5: Yearly Power Generated

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Figure 7: Seasonal Variations in Peak Demand

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Figure 9: Typical Daily Load Charts

DAILY LOAD CHARTS

120130140150160170180190200210220230240250260270280290300310320330340350360370380390400410420430

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The current Government policy is that the power station at Marsa is to be closed down. This implies that Corporation will have only one site for expansion of the generating system, namely Delimara Power Station, unless a new site is to be selected. However given the present planning situation in Malta, this is unlikely, and thus the limitation of the site at Delimara presents other problems. Since the present site at Delimara can only accommodate three more 130MWe CCGT type plants and even less if diesel engine based plants are selected, this would give Delimara a potential maximum total capacity of circa 694MWe comprising 390MW new CCGT at nominal rating of 130MW each (and only 300MW at summer rating of 100MW each), 110MW existing CCGT, 74MW open cycle gas turbines and 120MW steam plant. This together with the 37MW open cycle gas turbine expected to be still operating at Marsa would give an installed capacity of circa 730MW. If we assume that a reserve capacity of 130MW is retained, the peak demand that could safely be met by Delimara alone would be 600MW. The Corporation expects this demand to be reached in 2015. 7.3 The Distribution Set-Up 7.3.1 Overview The high-voltage (HV) network is under continuous development in order to meet the energy needs and expectations of the customer in a safe, secure and efficient manner which is both environmentally and economically sustainable. The high voltage (HV) network essentially consists of 132kV, 33kV and 11kV underground cables and overhead lines connected to the two Power Stations, the Distribution Centres (DC’s) and the distribution substations. The 132kV and 33kV circuits are the backbone of the HV network and convey power from the power stations to 18 strategically located distribution centres. 11kV circuits then distribute power from the distribution centres to approximately 1300 distribution substations dispersed all over the inhabited parts of the Maltese Island to serve around 250,000 consumers. Large industrial and commercial establishments are connected directly to the distribution substations, whilst the small to medium industrial and commercial entities, and the domestic consumers are serviced through a low voltage network supplied from the distribution substations. The Distribution Centres transform power from the 132 kV and 33kV feeders to be distributed at 11kV, which in turn is converted to 400V and 230V by the Distribution Substations. The 132kV and 33kV network is essentially a radial network with few interconnections between the various distribution

centres, while the 11kV network has over the years developed from an open ring structure to an interconnected network. Table 29 shows the transformer rating of each distribution centre in service. The total capacity of the 11kV transformers is 672.1MVA. Table 29: Transformer ratings in distribution centres Distribution Centre Transformers Transformation Total Transformer Rating

Mosta D.C. (132kV) 1x90 MVA (132 kV/33 kV) 90 MVA

1x22.5 MVA (33 kV/11 kV) 22.5 MVA

Mosta DC 2x15 MVA (33 kV/11 kV) 30 MVA

1x22.5 (33 kV/11 kV) 22.5 MVA

Marsa South DC (132kV)

2 x 50 MVA 1 x 90 MVA

132 kV/11 kV 132 kV/33 kV

100MVA 90MVA

Msierah D.C. 2x22.5 MVA (33 kV/11 kV) 45 MVA

Paceville D.C. 2x30 MVA (33 kV/11 kV) 60 MVA

Pembroke D.C. 2x12.5 MVA (33 kV/6.3 kV) 25 MVA

St. Venera D.C. 2x30 MVA (33 kV/11 kV) 60 MVA

Tarxien D.C. 3x22.5 MVA (33 kV/11 kV) 67.5 MVA

Vendome D.C. 2x6 MVA (33 kV/11 kV) 12 MVA

New Hospital D.C. 2x15 MVA (33 kV/11 kV) 30 MVA

1x22.5 MVA (33 kV/11 kV) 22.5 MVA

Valletta D.C. 3x22.5 MVA (33 kV/11 kV) 67.5 MVA

Kirkop D.C. 2x22.5 MVA (33 kV/11 kV) 45 MVA

Qala D.C. 2x30 MVA (33 kV/11kV) 60 MVA

Comino D.C. 2x6.3 MVA (33kV/11kV) 12.6MVA

The 11kV reinforcement projects and the construction and commissioning of new distribution substations are generally considered as routine works. These 11kV reinforcement projects are usually included in short-term plans that extend between one and two years, with new projects being proposed annually. Thirty to forty new distribution substations are added to the network each year. About two thirds of these are installed in substation rooms constructed by third parties while the rest are fully provided by Enemalta on land acquired mainly from the Government. The Distribution section is organisationally split into two sections, namely the distribution (or Consumer Services) section, and the development (T&D) section. The distribution (Consumer Services) section is split into 4 regions: Malta: North, Central and South and Gozo. Each region has a number of districts offices. These are shown together with the local councils served by each region in table 30.

Table 30: Localities in each Region

North Region Central South Gozo Mosta District Bkara District Paola District Gozo District Bugibba District Valletta District Luqa District Sliema District Qormi District

Local Councils Local Councils Local Councils Local Councils Gharghur Balzan Birgu Fontana Mgarr Lija Bormla Ghajnsielem Mosta Attard Isla Gharb Naxxar Birkirkara Kalkara Ghasri Rabat Marsascala Kercem Mellieha Mtarfa Fgura Munxar San Pawl il-Bahar Mdina Paola Nadur Dingli Tarxien Qala Sliema Iklin St Lucia Victoria Swieqi Zabbar San Lawrenz Ta’ Xbiex Valletta Xghajra Sannat San Giljan Floriana Luqa Xaghra San Gwann Santa Venera Gudja Xewkija Pembroke Hamrun Ghaxaq Zebbug Gzira Marsa Birzebbuga Pieta’ Marsaxlokk Msida Zejtun Zurrieq Kirkop Safi Mqabba Qrendi Qormi Siggiewi Zebbug Total number of Local Councils 13

Total number of Local Councils 16



Figure 10: Transmission System

7.3.2 Distribution Operations 7.3.2.1 Network Reliability The reliability of the HV network is determined by the ability to meet the electricity demand at all times, including periods when some of the network components are not in service due to faults, programmed maintenance and other works. All network components have a certain risk of failure. This risk is measured in terms of the probability of the component failing and the effect on the network in terms of the extent and duration of the power interruption following the failure. When considering the options for the reinforcement of the network, the selection of the network components and their configuration depends on their relative risk of failure. Acceptable supply reliability is achieved by having redundant components that serve as a backup for other items that are out of service for repairs or works. Increasing the redundancy of network components increases the network reliability in terms of a reduction in the extent and duration of interruptions in case of faults and works. However, this increase of reliability carries a cost with it, in terms of idle or under utilised plant. A compromise between reliability and cost is achieved by what is termed the (n-1) rule, where the continuity of supply on any part of the network is ensured in case of a single fault or outage in that part of the network. Thus, if for example three cables are required to meet the power demand in a specific part of the network, then four cables are installed to guarantee supply in case of a failure of one of these cables. This is the lowest level of redundancy and in case of two or more simultaneous faults in the same area, the network would be unable to deliver the required power. However, although multiple faults are possible, they are very improbable and the (n-1) redundancy is generally considered to be a good compromise between the risk of prolonged power interruptions and increased costs. The long-term plan for the HV network is based on the load demand increase projections given in the Generation Plan together with an assessment of the projected increase in load expected in the various parts of the Maltese Islands and the effect that this increase in demand will have on network capacities and redundancies. It is possible to reduce capital expenditure by sharing redundancies between adjacent parts of the network where it is technically possible and where it makes economic sense. Thus various options were considered in formulating the long-term plan so that timely investments are made that would not prejudice the reliability of supply or would result in unnecessary or premature investments. 7.3.2.2 Feeder Redundancy It is Enemalta’s policy to have a minimum (n-1) redundancy for the HV network. At 11kV, network redundancies are planned on an annual basis. These are relatively small projects that typically take a few months to complete, although compliance with the recent regulations and policies by MEPA and ADT, are delaying both the start and completion dates. When the existing 11kV source or sources reach saturation, a new 33/11kV distribution centre is generally required to provide additional 11kV feeders. Major Issue Consideration It is Enemalta’s current policy to have minimum ‘n-1’ redundancy for the High Voltage Network. Traditionally, Enemalta installed 33kV and 11kV circuits in trenches excavated along the arterial roads, and this practice is still in use by Enemalta for all 11kV cables and for some of the 33kV cables. The first 132kV cables from Delimara Power station to Marsa South DC were also installed in trenches. Whilst the excavation and backfilling of trenches is less expensive than tunnels to construct, the total cost of installing cables in trenches is increasing and it is becoming more difficult to obtain trenching permits as the arterial roads are being reconstructed by the ADT unless suitable cable reservations or culverts are prepared along the whole route of the reconstructed roads. Unfortunately this is a fact which the Corporation has not managed to get across to the ADT, as frequently cable reservations

along newly reconstructed roads disappear for a short stretch where the road narrows. Any such interruption basically renders the whole cable reservation useless. In view of this and the fact that buried cables are more prone to being damaged by excavation works, the Corporation has been obliged to decide to install the new 132kV cables in tunnels wherever possible. This will allow the Corporation to add future 132kV feeders without additional civil works. Unfortunately, due to complications arising from unexpected geological problems encountered whilst tunnelling, the completion of these tunnels has so far been delayed, resulting in a situation where the tunnels albeit more expensive than trenches, take longer to construct and complete and have more uncertainty as far as programming of works is concerned. Since 33kV feeders are relatively long, redundancies are planned when the cables to the new distribution centre are installed. Most of the 33kV feeders originate from the two power stations. With the introduction of 132kV distribution centres closer to the load, future 33kV feeders shall generally be shorter and less expensive to install. All future 132kV feeders are planned to be installed in underground tunnels. This will permit additional feeders to be installed without the need to open up large stretches of arterial roads. The present 132kV network has no redundancy and once the tunnel between Delimara and Marsa South is completed, two new 132kV circuits will be installed to provide an (n-1) level of redundancy and to cater for the addition of load from the Mosta 132kV DC. Where possible, the existing 33kV circuits shall be retained to provide redundant sources of supply in case of failure of one of the 132kV cables. 7.3.2.3 Redundancies of Power Transformers In most of the 33/11kV distribution centres, the load on the power transformers have exceeded the (n-1) capacity. Thus a failure of one of the transformers would result in wide spread and prolonged interruption of supply. Additional transformers cannot be installed in the existing distribution centres since the buildings lack adequate space for large additional equipment. Traditionally, Enemalta used to construct distribution centres with two 30MVA transformers with an (n-1) capacity of 30MVA. The present practice is to construct new distribution centres with three 22.5MVA transformers, with an (n-1) capacity of 44.5MVA. Consequently for an increase of 10% in total capacity, the firm capacity and overall reliability of the distribution centre is improved by almost 50%. However three x 22.5MVA transformers cost more than two x 30MVA transformers, so there is a cost to this as well. In order to restore transformer redundancies in the existing distribution centres, new distribution centres are required in the vicinity of these distribution centres, which would relieve sufficient 11kV load or provide alternative sources of 11kV to make good in case of failure of one of the power transformers. In the short-term, Enemalta shall procure a spare 33/11kV transformer and prepare an action plan for the rapid replacement of a faulty power transformer so that the duration of interruption due to faulty transformers is reduced as much as possible. Fortunately, these power transformers are very reliable and failures are uncommon. Furthermore, their condition is regularly monitored so that they may be replaced before they reach their end of life. 7.3.2.4 Switchgear The high voltage distribution network contains 17 distribution centres which deliver power at 11kV to some 1200 substations throughout Malta, Gozo and Comino. These distribution centres are the hubs of the network where power at 33kV and 132kV supplied by the power stations is converted to 11kV. They are also the switching centres of the network and any changes to the configuration of the network are done by operating the switchgear installed in these distribution centres. These distribution centres are a critical part of the network and any failure in the distribution equipment, especially switchgear, will result in wide spread interruption of supply.

Most of the 33kV switchgear installed in these distribution centres is air insulated. Analysis of faults on this type of switchgear revealed that the insulation of the switchgear is compromised by the humid and salt-laden atmosphere, especially for those distribution centres near the sea. Some 10 years ago, a decision was taken that all new switchgear for distribution centres should be of the gas insulated type so that the problems associated with air insulated switchgear are avoided. Furthermore, action was taken to install space heaters in distribution centres to prevent condensation

in air insulated switchgear and to increase the monitoring and inspection of the switchgear. However, the later was not always possible as load restriction do not permit frequent shutting down of switchgear in distribution centres.

During the recent years, there were cases were the insulation in 33kV switchgear in distribution centres failed catastrophically. The switchgear involved is of the HMX type, supplied by Medelec Switchgear Ltd and failures were reported at Qala DC, Comino DC, New Hospital DC, Freeport DC and again at Qala DC. The damage caused by failure at Freeport DC was so extensive, that the switchgear had to be completely replaced. In December 2008, a failure of the insulation in the 33kV switchgear at Qala DC, resulted in interruption of supply for few days in Gozo, until the switchgear was partially returned to service. Out of the 17 distribution centres in service, 11 of these are equipped with this type of switchgear.

The 33kV air insulated switchgear of the type HMX has proved to be unreliable and is expected to fail before the expected lifetime of the switchgear. This is an unacceptable risk to the personnel working in the distribution centres and to the security of supply. Switchgear with history of failures should be replaced without further delays, and this is being planned in a phased manner. As an interim measure the frequency of inspections has been increased to once monthly. However although this was originally considered as an alternative to the early replacement of the switchgear, recent events have proved that more frequent inspection and maintenance carried out to prolong the life of the switchgear does not prevent the failure of insulation.

In order to improve the reliability of supply, it is proposed that all 33kV HMX switchgear is gradually replaced by gas insulated switchgear. The proposal is for the replacement of three switchboard per year, through turnkey projects. The first phase of this project will consists of the replacement of the 33kV switchgear at Qala DC, New Hospital DC and Bugibba DC.

7.3.2.5 Load Growth Forecast The Corporation has traditionally focused its network planning on building new facilities to meet load growth. The Corporation’s load growth projections indicate that the peak demand for the whole network is expected to continue to increase. The table below shows the forecasted summer peak demand due to natural growth and due to large developments that are expected to come in operation during the coming years. The natural growth rate represents an average for the whole network and is not representative for all regions in Malta and Gozo. The overall strategy for this long-term plan is based on the development of a 132kV network that will provide means for the transfer of large amounts of power from the generating stations (sources) to each of these regions. This 132kV network shall be in ring form so that redundancies of the network links could be shared. The 132kV distribution centre’s will supply power to a number of 33/11kV distribution centres in each region. New 33/11kV distribution centres will be added to meet load growth and to increase the reliability of the 33kV and 11kV networks. Table 31: Peak Demand Growth Forecast

Year Low Growth rate (3% of present peak {natural growth} and planned developments) (MW)

2005 (actual) (411) 2006 (actual) 423 (404) 2007 (actual) 442 (434) 2008 462 2009 488 2010 511 2011 532 2012 553 2013 570 2014 587 2015 604

7.3.2.6 Distribution substations The distribution substations transform power from 11kV to 400V. There are a total of approx. 1300 such distribution substations in Malta and Gozo. Some of these distribution substations are dedicated to a particular consumer, usually either a large commercial or industrial consumer, whilst others are used to supply a mix of general (residential) commercial and industrial loads. Typically about 35 new distribution substations are commissioned every year, with Enemalta financing about half of these. The dedicated substations are generally financed by their consumers. The substations required for general consumer use are identified and planned through periodic monitoring of the quality of the low voltage (400V) supply. When existing sub stations are overloaded due to increase in demand, the supply quality invariably deteriorates with incidences of high/low voltage outside of standard limits and frequent faults. Suitable sites for these substations are becoming difficult to find, as residents tend to object both to MEPA and through the Courts to sub stations located close to them and when this fails enlist political assistance to block the construction. Most new substations are constructed on land obtained from the Lands Dept or the Joint Office or in the basements of large developments. In recent years the amount of maintenance carried out on these substations has been increased in order to improve the quality of service, and typically 170 substations are maintained annually. 7.4 Strategies to Meet Electricity Demand

The Electricity Division has prepared two main strategy documents, which are annexed to this report, namely the Generation Plan and the Transmission Plan. Both these strategic documents were approved by Cabinet. 7.4.1 Enemalta Generation Plan This document provides information on the present status of Enemalta`s generating plant and generation plans for the ten year period, 2006 to 2015. This is attached as Appendix 09. The generation plan reflects the Corporation’s commitment to comply with Malta’s environmental obligations. Throughout this period it is envisaged that despite the liberalisation of the energy sector in 2004, Enemalta will remain the only major organisation responsible for the generation and distribution of electricity in Malta. Presently Enemalta has a nominal generation capacity of 571MW (Marsa Power Station (MPS) = 267MW, Delimara Power Station (DPS) = 304MW), however the actual available generating capacity is reduced due a number of factors and the nominal available generating capacity during the summer months is 495MW. The existing plant has aged considerably. Over the years a number of turbines have been refurbished. However the average age of the steam turbines at Marsa Power Station is 45 years and the age of the boilers range from 21 to 39 years. At Delimara, the two steam units are 16 years old that is more than half their economic/design lifetime, whilst the combined cycle plant (CCGT) is 9 years old having half its design economic lifetime remaining. There are also three open cycle gas turbines, one at Marsa (18 years old) and two at Delimara (13 years old), however these are expensive to operate and are reserved for peak load duty or emergency duty. The average operating efficiency of the operational steam plant at Marsa is 27% compared to an average efficiency of the steam plant at Delimara of 32%, and of the CCGT plant of 40%. The calculated present natural growth rate in peak demand (MW) is about 2-3% per annum (circa 12MW) over the present peak load with the peaks occurring both during the summer and winter months. This increase in peak demand is associated with an increase in electrical energy consumption (MWhr) of just over 2% of present demand. There are also a number of new developments, which are planned within this period and which will add both to the total expected peak demand and total electricity consumption. On this basis with the existing generating plant, the

Corporation will only just meet the expected demand in 2010, with no reserve capacity. In fact if the rate of increase in peak load during the period 2008-2010 is abnormally high, or if there are major outages of generating plant, the Corporation may not be able to meet the peak demands during the summer months. Major Issue Consideration The Corporation will only just meet the expected demand in 2010, with no reserve capacity. In fact if the rate of increase in peak load during the period 2008-2010 is abnormally high, or if there are major outages of generating plant, the Corporation may not be able to meet the peak demands during the summer months. Thus, the Corporation may face problems as early as 2009. In order to comply with Maltese Law, which transposed EU environmental legislation, all the generating plant must have emissions which are below the limits set in the Large Combustion Plant Directive (LCPD) and the National Emissions Ceiling Directive (NEC). The main technical constraints on the selection of new generating plant are the need for operational flexibility, and reasonably high efficiency when operated at part load. This Generation plan summarises the investigations carried out by Enemalta Corporation into the optimum generation plant, which can meet the requirements of the present and expected environmental legislation at the lowest generation cost. Consideration has also been given to an electric cable interconnection with the European Networks, which would enable some local generation capacity to be replaced with imported electricity supplies. Comparisons of the impact on emissions and cost of the main options were also considered. This report identifies the use of Combined Cycle Gas Turbines (CCGT) as being the only generating plant able to comply with the present expected emissions limits in 2020. It also highlights the need for 200 MW of local generation to be replaced either by new generating plant or by a cable interconnection. In order to minimise the local cost of electricity these CCGT plants should be fired with gas which implies that a local supply of gas, either through a pipeline or a terminal will also be required. Finally the use of alternative energy sources has not been extensively discussed in this document simply because it is not envisaged that these can provide any significant substitute for the use of fossil fuels at the level of energy required in the time period covered by this report, namely to 2015. Furthermore due to the inherent ‘intermittency’ of most alternative energy sources (exceptions being bio-fuelled plant), conventional generating capacity is still required as a backup. Major Issue Consideration The Generation plan is basically based on the existing scenario where alternative energy is marked by its absence; and the fact mobilisation for generation of electricity through renewable energy technology will require a lengthy lead time. As stated previously, the Corporation has no leeway for lead time if it is to guarantee continued supply. The only exception to this, as is mentioned in the Dossier, is the installation of a submarine cable linking Malta to the European electricity grid, which would enable Malta to buy energy from green sources in Europe. Enemalta also re-states its commitment to buy onto its grid all the green energy that can be produced locally by third parties. It is pertinent to add that the Marsa Power Station is governed by the Large Combastion Plant Directive (LCPD): that is, its operational life is such that it is not to exceed 20,000 hours by 2015 or it will be subject to infringement proceedings under the said directive. Enemalta Corporation estimates that it will exhaust the 20,000hrs by 2012. In essence this means that the closure of the Marsa Power Station is brought forward to 2012 which - as is explained later in this document – is dependent on

investment relating to both generation or transmission; or the Marsa Power Station continues to operate in breach of the LCPD. The expected cost of the first new generating plant and the infrastructure for a possible gas supply is estimated to be Eur245 million. Figure 11: Power Generated in Gwh

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100MW generating plant Tender – Status: Four bidders (Man – Germany, Socoin – Spain, BWSC – Denmark, and Ido Hutny - Slovakia) submitted satisfactory bids. One bidder (Isolux – Spain) submitted a bid without a bid bond and was disqualified by the DoC. The remaining pre-qualified bidder (Metka – Greece) failed to submit a bid. Meetings have been held with Socoin, Man and Ido Hutny according to the pre-arranged schedule. This week meeting will be held with BWSC.

Two of the bidders have offered gas turbine based CCGT plants which would fit within the allocated site. The other two have offered medium speed diesel engines, and require twice the area of a CCGT plant, which will result in reducing the eventual capability of DPS to accommodate new plant. The Bidders are required to submit their bids by the 4th of March 2008. It is planned to award the Contract by end of third quarter 2008. Given the projected increase in peak demand, this generating plant is required to be in service during 2010. Any delay to this project, will severely prejudice the ability of the Corporation to meet the expected peak demand from 2010 onwards. In fact this project is already ‘late’ and it may be expected that Enemalta may have difficulty to meet the peak demands in the summer from 2009 onwards, although in the case of major plant outages, this could also be the case this summer. Major Issue Consideration The 100MW Generation plant must be in service during 2010. Delays in this time line will result in Enemalta Corporation’s inability to meet demand during the peak season. A PDS has been submitted to MEPA and following this and Public consultation with NGO’s, MEPA have issued terms of reference for an EIA. We will contact suitable consultants to obtain proposals for this EIA. The preparation and acceptance process for this EIA is considered to be a likely source of delays and additional costs to this project. 7.4.2 Transmission Plan The high-voltage (HV) network requires continuous development in order to meet the energy needs and expectations of the customer in a safe, secure and efficient manner which is both environmentally and economically sustainable. The transmission plan describes the way the present high voltage (HV) network is to be developed in order to meet the expected increase in electrical demand and to cater for the planned changes in the local generation system during the next ten (10) years. The plan is attached as Appendix 10. This plan starts with a detailed analysis of the present condition of the HV network. The analysis shows that during peak demand periods most components of the HV network are operating close to their capacity and without any redundancy. This implies that during peak load periods, unless the HV network is reinforced as required in the short term, significant parts will be unable to meet the all of the demand in case of a failure of one of their main components. It should be noted, that in recent years the peak demand period occurs during the summer months and these are generally extended periods lasting several weeks or more. Furthermore, significant parts of the network are not expected to be able to meet the increase in demand over the medium to long term unless they are reinforced. The HV network has to be substantially modified to cater for the possible decommissioning of Marsa Power Station and to accommodate new generation sources which are expected to be installed at Delimara Power Station, together with possible input from large off-shore wind farms (at or after the 2015 horizon of this report), an electrical interconnection with the European electricity grid system, and the possible introduction of third party or distributed generators. In the latter case of large scale third party or distributed generation (over 5MVA capacity), the required network reinforcement can only be determined when the size and location of the new (third party) generators is known, hence there are no specific provisions in this transmission plan for these connections. The previous plans for the HV network were based on the introduction of a 132kV transmission system, with cables being laid in underground tunnels for reasons of safety, wherever possible. Works on these tunnels have started but completion has been delayed due to complications arising from unexpected geological problems.

These delays have also stalled the reinforcement of the 33kV network with the result that the load growth on most of the 33kV network has exceeded the firm (n-1)1 capacity and in some cases the 33kV network is operated close to its full capacity. Therefore unless the network is reinforced, preferably by means of the planned development of the 132kV system, there is inadequate spare capacity in the medium to long term to meet the expected increase in demand in some areas. Major Issue Consideration The HV network requires substantial modification to accommodate for possible decommissioning of Marsa, renewable energy technology; third party generators, et al. A key strategic component is the development of tunnels to pass through 132kV cables. The tunnels whilst initiated are behind schedule. Failure to reinforce the network will mean inadequate spare capacity in the medium to long term. The reinforcement of the high voltage network will be carried out in two phases. The first phase is to be completed by 2009 during which the network will be strengthened through the commissioning of Mosta 132kV DC and the installation of new 33kV feeders for the reinforcement of Bugibba DC, Mellieha DC and the distribution centres in the Sliema Region. By the end of the year 2009, a new 132kV distribution centre will be commissioned at Kappara. The 132kV network will be reinforced by two 132kV feeders from Delimara Power Station and by a connection to the European Grid, which is expected to be commissioned between 2012 and 2014. The second phase of the long-term plan involves the commissioning of a new 132kV distribution centre at Marsa, to be designated Marsa 2 DC and the completion of the 132kV ring network. This new Marsa 2 DC will be an effective replacement for the Marsa Power Station and is required to be in operation before the decommissioning of the Marsa Power station commences. These works should be completed by 2013. This program envisages the installation and commissioning of three 33kV DC’s during 2008-09 and another 33kV DC together with a 132kV DC during 2009. During this same period numerous cables (both 33kV and 132kV will have to be laid together with the proposed submarine HVDC interconnector to the European Grid. The anticipated cost of this programme together with the cost of the interconnector is expected to be about Lm97million. 132KV DC’s The second phase of the Mosta 132kV DC is nearing completion and is planned to be fully in service by the end of June 2008. The construction of Kappara 132kV DC is well advanced and the building is expected to be complete in shell form by the end of February 2008. Tenders for the supply of equipment are expected to be published during 2008. This DC must enter into service by 2010, or there will be severe limitations on the ability to meet the demand of the high growth Sliema – St. Julians areas, particularly if the projected mega-developments are completed as planned. Major Issue Consideration The Kappara DC must enter into service by 2010 otherwise there will be severe limitations on the ability to meet the demand of the high growth Sliema – St.Julians area.

1 The firm (n-1) capacity at any point in the network is the remaining capacity following a single fault, thus for example if two cables are required to meet the demand, three cables are installed and the firm (n-1) capacity is given by the rating of two of the cables.

Two possible sites for the proposed 132kV DC at Marsa (power station) have been identified and cable/tunnel routes to connect to the existing 132kV system are being identified. Tenders for the construction of this DC are expected to be issued next year. This DC must be completed prior to any decommissioning of generating plant at Marsa Power Station, and any delay will result in the plant remaining in service for longer. This will imply an increased operating cost due to the low efficiency and possible infringement of the 20,000 hour rule (LCPD). Major Issue Consideration The Marsa DC must enter into service prior to the decommissioning of the Marsa Power Station. If this is not so, then the Marsa Power Station will continue to operate resulting in the infringement of the 20,000 hour Large Combastion Plant Directive. 132kV Cables

The load on the two existing 132kV cables from Delimara to Marsa South DC are expected to exceed 200MVA next summer, which means that we will no longer have n-1 capability on these circuits, and in case of failure of one of these cables, supply would have to be interrupted to parts of Malta until the fault is located and repaired. This may take several weeks, since the Corporation does not have the means and capability to repair 132kV cables. An additional 132kV cable is thus required to improve the reliability of supply and reduce the risk of prolonged interruption of supply in case of failure on one cable.

Enemalta is also in the process of installing new generating plant rated 100MW (minimum) at Delimara Power Station. The existing 132kV cables are unable to deliver this additional power since the total power that would have to be delivered from DPS would exceed the rating of the existing cables. Thus another cable is required for the new generating plant to be of use.

Major Issue Consideration To secure n-1 redundancy between the Delimara and Marsa South DC two additional cables must be installed in order to meet the increase in demand and to avoid potential long term disruption in the event of faults in one of the existing 132kV cables.

It is expected that tenders for the procurement of these cables will be published this year, with the cables in service by the beginning of 2010. Any delay to this program will result in (a) risk of prolonged outage if any of the two cables develops a fault and (b) risk that the new generating plant at Delimara will not be fully utilised due to a lack of capacity to export power from the station.

33kV DC’s

Four new 33kV DC’s are currently planned. Of these, the construction of Manoel Island DC is almost ready and tenders for the procurement of the required equipment will be published this year. In addition the 33kV cables from Msierah 33kV DC to Manoel Island DC will also be laid this year. St Andrews DC, is still in the ‘procurement of land’ stage with the finalisation of the transfer of land from the Lands Department expected this year. A tender for the construction of the building will then be published. This DC is required to be in operation in 2009. Delay to this DC may lead to a limitation of the capability to supply the expected increase in load in the St Julians area. Major Issue Consideration The St Andrews DC must be in operation by 2009. A delay in commissioning with lead to limitations in the supply of electricity to the St Julians area.

Xewkija DC is currently in the early stages of construction and it is expected to issue tenders for the equipment late this year. Ricasoli DC, which is intended to serve the Smart City development, will be constructed and financed by the developer to Enemalta specifications and handed over to Enemalta. This project depends heavily on the start and completion of a tunnel from Marsascala to Ricasoli, which depends in turn on both MEPA and the developer identifying and agreeing the end detail of the tunnel at Ricasoli so that works can commence from both ends. Delay in this DC will affect the development of the Smart City project. In addition a small 33kV DC may be required to supply the Kordin area due to the planned expansion of the technical instate and the load demand expected by VGT the port operator. This is still in the evaluation stage, and we are awaiting details from VGT. 33kV Cables A number of new 33kV circuits are planned, either to replace aging cables or lines or as new reinforcement. The new 33kV Mosta – Mellieha feeders will replace the aging overhead lines and increase the existing capacity to meet the expected demand growth in the North and Gozo. So far approximately one third of the route has been completed and this year the second third will be installed with the project completed next year. This project is required both to meet the increase in demand in the north and Gozo and to decommission the aging and badly deteriorated pylons. A new 33kV cable from Mosta to Bugibba was started last year but was not completed due to lack of an ADT permit for trenching from Burmarrad to Bugibba. Part of the cable will be laid in a common trench with the Mosta-Mellieha cables. The work is expected to be completed this year. A new 33kV cable from Marsa South to Kirkop will be laid this year to reinforce the supply to the ST factory and surrounding industrial zone, and to relieve the load on the Freeport/Hal Far DC’s. This will also permit the final decommissioning of the MPS 11kV switchboard. Upgrading of existing DC’s A number of existing 33kV DC’s will be upgraded annually through replacement of old switchgear and installation of substation control systems which will be integrated into the proposed SCADA system. It is expected to replace three 33kV switchboards and install 3 new SCS’s this year. This upgrading program is required both to improve the quality of supply and to increase reliability and as a precaution against catastrophic failure of the 33kV air insulated switchgear. 7.4.3 The Sub-Sea Interconnector Although this is not strictly electric generation equipment, it is another option that finally produces the same result. The proposed link is between Malta and Sicily, which is the shortest route the cable can take for connection to the grid in continental Europe. It is proposed that the Malta landing site will be at Pembroke, for both environmental reasons and in order to balance the power sources with the load. There are several advantages and disadvantages associated with the commissioning of such an interconnector, which can be summarised as follows: The advantages of an interconnector are: 1. Relatively invisible to the Maltese citizen since there are no large noise and visual signatures

attached to such an infrastructure as well as no air pollution. 2. Can be used as back up in case of emergency and therefore, a reduction in the spare

capacity would be possible.

3. There would be no need for additional fuel storage facilities, which would be required for local generating plant.

4. Depending on the cable contract, the present plant operation regime can be tailored to

optimise machine efficiency. This however would then penalise the cost of electricity passing through this link.

5. Malta can satisfy at least some of the obligations regarding renewable electricity generation

through buying renewable energy generated overseas through this connection. 6. The interconnector would be absolutely required in order to ensure the safe and reliable

operation of the network in conjunction with large intermittent RES sources such as the possible large offshore wind farms.

The disadvantages are: 1. Since the Italian tariffs are relatively high, the source of electricity may have to be sourced

from outside Italy with the nearest cheapest sources being Greece and France. Other countries e.g. Norway, UK, Czech republic etc are further away and therefore network restrictions and increased network fees may apply in some cases.

2. The Italian power system has a demand profile similar to that of Malta. It also has revealed

itself to be rather weak in electricity generation capabilities. Such weaknesses may manifest themselves during concurrent high demand periods on the Maltese and Italian grids and may therefore lead to problems during high peak demands. However Sicily is a region with an overcapacity of generating stations which may tend to mitigate this aspect.

3. As with the failure of any large unit, if the cable connection is lost when supplying a load

greater than 60 MW, local grid instability may result leading to partial shut down of the generation facilities running at the time, at least until the gas turbines can be started up and synchronised. This risk may be mitigated by use of load shedding systems similar to those used to prevent generating plant trips from cascading out of control.

4. Any damage that can occur on the cable/s can take a long time to repair, which is estimated

at one month, average. Since this repair has to be carried out by specialised foreign contractors, it can also be assumed that it would be rather expensive. It should however be noted that the experience internationally is that well installed and protected cables are extreamly reliable.

5. For reliability and security of supply a redundant cable link is necessary, so that maintenance

work can be carried out without interruption to the supply. The large interconnected European electricity grids are extremely stable compared to island systems, which may improve system reliability locally, however recent experience has shown that in times of localised energy shortages, each country puts its national interests above that of contractual obligations which could impact on the reliability and security of supply, especially during periods of concurrent peak demand. It is also not good practice to rely on electric cables for supply without having backup generating plant available in case of interruption of supply due either to a fault (land cables, converter stations sub-marine cables) or other reasons. Hence for security of supply reasons, a cable interconnection needs to be backed up by alternative (local) sources of supply. These could be mothballed generating plant, which is not normally used due to low efficiency, however if Marsa is decommissioned and the site returned to other uses, the existing plant at Marsa cannot be used for this. Installation of a submarine cable interconnection with the European grid will result in Malta’s electricity distribution system, losing the status of a ‘Small Isolated system’. The consequences are not considered to be a significant obstacle to the installation of such an electric cable interconnection.

Major Issue Consideration The installation of a submarine cable interconnection with the European grid will result in Malta’s electricity distribution system, losing the status of a ‘Small Isolated system’. The consequences are not considered to be a significant obstacle to the installation of such an electric cable interconnection. It should also be noted that the anticipated outage duration for a submarine cable fault is of the order of 30 days and would require a specialised vessel and specialist personnel. If an electric cable interconnection is installed the reserve capacity required to ensure security of supply, should include the cable rating and the largest generating unit, if the rating of one single cable is more than the rating of the largest generating unit, i.e. if one or more 100MW rated cables are installed, the reserve capacity required would be 160MW to 200MW. Similar to the gas pipeline situation, since the Maltese internal market is very small, the economics of the cable connection are extremely marginal. Moreover, EU regulation states that any extra pollution that a country generates in order to supply another country with energy, is to be accounted for by the receiving country. This therefore does not exonerate Malta from its environmental obligations unless fossil fuel free energy is procured. However sourcing electricity from the large generating stations that benefit from economies of scale, will still provide Malta with a net environmental benefit. Sub-Sea Interconnector Project - Status The Corporation has prepared Terms of Reference for a feasibility and cost-benefit analysis of the various contractual options and an analysis of the regulatory position, and have discussed with the Director of Contracts the best way to obtain the services of a consultant. Following these discussions approval from to Ministry of Finance via the Ministry of Investments, Industry and IT has been obtained to go to a form of Direct Order following a negotiation with three or so suitable companies. Proposals were requested from three leading companies with the required expertise, namely, Terna the TSO in Italy, RTE the TSO in France and Lahmeyer, a German consultancy firm which carried out a study on possible interconnections for the MRA. The Corporation received proposals from Terna, and RTE which are quite comprehensive and are reviewing them. Assuming that the regulatory issues are resolved, a decision on whether the interconnector is a private merchant or a regulated interconnector, or a hybrid has to be taken. If it is to be regulated and built by the Corporation, a seabed survey and EIA needs to be commissioned both in Malta and Italy. In this regard, it is proposed that a Cost Benefit Assessment is carried out. A Project Description Statement (PDS) has been submitted to MEPA for review. This is a preliminary to the submission of an EIA and has been based on a worst case (in local planning terms) scenario. Due to the very high demand for submarine cables, it is possible that any delay in awarding this contract will result in significant delays to the completion of the project. Furthermore the original amount estimated for this project, namely Lm55 million is increasingly being seen as significantly low and a more realistic cost, based on latest information is of the order of Lm85 million. Major Issue Consideration The original amount estimated for the Sub-Sea Interconnector project, namely Lm55 million is increasingly being seen as significantly low and a more realistic cost, based on latest information is of the order of Lm85 million. A tender for the equipment will also need to be issued. The earliest date for operation of the interconnector is expected to be 2012. Without this interconnector or the equivalent in new local generating plant it will not be possible to decommission the plant at Marsa Power Station.

Major Issue Consideration The decommissioning of the Marsa Power Station is based on the setting up of the sub-sea interconnector cable. In the event that an alternative option to the sub-sea interconnector cable is chosen the equivalent in terms of generating capacity in terms of new plant would have to be put into place. Given the projected increase in load demand and the expected operating regime of the plant at Marsa, it is expected that the 20,000 hours will be utilised by 2012, and hence any delay in commissioning of this interconnector may result in the Marsa plant being operated beyond the 20,000 hours with consequent risk of infringement of the Large Combustion Plant Directive. 7.4.4 Natural Gas Supply Three outline proposals were received at the end of last May for the supply of Natural gas for power generation by Enemalta. Two of these proposals were for LNG supply and one for CNG. There were no offers for a pipeline to Sicily or elsewhere. Work on the evaluation of an RFP for advisors to assist us in the process of evaluating/negotiating these proposals has been concluded and approved by the DoC. Internationally the consensus seems to be that the long term future of LNG as compared to a pipeline for importation of natural gas offers the most long term flexibility, as it is expected that the small spot market will continue to develop and grow. There is no major experience with CNG, but the principles (purchase, transport etc) are similar to LNG and CNG could be a viable long term alternative. The MRA consultant did not however consider CNG as a potential technology to source the supply of natural gas, and only compared pipelines to LNG. The pricing of gas on the international market generally follows the following formula: P = A + BxHFO + CxGasoil Where A is the initial price determined at the start of the contract, B is a factor (+/-) applied to the price of HFO, and C is a factor (+/-) applied to the price of gasoil. This type of pricing formula usually results in the cost of natural gas being below the cost of the alternative fuel. Some formulae index the cost of NG against other variables such as cost of coal. The pricing taken by the MRA consultant was considered to be unrealistic and additional sensitivity analyses were requested by Enemalta (at a cost partially borne by Enemalta). This project is envisaged to be completed by 2015 and a delay of one year or so at this point can easily be accommodated within the overall schedule.

8 Petroleum Division 8.1 Introduction The Petroleum Division is responsible for the programming, importation, storage and distribution of all petroleum products in Malta. In terms of importation of energy commodities the following is to be noted: Diesel: The importation of gas oil and diesel accounts for 14% followed by

Jet A1 and gasolines. The quality of petroleum products has improved and it conforms to European Standards. Automotive gasoil (diesel) now conforms to EN590 and is available at all petrol stations in Malta and Gozo.

Lead Replacement Petroleum: As part of an universal environmental programme to reduce pollution

from road traffic and improve the air quality, leaded petrol has ceased to be available in Malta for general sale from January 2003. However, as there remains on Maltese roads a significant number of cars that use and need leaded petrol, the Corporation introduced Lead Replacement Petrol better known as LRP.

Aviation Fuels: The aviation fuels constitute almost 10% of the sales of the

Petroleum Division (the sale of Fuel Oil to the Electricity Division amounts to 65% of the total sales). Aviation customers are given an international standard service at the Malta International Airport. he Division's management system of the Aviation Section is certified to meet the requirements of ISO 9001:2000 Certification. Foreign consultants, besides the annual ISO audit by SGS United Kingdom Ltd, regularly inspect the services provided by the Aviation Section. Iternational airlines as well as Air Malta, are given the facility to inspect our facilities at the airport

Storage: The Petroleum Division also provides storage to international oil companies at Has Saptan and Ras Hanzir underground installations. Has Saptan’s capacity is over 140,000 tonnes of clean petroleum products, namely gasoil and Jet A1.

The MRA regulates the selling price of Lead Replacement Petrol, Unleaded Petrol, Diesel, Kerosene, Light Fuel Oil and Thin Fuel Oil. These prices are adjusted on a monthly basis to account for price variations in the international market The Corporation operates and maintains a number of key installations: 31st March 1979 Installation at Bizerbbugia; Wied Dalam Depot; Hal-Saptan Installation; Ras il-Hanzir Installation; Luqa Airport Installation. These are discussed 8.2 The Installation Operations 8.2.1 31st March 1979 Installation, Birzebbugia This installation is able to receive directly from supply tankers, and store Unleaded Gasoline, Diesel and Jet A1. Unleaded Gasoline and Diesel fuel is loaded onto road-tankers via a loading gantry which is equipped with four loading lanes. Dyed Jet A1 is loaded onto kerosene hawkers’ road-tankers via a separate loading bay. Jet A1, which can also be received by pipeline from Has-Saptan Installation, is transferred via pipeline to Wied Dalam installation.

It is pertinent to note that the Government, following the publication of the Development Plan for the South of Malta drawn up by MEPA, made a commitment to close down this installation. This closure will be consistent with Directive 2003/105/EC of the European Parliament and of the Council amending Council Directive 96/82/EC on the control of major accident hazards involving dangerous substances, promulgated into Maltese Law on 4th July 2003 (LN 144 of 2003) by virtue of the Control of Major Accident Hazards Regulations, 2003 (LN37.2003) and by the Control of Major Accident Hazards (Amendment) Regulations, 2005 (LN6.2005)(COMAH). This means that the Petroleum Division will lose its main facilities for the storage of gasolines and road-tanker loading. A replacement installation therefore had to be erected. Major Issue Consideration Given the Government’s commitment following the publication of the Development Plan for the South of Malta and in terms of local legislation the installation of 31st March 1979 is to be decommissioned and replaced. Whilst the Petroleum Division has initiated steps to build a new installation to replace the 31st March 1979 at Birzebbugia and, preliminary applications have been submitted to MEPA, such a new installation is intrinsically twined with the commercialisation process of the said Division, and its outcome. It is to be recorded that several objections and concerns to this proposed installation have been received from different quarters. Major Issue Consideration Whilst steps to build a replacement installation at Ras Hanzir for the 31st December 1979 installations are underway, this process is intrinsically twined with the commercialisation process relating to the Petroleum Division and its final outcome. The Corporation currently supplies all petrol stations fuel and diesel – with the exception of bio-diesel, through its internal distribution fleet.

With Malta joining the European Union an obligation to control the release of volatile organic compounds (VOC’s) during the loading and unloading of road-tankers has been imposed. Indeed this directive has been transposed into Maltese law as LN214 of 2001. This directive, which applies to the handling of gasolines only, is being partly observed by having a Vapour Recovery Unit installed at the plant which is connected to the storage tanks. Although this unit has been sized to cope with the load of the simultaneous operations of receipt of gasoline into the storage tanks from a tanker and the loading of road-tankers, the road-tanker filling gantry is not connected to the unit as the infrastructure in use allows only for top-loaded of the fleet. The recovery of the vapours released from the loading of road-tankers can be carried out effectively only if these are bottom loaded. This requires the replacement of the control and loading equipment on the gantry and the replacement of the road-tanker fleet. Major Issue Consideration The Corporation is in breach of LN214 of 2001 and securing compliance requires considerable investment in terms of constructing a bottom loading bay and introducing a new fleet of bottom loading road tankers (or sub contract out service).

It is further to be noted that the Malta Resources Authority in October 2007 liberalised the distribution of in-land fuel; where-in it issued a call for applications for the opening and call for applications for operating licences, related to (i) the carry out of activity of importer and wholesaler of petroleum; and (ii) the operation of a primary storage facility. Thus, any investment that the Corporation should consider taking in order to upgrade its facilities should be carried out within the context of whether it is cost effective for the Corporation to compete in this market given that the liberalisation process is now underway. The investment decision in this regard is also intrinsically twined with the commercialisation process and its final outcome. Major Issue Consideration The MRA has initiated the process for the liberalisation of the inland market in relation to importing, wholesaling and storing of energy commodities. The decision to upgrade to secure compliance should be taken with regards to the Corporation’s cost effectiveness to compete in this market as well as commercialisation process of the Petroleum Division and its final outcome.

The installation has a number of deficiencies which need substantial investment: (i) of the nine tanks on site one is not in use as it is beyond repair. (ii) the Filling Point Control System is obsolete and needs to be replaced. This is a critical issue.

If the Filling Point Control System suffers a fatal breakdown the Corporation would not be in a position to load tankers through the loading bay. This is, undoubtedly, a critical point of failure.

Major Issue Consideration The Filling Point Control System is obsolete and constitutes a critical point of failure as in the event of a catastrophic defect the Corporation would not be in a position to load fuel to its fuel fleet through the loading bay. (iii) the Tank Refurbishment programme is only partly complete and needs to be completed. (iv) the pier leading to the dolphin needs structural maintenance on its piers. Sirens as part of the OHSA ‘information to public’ requirements are being procured through tender. A backup diesel generator is required to feed the installation in case of a power cut, as no fuel loading could be affected otherwise. Power cuts are not frequent however. 8.2.2 Wied Dalam Depot Wied Dalam Depot is an underground installation dedicated to Jet A1. It is the main storage of Jet A1 for the airport. It is connected by pipeline to the 31st March 1979 Installation and Has Saptan Installation for receipt purposes, and connected also via a pump room and pipeline to the depots at Luqa airport. Simultaneous receipt and pumping to Luqa Airport operations can be carried out. The tanks are currently being externally refurbished and will be completed in the coming weeks. In tandem with this work, internal testing of the tanks was carried out; and as appropriate repairs ensued. The pipeline is also to be changed wand will be coated both internally and externally. A new filtration station has been introduced for Jet fuel, in view of the fact that this fuel will not be able to settle at B’Bugia (and will thus hold water) once the 31st March installation is closed down.

Technology investment is required to link the Wied Dalam Deport with the Luqa and Has-Saptan Installations respectively in order to enable the remote control of the pumps during transfer operations. 8.2.3 Has-Saptan Installation This underground installation offers storage facilities for middle distillate products (gas oils, diesel and Jet A1), and limited facilities for the storage of gasolines. This installation is equipped with five pump-rooms of different capacities, and pipelines leading to two ship loading / unloading points, one in the middle of Marsaxlokk Harbour and the other at Corradino Wharf. This installation is also equipped with an emergency road-tanker loading facility in the vicinity of Gudja. Hal-Saptan is a 1960’s installation, with sixteen below ground tanks. Of these, one is not in use as it is in need of repairs. The Corporation is planning to clean and check the internal condition of each tank – and need for repairs are anticipated. The pumps, whilst old are reliable and parts are available. Parts of the pipelines need replacing in some areas. Moreover, the electrical control and fire / vapour alarm system is not up to date as the system is obsolete. The communication system is not adequate and most of its cables and components (together with some power cables) need replacing. The ventilation system, however, is adequate. Due to the very damp conditions inside the tunnels, the electrical systems require continuous maintenance. Moreover the electrical circuits and system need a holistic review. The Gudja Filling Point needs refurbishment, mainly in connection with pipelines leading to and from Has-Saptan. Ideally the pumps feeding this filling point are to be supplied with remote switching from the filling point. The Dolphin is used to load and discharge vessels. This is isolated five hundred meters away from the shore with no electricity or communication connections. A solar powered navigation warning light is installed to warn ships of its presence during the night. The structure condition appears to be fair. The hose handling facility needs replacement, although it is regularly maintained. The loading arms need to be installed, complete with breakaway valves in order to replace the existing hose handling facilities. Sirens as part of the OHSA ‘information to public’ requirements are being procured through tender. 8.2.4 Ras Hanzir Installation Ras Hanzir Installation is another underground installation offering storage for middle distillate and thin fuel oil products. No heating facilities exist, so products stored have to have a pour point below 0oC. No pumping facilities exist and loading of barges / ships through the loading points at Corradino Wharf (same points shared with Has Saptan Installation) is done by gravity. Presently no thin fuel oil is stored at this installation, with the thickest fuel stored being a blend of Light Cycle Oil and gas oil, which is marketed as Light Heating Oil (LHO). This is a 1930’s installation, with 10 underground tanks, two of which are out of use as they are cracked, while one tank is used to a low level as it has a crack at a high level. Ventilation is poor at some points, and needs strong improvement. The pipelines are of cast-iron, and with caulked (lead) joints which leak in places. These pipes and their jointing are today no longer acceptable in the petroleum industry and need wholescale overhaul.

There is no fire detection or fire alarm or communication system. Again electrical-wise it requires regular maintenance due to high humidity in tunnels and low insulation resistance of circuit cables. Water seeps from the roof into the tanks, thus ‘contaminating’ the fuel with water. False roofing or some other form of solution need to be installed to divert water ingress away from the fuel. The Dolphin appears to be in good condition. Sirens as part of the OHSA ‘information to public’ requirements are being procured through tender. 8.2.5 Luqa Airport Installation

At Luqa Airport there are two bulk storage depots for the receipt, storage and loading of Jet A1. Another small depot for the handling of Avgas has also been constructed in the vicinity of the main bulk depot. These depots are known as Bulk No.1 and Bulk No. 2. Bulk No.1 is situated at the Qormi end of the main runway and is comprised of eight horizontal mounded tanks and two vertical fixed roof tanks, all dedicated to the storage of Jet A1. This installation is also equipped with six aircraft-refuelling-vehicle (refuellers) loading points. Another depot for the handling of Avgas, comprised of four horizontal tanks, one refueller loading point and a filling point for small private aircraft, is also situated at this bulk.

Bulk No.2, also dedicated for Jet A1 and which is situated at the Safi side of the main runway, is comprised of four horizontal mounded tanks and two refueller filling points. Due to its ‘inaccessible’ position this installation is used only as a back-up with the regular operations being carried out from Bulk No. 1. Receipt of Jet A1 at these two bulks is done through a pipeline from the Wied Dalam Installation.

This is a post-war installation, but has had various additions and improvements to both tanks and offices over the years. Its condition is fair. The fleet of refuellers is obsolete. 3 AEC refuellers, one of which is no longer in operation, were handed over to the Corporation by the RAF in 1978. 1 Sommerset refueller was purchased second hand in 1980. 3 Fluid Transfer refuellers were purchased new in 1988, and 3 LAG refuellers in 1994. The Corporation has only 2 Fluid Transfer Hydraulic Platforms – becoming increasingly important as new airplanes are primarily designed for wing refuelling – which were purchased in 1992. Furthermore, there is 1 AEC AVGAS dedicated refueller which was handed to the Corporation in 1978. In essence the most recent fuelling equipment that the Corporation holds in possession is 13 years old. The efficiency and technology impact of this fundamental resource can never allow for optimal efficiency to be gained as enjoyed by other international refuellers which have far more advanced technological efficient equipment. The investment in new technology and equipment to ender efficiency in the work process is limited. The main investments have consisted of only (a) the installation of new pipeline between Wied Dalam and Luqa for faster and more reliable fuel transfers in 1999; (b) the purchase of a towable variable height ladder in 2002; (c) 4 towable fixed height steps in 2004; and (d) the purchase of a towable variable height ladder in 2006. With the refuelling equipment in place, the Corporation can only service 6 airplanes simultaneously. Whilst the situation is currently manageable this is expected to deteriorate as operations from and to the Malta International Airport increase particularly due to the increase of low cost carriers. Major Issue Consideration The fleet and equipment at the Luqa Aviation Unit is obsolete and geared to service 6 airplanes simultaneously – which although currently manageable can become a critical issue if the incidence of traffic at the Malta International Airport continues to increase.

8.2.6 Security Oil Stocks The EU Council Directive 98/93/EC of 14th December 1998 amending Directive 68/414/EEC imposes an obligation on member states of the EU to maintain minimum stocks of crude oil and / or petroleum products for an equivalent of a minimum ninety (90) days of inland consumption. The Corporation is currently the designated stockholder and was given to understand that it will continue to be so for the first year following liberalisation. Following the said first year, this responsibility will devolve upon licensed operators who will be required to hold security stocks in proportion to their share in the market of the various products in the previous calendar year. The Corporation also understands that security stocks may in part be held outside the territory of Malta, subject to approval by MRA and the necessary arrangements being in place. These include arrangements which envisage the Government entering into acceptable agreements with the government of the hosting country, ensuring inter alia adequate arrangements for the transfer of the stocks to Malta when needed. This security stockholding must be in line with LN 237 of 2002 as amended by LN 424 of 2002. Major Issue Consideration Costs related to these stockholdings should be borne by Government and not Enemalta. In fact the Security Stockholding Legal Notice requires that regulator to establish a compensation scheme. 8.3 Commercialisation of the Petroleum Division In March 2001 the Minister of Finance informed the Corporation that it was designated by the White Paper titled ‘Privatisation – A Strategy for the Future’ as one of the public sector entities to be in the scope of the privatisation programme. In conjunction with the Privatisation Unit and MIMCOL, the Corporation worked on the preparation of the privatisation process. In June 2007 the privatisation process for the Petroleum Division / MOBC commenced by the publication of the “EOI” (Expression of Interest). The privatisation process incorporates all the storage facilities, both underground and surface, owned by the Corporation across Malta. Sixteen companies expressed interest in the commercialisation process. On 4th December 2007, the Government issued an Invitation To Tender (ITT). The ITT established the following goals for the selected bidder:

“(a) ensure the timely maintenance and development of primary storage facilities to acceptable local regulatory and international standards to match the growing needs of the Maltese economy; and

(b) develop and manage the facilities, both existing and new, profitably and in a way that

ensures that end users and the Government are satisfied with the level and quality of services and facilities provided; and

(c) ensure that no revenue or capital support for the project will be required from the

Government of Malta and / or Enemalta, but rather to maximise proceeds to the Enemalta, consistently with the other aims being achieved.”

The model of privatisation selected was one of commercialisation of the Petroleum Division by means of a 30 year concession. To this effect, the ITT states:

“Enemalta Corporation expects to be able to take back the operation and management of the asset infrastructure which are the subject of this Concession once the Concession period is over and that, therefore, the Concessionaire will be obliged to keep operating the current business activities and operations of the Petroleum Division … through ConcessionCo in such a manner as to enable the Corporation to step in and carry on the business at the end of the Concession Period without any major adjustments or action …”.

A copy of the ITT is attached as Appendix 11. The ITT was picked up by 13 companies. On 14th January 2008 the Data Rooms and installation sites were opened to the bidders. 10 companies responded to this phase. At this stage the Corporation together with the Privatisation Unit, MIMCOL and the legal (Ganado and Associates) and finance (PriceWaterhouseCoopers) consultants respectively is responding to queries submitted by the interested parties. The following are the next phases of the tendering process: 11th April 2008 Earliest date permitted for submission of bids accompanied by the Bid Bond 18th April 2008 Final date for submission of bids accompanied by Bid Bond not later than 1200

hrs (CET). 13th June 2008 Bid evaluation and clarifications and identification of short listed bidder or bidders. 17th June 2008 Invitation for contract negotiations. Major Issue Consideration Final bids on the commercialisation process of the Petroleum Division will be submitted by 18th April 2008 with evaluation targeted for completion by 13th June 2008. Major Issue Consideration The light heating oil provided by the Corporation whilst finally cheaper is a blended product that (i) does not provide quality consistency and (ii) breaches Council Directive 1999 – 32 Reduction of Sulphur in certain liquid fuels and Directive 2005/33 /EC as it has a sulphur content that is higher than 0.2%.

9 Gas Division 9.1 Introduction The Gas Division, with 38 staff members, is the smallest of the core operations of the Corporation. Nevertheless, the Gas Division which supplies LPG for consumers as well as in bulk for commercial and industrial basis, is a highly strategic and sensitive operation. In this regard the Division’s main activity is the bottling of 10Kg, 12Kg, 15Kg and 25Kgs LPG gas cylinders which constitute the main of the production line, the supply of propane for commercial purposes, the supply of bulk LPG and Propane and the filling of individual camping gas cylinders. The strategic and sensitivity of gas production and distribution has accentuated in lieu of the increases in the price of electricity and the substitution of electricity products with gas based products given the fact that the price of gas is relatively cheaper. Despite the fact that the use of gas, the Qajjenza installation, with the exception of major investment carried out in the past twenty four months, has remained relatively unchanged from the original installation established in the 1960s and investment carried out in the mid 1980s relating to the introduction of a carousel. 9.2 The Installation Operations The Graph below shows the pattern of gas sales between January 2004 and January 2008. As the graph clearly depicts the sale of gas is highly correlated with weather behaviour during the winter months. It essence, this implies that gas is used primarily for domestic heating purposes as the sale of gas over the non winter months has remained relatively static. Furthermore, a mild winter, such as that experience in 2007, dramatically reduces the demand for gas. Figure 13: Gas Cylinders Sales Between January 2004 and January 2008 Nevertheless a cold winter spell, even a short one, exponentially increases the demand for gas. The Graph below shows the sale of gas over the December 2007 – February 2008 winter period. The Graph demonstrates how a short spell of cold dramatically impacts sales in terms of volumes; with the corresponding impact on stock depletion.

Figure 14: Gas Sales from 1st December 2007 to 19th February 2008 Thus whilst sales average 100MTs per day under normal winter conditions the bitter cold experienced between 11th February and 19th February saw sales increase from 111MT on 8th February to 136MTs on 11th February which peaked at 158MT on 19th February. This is demonstrated in the Table below. Table 32: Sale of Gas Between 26th January 2008 to 19th February 2008

2007

2008

26-Jan 70 25 9527-Jan 64 13 7728-Jan 105 20 12531-Jan 65 4 691-Feb 100 22 1222-Feb 68 0 683-Feb 104 23 1274-Feb 66 19 855-Feb 70 10 806-Feb 99 20 1197-Feb 98 12 1108-Feb 96 15 111

11-Feb 109 27 13612-Feb 108 13 12113-Feb 100 47 14714-Feb 102 21 12315-Feb 100 10 11016-Feb 108 31 13917-Feb 125 13 13818-Feb 127 25 15219-Feb 128 30 158

The above shows that the Gas operations has three critical bottlenecks. These are discussed hereunder.

9.2.1 Stock of Cylinders The demand for gas simulates both the need to fill available stock as well new cylinders to meet the demand for new services. In this regard, the Corporation has taken an aggressive stance to secure sufficient cylinders in stock to meet the increasing demand in new services. The graph below shows the investment made in new cylinders over the past years and the aggregated stock of cylinders in hand. Figure 15: Total Number of Cylinders This investment has enabled the Corporation to be in an excellent position to meet the demand placed on it. It is pertinent to note that investment in cylinders was also directed to replace old stock: and a continuous process is underway. Over the past 5 years the Corporation scrapped and replaced 50,443 cylinders. Major Issue Consideration The procurement of new cylinders to provide for new services as well as to replace old stock should be maintained on a sustained basis particularly given the evident substitution of electricity heating with gas heating. 9.2.2 Production Process of Cylinders In 2006 the Corporation initiated the process to replace the manual carousel with a state-of the art automatic carousel. The investment was made on analysis of previous years productions and the realisation that the manual filling process would not be sufficient to allow for efficient production of cylinders without creating disruptions in the distribution process. The new carousel was installed in October 2007 in anticipation of the winter period. The following shows the production reached in particularly months and the rate of production per hour:

Table 33: Hour Production of Gas Cylinders Month Total Cylinders Hours Worked Cylinders / Hour December 2005 137,416 230 597 January 2006 194,507 318 611 January 2007 134,145 261 513 January 2008 155,003 251 617 As the above table show the introduction of the new carousel has induced more efficiency at lesser hours worked. The carousel, however, constitutes a single point of failure: the Corporation has only the said carousel and in the event of a catastrophic defect production would practically be brought to a standstill – the only back-up option being to resort to manual filling. In order to minimize the dependency of a major failure in the carousel the Corporation has entered into a maintenance agreement where-in it secured key spare parts to be physically in Malta. It has also procured an additional integrated engine-gear box to act as a stand-by replacement. Given the performance over the past winter, it is argued that the Corporation should seek to procure a second albeit smaller carousel. This will meet a number of purposes. First it will act as the main process operations for the filling of the 25Kg cylinders thereby avoiding the current need to calibrate and de-calibrate the carousel as production is shifted from 12Kg to 25Kg and vice-versa. Second it will act as an alternative carousel in the event that the main carousel suffers breakages thereby diminishing the downtime in the filling of cylinders and the consequential impact on distribution. Third it will act as a main processing unit in normal circumstances to enable for routine and preventive maintenance to be carried out on the main carousel. Major Issue Consideration The procurement of a second, albeit smaller, carousel in preparation for the winter 2008/2009 is considered to be a necessary investment in order to secure capacity for anticipated increase in demand, streamlining of operations, and to secure redundancy in operations. The stocking and preparation of gas for provision to the distributors from the plant has also been reformed. A palletising plant was set up in 2006 and a system of pallets for the stock of cylinders ready for loading to distributors was introduced. This new process has worked successfully as it has minimised the waiting time for distribution to load the cylinders, reduced health and safety risks to both the distributors and at the Plant as well as to third parties as the cylinders are driven to their distribution routes. 9.2.3 Maintaining Supply of Gas The Division incorporates a total of 20 storage tanks which are subdivided as follows:

10 X 50 TON tanks - 400 TONS (2 tanks are O.O.O)

4 X 160 TON tanks - 640 TONS

6 X 300 TON spheres - 1800 TONS

Total Storage 2840 TONS

Out of the above 2440 tons are used for storing the LPG mix whilst the remaining 400 tons are used to store propane. The last certification of the above tanks was made in 2005 whereby all tanks and ancillary pipe work was tested and inspected for integrity. Subsequent to the test all pipe work was replaced and three storage spheres were supposed to be repaired due to excessive corrosion on the shells. In fact only 1 sphere would have been completed by the end of this year. As matters stand, the most critical issue in the gas operations process is maintaining and managing stock to ensure continuous supply of gas. The supply of gas is dependent on the shipping of gas onto

the island. Current tender arrangements demand that we supply order three weeks prior to delivery date. In essence this demands that planning estimations are taken with care – particularly given that the MT storage available for stock is small. As discussed earlier, an adverse spell of cold weather results in an exponential demand for gas – which means that the planning for gas stock is prone to disruption. An abnormally cold spell, even of a short duration, say 4 or 5 days, means that order in place would need to be changed in an attempt to secure a far early shipment. Given that the gas is transshipped securing a fast tracked order is not easy – it depends on the availability of ships in the Mediterranean. Considering external factors such bad weather that will hinder the ship from getting to Malta and berthing or strikes at the point of departure, the Corporation is not in a position to secure continuity of gas during peak periods arising from abnormal cold spells. It is pertinent to state that a planned third week December delivery in 2007, during to bad weather which prevented the ship to depart from its point of departure and subsequently to birth in Malta as well as cold spell which hit Malta between the 17th and 19th of December left the Corporation with only 90 minutes of supply of gas. The issue of storage and continuity of supply has become a critical one; and if demand for gas increases in the winter 2008/2009 it will be extremely difficult for the Corporation to guarantee continuity during peak periods. The state of play relating to the commercialisation process and the activation of the decision to move away from the Qajjenza plant render it difficult to substantiate massive investment in building new storage tanks. It is believed that a consideration of available options and a solution to mitigate against the current state of play needs to be taken with utmost urgency prior to the next winter season. Major Issue Consideration Further increases in the demand for gas will render it difficult for the Corporation to guarantee continuity of supply in Winter 2008/2009 and thus a consideration of available options and a solution to mitigate against the current state of play needs to be taken with utmost urgency prior to the next winter season. 9.3 Relocation of Qajjenza Plan The lack of town planning resulted in building permits being granted for the construction of residential buildings in the neighbouring area until the build up zone reached the gas plant location. On 9th December 1996 Directive 96/82/EC on the control of major accidents hazards, referred to as the Seveso II Directive, came into force on 3rd February 1997 under the aegis of the Occupational Health and Safety Authority as the competent authority. Given the insufficient distance from the perimeter of the plant to the nearest inhabited zone relocation of the plant is a necessity. In this regard a site known as ‘Ix-Xoqqiet’ in Benghajsa was identified for the building of a new plant and the appropriate application processing initiated with the Malta Environment and Planning Authority. It is pertinent to note that on 23rd April 2004, the Government granted to the Corporation, by title of temporary emphyteusis for a period of 65 years, the land at Benghajsa measuring a total of approximately 77,376 square meters. The plant continues to operate at Qajjenza. It is to be noted that health and safety investment is primitive. This is a matter of concern. Again, given the decision to move out of Qajjenza compounded by the commercialisation process, has acted as a restraint on the infrastructural health and safety investment in this regard.

9.4 Distributors The Corporation distributes gas through a network of 31 distributors. The distributors are self employed and hold a licence of operation provided to them by the Corporation. The licensing arrangement is expected to be reformed given the liberalisation of the market – with licenses to now be issued the MRA. The distributors are represented by the GRTU. In late 2007 the GRTU made a claim for the increase of the commission to the distributors. The Corporation subsequently commissioned Ernest & Young to review the financial report submitted by the GRTU. In February agreement was reached between Government and the GRTU to introduce with effect from 1st January 2008 an increase of Lm0.10 cents per cylinder and to carry out discussions with the Corporation to reach agreement on 2006 and 2007 arrears respectively. Major Issue Consideration The Corporation and the GRTU on 25th February 2008 signed an agreement to establish a joint team to determine, within one month of signing, quantum of commission arrears to be paid to the distributors. 9.5 Commercialisation of the Gas Division Within the framework of the Government’s programme to privatize public enterprises, and in the context of the impending liberalisation of the fuel sector, MIMCOL in August 2006 issued a proposal for a concession for the storage and bottling of LPG. The concession was designed on the basis of a Build-Operate-Transfer whereby the operator would build the new plant, operate if for a period of 30 years, and subsequently transfer back the asset to the Corporation at the end of the concession term. The proposal stated that the selected concessionaire will take overall responsibility for:

“(i) immediately, the operation of the Qajjenza facilities for a temporary period to be determined by agreement, during which he would be expected to:

(ii) build the new LPG bottling and storage facilitieis [New Plant], preferably at the Benghajsa site

already held by the Corporation, and transfer all operations from Qajjenza to Benghajsa (or alternative site);

(iii) operate the new LPG bottling and storage facilities at Benghajsa (or alternative site) for a fixed

term; and (iv) at the end of the concession term the facility at Benghajsa (if applicable) is to be transferred back

to the Corporation in accordance with the terms to be established in the Concession Agreement.” A total of 9 companies obtained the Request For Proporsal and subsequently 7 visited the data room. On the closing date for submissions (November 20th 2006), 3 companies submitted their proposal. One of the bids was disqualified further to the non-attainment of the mandatory criteria set. Following the completion of the evaluation process by the adjudicating committee recommended GASCO in partnership with Liquid Co as the preferred bidder. Cabinet subsequently approved the Adjudication Committee’s recommendation on 20th March 2007. Negotiations with GASCO commenced on the 27th April 2007 and suspended in December 2007. Up to the negotiation process, the following are key elements agreed to between the parties: - The Corporation will continue to operate the Qajjenza facility for the interim period until

Benghajsa LPG plant is built and commissioned (3years).

- As from 1st July 2008, Liquigas Malta Ltd will be taking over the sales and marketing function of LPG from the Corporation. During this period the Corporation agree to bottle LPG and sell

to Liquigas Malta Limited (a company to be set up by GASCO) under the terms of a Supply and Filling agreement negotiated between the Corporation and Liquigas Malta Limited.

- Transfer of Enemalta’s land at Benghajsa to Liquigas Malta Ltd, on which land the LPG plant

is earmarked to be built. The outline development permit will be transferred to Liquigas Malta Ltd. This transfer and other terms and conditions set, will be regulated by a sub-emphyteutical deed which has been prepared by the Lands Department and which requires approval from the House of Representatives. The deed also regulates how Benghajsa site and investments thereon are to be transferred back to the Corporation at end of concession.

- Liquigas Malta Ltd undertakes to develop the Benghajsa site into a primary LPG bottling and

storage facility. The investment to be undertaken will total Lm8 million.

- Liquigas Malta Ltd undertake to commission the new Benghajsa plant within 2.5 years from obtaining the necessary permits. This commitment is being made against a performance bond of Lm800,000. If the new plant is not commissioned within the stipulated two and a half years a six month grace period comes into force. Should the delay be longer a daily penalty of Lm2200 up to a maximum of Lm600,000 will be enforced. If another six months elapse then the Corporation will have the right to terminate the concession agreement and all investment carried out to that date will revert back to the Corporation without compensation.

- GASCO will make an additional investment of Lm1.5 million in a pipeline and Heat Exchanger

at Oil Tanking Malta Limited site. This will be done through a servitude that Malta Freeport Corporation will provide to the Corporation.

- An agreement between the Corporation and GASCO in respect of LPG storage and bottling

business regulating the transfer of movable assets to from Enemalta Corporation to Liquigas Malta Ltd following the closure of the Qajjenza plant.

Through their business plan Gasco undertake to: - Improve demand for LPG by 3.9% per annum for first 10years, from 20,500MT today to circa

30,000MT by the 10th year of operation. - Introduce Autogas on the local market. - Develop new distribution channels. - Introduce new quick home delivery service enabling customers to request special delivery

outside normal rounds. - Remote (telemetric) monitoring of commercial clients’ storage tanks. The financial considerations for concession at the date of the suspension of discussions stood as follow: - Lm1,846,000 to be paid as up front payment upon signing of the concession agreement; - Lm75,000 will be paid upon take over of the cylinders stock. Liquigas Malta Ltd will also be

assuming the deposit liability of Lm1,015,000; - an amount of Lm261,000 will be paid on commissioning of Benghajsa plant this will represent

the depreciated value attributed to the Qajjenza plant; - an amount of Lm58,000 being projected as the transfer value of the recently procured new

carousel filling machine also to be paid upon commissioning of Benghajsa plant; - on this date GASCO will also compensate the Corporation for additional cylinders/assets

procured in the interim period, provided that Corporation would have consulted with GASCO prior to the undertaking of such investment;

an annual concession fee of Lm50,000 which will be increased by 15% every five years

throughout the concession; - the payment by Government to GASCO of appropriate funds so that they maintain break even

for the first three years of operation. Major Issue Consideration A re-opening of the negotiations with GASCO and a determination on the way forward vis a vis the commercialisation process.

10 SWOT Analysis The final chapter of this Dossier considers the Strengths, Weaknesses, Opportunities and Threats concerning the Corporation. 10.1 An Overview of the Corporation’s Strengths and Weaknesses The Dossier presents a comprehensive discussion of the state of play within the Corporation. This section presents an overview of what are considered to be the Corporation’s strengths and weaknesses. 10.1.1 Strengths The following are the perceived strengths of the Corporation:

- A vertically integrated utility. - Enjoys Government support. - Over 100 years experience in generation, distribution and supply. - Possession of the distribution infrastructure which is based on u/g circuits for most of the

HV system. - Possession of the generating stations. Delimara Power Station is relatively new, and can

be converted to NG firing. - The Corporation has a significant percentage of well trained personnel with very good

skills. The majority of personnel can be classed as possessing medium to good skills. - A significant percentage of personnel give a fair output. - Key positions are held by professionals (the management and senior professional strata)

with very high level of competence and loyalty to the Corporation. - The Corporation possesses a very high level of capability in coordinating and planning

operations, maintenance and development. However this capability is strictly speaking not possessed by the Corporation, but by the key personnel.

- Development / planning are backed up by experienced personnel from operations and maintenance.

- Strategic plans for generation and transmission development have been prepared. - The Corporation owns considerable estate.

10.1.2 Weaknesses

The following are the perceived weaknesses of the Corporation:

- The Corporation lacks a clear decision taking process, especially in view of decision

taken by parties outside the Enemalta structure. - A lack of continuity at Board, Chairman and CEO level has resulted in an unclear

strategic direction. - The Corporation lacks a clear identity and stakeholders see Enemalta differently (i.e. a

Government Department; an Industrial Entity; commercial; etc). - Very limited commercial considerations. - The Corporation’s has limited management support infrastructure. - The Corporation has a very weak cash generation capability, it is highly leveraged and its

debt and interest cover ratios are very weak. Cash flow is very weak. - The Corporation, despite attempts, has no internal audit capacity. - The Corporation has no strategic human resource management and development.

Work practices are governed by Collective Agreements; where-in current Collective Agreement for non professional staff shares management authority with the Union. Key work practices are governed by side agreements set in 1994 (generation) and 1996 (aviation).

- The Corporation is designed on grades rendering flexibility next to impossible. - Marsa Power Station is old, inefficient and has low reliability, ear marked for closure

(operation limited to 20,000 hours or 31st Dec 2015) and significant probability that 20,000 hour limit will be exceeded resulting in penalties.

- Delimara Power Station has emissions compliance problems, it cannot meet the full demand and is located far from the load centres requiring long and (expensive feeders).

- Delimara Power Station has limited space available for expansion, limited reserve capacity available to meet load growth, which creates operational and maintenance problems.

- Small size of system resulting in limited options when considering new generating plant. - Delimara Power Station CCGT plant most efficient, but uses gasoil fuel hence more

expensive to operate. - Lack of sufficient investment in generation and distribution over last few years - New plant investment, both in generation and distribution is already too late. - The distribution infrastructure is aging, lacks of n-1 in HV circuits and DC’s. - Very little investment in the Petroleum Division. The Division is in breach with legislation /

directive relating to bottom loading of fuel fleet. - Lack of storage capacity in the Gas Division. - Uncertainty arising from non conclusion of Gas and Petroleum Divisions respectively

impacts ability to carry out much needed investment. - Qajjenza and 31 December 1979 installations are to be closed - Need of further inculcation culture of Health and Safety. - Aging meters, leading to under metering and revenue loss. - Dependence on Water Services Corporation for billing and debt management resulting in

an inefficient billing system, rudimentary customer care organization and ineffective IT support of basic functions.

- Lengthy billing cycle, no pre-payment systems, high level of non-technical losses. - Commercialisation of only revenue generating division (petroleum). - Lack of control over tariffs and tariff structure. - Tariff revenue insufficient to cover operating costs and to fund development. - low productivity of the majority of the workforce, over manning in certain place, inflexible

and out dated working practices and highly unionised and politicised workforce. - A high degree of Political interference. - Culture of appeasement. - Absence of a culture of change. - Lack of enforcement of discipline. - Special arrangements and concessions given without any reciprocal benefit to the

Corporation. - Undermining of Management Authority. - Lengthy bureaucratic procurement procedures, requiring several levels of approval by

external agencies following different priorities. - No strategic IT plan, except IUBS big-bang approach. - Prevailing weak corporate culture which is generally risk adverse and welfare orientated. - Poor internal and external communications and marketing. - Distrust between workforce and supervisors and management. - Low moral due to highly publicised decision to close Marsa Power Station.

Lack of professional support staff (back-office, accountants, IT) and loss of HR resources in support areas, such as finance and IT.

- Overall negative public perception of Enemalta. - Overall negative perception by government entities – black sheep syndrome. - Main operating expenses are outside the Corporations control, fuel, equipment etc. - No demand side management exercised.

10.2 An Overview of the Corporation’s Opportunities and Threats This section presents an overview of what are considered to be the Corporations opportunities and threats. 10.2.1 Opportunities The following are the perceived opportunities for the Corporation:

- the removal of the definition of ‘consultation’ as captured in the current GWU Collective Agreement and the establishment of an expiry date on the Side Agreements may lead to positive reorganisation of the Corporation’s working practices and workforce resulting in a leaner more flexible and efficient workforce.

- the application of a new ICT backbone for billing and smart reading should be leverage to

achieve a ‘divorce’ in existing ‘marriage’ between the Enemalta Corporation and the Water Services Corporation to provide the Corporation with full control over its billing (and hence revenue and cash flow) and debt cycle.

- the Corporation is the main (only) provider of electricity in a small island and this situation

is expected to remain unchanged in the short term. This results in a generally low customer buyer power and consequent negative perception. Space and planning limitations and high initial capital outlay mean that entry barriers to competition are high and this limits the threat of new entrants into the market. Looking solely from the operational viewpoint, a small competitor would in actual fact most probably help the Corporation in meeting peak demand load as only small installations are realistically possible including tanking facilities. On the other hand special tariffs could be applicable for peak demand. However this is considered as an opportunity if the whole matter of tariffs can be managed to account for the Corporation’s strategic needs resulting in cascading advantages to the consumer.

- the Sub-Sea Cable interconnection with European mainland, which is currently stalled to

study regulatory / political / legal and technical aspects, is considered to be a medium-long term solution to the decommissioning of Marsa Power Station and compliance with EU environmental legislation. The interconnector may be used not only to import electricity but also to export to enable operation at peak efficiencies and also if large scale RES (wind farms) ate constructed. It is unlikely however that a trade advantage from this situation can be gained considering low economies of scale enjoyed by Malta. This type of cross-border interconnection within the EU is encouraged and funds for such a project may be available.

- modest peak demand (MW) increase of about 2% per year. Consumption increases

(MWHr) of 2% per year although relatively stagnant between 2005-2007 due to the relatively good weather and the surcharge. The rate of increase is expected to decrease after 2015 as the system matures and as energy conservation increases.

- new generating plant which can be put on-line in phases – for example installing 100MW

plant consisting of a number of small units but putting the machines in service sequentially and not waiting for the whole block to be commissioned. However there are technical issues which must be considered.

possibility of conversion to Natural Gas firing, either imported as LNG or CNG (pipeline –

highly unlikely), and reduction in overall fuel costs, and emissions.

- possibility to strengthen links with main suppliers of plant already installed, or with future suppliers. This could result in less capital tied up in stores and better knowledge and control of the plant operation. This is also attractive in view of the aging distribution infrastructure, where a strategic partnership or long term contract could be envisaged for condition monitoring and assessment and preventive maintenance.

- need to adopt demand side management techniques to influence demand in favour of the

Corporation’s operational requirements. This will require a time of use tariff structure and ideally smart metering which together with an advanced metering and billing infrastructure will result in shorter billing cycles and better cash flow. Partial implementation of the IUBS project could be possible, particularly for AMR and billing. Use of smart metering technology and communications could open up other business opportunities.

- the possibility of the unbundling of the various sections of the Corporation means each

section must be financially viable which would be an impetus to improve financial position towards viability and overall good corporate governance.

- the fact that Enemalta already operates the major oil storage depots on the island, and

the fact that the erection of new storage depots in strategic points is very difficult due to the size and highly urbanisitc nature of the Maltese Islands, potential competitors will find it very difficult to operate efficiently. This situation makes it very difficult for liberalization to be truly felt. In this respect he Petroleum Division can decide to stop importing and selling fuel but maintain the operation of all its installations. The Division will offer all its storage space for rent to third parties interested in marketing their fuel in Malta – similarly to what is already being done in the bunkering field. These third parities can then send their fuel to our tanks, whilst Enemalta would receive, store and load this fuel onto the third party’s trucks. In this way it would be very easy to have a number of oil companies marketing their fuel – thus giving sense to Liberalisation.

- the commercialisation of the Gas Division and Petroleum Division respectively will result

in the closure of the current installations and hence the meeting of necessary health and safety legislation.

- public-private partnership to raise capital needed to invest in added capacity installations.

Internal restructuring may be necessary to make project attractive to potential investors. Also implications on cost structure of electricity (the social component linked to the price of electricity). The sub sea interconnector project is particularly well suited to this type of contract, as could be the IUBS project (in part or in full).

- compliance with EU environmental legislation, both for the obvious ‘quality’ benefits and

for the improvement in public image and perception.

- development of the 132kV backbone to the distribution system to reduce technical losses, and consequently increase overall efficiency and reduce total emissions. This will improve system reliability as cables are protected in tunnels and 33kV feeders are shorter.

- use of expensive tunnel infrastructure by third parties resulting in new revenue stream for

the Corporation. 10.2.2 Threats The following are the perceived threats to the Corporation:

- there is a high degree of political interference in the internal day-to-day running of the Corporation.

the Corporation has lost two Chief Executive Officers in three years resulting in a destablising environment and lack of continuity. The difficult ambience within which the Corporation operates works against inducing Chief Executive Officers to establish a long term relation with the Corporation.

- the failure by Government to pay the contributions owed to the Corporation will soon lead

the Corporation to face significant financial issues.

- the procurement of the price of oil is beyond the control of the Corporation and the Corporation is not in a position to absorb such cost – in part or otherwise. As matters stand the future financial viability of Corporation in jeopardy.

- the full impact vis a vis the procurement of oil has been mitigated by the weakness of the

dollar: a strengthening of the dollar or conversion to euro by the oil selling nations will further compound what already is a very difficult situation for the Corporation.

- failure to follow up the Collective Agreements with full organisation and work practices

reform will yet again lead to a lost opportunity in moving towards securing the Corporation on an efficient and effective basis.

- retaining the current dependency on the Water Services Corporation for billing and debt

management would mean that the Corporation will continue to have no hold on its billing and debt management cycle – thereby remaining constrainted in adopting measures to protect its revenues (and hence cash flow) and in managing its bad debt portfolio.

- due to increasing international demand the suppliers’ power has increased during the last

decade and it is not an ideal time to buy new plant or cables (particularly sub sea cables) as buyer’s power is reduced which has significant implications on cost and delivery times.

- increasingly tough emissions and environmental legislation.

- increasingly tough compliance requirements generally for EU legislation.

- difficulty to forecast future cost of producing electricity due to fluctuating international fuel

prices – forward buying / hedging are an option but there are also risks attached.

- increase in demand - will the Corporation be able to meet demand beyond 2009? If the pace of infrastructure upgrading – whether at plant or network level – is slowed the Corporation will find it difficult to guarantee continuous supply of electricity during peak periods starting from the summer of 2009.

- Government could opt to sell all the generating capacity to private investors, thus

divesting itself of the problems currently being faced, whilst retaining control of the distribution network as a natural monopoly.

- alternatively government could opt to sell or lease parts of Delimara Power Station to

private investors thereby securing a strong competitor to the Corporation in the market.

- the present electricity market could change further if a cable connection with the European mainland were to be installed by a private investor. This scenario may be possible especially if the price of oil continues to increase. Would local utilities then be able to compete? Possibly then we could eventually end up with a monopoly being enjoyed by private investors instead of by government as local producers could possibly be pushed out of business.

- environmental considerations and EU legislation have increased the attractiveness of

alternative energy / renewable sources of electricity. Will the necessity to satisfy EU rules on minimum RES penetration compel the Corporation to invest in expensive technologies or subsidise private investors?

increasingly tough regulatory measures primarily from MEPA in respect of planning and environment, based on being tougher than the toughest other Member States, ADT regarding infrastructure in public roads, OHSA with respect to H&S and enforcement of regulations blindly modelled on UK legislation which is now being withdrawn, and MRA.

- increasing public objection to the Corporation’s infrastructure based on increasing

environmental awareness, NIMBYism and bad neighbourliness..

- the Gas Division commercialisation as currently negotiated would mean that the Corporation would continue to have operational risk over the next 36 months as it will continue to run the Qajjenza Installation for that period.

- investments on health and safety at the Qajjenza plant will continue to remain minimal

over the next 36 months thereby rendering the Installation and its surrounding areas to be high risk.

- given the continued increased in the demand of gas as a substitute to energy for heating

purposes renders it difficult for the Corporation to guarantee continuity in the supply of gas in the 2008 / 2009 Winter unless a solution to current storage constraints is found.

- unless the Petroleum Division commercialisation is completed by the end of 2008

decisions are required on investment relating to a bottom load bay; its fuel distribution fleet; and its fuel aviation fleet at Luqa Airport.

- the IUBS project – a big bang approach to the idea that IT and out-sourcing can solve all

the inherent structural problems of the Corporation - was over specified in terms of system integration, under budgeted, and based on unrealistic time lines. Worse it constituted the only venue for introducing ICT within the Corporation. Abandoning the IUBS initiative will mean that the Corporation will lose at least 18 to 24 months before it is in a position to adjudicate on new solutions.

1 APPENDIX – Enemalta Act 1977

2 APPENDIX – Electricity Supply Regulations

3 APPENDIX – Management Accounts as at 30 September 2007

4 APPENDIX – Draft Estimates 2007/2008

5 APPENDIX – 5 Year Projections (2006-2011)

6 APPENDIX – Annual Report and Financial Statements 30 September 2006 (Draft)

7 APPENDIX – Benghajsa Land – impairment issues

8 APPENDIX – Annual Report and Financial Statements 30 September 2005 (Audited)

9 APPENDIX – Electricity Generation Plan 2006-2015

10 APPENDIX – Transmission Plan 2006 - 2015

11 APPENDIX – Invitation to Tender: Petroleum Division (To be handed over upon request)

12 APPENDIX – Standard & Poor’s 2007 Full Report

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