A U.S. law firm has raised serious concerns about the feasibility of the planned electricity interconnector between Cyprus and Crete, according to a legal due diligence study conducted for Cyprus’s Ministry of Energy.
Curtis, Mallet-Prevost, Colt and Mosle LLP highlighted that documentation received from Greece’s power grid operator IPTO fails to provide reliable evidence of the project’s financial viability as required under the Cross-Border Cost Allocation Agreement (CBCA).
The report notes significant deviations from the original 2017 CBCA agreement, which was signed when EuroAsia Interconnector was the project promoter. The initial plan projected total costs of 1.5 billion euros, with 750 million euros in EU funding through CINEA, 50% financing from the European Investment Bank (EIB), and 20% from commercial banks.
Seven years later, the project faces substantial challenges. Capital costs have risen by 500 million euros to 1.94 billion euros, whilst EU funding has decreased by 93 million euros to approximately 658 million euros. The EuroAsia’s loan application for 50% of the project requirements was rejected, whilst IPTO’s new request for about 500 million euros remains pending.
The law firm expressed particular concern over geopolitical risks, specifically potential Turkish interference. The 1,000-kilometre subsea cable route, reaching depths of 3,000 metres between Crete and Cyprus, faces not only technical and financial challenges but also the distinct risk of Turkish actions that could either prevent construction or damage project assets.
The study criticises IPTO’s attempt to transfer these risks to Great Sea Interconnector (GSI), the project’s implementation vehicle, through a concession agreement submitted to Cyprus’s energy regulator CERA. Despite IPTO remaining the interconnector’s owner with significant control over GSI decisions, it seeks to have investors secure insurance against partial or total damage, including political violence risks.
Curtis, Mallet-Prevost maintains that insurance is not an effective risk mitigation strategy, noting that geopolitical risks are particularly difficult to insure at reasonable cost. The firm concludes that investors would be unlikely to back a company burdened with unfeasible obligations and exposed to termination risks.
The latest CBCA modification, dated 30 September 2024, attempts to address geopolitical risks by allocating 100% of termination costs equally between Greece and Cyprus in cases of project delays or cancellation due to external factors beyond the project promoter’s control. However, the law firm suggests this arrangement remains insufficient without clear mechanisms for cost distribution and implementation.
The study also notes IPTO’s limited progress in securing financing, having only discussed potential lending terms with the National Bank of Greece and lacking a financial advisor for fundraising efforts.
Read more:
