MacroPolis

“In the medium to long term, we aspire to be exporters of green energy, by harnessing the significant potential that we have, in particular when it comes to offshore wind [...]; but in order to do that, we need to build the necessary interconnections.”
Prime Minister Kyriakos Mitsotakis, World Economic Forum, January 18, 2024.

Greece’s aspiration to become a regional gas hub has been tempered by increasingly stringent climate targets and efforts to reduce the use of natural gas as part of the EU’s response to the Ukraine war. The country has now pivoted towards becoming a green energy powerhouse at the intersection of regional and trans-continental electricity flows. How realistic are these new goals and what are the implications for Greece of the new energy geopolitics?

Background

The government’s strategy on energy is outlined in the National Energy and Climate Plan (NECP), the latest version of which (the 2023 draft NECP) is currently undergoing revision and is due to be submitted to the European Commission in June 2024. This draft contains significant departures from the original version of the document which was adopted as recently as 2019[1].

Like most facets of international relations in Europe, cross-border trade in energy of all forms was reshaped by Russia’s invasion of Ukraine in February 2022, and the 2023 draft NECP bears the imprint of this major geopolitical event. Meanwhile the ripple effects of the October 7 Hamas attack are still unfolding.    

Before assessing the recent change in direction, it is worth looking first at the background of Greek energy policy. Despite being a net energy importer historically, Greece has in recent years looked to its geographical location on the southeastern tip of continental Europe as a source of potential geopolitical advantage, putting it in control of energy flows between producing and consuming blocs.

Greece’s own energy dependency on exporting countries grew from 68 per cent in 2010 to 74 per cent in 2021, largely because of a policy-driven “dash for gas” which had been in progress since the early 90s. Greece produces no natural gas of its own.

The role of Russian pipeline gas - which represented 85 percent of fossil gas imports as recently as 2005 – was diluted over time through investment in pipelines and LNG infrastructure (allowing gas to be shipped by sea in liquid form). The largest shifts came with the inauguration of the Revithoussa LNG terminal in 2000 and the TAP pipeline in 2020 which connected Greece with the Caspian gas fields in Azerbaijan.

The decision in 2019 to rapidly phase out coal-fired power generation only reinforced the national policy doctrine of using natural gas as a “transition fuel” to renewables. This was expressed vividly in 2021 by one senior Greek policymaker as the conviction that “investing in natural gas is both rational and unavoidable”.

On the eve of the Ukraine war, and despite the efforts to diversify its own energy supply, Greece met around 41 percent of its natural gas demand and 47 percent of its total energy needs with imports from Russia, making it among the most energy-dependent countries in the EU.

In fact, Greece pursued increasingly ambitious plans to become a natural gas hub – investing not only to meet its own needs but also to manage long-distance energy flows - by building interconnections with neighbouring and more distant countries. These included the IGB pipeline to Bulgaria (eventually inaugurated in the summer of 2022), but also what was billed as potentially world’s largest undersea pipeline, the EastMed, connecting the gas fields of the eastern Mediterranean to the EU via Greece.

The latter, despite becoming the focus of much high-level "pipeline diplomacy” between Greece, Cyprus and Israel, as well as the EU and the US, had fallen out favour by the start of 2022 with its main sponsors withdrawing due to a combination of climate, commercial and geopolitical imperatives, while the irritation it caused Turkey had begun to be seen as a hindrance to peace in the region rather than a benefit.

The fate of the EastMed pipeline, which continues to languish on the wish list of EU mega-projects, illustrates the complex dance of geopolitical and commercial factors which ultimately define the success or failure of energy initiatives in the region. It is a motif that is likely to be repeated by projects of this scale and ambition.  

Natural gas in the post-Ukraine war landscape

By the end of 2023 the largely successful response to the Ukraine war made it abundantly clear that - contrary to a dominant assumption driving national energy policy – natural gas was not the only, or indeed the best, route to decarbonisation. At the Davos World Economic Forum in January 2024, Greek PM Kyriakos Mitsotakis acknowledged the high cost of investing gas as a “transition fuel”: imports cost the Greek economy 7 billion euros in 2022, compared to 1 billion euros at pre-war prices.

At EU level, the REPowerEU programme introduced explicit goals aimed at cutting dependence on Russian hydrocarbons and fossil gas more generally, securing energy supply chains and speeding up the adoption of alternative fuels. Greece has now secured an estimated 16 billion euros of funding – approximately 45 percent of its share of the EU Recovery and Resilience Facility – to invest in accelerating its energy transition plan.

The response to the Ukraine war also exposed as a fallacy the notion that Greece needed to build more gas infrastructure, as subsequent analysis demonstrated that the country was able to cover its domestic energy needs through a combination of demand reduction, fuel switching and import substitution relying solely on the existing – previously underutilised – LNG import capacity.

The updated NECP takes on board some of these lessons, but not all. The new strategy curbs new investment in domestic gas infrastructure, reversing the previous direction which included extensions to the distribution grid and promoted the uptake of natural gas for heating.

At the same time, however, 2022 saw a ramping up of exports to neighbouring countries, primarily Bulgaria. Around 35 percent of the 7.5 bcm of natural gas imported in 2022 were immediately exported via pipeline. This appears to have increased the appetite of commercial players and the government for importing and transporting the fuel for export – hand in hand with investing in new cross-border gas infrastructure.

In addition to completing the IGB interconnector, Greece went ahead with building a new LNG terminal in the northern port city Alexandroupoli. The Alexandroupoli FSRU received its first test shipment of LNG in March 2024. Some 60-70 pct of gas to be imported at the FSRU is destined for export through the IGB, with interest being registered by several Balkan countries as well as potential buyers as far north as Moldova and potentially Ukraine.

In this project, Greece received considerable diplomatic support from the US, motivated both by the commercial desire to build export markets for its LNG exports and the strategic imperative – shared with the EU - to displace Russian influence in the Balkans.

The energy sector has long been identified as a channel for Russian interference through ownership holdings in national utilities as well as binding long-term energy supply agreements. The EU has been promoting formal engagements such as the Vienna-based Energy Initiative, as well as encouraging bilateral ties, with the aim of ending the region’s high dependence on coal as well as Russian gas by speeding up the development of renewables and increasing connectivity.

Forging more energy routes northward is also seen as promoting larger strategic goals in the region. With 2030 being the notional target for EU enlargement in the western Balkans, the Ukraine war accelerated the perceived need to nudge national energy policies in the region into line with the European market liberalisation and green transition targets.

The “vertical gas corridor”, a plan to connect the gas consumers of central and eastern Europe to the Mediterranean, with Alexandroupoli sitting at its southern extreme, has been an integral part of this project. Even more ambitious schemes such as the Three Seas Initiative, sponsored by the US and the European Commission, aim at improving connectivity between the Baltic, Adriatic and Black Seas.

The Greek government says it supports proposals by commercial players which will quadruple the country’s natural gas export capacity by the end of the decade. The 2023 draft NECP envisages this export market paying for existing and new investments in gas infrastructure, reducing the risk of stranded assets, even as domestic demand is curtailed.

Other initiatives also piggy-back on the appetite for cross border energy transfers. The Alexandroupolis CCGT, a gas-fired power station which started construction as recently as January 2023 was one of three new gas-fired plants included in the 2019 NECP which are still going ahead[2]. Under the latest plans, the Alexandroupoli plant will be linked to the Bulgarian electricity grid with the aim of serving primarily the export market.

Even the high level of political support for these projects, however, does not create a foregone conclusion. Just how secure the assumption of cross-border demand is remains to be seen, with 2023 data suggesting that neighbouring markets may be more fickle than originally thought. Exports from the Greek gas grid almost halved year-on-year in 2023 and LNG imports shrunk by a quarter, as the Bulgarian supplier switched to importing cheaper Russian natural gas via Turkey[3] under the terms of a recently signed 13-year supply agreement.

This suggests that potential partners in the project will continue to exploit arbitrage opportunities as long as they exist, undermining the commercial rationale for new and enhanced infrastructure. The alignment of interest between Greek policy makers and commercial players may also be loosening, as reports suggest the consultation over the NECP has stoked tension between them[4].

Pipelines to cables

While the door of natural gas investments appears to be closing, a new window of opportunity is opening for cross-border electricity projects. 

Driven by an increase in renewable generation Greece became a net electricity exporter for significant periods of 2022 when its wholesale prices dipped below those in neighbouring countries and generation exceeded demand. While the country remains a net importer on a year-round basis, this new pattern appears to point the way to a policy shift of significant dimensions.

Like gas pipelines, cross-border electricity interconnectors are encouraged by EU policy as a way of moving towards an integrated energy market, a goal which has gained greater impetus in light of the decision to cut energy ties with Russia. According to the latest revision to the NECP, Greece intends to meet the EU’s interconnectivity target of 15 pct by 2025[5] – five years earlier than mandated – and to increase it to 23 pct by 2030.

Low interconnectivity of electricity systems in the Balkans is a legacy of Cold War divisions and the more recent troubled history; Greece’s targets will bring it closer in line with regions with a longer history of integration such as northwest Europe.

On the regional level, the 2023 draft NECP aims for a doubling of interconnection capacity by expanding the capacity of interconnections with Bulgaria, North Macedonia, Turkey and Albania by 2030 and introducing two new interconnectors, one to Cyprus and one to Egypt. New to the latest draft are two even more ambitious projects: a Greece-Germany interconnector dubbed “Green Aegean”, and a Saudi Greek Interconnection, both with a target date of 2035. The combined capacity of these cross-border projects is set at 17.2 MW, compared to the present level of 6.8 MW.

The addition of these projects signals a significant escalation in ambition, which accompanies an equally notable shift in targets for electricity generation. The two are closely related and interdependent.

The updated renewables targets in the 2023 draft NECP call for an additional 10 percent installed renewable (RES) generation by 2030 compared to the 2019 plan. The increase is mostly driven by a 38 percent increase in solar power targets compared to the 2019 NECP, which was in turn prompted by the acceleration of PV installation which is already nearing the original 2030 target. Wind power targets have been reined in by 8 percent but have shifted mostly to offshore wind, where a target of 1.9 GW has been introduced.

Even more striking is the shift in the 2050 targets. The draft document proposes a 48 percent increase in installed wind power capacity compared to the most ambitious transition scenario (“New Carriers 1.5”, or “NC1.5”) in the government’s “Long Term Strategy for 2050” which supported the original NECP.

Overall, the total generation capacity of almost 80 GW (roughly four times the current level) is enough to meet future in-country demand several times over, even considering the higher projected demand due to the electrification of the transport and heating sectors which is part of the strategy.

Combined with a 42 pct reduction in energy storage targets and 46 percent less thermal generation compared to NC1.5, this assumes that excess electricity from renewables will not only displace fossil fuel generation but will have to be exported from the system.

In the NC1.5 scenario, the excess electricity was to be converted into green hydrogen and other synthetic gases; their role, however, is downplayed in the latest NECP draft due to concerns about cost.

Indeed, the intention to move towards using cross-border interconnectors to ship out excess electricity from renewable sources in preference to other balancing mechanisms is confirmed by the PM’s chief energy advisor, Nikos Tsafos, who posted recently on LinkedIn, “that’s why we are so keen to expand our links with our neighbours – these cables will play an indispensable role in the energy transition”.

Domestic factors

While the priorities of EU partners and near neighbours undoubtedly helped to shape this new policy direction, there is more than a little self-interest involved in the change of tack.

One domestic factor undoubtedly driving the interest in cross-border electricity exports is the technical challenge that is becoming evident in the short-to-medium term in integrating increasing levels of RES generation into the Greek electricity system.

Congestion on the grid from the increased penetration of renewable generation has led the Energy Ministry to prioritise the connection of new RES projects linked to long-term power purchasing agreements over standalone investments and to oblige future renewables developers to restrict their output by incorporating storage.

Standalone electricity storage in form of batteries and pumped storage, which would help to manage the flows from RES generation, has also been slow in coming, thanks in part to delays in introducing a framework for large-scale batteries - even though active interest by commercial players represents multiples of the 2030 target and has resulted in a lowering of costs.

Planning disputes add to the challenge of upgrading and extending the power grid, which is an essential step to be able to handle new generation from renewables and to connect isolated parts of the country including Greece’s many islands. Earlier this year it was announced that the Ariadne Interconnection between Crete and mainland Greece would not become commercially operational until late 2025 rather than the original target of early 2024[6].

For Greece, therefore, the prevailing geopolitical mood favouring greater connectivity and investment in cross-border electricity infrastructure offers a potential “free ride” on the costs of balancing its domestic electricity market in a “high renewables” scenario. At the same time, the government is increasingly downplaying the potential role of alternative or complementary solutions such as storage due to perceived cost constraints.

The new mega-projects

Cross-border interconnectors, in contrast, offer the advantage of attracting dedicated EU funding through mechanisms such as the lists of Projects of Common Interest (PCI) and Projects of Mutual Interest (PMI) which act as gateways to EU grants, which in turn can help to leverage financing through commercial or quasi-public lenders. The attraction of participating in such projects is clear.

The Ukraine war and the acceleration of energy plans with which EU leaders responded has seen a crop of new proposals enter the arena and secure high-level political backing which is often the first step to securing European funding. Power grids are attracting an increasing amount of EU funding, with the European Commission estimating that 584 billion euros will need to be spent on them in the coming decade to help meet the REPowerEU renewables targets, and other estimates ranging even higher.

This puts the projects once again at the intersection of geopolitics and commercial interests, with several obstacles to navigate before materialising.

The recent travails of the Great Sea Interconnector (GSI - formerly known as EuroAsia Interconnector), the most mature of Greece's major interconnector projects, illustrate some of the potential pitfalls. The project includes the Greece-Cyprus interconnector, with an extra leg connecting Cyprus to Israel.

Initially estimated to cost just under 1.6 billion euros in its entirety, the projections have now spiralled to 1.9 billion euros. It has so far secured 657 mln euros from the Connecting Europe Facility for the Greece-Cyprus leg, 100 million euros from Cyprus’s Recovery & Resilience Mechanism and a potential 100 million euros from an agreement between Greece’s IPTO and an Israeli investment fund, leaving a 1-billion-euro financing gap.

In August 2023, however, the EIB turned down the developer’s application for a 600-million-euro loan for the project after it failed the bank’s economic evaluation. The EIB expressed concerns over whether the project could attract private investors to complete its funding, and suggested that energy storage might be a more economically viable option for Cyprus.

In September, EuroAsia Interconnector missed the first payment of 50 million euros to its Norwegian cable supplier, Nexans, leading some to speculate that the project would fail.

The announcement that Greece’s IPTO was stepping up to assume the lead role in the project has provided some reassurance as to the technical competence to complete the project. On the political side it continues to enjoy the backing of the Greek government, which pitched for the involvement of the US development fund DFC.

At the same time, however, the government in Nicosia still appears undecided regarding the economic viability of the Cyprus-Israel leg and is awaiting an independent cost-benefit assessment, while it recently asked to reopen negotiations on cross-border cost sharing for the Greece-Cyprus section.

Originally scheduled to be completed in December 2025, the Greece-Cyprus leg is now expected to be operational at the end of 2029 at the earliest.

GREGY, the proposed interconnector with Egypt, just made it onto the PMI shortlist in 2023, while an earlier rival Crete-Egypt interconnector (GAP) failed to secure the support of the Greek state.

IPTO is now proposing to take a stake in Elica, the developer of the GREGY interconnector. In May 2023 the two companies signed an MoU regarding a 33.3 pct share.

The European Commission’s naming of the GREGY project in the context of a 7.4-bln-euro strategic partnership deal with Egypt is being seen as a sign of political support for the project as it seeks to be added to the latest PCI round. At the same time, the linkage drawn between meeting the EU’s energy goals, stemming migration and shoring up Egypt’s economy underlines the complex situational dependencies which drive such geopolitical deals with third party countries.

“Green Aegean” is at an even earlier stage. Costed at 7-8 billion euros and being promoted principally by the Greek government and IPTO, and recently included in the European transmission grid operators’ (ENTSO-E) 10-year plan putting it a step closer to PCI designation, it is awaiting the results of cost-benefit analysis by grid operators in the Adriatic and central Europe.

“Saudi Greek Interconnection”, while enjoying high-level support, remains in the planning phase, with its routing potentially compromised by the war in Gaza.

The discussion which isn’t being had

The interdependency created between Greece’s “green transition” and the building of a green power export market dedicated to serving foreign markets raises other potential risks in addition to the geopolitical risk routinely associated with such projects.

The proposals and targets set out in the revised NCEP draft will become obligatory once approved by the European Commission, but public debate about what they might entail for Greeks has been almost non-existent.

The previous plan, with its reliance on onshore wind development, was met with protests at both local and national level, forcing the government, like others in Europe, to look offshore. An earlier plan to develop a wind farm with EU funding on uninhabited Aegean islets had to be withdrawn after well-founded objections over risks to biodiversity, while one of the first plots outlined for true offshore development was moved after objections from Cretan hoteliers.

Not only the wind turbines themselves, which are projected to increase to 30 GW capacity in 2050 from just under 5 GW in 2021, but the platforms, cables, substations and other grid infrastructure, can be expected to bring a visible transformation to Greece’s landscape which will not be limited to remote locations and may impact other economic activities such as tourism. The fact that certain trade-offs might be required to bring about this major policy shift has yet to be explored in public dialogue.

The absence of an active stakeholder engagement programme in Greece contrasts strongly with more consultative approaches followed by governments and developers elsewhere. Such an approach might be deemed an essential part of the democratic process, but also acts as a risk management tool. In the Netherlands, for example, where there is a long-established tradition of consensus-building, it took a full 10 years for the first offshore wind farm to be completed, in part because of the lengthy engagement process required to overcome local objections.

The Greek government has consulted organised stakeholders including the military, tourism, fishing and shipping bodies in drawing up its map of offshore wind plots; however, the public at large remains largely unaware of the plans.

The risk to projects, if not the whole strategy, is not merely theoretical. The main opposition party SYRIZA recently took up the cause of local protesters against new high-voltage power lines in Crete, with the chief complaint that they are being used to ship energy through the region from large private developers’ projects without benefitting local communities. Were such local protests to gather momentum and become a national political cause, they could present a real political threat.

Visionary plan or risky gambit?

As a statement of intent, Greece’s ambitious plan to become a green energy hub over the next two-and-a-half decades sends a strong message. The strategy is one which seemingly combines a commitment to meet and exceed environmental targets while essentially creating a new national industrial paradigm. The practicalities, however, are more daunting.

In essence, the plan involves hitching national long-term climate goals to a chimera composed of many moving parts, not all of which are in the control of national policy makers: fickle geopolitical alignments, global commercial interests, potentially volatile domestic politics and fiercely competitive global supply chains must all line up in at a particular moment in time. The stakes are high: if the strategy fails, Greece risks missing even its more modest national targets.