Businesses and families risk getting hit with high energy prices if Malta does not increase its sources of renewable energy soon and the EU forces the government to end blanket subsidies on consumption next year, Times of Malta understands.

Malta is spending more than €400m annually in subsidies to cushion the cost of energy. That is pushing the national deficit beyond the EU-set limit, which could trigger an excessive deficit procedure.

If that happens, the country would be forced to cut down on its energy subsidies, possibly restricting them to the vulnerable population, government officials said.

Finance Minister Clyde Caruana in a speech in parliament last week called for great discipline in government spending. He said the message from the EU was  'balance your books and cut back on subsidies'. Malta, he said, needed to gear down for the challenges it faced before anyone forced its hand. He underlined the need for more alternative energy sources and also for an infrastructure to support the transition to non-polluting cars. The sale of new petrol and diesel cars will be banned in just 12 years’ time.

Sources said that raising electricity production from renewable sources would be a key part in avoiding a spike in prices and making the country less dependent on energy imports.

This does not mean Malta must have offshore wind farms up and running by next year but it does mean that the government must persuade the European Commission that it will have new sources of energy in place over the following few months and years.

Meanwhile, Malta is bound by international treaties to become carbon neutral by 2050. In last year’s electoral manifesto, Labour pledged to work with the private sector to develop offshore floating wind and solar renewable energy projects but no further plans have been announced.

Energy Minister Miriam Dalli says Malta has already surpassed its 2030 EU renewable energy target and the government’s ambition is to go further.

The energy crisis hit Europe after the Russian invasion of Ukraine last year, when fuel prices hiked and the Maltese government decided it was best to cushion the impact completely by forking out the price difference, effectively freezing bills for families and businesses at pre-war levels.

International financial organisations such as the International Monetary Fund (IMF) have since lauded Malta for its approach to protecting the economy but have repeatedly warned that the subsidies are not a long-term solution and must be gradually phased out.

This year alone the government is expected to spend around €400 million to subsidise energy and food prices in a bid to save businesses and keep the economy growing as it recovers from the pandemic.

It appears the strategy is working. In a credit rating report released last week, Fitch confirmed Malta’s A+ score, saying the economy was stable and growing and the country was managing to reduce public debt.

But it also observed that Malta is at the mercy of international energy prices. It noted with some concern that the lack of a “clear exit strategy” from energy and fuel subsidies created fiscal risks for the government.

Malta gets its energy from the interconnector cable to Italy and from a gas-fired power station in Marsaxlokk, both of which have been highly controversial in the past decade. Last year, the government announced that Malta was to get a second interconnector linking the island to Sicily.

But the problem is that Malta is almost entirely dependent on international sources of energy. Even if the economy does well enough to enable the government to continue forking out millions to cushion international prices, the EU might well block it from doing so, because the subsidies are responsible for pushing up the deficit.

The EU does not allow member states to accumulate deficits that exceed three per cent of the country’s GDP. The EU calls it the Stability and Growth Pact, in which it also lays down that states must keep their debts at under 60 per cent of the GDP.

The effects of the pandemic and the Ukraine war forced the EU to temporarily release the grip on those stringent measures, allowing countries to overshoot debt and deficit limits to rescue their economies in a special exception the EU called the “general escape clause”.

Malta has, so far, kept its debt under control but found the general escape clause handy when subsidising energy. This has caused the deficit to hover well above three per cent.

Earlier this month, the EU informed member states that the general escape clause would be stopped at the end of this year and countries needed to lower their spending again.

Countries that do not manage to bring down their spending by November next year could end up in an excessive deficit procedure.

It looks likely that Malta will be among them, as the deficit is projected to still be over three per cent by then.

That is not a problem, so long as the government presents a practical, target-oriented plan to convince the EU that it will be decreasing the country’s dependence on international energy sources and increasing its national, renewable sources over the following few months and years.

Government officials fear a scenario in which Malta is forced to stop subsidising energy while it is still dependant on foreign sources and international energy prices remain high.

That would mean energy prices will inevitably spike, with expenses becoming hard to bear for many Maltese families and businesses.