An energy project in which Bord Gaís was involved as a supplier has run into major controversy in the Isle of Man after £120 million (€178 million) in loans were granted without official approval.

Manx Electricity Authority (MEA) has an agreement in place with Bord Gaís for a gas pipeline to the island. The pipeline is a spur of a larger interconnector between Ireland and Scotland.

The gas brought in via the pipeline supplies the island's Pulrose power station, which came into operation two years ago.

However, the MEA has found itself mired in controversy over spending on the whole project.

Problems arose after the cost of the power station ballooned from £185 million to £315 million.

To cover the increased costs, the MEA took out two extra loans totalling £120 million without the approval of the Isle of Man government.

As a result, the state-owned authority has been left with a debt equal to £4,000 for each of the island's 78,000 residents.

The MEA's board has resigned, there has been a threat that electricity bills could rise by 60 per cent and politicians have been attempting to deal with the project's fallout.

The overruns do not relate to Bord Gaís and a company spokesman last night said it built the gas pipeline and had no role in work beyond that. He said the company was paid a tariff like in any other deal involving the transportation of gas.

Bord Gáis is understood to have an eight-year contract worth in the region of €200 million with the Manx authority.

Isle of Man politicians will have to find an extra £17 million from public finances each year to service the debt and the island's treasury has admitted the fiasco will have a severe impact on public spending for the next decade.

Members of the island's parliament, the Tynwald, are concerned the cost of the project could rise even further once debts have been refinanced.

The Pulrose power station, near the island's capital, Douglas, was a key project for the MEA. It was meant to help the islanders get greener and more efficient power. However, it has turned out to be a major drain on the island's finances.

The island's treasury initially agreed to put up £185 million in the form of a bond placed with Barclays Bank to fund the project. At the time, it was stated that no further funds would be forthcoming.

However, in November 2004, it emerged that the MEA had sought two extra loans, of £50 million and £70 million, to cover the spiralling costs, which could yet rise further.

Although the state-owned electricity provider is banned by statute from taking loans without treasury approval, the authority appears to have circumvented this restriction by using a subsidiary company, Manx Cable Company, to apply for the loans.