Filenews 31 July 2022
Interview by Chrysanthos Manolis
From this two-page interview with the Minister of Energy, Natasa Pilides, we single out her report that the Government will review, in the framework of a Working Group, consisting of the Ministry, CERA, the Transmission Operator and ETEK, the promoted model of competitive electricity market, in the light of the inaccessible profits made by producers from renewable energy sources in the EU and Cyprus.
"At this stage," she says, "the EU is reviewing the target model for the electricity market and the discussion in Brussels has begun precisely in the light of the very high gas prices that largely determine the price at which low-cost power plants, such as RES, are also compensated." In this context, a similar discussion will take place in Cyprus.
The competition market
The director of the TSOC office argues that the market cannot function in October unless the regulations for the staffing of his service are submitted to parliament and approved. Where is the issue of regulations? When will they be submitted to the Parliament by your ministry and when do you think the TSOC will be ready to operate the market?
First of all, I would like to confirm to you that as the Ministry of Energy, Commerce and Industry (OHIM) we are doing everything possible to ensure that the competitive electricity market will operate in the autumn of 2022 and in any case before the end of this year. Tsoc's concerns are understandable and we are doing everything possible to adopt the relevant Regulations as soon as possible. However, I would like to assure you that the Operator is able to operate the competitive electricity market based on the current institutional framework, and specifically the transitional provisions provided for by the Regulation of the Electricity Market Law of 2021. In 2018, 20 scientific staff were recruited by the EAC and assigned to the TSOC, precisely for this reason. Also, the assistance to the work of THE TSOC by specialized consultants continues. As far as the procedure until the adoption of the Regulations by the House of Representatives is concerned, recently, ie. on July 22, the TSOC received the final draft of the Personnel Regulations in which the comments of the Department of Public Administration and Personnel were incorporated and relevant instructions were already given to follow the procedure of legislative control, under the procedure of urgency.
There is great concern among those involved in the energy sector, outside the environment of CERA and the Ministry of Foreign Affairs. Do many believe that this model, which is the EU's target model, will not lead to a reduction in prices for domestic consumers and small and medium-sized enterprises and that, on the contrary, the procedures provided for allow the creation of excessive profits by res producers.
Allow me to make it clear that Cyprus enjoys a total or partial derogation from 40 articles, out of a total of 71 articles, of the Regulation on the internal market in electricity. These derogations are valid until 1 January 2026, but even then there is a possibility of a reassessment by the European Commission, i.e. whether the need for their full or partial extension is justified. These derogations, which were secured after an in-depth analysis by Cyprus to the Commission and the Council on the basis of the objective difficulties we face as a small and isolated electrical system, give the opportunity and flexibility to CERA to adapt the EU target model for the electricity market to the needs of Cyprus. It is accepted that since 2014, when CERA was conducting the relevant study that made it easier for it to take its final decision on the most appropriate electricity market model, different conditions prevailed.
At that time, RES were characterized by high capital costs and the planning of the pre-day market, ie. their compensation at the limit value for the marketing year encouraged investment in this sector, since the difference between their compensation and operating costs contributed to their viability. Along the way, with the development of technology, the more massive production of RES systems, but mainly the surge in natural gas prices, the phenomenon of making "windfall profits" was observed. It is for this reason that at this stage, the EU is reviewing the target model for the electricity market and the relevant discussion in Brussels has begun precisely in the light of the very high gas prices that largely determine the price at which low-cost power plants, such as RES, are also compensated. In this context, we have as a Ministry set up a working group, in which the Ministry of Environment and Energy, CERA, TSOC and ETEK participate, to evaluate the new conditions, with the aim of jointly formulating a national position and submitting suggestions in relation to possible changes in the existing market model, in order to address in the best possible way the particularities of the electricity market in Cyprus. A working group has also been set up between the Ministry of Environment, Energy and Climate Change, the Ministry of Foreign Affairs. Finance and CERA to examine the issue of possible excess profits and the imposition of a relevant tax or fee.
EAC's penetration in RES and tenders
How, Mrs Pilides, will your ministry manage the issue of the greater penetration of EAC in RES? After the last meeting under the President, what developments are there on this aspect? Will EAC be able to compete freely with private RES producers?
In mid-July we had a very constructive meeting with the President and the members of the Board of Directors of EAC, during which it was agreed that EAC would submit to the Ministry its proposal, in the form of a detailed and realistic plan for the installation of RES production systems. The plan should take into account the implementation times of the RES projects proposed by EAC, the timetable for the withdrawal of its contractual capacity, the existing licenses for the construction and operation of RES systems that it already holds, as well as new applications for the issuance of a license for the construction and operation of RES systems that the organization recently submitted to CERA. In addition, EAC was asked to include in this plan two modules: a section with the immediate investment needs of the organization and a separate section with longer-term investments, that is, until 2032. EAC's proposal is expected to be submitted to us soon and after being agreed with the ministry, it will be submitted to CERA for approval.
Why does the ministry reject the request for the organization of tenders for new RES, since it seems that with such tenders we can secure electricity at a very low price?
Under no circumstances do we reject the request to organise tenders. However, tenders from 2014 onwards have been conducted on the basis of the EU State aid guidelines. In this case the aid is granted as an increase, in addition to the market price at which the producers sell the electricity directly on the market. Given that in Cyprus there is still no market price, i.e. a price obtained under competitive electricity market conditions, any tendering procedure that would take place before the opening of the market would be contrary to EU rules on state guarantees.
But even if the EAC were to be obliged to buy all the electricity produced from the units participating in such a tender, the benefit, at this stage, to the final bill of the consumers would be negligible.
Delays at the pier
Are you satisfied with the progress of the work on the import of natural gas? Can you tell us at what point the performance of the contract is at?
The works for the LNG arrival infrastructure project in Cyprus are in progress and all the necessary actions are being taken to implement the project within the revised timeframes set by the contractor, i.e. at the end of July 2023. A continuous effort is made to complete the project as soon as possible and to safeguard the interests of the Republic of Cyprus. The implementation of the part of the project concerning the conversion of the floating unit located in China is progressing satisfactorily, but some delays are identified in the part of the project that concerns the construction of the pier in Vasilikos, which the contractor considers that it will cover within the mentioned timeframe. The progress of the project is monitored very closely, both by ETYFA and by the Ministry, in order to take the appropriate actions on the part of all those involved in a timely manner.
Energeian's proposal and EAC's support
There is a confusion, Minister, as to whether or not the government is discussing a proposal by Energean, either for the import of natural gas from Israel via pipeline, for local needs, or for the liquefaction of gas for exports to European markets.
A natural gas transmission corridor has always been one of the infrastructures under investigation in terms of the utilization of our energy resources, but also in strengthening the role of Cyprus in the energy planning of the EU and the region. A preliminary proposal has been submitted by the company, which concerns the installation of a floating natural gas liquefaction unit (FLNG) in Cyprus. According to the proposal, the gas will be transported by pipeline from the deposits managed by the Greek company Energean to the EEZ of Israel and then, from the FLNG unit, it will be transported by ships (LNG carriers), to regasification stations in Europe, while some quantity could also be available in Cyprus. According to the timelines set by the company, these infrastructures could be ready in the 2nd half of 2026. The proposal is a positive development, given the circumstances. At this stage, working groups have been set up to examine the technical aspects of the proposed project, the permitting procedures as well as the possibility of financing the project from European funds.
In some of their recent public interventions, the EAC's guilds argued that the organization is on a path of attrition, with the risk of not being able to meet its mission. Do you share this view? Is there really a need to significantly strengthen EAC's human resources?
The Ministry has never recommended in the context of the examination of the organization's budgets the rejection of any sufficiently justified request of the EAC, including requests related to the creation of positions that are necessary for the successful conduct of the organization's mission and especially those necessary for the implementation of critical projects in the transmission network. I repeat that the Ministry considers EAC one of the most important drivers for our transition to green energy. This concerns both the competitive and monopolistic activities of the organization.
With this in mind, a large number of posts were approved in 2021 and additional positions are being promoted for approval in 2022. However, the modernization of EAC does not only concern the creation of new positions, but the technological upgrade of the organization and the network, and the integrated rational strategic planning in view of the major challenges in the energy sector. We are always next to EAC to assist in the achievement of the above objectives and therefore significant funds have been included in the "Cyprus tomorrow" and "Repower EU" Plans, as well as in the Just Transition Fund for the realization of relevant investments.
The advent of gas and the price of electricity
Are you concerned that the import of gas, given current prices, will eventually lead to a greater increase in the price of electricity?
Reducing or increasing the cost of energy production depends on a number of parameters, the most important being the price of fuel. In this case, the price of natural gas that will be available for combustion in the production units, which in turn depends on the percentage of natural gas that will be secured through the Medium-Term Natural Gas Agreement (the rest will be secured through the Direct Delivery Market), from the time the medium-term agreement is concluded and the prices that will prevail then, as well as from the future prices that will prevail in the Natural Gas Direct Delivery Market.
Clearly, during this period, fuel and gas prices are showing significant increases and fluctuations internationally, which is mainly due to increased global energy demand, as well as due to the war in Ukraine, but there is no corresponding increase in gas production to meet this demand. At the moment it is uncertain when these factors that contribute to the increase in the price of natural gas will disappear.
We hope that it will take place soon with the end of this humanitarian crisis that has caused economic repercussions throughout the world and in our country. In addition, the proposal of the company Energean for the creation of a pipeline from the deposits of Israel to Vasilikos is being examined. If the proposal is implemented, it could offer the possibility of supplying gas to Cyprus potentially at lower prices. I would like to make it clear that this project can coexist and operate alongside the FSRU in Vasilikos.
From time to time, a view in favour of exploiting the Aphrodite deposit for local needs, through a pipeline to Vasilikos, is brought back to the public sphere. What is the government's position on this eventuality and what do the consortium companies say? Is the cost really prohibitive or is there a window for the exploitation of Aphrodite in the electricity generation of Cyprus?
The natural gas of Aphrodite, according to the approved Plan for the Development and Production of the Deposit agreed between the Republic of Cyprus and the Licensee, will be transported by pipeline to Egypt for liquefaction to one of the liquefaction terminals of natural gas. Relevant is also the interstate agreement between Cyprus and Egypt of 2018, which was ratified by the Interstate Agreement on the Direct Undersea Gas Pipeline between the Government of the Republic of Cyprus and the Government of the Arab Republic of Egypt (Ratification) Law of 2019.
In addition to the direct pipeline to Egypt, Licensee is also working on synergies with facilities existing in the region to transport Aphrodite's natural gas to Egypt. Under the current techno-economic conditions, the project to transport natural gas via pipeline to Cyprus for power generation purposes is not viable, due to the relatively small quantities required annually. However, the consortium should discuss how natural gas is supplied to the Republic of Cyprus and the various options, an issue that has already been raised by the Ministry of Environment and Energy in our discussions. Also, if the Energean project is carried out, it could at a later stage be used to transport natural gas from deposits of the Republic of Cyprus to Cyprus.
