Filenews 30 May 2023 - by Angelos Nicolaou
The Republic of Cyprus is not taking adequate measures to address the risk arising from any cost pass-on to consumers, mainly of EAC, resulting from the increasing cost of purchasing greenhouse gas (GHG) emission allowances. This emerges from the special report of the Audit Office entitled "Have the actions promoted by the Republic of Cyprus brought about the desired results in reducing greenhouse gas emissions?".
The Audit Office observed that the largest part of GHG emissions from installations included in the sectors of the Greenhouse Gas Emission Allowance Trading System (ETS) comes from the production of electricity with conventional fuels, which accounts for approximately 70% of the total GHG emissions produced by all installations at state level.
Since 2013, electricity generation installations have not benefited from free allocation. However, Cyprus obtained a derogation from this provision and EAC received a partial free allocation for the period 2013-2019, with a decreasing quantity of allowances to zero in 2020. According to available data received by the Audit Office from EAC, during the period 2017 – 10/2022, a total amount of €569,581,932 was paid for the purchase of GHG rights, which was passed on to consumers. The Audit Office recommended that measures be taken to address the rising cost of electricity production. Essentially, this is money that EAC receives from consumers for the pollutants emitted by the three power stations, while this €570 million could be spent on the electricity sector. to be dedicated to changing technology.
The Audit Office recommends that all stakeholders involved in implementing policies and measures take the necessary actions to address the impact of the rising cost of purchasing GHG emission allowances on electricity generation, which account for around 70% of total ETS emissions. In particular, it suggests that these actions could concern targeted moves for feasible and sustainable policies and measures aimed at reducing the cost of electricity production.
It is noted that the Director of the Department of Environment informed the Audit Office that appropriate measures will be included in the revised National Energy and Climate Plan (NECP) which is expected to be submitted to Brussels in July.
Another issue recorded in the special report of the Audit Office has to do with the evaluation of the contribution of the projects implemented under the provisions of the legislation to the reduction of GHG emissions. The Audit Office expected that the projects/actions submitted to the European Commission and implemented under the ETS Directive in the years 2021 and 2022, would already have been evaluated, since they constitute significant public investments. However, the Department of Environment has not evaluated the projects/actions implemented through the ETS in terms of their environmental, social or other impacts and their contribution to national targets, nor has it evaluated the results against specific performance indicators. To this end, the Audit Office recommends that an evaluation be carried out of the projects implemented, in terms of energy efficiency and/or modernization of the energy system, achieved through the relevant expenditures/investments.
Furthermore, according to the institutional framework, all revenues arising from the auctioning of rights end up in the State's Fixed Fund and, through the respective annual budgets, must be allocated at a rate of 100% if they come from air transport and 50% if they come from fixed installations, for the implementation of specific purposes. However, after an audit by the Audit Office, it was found that in the national institutional framework, the allocation rate of 50% of revenues coming from stationary installations is in line with the corresponding provision in the ETS Directive, however, as far as aviation revenues are concerned, the legislation does not refer to the allocation of all revenues, but to revenues in general. The word "everything" is virtually absent from the national context.
As a result, the legislation seems to have been misinterpreted over time, with the result that the Department of Environment calculates, as an amount to be allocated, 50% of both the revenues generated by fixed installations and air transport. It is noted that following a relevant suggestion by the Audit Office, there was an admission, on behalf of the Department of Environment, about the wrong way of handling the issue over time.
Regarding the allocation of at least 50% of revenues for specific purposes, the practice followed was to identify already planned expenses from relevant projects and/or actions implemented through the annual budget and then to present these expenses appropriately in a revenue use report.
However, it was found that in addition to the planned projects, other projects were included that were implemented in order to comply with the letter of the law. Of course, the spirit of the directive is not this, but the implementation of specific measures that reduce emissions. The Audit Office states that the allocation of revenues is carried out unorthodoxly and is not in line with the spirit of the institutional framework, since it is done by ex-post identifying expenses from relevant projects or actions implemented through the annual state budget.
Promotion of projects with natural gas and RES
According to the Audit Office, Cyprus has achieved the greenhouse gas reduction targets set for the period 2013-2020, in the context of effort sharing. However, it notes that in recent years there has been an increasing trend in emissions, at the same time that at EU level there has been a significant decline, which makes it more difficult to achieve the future, stricter, reduction targets.
To this end, the Audit Office considers that a reliable monitoring mechanism for the implementation of policies and measures should be established, ways should be found for the effective allocation of auction revenues and the costs/investments implemented with these revenues should be evaluated in terms of energy efficiency and/or modernisation of the energy system they achieve.
In particular, with regard to the electricity production sector, energy sources with lower or zero emissions, such as natural gas and RES, should be evaluated and promoted as soon as possible.
The need to limit emissions to the allowance limit becomes more urgent, taking into account the European Commission's reported progress report and the targets of the fit for 55 package, which aligns EU policies with its commitment to reduce its net GHG emissions by at least 55% by 2030; compared to 1990 levels and achieve climate neutrality in 2050.
INTERVENTION
Consumers lost €900 million.
EAC does not take any action regarding targeted actions for feasible and sustainable policies and measures aimed at reducing the cost of electricity production. As a result, the rising cost of electricity, due to the need to purchase GHG emission allowances, is passed on to consumers. In fact, year after year, the expenditure on the purchase of allowances shows a significant increase, mainly due to the increased cost of allowances as well as the decrease in the number of allowances allocated free of charge. If one considers that the cost of purchasing allowances for EAC amounted to €2017 in the period 2022-600, while another €300 million. is expected to be paid by EAC for 2023, meaning that the total amount increases to €900 million. A huge amount that could be better managed in the organization in order to reduce energy costs for consumers.
