Filenews 6 October 2024 - by Christakis Chatzilaou
The electricity market in Cyprus is facing critical problems, which lead to serious economic distortions, placing an unbearable burden on consumers and causing great concern for the country's energy future.
The high price of electricity significantly affects households and businesses, making cost reduction one of the main priorities of the Government for the economic well-being of citizens.
In this context, government actions for radical changes in the electricity market must be crucial and immediate, as they will determine the price of electricity and the energy future of the country.
Reasons for the high price of electricity
The main drivers of the electricity price are the cost of production and the regulatory framework for the operation of the electricity market. Taking into account that the majority of consumers are invoiced by the Electricity Authority of Cyprus (EAC), it is no exaggeration to say that the operating costs of EAC's conventional power plants largely determine and will continue to determine the price of electricity for years to come.
The operating costs of conventional production units depend on the price of fuel (oil and fuel oil), the price of emission rights, as well as EAC's production management system.
Since the main drivers of conventional production costs, i.e. the fuel price and the price of emission allowances, are projected to remain high over the next few years, the price of electricity will not fall from current levels but may increase further.
In this regard, it should be noted that a substantial reduction in production costs can only be achieved with the advent of natural gas and/or the operation of the electricity interconnection. However, the implementation of these projects is expected to take several more years and therefore the majority of consumers will remain trapped in the expensive conventional production of EAC.
RES penetration weighs on the price
As we have analyzed in detail in a previous article in "F", the price of electricity is significantly affected by the increased penetration of Renewable Energy Sources (RES), which instead of reducing the price of electricity, increases it, causing an even greater burden for the majority of consumers.
This fact is due to the uneconomic operation of EAC's conventional units, caused by the increased penetration of RES and the way RES production is compensated under the transitional arrangement for the electricity market in Cyprus.
Therefore, the price of electricity for the coming years will remain at high levels, with no prospects of reduction, unless the Government immediately proceeds with radical changes in the operation of the electricity market.
Distortions in the Transitional Arrangement
The transitional arrangement, which has been operating temporarily for seven years (!!), has caused serious economic distortions for the electricity market, resulting in a burden for the majority of consumers invoiced by EAC (over 85% of electricity demand).
It operates almost exclusively with RES production, on the basis of bilateral contracts between private producer suppliers, who have the obligation to find consumers in order to dispose of the energy produced.
The operation of the transitional arrangement with almost exclusively RES production, which covers a percentage of demand not exceeding 15%, is due to the fact that the competent bodies have failed to connect and operate in a timely manner large conventional units of private producers.
As a result, the transitional arrangement cannot fulfil the purpose for which it was designed, namely the development of healthy competition and the reduction of electricity prices, since the majority of consumers were left trapped in the expensive conventional production of EAC.
As we have analyzed in detail in a previous article, the operation of the transitional arrangement benefits the participating suppliers and producers of RES – who make superprofits – and a small portion of large consumers, while the majority of consumers are burdened with an increased price of electricity.
Contradiction with Regulatory Decision 04/2017
This conclusion, namely that the operation of the Transitional Agreement does not have a benefit but a burden for the majority of Cypriot consumers, contradicts the following provision of the Regulatory Decision 04/2017 on the Transition, which states verbatim "-Final Consumer Cost: Benefit to the Cypriot consumer and the national economy. Avoiding an increase in the price of consumers' electricity.
Taking into account that this arrangement is a transitional arrangement for the operation of the electricity market before the implementation of the Final Model, this should not impose additional costs on the consumer."
This development concerns the "benefit" of the further operation of the transitional arrangement and highlights the urgent need for substantial changes in the way the market is managed and regulated in order to eliminate distortions to the detriment of the majority of Cypriot consumers.
Opening up the Competitive Market
The full opening of the competitive electricity market on the basis of the "target" model, after continuous delays and postponements of many years, is planned for 2025.
Nevertheless, there is an assessment by many that this reform, in the form it is designed, will not correct the existing distortions in the electricity market to the benefit of the majority of consumers by reducing the price of electricity.
In connection with the above estimate, it is noted that the penetration of RES in the electricity system of Cyprus is not expected to exceed 30% of demand until 2025. This fact results in most of the electricity demand, i.e. the majority of consumers invoiced by EAC, will remain for the next few years necessarily trapped in the high price of conventional production. Therefore, it is not excluded that, with the full opening of the competitive electricity market, the Cypriot consumer may even experience an increase in the price of electricity.
Proposal for Reform
Based on the above-mentioned positions on the transitional arrangement and the full opening of the market in 2025, the electricity market in Cyprus is at a critical crossroads and needs radical changes to reduce the price of electricity. To achieve this goal, a new regulatory framework is needed in the electricity market, which decouples the low production costs of RES from the high cost of conventional production.
The low cost of RES production should be introduced into the rest of the country's energy production mix, in a way that brings about a reduction in the price of electricity for the benefit of all consumers.
Hypothetical scenario for reform
For the sake of reflection on the further course of the electricity market on the basis of the above-mentioned proposal, a hypothetical scenario is presented in case the way RES production could be compensated entirely through tenders.
According to this scenario, the compensation of RES production would be around 8 σ/kWh, a price that has been secured for a number of PV Parks (30 MW) in the context of a tender procedure.
Taking into account an annual RES penetration rate of 30%, combined with the compensation of 8 σ/kWh for the entire RES production, this would result in a reduction in the price of electricity at a rate that based on today's data would be around the not insignificant rate of 20%.
Conclusions and proposals
- Without gas, electricity interconnection and substantial changes to the regulatory framework for the electricity market, the price of electricity will remain high for years to come.
- The penetration of RES, as it is currently implemented, increases the cost of conventional EAC production and burdens the price of electricity for the majority of consumers.
- The operation of the transitional arrangement benefits the participating suppliers and producers of RES - who make superprofits - and a small portion of large consumers, while the majority of consumers are burdened with increased electricity prices.
- The full opening of the competitive electricity market, based on the "target" model, in 2025, may not solve the problems but exacerbate them and even cause an increase in the price of electricity.
Taking into account the years needed for the advent of natural gas and the operation of the electricity interconnection, the distortions and burdens from the operation of the electricity market on the basis of the "target" model, the Government is called upon to take bold and immediate decisions in relation to the further course in the electricity market, if it wishes to immediately reduce the price of electricity.
Without radical changes in the electricity market, allowing the introduction of RES production into the country's energy mix at low cost, the price of electricity will remain high for the coming years.
