Filenews 17 November 2024 - by Eleftheria Paizanou
y Authority of Cyprus could save up to 15% of total production costs, the Fiscal Council argues.
Instead of these advance purchases, the Council argues, EAC relies on passing on these additional costs (fat) to consumers.
The Chairman of the Fiscal Council, Michalis Persianis, in a note to the Parliament, presents data on the practice of passing on pollutant and fuel costs to the consumer and the methodology he applied to reach this conclusion.
If the Authority had pre-purchased fuel when prices were lower, there would have been savings of €58 million per year. In the case of pollutants, if they were purchased at the lowest price recorded this year, savings for EAC would be up to €121 million.
EAC protects itself
As Mr. Persianis says, organizations faced with large fluctuations in their production costs are adopting measures to protect themselves from uncertainty. In the case of EAC, according to the chairman of the Fiscal Council, this risk is primarily related to fluctuations in oil and pollutant prices.
At the same time, he notes that the measures that can be taken concern the pre-purchase of oil or pollutants, based on strategic risk management, but also by securing financial products in international markets, which will protect the balance sheets of the organization. Unfortunately, EAC protects itself from any increase or decrease in these prices in a single way. And that is to pass on to the consumer the increased costs," he notes. Soon, the President of the Fiscal Council will meet with CERA and EAC to discuss the issue.
Fuel savings
Regarding fuels in detail, he claims that their total cost this year for EAC's needs was estimated at €558 million, based on the price prevailing internationally in April 2023 (average price for the month: $ 84.6/barrel). According to the data, the average cost for 2024 for the first ten months was about 3.2% lower than estimated, while the median fuel price for the same period was 2.9% lower than budgeted ($82.15).
"From the fluctuation in oil prices and with the Random Market Strategy, savings of around €20 million can be expected against the budget for 2024, anyway," it added.
The lowest price for the year was 10.36% below the price estimated in the budget, which is the maximum potential benefit if a hedging policy had been followed. Therefore, he argues, if the fuel purchase had been completed (for future delivery) at the lowest price of the first ten months, then the savings (with constant fuel purchase volumes) could have amounted to up to 10.36% or about €58 million (maximum potential savings) in terms of the organization's fuel costs.
€121 million less than pollutants
In relation to pollutants, as reported in the study of the Fiscal Council, their market for the nine months of the year was 14% lower than last year, mainly due to the reduced price per tonne on the emissions exchange, which is due to the oversupply of allowances, due to the anaemia that characterizes European economies.
In addition, he emphasizes that despite the pre-purchase of pollutants in the relevant auctions, the available data from this market do not show this, as the Authority has proceeded during the year with purchases that consistently correspond to 0.3% of each auction.
"Only once (out of about 150 transactions between 1/1 and 5/11), on August 29, has a deviation from stable purchase volumes been detected. In the absolute absence of any other information, the data from the markets themselves lead to the estimation that only once did this happen during 2024, when on the above date 1.5% of the issue was purchased by EAC (i.e. a quantity greater than usual, as a pre-purchase)", he underlines.
It also states that the argument that the market for emission allowances is effectively managed beyond the 'buy-as-you-pollute' practice is not acceptable, since deviation from this practice has only been recorded by the markets once. "This purchase accounts for 3.8% of total expenditure of approximately €84 million until the beginning of November for the purchase of emission rights from EAC", it is stressed.
Mr. Persianis goes a step further, pointing out that the pre-purchase of pollutants was accidental, as on that date the price was 7.9% higher than the average annual price to date, and, mainly, 7.3% higher than the average price of the year until the day of purchase.
"This value was, in fact, 40.4% higher than the lowest point of the year, and since the end of August, prices have remained below the levels recorded on that date, but without noting any deviation from the usual trend of purchasing emission allowances, which leads to the conclusion that the allowance market continues to follow the practice of random collateralization without any cost management."
At the same time, he points out that due to the low prices of pollutants, EAC will have savings in purchase costs of 25%, stressing that if pollutants were purchased at the lowest price then the savings would be of the order of 44%, i.e. €121 million.
EAC could have saved more
"Under a simplistic allowance purchase scenario ("Minimum Management Scenario") when there was an apparent trend of price decline (e.g. between 8/2 and 9/4 and between 30/9 and 14/10, with the price in the second episode being higher than in the first), the annual savings could have been 4% more than the savings expected under the "Buy-as-you-pollute". Overall, such a scenario could generate savings of more than 30% of the amount recorded in the Authority's budget for 2024.
According to Mr. Persianis, the 4% savings due to the pre-purchase of pollutants are small, adding that "based on other preliminary scenarios of more "active" management, the savings can reach €84 million, or 34.6% of the cost foreseen in the budget. Such a simplistic strategy could bring about an additional easy cost reduction of an additional 2%, or EUR 5 million. euros, approximately. The savings will clearly be significantly higher in the years in which prices in the relevant auctions will follow the trend over time, as expected for the period 2025-2027."
In conclusion, he notes that with a more elementary strategy that deviates from the current strategy of random buying, a cost reduction of €10 million can be expected. which is the absolute minimum, with the potential benefit being many times greater in case of more severe strategy and smoother market behaviour.
For this year, emissions will amount to 3.11 million tonnes of carbon dioxide, compared to 3.31 million tonnes. tons in 2023.
