Cyprus Mail 24 March 2025 - by Dr Charles Ellinas
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| In 2024 the electricity price paid by Cypriot household consumers was the seventh highest in Europe, climbing to second highest when assessed on the basis of purchasing power |
Given its importance to Cypriot consumers and industry, I am returning back to the burning subject of electricity prices. These must come significantly down now and not just wait for natural gas to come to the rescue…if and when.
On February 26, the European Commission (EC) adopted an ‘Action Plan for Affordable Energy’, setting actions to lower electricity costs for European consumers and businesses. This was discussed by the European energy ministers on March 17, including Energy Minister George Papanastasiou.
The Action Plan seeks to make electricity bills more affordable by reducing taxes and network charges and promoting energy efficiency. Energy bills are determined by a combination of factors: energy supply costs, network/operating costs, emission allowance charges and excise levies and taxation.
But if you examine the way EAC presents its bills to its customers, you will be hard-pressed to understand what these really include. The biggest components, before inclusion of VAT, are:
- Production of electric energy: €0.1035/kWh
- Electricity network use: €0.0305/kWh
- Fuel readjustment: €0.10407/kWh
The convoluted and opaque way EAC’s bills are presented makes rational analysis near-impossible, but I have attempted in the following to focus attention on how electricity prices can be reduced substantially, in response to EC’s Action Plan.
Based on EAC’s last published report, in 2022, roughly 50 per cent of its total costs were for fuel, 8 per cent for the purchase of RES (renewable energy sources) electricity and 20 per cent for emission allowances. The remaining 22 per cent were operating costs.
With current Brent crude prices, the price of diesel in Europe is about €0.05/kWh. As a result of the way they are presented, it is difficult to see how the above costs correlate to this. In addition to emission allowances, what else is included in EAC bills?
Given the fact that the funds collected from emission allowances are treated as income by the government, clearly the imposition of VAT on these constitutes double taxation. And so is the imposition of VAT on the excise duty component of fuel costs.
Based on Eurostat data, in 2024 the share of taxes and levies paid by Cypriot household consumers was about 35 per cent of the price of electricity – the fourth highest in Europe. Greece had one of the lowest, about 15 per cent.
In 2024 the electricity price paid by Cypriot household consumers was the seventh highest in Europe, climbing to second highest when assessed on the basis of purchasing power – inexcusably high.
The recently announced reduction of VAT from 19 per cent to 9 per cent is clearly welcome, but it can only be seen as a beginning. EC’s Action Plan points out that Member States may lower national taxes and levies in the electricity bill to the minimum excise duty rates provided for in the Energy Taxation Directive of € 0.0005/kWh, apply the reduced VAT rate allowed by the VAT Directive of 5 per cent and eliminate levies that are not energy-related, presumably including double taxation.
Full implementation by the government of these recommendations could bring electricity prices down by more than 20 per cent. Given the massive fiscal surplus of about €1.5 billion recorded by Cyprus in 2024, there is ample room to implement such cuts without affecting the government’s finances adversely. This surplus will increase further as a result of the ‘green taxes’ planned to be imposed in May and the imposition of EU ETS2 charges on buildings, road transport and industry in 2027.
Given the hardship experienced by Cypriots – including widespread ‘energy poverty’, deprivation and deaths – directly as a result of the very high cost of energy, this must be treated as a matter of urgent priority. It is becoming an ‘existential’ issue for many Cypriots.
What is happening with the import of LNG?
The much-delayed import of LNG could have an even bigger impact on reducing the price of electricity, by as much as 40 per cent if achieved in 2026. But how likely is this to happen? Until recently the minister of energy has been insisting that the project will be completed by the end of 2025.
But March is almost over and appointment of a new project manager and contractors is still pending. And so is settlement of CPP-related issues. Works on site have not started and the status of long-lead materials and equipment in unclear.
Given the continuing importance of the project to Cyprus, its handling, timetable and completion should be more transparent. And so should be the investigation of the debacle that has led to this sorry situation. We were told that the government has left this to Brussels. But after more than a year, nothing has been heard.
How is the investigation progressing? When will we know the results? It is hoped that this does not go the way of most other investigations of major failures and allowed to die a slow death, without an outcome. Its direct cost impact, in terms of additional costs to complete and annual cost of fuel and emission allowances – by having to continue using diesel/HFO instead of natural gas – is already well in excess of €1 billion.
The ministry of energy must put in place and publish a new, firm, timetable to demonstrate seriousness and commitment to the completion of the project. Hopefully within 2026, by which time large quantities of new LNG will come into the market, bringing prices down.
Renewables and interconnectors
In presenting EC’s Action Plan, the European energy commissioner emphasized that to bring the cost of electricity down Europe needs more, cheaper, renewables and more interconnection. So does Cyprus.
But increasing uptake of renewables in Cyprus currently faces major obstacles: lack of battery storage, upgrading of the electricity network, smarter system management, competitive bidding, to name the most critical. We have been aware of these and what needs to be done since the last decade. The Recovery and Resilience Plan, prepared in 2021, includes provisions and resources to tackle them. But the last two governments have been tardy in addressing them and they have now become a bottleneck.
Low energy prices are a necessary condition to improve the quality of life of Cypriots and the sustainability of the economy. But the current artificial system that retains a stranglehold on renewable energy, and maintains artificially high prices, has become the major obstacle to the expectation that cheap renewables can bring electricity prices down. This must be tackled through clawing back super-profits and ploughing them into storage and through open, competitive, bidding for new projects.
Strengthening interconnections between member countries is also crucial for reducing prices, as it will lead to better use of surplus energy and a more competitive market. The minister of energy put the interconnector problems squarely in EC’s court and that’s quite right.
We must act now.
Dr Charles Ellinas, @CharlesEllinas, is a councilor at the Atlantic Council
