This was the damning finding in the report published at the end of February by the Auditor General (AG), which presented the results of his audit of the Cyprus Electricity Authority (ECA). A few critical articles were published by the Cypriot media, but the issue has since been overtaken by the constant stream of disturbing news from the war in Iran.
However, developments in Europe this week have catapulted the issue back to the top of the EU agenda. Strongly concerned about the “unwanted effect” of the Emissions Trading System (ETS) on electricity prices and industry competitiveness, Italy has called for the ETS to be suspended and to be followed by comprehensive reforms leading to lower prices.
But while Italy is drawing up plans to address the issue, in Cyprus neither the energy minister nor the government have responded to the findings and recommendations of the GE, even though they raise many troubling questions that require convincing answers. “Three years later, there is still no energy plan” and no answer to Cyprus’ persistent energy problems.
Given the seriousness of these findings and their huge impact on Cyprus’ excessive electricity prices and consumers, both household and industry, in this article I focus my attention on the key issues.
In the introduction of his report, the Attorney General states that “the delay in the adoption of renewable energy sources (RES) by EAC is mainly explained to some extent by the inability to secure approvals from CERA in the initial stages, in an ‘attempt’ to protect competition. However, reasonable questions arise about the lackadaisical response of previous EAC councils to such a strategically important issue. During the same period, private investors have developed a significant number of photovoltaic projects or obtained relevant permits, without any clear effect on the reduction of electricity prices to date.” He added: “the cost of emission rights is passed on to the consumer and, combined mainly with EAC’s limited utilization of RES, lack of electricity interconnection, limited storage, non-arrival of natural gas and aging of EAC’s existing thermal units, contributes to maintaining high electricity prices.”
He concluded that “the above demonstrates the need to strengthen the efficiency of the EAC and accelerate strategic actions, mainly regarding RES, in order to ensure, through its own participation, the avoidance of oligopolies and the safeguarding of healthy competition. Of course, for there to be immediate benefits for the consumer, the strategic decisions, most of which are not under the control of EAC, must be taken by the state and CERA”.
But first, let’s look at Italy’s proposals to reduce electricity prices.
Proposals of Italy
Key to these is that Italy proposes to reduce electricity bills by subtracting the cost of carbon emissions from wholesale prices. It plans to achieve this by compensating power stations for the price of buying EU emission permits.
Prime Minister Meloni said her government wants to separate the cost of emission permits from the pricing of renewable electricity. This will then reduce bills, as the most expensive form of electricity generation, usually natural gas, currently sets the price for all companies, even if they generate renewable energy and do not need to buy emission permits.
The European Commission plans to present its own options for reforms to the EU energy market, which could lower costs, in March. But clearly, if Italy succeeds in reducing electricity prices, other countries will likely follow suit.
“Oligopolia” RES
Based on the GE report, excluding residential solar power, about two-thirds of RES generation is in the hands of a small number of private investors who operate as RES “oligopolies”, with no real competition. The GE blames this on CERA’s policies that discriminated in favor of private investors at the expense of EAC and consumers.
Private investors – who were given these licenses without competition – charge prices slightly below EAC’s price, but while EAC pays emission rights and full regulated network costs, they do not and pocket the money. The end result is that while the EAC is allowed a “regulated profit margin” of 4.66%, RES owners make exorbitant profits of up to 70%, which Cypriot consumers pay for.
So far, the government refuses to address this glaring irregularity. The result is that not only do consumers not benefit from RES and pay subsidies to private investors, but they also pay for the excess profits that private investors make.
With the price of EU-ETS emission allowances forecast to average €100/t this year, the cost to the EAC could exceed €320 million, further exacerbating these distortions.
Auditor General’s recommendations
The main conclusion from the GE audit is that the restrictions imposed on the EAC regarding the development of its own RES units have not contributed to the reduction of electricity costs. Instead, they have helped develop an oligopolistic system that leaves consumers paying more.
These EAC restrictions have, in effect, given the advantage to private investors “to develop large RES projects or secure relevant permits, occupying most of the available land, much of which belongs to the state, but without the consumer benefiting so far from the entry of these companies into the market”. These unused licenses have a total capacity of around 1000MW and act as a barrier to others wishing to enter the market, such as EAC. Surprisingly, holders of such licenses are allowed to sell them to others, charging exorbitant prices.
The GE made a number of key recommendations for the EAC:
1. Accelerating the development of RES projects, so that the benefit of lower production costs is passed directly to the consumer.
2. Strengthening of EAC-CERA cooperation, with a substantial dialogue on the balance between competition and consumer protection.
3. CERA must consider revoking unused licenses, as provided by law, in order to free up land and capacity.
4. Strategic decisions must be taken by the state, in areas not controlled by the EAC and which directly affect the price of electricity, for the disengagement and progress of market reform, interconnection, natural gas, storage.
Given the low regulated profit margin of 4.66%, implementing the above and redistributing the revoked licenses to the EAC would lead to a noticeable reduction in electricity costs for consumers, as it would eliminate the exorbitant profits currently pocketed by the RES cartel.
The GE concluded that “all of the above demonstrates the need for immediate and politically bold decisions and actions in order to strengthen security of supply, limit environmental and fiscal risks and achieve a substantial reduction in electricity costs for society and the economy”. And, most importantly, to avoid oligopolistic distortions.
The DG’s report raises many troubling questions that require convincing answers and, above all, its recommendations require urgent implementation.
*Senior Fellow at the Global Energy Center of the Atlantic Council