Cyprus Mail
Cyprus Energy

Cost of electricity unlikely to drop after privatisation

The Vassilikos power station

By Elias Hazou

The ministry of energy has said the cost of electricity will not drop appreciably once the energy market is liberalised, the admission giving more ammunition to the Electricity Authority (EAC) to question the point of its intended privatisation.

In the comments section of a document produced by the energy regulator, available online, the energy ministry says: “In particular, it is expected that the prices which independent producers generating energy with conventional fuels will be able to offer independent suppliers will not be much different to those prices offered by the EAC, even after the advent of natural gas for electricity generation.

“Therefore,” the ministry goes on, “end-consumers will not have a sufficient incentive to switch suppliers, or investments in production and supply of electrical energy may not be viable.”

The comments feature in stakeholders’ responses to proposed changes to the energy market regime, following a consultation process launched by the energy regulator that ended January 26.

The energy regulator is now considering the responses, and will soon present a final proposal for the new state of affairs in the market. The Cyprus Mail understands that this will take place by month’s end.

According to sources close to the EAC, the energy ministry’s comments are a roundabout way of saying that the current cost of electricity, given the size of the Cyprus market, is as low as it can get and that this does not encourage competition.

Moreover, electricity rates are not expected to drop considerably even with the use of natural gas due to the cost of turning LNG back into gas so that it can be used as a fuel.

Therefore, the ministry proposes that the energy regulator impose a power generation quota, or cap, on the EAC so that new players are encouraged to build power units.

The ministry also proposes downsizing the EAC, selling off its assets to investors abroad, and leasing its most efficient power engines to local private operators, thus granting “living space” to private players.

The bottom line, say EAC sources, appears to be not for consumers to have low electricity bills, but rather that competition is promoted whatever the consequences.

For one thing, splitting up the EAC’s infrastructure is not feasible, the same sources explained.

“You can’t give engine number 1 to one power operator, and engine number 2 to another… it doesn’t work that way. The infrastructure, say at the Vasilikos power plant, is all shared: everything is connected to the same fuel source, same water tanks, same pipes.”

What’s more, it’s extremely doubtful whether private operators can turn a profit, due to the market’s small size.

“There are no economies of scale here. Peak demand during summertime is 900MW, which is covered by Vasilikos. Imagine splitting that up between competing suppliers,” another source, who also requested anonymity, said.

“The truth is that investing in energy production with conventional fuels just isn’t profitable in Cyprus,” he added.

Under the “net pool” model proposed for the energy market, the EAC’s activities are unbundled, and the EAC’s production and supply operations are separated. EAC Production will then strike bilateral agreements with suppliers (EAC Supply and private players) for the sale of energy, at regulated prices.

This regime would apply for the bulk of energy production, which some estimate at 80 per cent. For the 20 per cent remainder, prices would be set dynamically, based on daily bids.

One way proposed would be via the Day-Ahead Market, where hourly or half-hourly energy blocks are traded for the next day: participants submit offers/bids where they specify the quantity and the minimum/maximum price at which they are willing to sell/purchase.

EAC circles suspect the model is an attempt by the ministry to square the circle with regard to the intended denationalising of the power utility. If electricity won’t get cheaper, what is the point of privatisation, they ask.

Under the road map agreed by the government and Cyprus’ international creditors, the EAC is to be transformed into a corporation governed by private law by the end of 2015, with all of the company’s shares held by the state. Full privatisation of the EAC – however this is implemented – must be completed by 2018.

Meantime, following votes taken at regional gatherings across the island, EAC staff have given their affiliated trade unions carte blanche to take steps, including possible strike action, to thwart privatisation.

The government has initiated a tender for commissioning an independent consultant to prepare a study into how the legal separation of the EAC would be carried out. The unions want the tender scrapped.

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