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Stranglehold of EAC remains

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Still a way to go before cheaper electricity despite passing of ‘landmark’ energy liberalisation bills

 

By Elias Hazou

Despite the pageantry surrounding the so-called ‘opening up’ of the electricity market some 10 days ago, the jury’s still out on whether consumers will see a reduction in their energy bills. And whereas lower prices are the stated point of the exercise, the real world consists of many moving parts, so one should probably not hold their breath just yet.

It might surprise some to learn that the electricity market in Cyprus has – on paper at least – been fully liberalised since 2014 to allow all consumers (both domestic and non-domestic) to choose their electricity supplier. Despite that, no electricity company has broken into the market yet and the Electricity Authority of Cyprus (EAC) remains the sole supplier of electricity, enjoying a de facto monopoly.

What happened on September 23, with the passage of three laws, is that the Transmission System Operator (TSO) was rendered completely independent of the EAC.

This is key, says Constantinos Varnava, formerly assistant manager at the TSO.

“Being totally autonomous, the TSO can now manage the wholesale electricity market,” he tells the Cyprus Mail.

The TSO will operate and manage a power exchange, based on the ‘Net Pool Market Model’. Without getting too technical, the dynamic system matches electricity supply bids every half an hour and yields a settlement price.

All types of electricity – conventional and renewables – will feature on this power exchange or platform.

The other major change of the September 23 legislation lies in that it harmonises with EU Directive 2019/944 on common rules for the internal market for electricity.

Under the EU’s internal energy market rules, consumers will be able to request the installation of smart electricity metres at no additional cost; household customers and microenterprises will have access, free of charge, to at least one tool comparing the offers of suppliers, including offers for dynamic electricity price contracts; to switch suppliers free of charge within a maximum of three weeks and to participate in collective switching schemes.

Also, end-consumers with smart metres will be able to request dynamic electricity pricing contracts with at least one large supplier; and they will have the right to act as ‘active customers’, for example by selling self-generated electricity, without being subject to disproportionate or discriminatory technical requirements and to have summarised clear contractual conditions.

Rivalry leads to lower prices – or so the theory goes.

“But since the EAC has the transmission and distribution sectors locked down, the competition really is going to be on energy – suppliers buying and selling to consumers,” comments Varnava.

“And energy accounts for around two-thirds on your utility bill.”

Here’s where it gets dicey. Although the EU directive states that suppliers are free to set their prices, Cyprus has obtained an exemption from this until the end of 2024.

Until that date, the energy regulator in Cyprus will continue to regulate the EAC’s prices. And under the rules, the state-run power company can make profits on sales up to 4.5 per cent.

Whereas that may sound like a small margin, it’s also a guaranteed margin for the EAC.

Charalambos Rousos, director of the Energy Service at the Energy Ministry explained why the exemption:

“Cyprus, on the grounds it is a small and isolated system, in the case of market shortcomings, i.e. limited market liquidity or concentration of market power in the form of oligopoly, reserves the right to exercise regulation on supplier tariffs,” he said.

“According to the Law for the Regulation of the Electricity Market of 2021, the Cyprus Energy Regulatory Authority (Cera) may impose retail tariff regulation when there are substantiated indications that competition is not effective, or in the case that a licensee has the power to affect the market due to its significant size and market position.”

So one could say the electricity market here became free-ish, rather than free.

Getting down to the nuts and bolts, the system powering the electricity exchange won’t go live before autumn 2022.

According to the energy ministry, the software and hardware platform for managing the electricity market has reached the phase of ‘factory acceptance testing’.

Under the project implementation plan, system installation and configuration will be completed by June 2022, followed by a dry-run testing period.

During this dry-run period, the ministry said, “interested market participants will have the possibility to interact with the MMS system both for testing their systems and also to familiarise with the various processes of the electricity market. The official launch of the electricity market under the new model (Net Pool Market Model). which conforms with the relevant European Directives. will follow immediately after a successful dry-run period in autumn 2022.”

Asked whether the small size of the market in Cyprus is conducive to driving prices down, given that independent power producers might never gain a sizeable share, and also given that renewables currently account for just 12 per cent of energy generation, the ministry had this to say:

“Several different companies have acquired production licences for conventional power stations from Cera for some time now, and some of them are pushing forward with their investment. The size of the market they’re going to gain, depends solely on the wholesale prices they can offer and of course their production capacity.

“What would be important is profitability rather than gaining a certain market share. A producer with a small generator, e.g. 20 to 50 megawatts will never get a big market share, but if they can be profitable they can stay in the market. As far as renewable capacity is concerned, there is also a significant amount of capacity licensed which is going to enter the competitive market. It is also worth mentioning that, several private RES producers already participate in the ‘transitional electricity market’ designed by the Cyprus Energy Regulatory Authority and it is operated by the TSO since January 1, 2021.”

To date, the energy regulator has granted licences for construction and operation of conventional power plants to independent power producers of a total capacity of 630MW.

These represent a generation mix of internal combustion engines and combined cycle gas turbines (Ccgt’s) running on liquid fuel oil/diesel and/or natural gas. A Ccgt of a total power of 260MW is currently under construction at the Vasilikos area.

What of the switch to natural gas for power, expected to reduce generation costs but also save the island millions in greenhouse emission allowances – items that get tacked onto utility bills?

Rousos said the liquefied natural gas import terminal located at Vasilikos is currently at the construction stage.

“The project consists of a floating, storage and regasification Unit (Fsru vessel, currently at the dry dock at Cosco shipyard in Shanghai, China in preparation of its conversion, a jetty (offshore infrastructure) for the permanent berthing of the Fsru and an offshore/onshore natural gas pipeline and related onshore construction components. The date for the completion of the project and commencement of its operations is expected by the end of year 2022.”

What happens under the new system if/when wind farms do not generate enough electricity due to weather conditions? Given that power generation from wind farms will be on the power exchange, could this scenario not lead to a shortfall in supply, driving rates up?

TSO director Stavros Stavrinos said no, due to safeguards in place.

“The market operator [the TSO] will be procuring enough reserves during the daily scheduling of the system to ensure that all consumers will be served with electricity, i.e. there will be no power cuts because of the intermittency of renewable generation,” he said.

“The scarcity of any resource may drive prices up and this is especially true for electricity due to the inelastic character of its demand. This could happen for example in cases of reduced production capability of cheaper resources (e.g. wind/solar due to unexpected weather conditions) which could result in the commitment of more expensive resources to fill in this shortfall in generation. In such cases wholesale prices during the involved time periods could go up.”

Asked when might consumers expect a decline in prices, the ministry offered:

“This is difficult to predict, since prices will depend on the prevailing market conditions when full liberalisation takes place.”

Echoing this, Varnava said: “Competition in the wholesale market should bring prices down there. But whether that gets passed onto the retail market – to consumers – remains to be seen.”

At the very least, to have a fighting chance, people should install a smart meter, he added.

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