Over 35 per cent of our energy bills goes on taxes

The age of electricity is upon us, but in Cyprus it is finding us unprepared. Most of the issues outlined below also apply to Cyprus.

In a keynote address at the International Energy week (IE Week) organised by the Energy institute in London, Fatih Birol, executive director International Energy Agency, declared that the world is entering the ‘Age of Electricity’. Over the next ten years the rate of electricity demand growth is expected to be six times faster.

But grids are becoming a major bottleneck. The main factors contributing to this are lack of planning, permitting and licensing. Worldwide 1600GW renewable projects are waiting to be connected to the grid.

Another major bottleneck, that also adds to the energy security risk, is procurement of grid materials and equipment. You have to wait four years from order to delivery for cables, with prices almost doubled since 2019, and five for transformers, with prices up 75 per cent. This could lead to electricity prices rising even further.

Another critical factor is pricing of electricity, impacting affordability and competitiveness. How do you price electricity fairly, what are fair taxes and subsidies?

Today electricity prices in Europe are two times higher than pre-Covid, which is inexcusable. Unaffordable prices lead to energy poverty and lower living standards and contribute to loss of competitiveness for industry.

Countries that read the game and make most out of electricity development will make most in terms of economic development. Especially those that combine natural gas with renewables to ensure energy security and 24-hour reliable electricity supplies, that renewables alone cannot provide.

Natural gas and LNG

Natural gas provides the perfect complement to intermittent renewables during energy transition. It is very flexible, with much-lower CO2 content than coal, and can be decarbonised. It will be the second-fastest growing energy source up to 2050.

Shell has just released its ‘2025 LNG Outlook’ and expects global demand for the fuel to carry on increasing, by as much as 60 per cent by 2040.

It will be driven by demand growth in Asia, particularly in China and India, with most of it used in non-power sectors, especially as an industrial fuel and feedstock.

With about 170million tonnes of new LNG coming into the market between 2026-2030, it will help ease prices, adding to the attractiveness of gas as a complement to renewables.

The availability of plentiful low-priced gas will in fact move the world into an age of ‘energy-addition’, where rising energy demand is met by a combination of low-carbon energy and natural gas. This will require greater investment in new energy systems, especially in electricity grids and energy storage.

Grids and electricity storage

Energy systems around the world are undergoing significant change, responding to accelerating global electricity demand.

If grid and storage limitations are not addressed with a degree of urgency, the expansion in renewables and electricity may be delayed, or ‘stuck in limbo’. Also, the curtailment of increasing amounts of renewable electricity because of the inability of outdated systems to accept them is “economically criminal”.

As we approach 2030 and beyond, electricity demand will be growing well above normal rates because of accelerated increases in:

  • the adoption of electric vehicles
  • demand for cooling and heating due to hottter-than-usual summers and colder-than-usual winters
  • rapid development of AI
  • desalination needs due to more frequent and severe droughts
  • growing electrification of industrial activity.

In Cyprus we have known about the need to upgrade the grid and add electricity storage for years now. These were actually included in Cyprus’ ‘Recovery and Resilience Plan 2021-2026’, making funding available. I have also been writing repeatedly about this since 2021.

However, nothing was done about it until this year. Earlier in February the energy ministry published guidelines for a €35million scheme aimed at promoting battery storage. Hopefully this will be extended to include upgrading of the grid, with completion in 2026.

Cyprus successfully launched the ‘Photovoltaics-for-all’ scheme last year, that attracted thousands of Cypriots into renewables, on the promise of low electricity costs. But, without energy storage, 29 per cent of domestic renewable energy was curtailed in 2024 – and probably more this year – in order “to keep the network stable”. This and inevitably the adverse publicity it attracted are in danger of sapping confidence in the scheme.

Cyprus’ energy system and market have become dysfunctional. Much needs to be done to overcome the problems, put transition on the right track, bring prices down and regain consumer confidence.

Electricity prices and taxes

Electricity prices are too high in Europe, but also in Cyprus, due in part to high taxation. Europe must cut what are seen as “paradoxical” taxes on electricity urgently if it wants to help struggling industries become more competitive and move consumers out of energy poverty. The calls at IE Week were to bring these down to US levels of 10 per cent.

In Cyprus taxes constitute more than 35 per cent of consumer bills, much higher than the EU average of 23 per cent. This adds to the suspicion that “electricity bills are being used as a convenient way for governments to raise tax because they are impossible to evade without being cut-off from power.” In fact, “the extras tacked on to the price of electricity are in many cases the biggest part of the bill”. This applies to Cyprus too.

In an article in the Financial Times earlier this year, Ursula von der Leyen promised measures to reduce energy taxes. In addition, Dan Jorgensen, EU energy commissioner, said that EU’s new ‘Clean Industrial Deal’ policy would look at reducing the “non-energy” component of bills. He added: “We all agree that we have to bring down energy prices, and we have a way to bring prices down tomorrow.”

In fact, European Commission’s (EC) just-released ‘Affordable Energy Action Plan’ says EU countries “can lower electricity bills already today”, by “lowering taxes immediately”. It calls for “making electricity bills more affordable” and “bringing down the cost of electricity supply”.

In order to make electricity more affordable, the EC will tackle all three components of energy bills, network and system costs, taxes and levies and supply costs and will support bringing more and faster renewables.

The plan states: “an energy system underpinned by market integration, renewable generation and flexibility could result in 40 per cent lower wholesale electricity prices on average in the EU.”

Cyprus must prioritise this and act now as part of its ongoing tax reform. Lowering electricity taxes and removing non-energy extras “is a no-brainer to ensure more affordable prices”. It could bring bills down by as much as 8-10 cents/kWh, a much-needed relief for hard pressed consumers, especially the 50 per cent classified as energy poor.

Dr Charles Ellinas, @CharlesEllinas, is a councilor at the Atlantic Council