The launch of Cyprus’ competitive electricity market represents an important modernisation step, but stronger regulatory safeguards are essential to prevent market distortions and protect consumers, according to energy expert Andreas Poullikkas.

Poullikkas, professor of energy systems at Frederick University and former chairman of the Cyprus Energy Regulatory Authority (CERA), said the transition towards competition in Cyprus’ electricity sector could not by itself guarantee fair pricing or smooth market operation.

“In an emerging electricity market such as Cyprus, with a dominant producer, targeted regulatory rules are needed so that new distortions are not created instead of strengthening genuine competition,” Poullikkas said.

He explained that the Cyprus Energy Regulatory Authority (CERA) had already established a broader framework, formally known as the “Statement of Regulatory Practice and Electricity Pricing Methodology”.

According to Poullikkas, the framework seeks to prevent cross-subsidisation and regulate cost recovery mechanisms by ensuring tariffs and charges reflect the actual cost of providing services while also protecting consumers and safeguarding competition.

However, he argued that further clarification and more detailed implementation rules were required concerning the prices declared by the dominant producer in the day-ahead electricity market and the handling of must-run generation units.

“One of the key issues that must be regulated is the prices declared by the dominant producer in the day-ahead market,” he said.

He stressed that as long as the generation activity of the Electricity Authority of Cyprus (EAC) continued to hold a dominant market position, its bids in the day-ahead market could not be treated as if they originated from a fully competitive and mature market.

“For this reason, during the third trial period, a clear methodology for cost-based declarations should have been established so that the prices declared by the dominant producer in the day-ahead market reflect the actual variable cost, technical constraints and reasonable cost recovery needs,” Poullikkas said.

He added that the system should not allow costs to be transferred from the forward market, namely from the regulated wholesale tariff structure.

Poullikkas also raised concerns over the operation and compensation of must-run units, which are required to operate to preserve system reliability rather than because they are always the cheapest available option.

“These units are not integrated because they are always the cheapest, but because the electrical system requires reliability, inertia, reserves and technical operational security,” he said.

He argued that during the third trial period, compensation for such units operated by the dominant producer should also have been governed by transparent rules.

“Their compensation should have been regulated with clear rules, without allowing cost transfers from the regulated wholesale tariff or non-transparent recovery through the market,” Poullikkas said.

At the same time, he stressed the need for ex-post physical allocation of must-run units to suppliers before financial settlement takes place.

Poullikkas explained that this approach was crucial because must-run units provide a real physical service to the electricity system and therefore the associated energy and costs should not be allocated in ways that distort competition between suppliers after the fact.

“If ex-post physical allocation does not take place first, there is a serious risk that part of the reliability cost will be transformed non-transparently into a commercial settlement component, creating unfair burdens,” he said.

According to Poullikkas, this issue represents the central regulatory challenge facing Cyprus’ electricity market.

“The key objective is to avoid cross-subsidisation of the allowed revenues of the dominant producer between the regulated wholesale tariff and the dominant producer’s bids in the day-ahead and balancing markets,” he said.

He warned that if part of the dominant producer’s costs were recovered through regulated charges and another part through market bids or payments linked to compulsory unit integration without a clear regulatory separation, the result would not constitute a genuine market.

“Without clear separation, the outcome will not be a market but a distorted revenue recovery mechanism,” Poullikkas said.

He stressed that each cost must be recovered only once, through the correct mechanism and with complete transparency towards all market participants.

Poullikkas noted that the principles behind Regulatory Decision 01/2021 already rested on the idea that tariffs should reflect actual expenses and avoid cross-subsidisation.

As a result, he said the issue was not the creation of an entirely new framework but rather the practical implementation of the existing rules concerning the dominant producer and must-run units.

“This is exactly how electricity markets historically opened in many countries, especially in the European Union,” Poullikkas said.

The former CERA chief explained that liberalisation in other countries was achieved gradually through clear rules, activity separation, regulatory supervision and a carefully managed transition from monopoly structures to competition.

Poullikkas also linked the debate to proposals he had presented in an earlier article regarding the Cyprus electricity market.

These proposals included an ex-ante market power mitigation mechanism and a price shock absorber mechanism aimed at smoothing tariff fluctuations.

“The regulation of the dominant producer’s bids and must-run units is effectively a continuation of the same logic for a market operating with transparency, control of market power and consumer protection,” he said.

Poullikkas further argued that the need for such regulation was directly linked to what he described as a widespread misunderstanding in the public debate concerning renewable energy sources.

“There is a mistaken perception that as renewable energy increases, electricity prices automatically fall,” he said.

According to Poullikkas, this interpretation is overly simplistic because it focuses only on the generation cost of individual technologies rather than the total operating cost of maintaining a reliable electricity system.

He acknowledged that renewable energy could reduce electricity costs over time, but only if accompanied by sufficient investments in flexibility, storage, electricity grids, interconnections and suitable market regulation.

“Renewable energy sources may reduce electricity costs in the long term, provided they are accompanied by sufficient investments in flexibility, storage, networks, electrical interconnections and appropriate market regulation that distributes reliability costs fairly,” Poullikkas said.

He added that the real issue was not whether renewable energy sources are individually “cheap” or “expensive”.

“The correct discussion is whether the electricity system as a whole can remain reliable and economically fair as the participation of variable energy sources increases,” he said.

Poullikkas stressed that this challenge was even more significant in Cyprus because the island operates as a non-interconnected electricity system and therefore cannot easily rely on neighbouring markets for security of supply.

He further stated that regulating the prices declared by the dominant producer in the day-ahead market, establishing separate and transparent compensation for must-run units and ensuring ex-post physical allocation before settlement were not merely technical details.

“These are fundamental prerequisites for the electricity market to operate transparently, for competition to be protected and for consumers to receive the real benefits of a properly designed energy transition,” Poullikkas concluded.