ECB paper warns fragmented EU energy market leaves Cyprus firms vulnerable

The European Central Bank (ECB) has published a paper warning that Europe’s fragmented energy system continues to expose firms to high and uneven energy costs, with particular implications for countries such as Cyprus where industrial electricity prices remain significantly above EU peers.

Indeed, recent Eurostat figures showed that Cyprus recorded the second-highest electricity prices for non-household consumers in the EU in the second half of 2025, reaching €24.29 per 100 kilowatt-hours, placing the country just behind Ireland at €25.52.

Germany followed closely at €22.64 per 100 kilowatt-hours, while significantly lower prices were recorded in Finland and Sweden at €7.48 and €9.70 respectively, highlighting the wide divergence in industrial energy costs across Europe.

The data, which covers businesses consuming between 500 megawatt-hours and 2,000 megawatt-hours annually, placed Cyprus firmly in the upper tier of EU energy costs for firms, a position that aligns with concerns raised in the ECB’s recent policy paper on energy security and industrial competitiveness.

The ECB paper, titled ‘Energy security and industrial competitiveness the case for a European Energy Union‘, argued that the European Union’s continued reliance on imported fossil fuels leaves it vulnerable to external shocks, including the Middle East conflict in 2026, while also weakening long-term industrial competitiveness.

It highlighted that the EU imports almost all of the oil and gas it consumes, making it highly exposed to geopolitical disruptions that can rapidly feed into energy prices and economic stability.

The paper’s authors, Charlotte Grynberg, Francesca Vinci and Alessandro De Sanctis warned that such vulnerabilities can also have implications for the broader euro area economy, including the conduct of monetary policy.

In this context, Cyprus stands out within the EU energy landscape due to its relatively low reliance on electricity and gas in industry.

The paper noted that in Cyprus, electricity and gas account for around 22 per cent of industrial energy use, compared with a much higher 87 per cent in Luxembourg, underscoring structural differences in energy dependence across member states.

This fragmentation feeds into wider price disparities across the bloc, with the ECB stressing that energy remains one of the least integrated components of the EU single market despite decades of reform efforts.

It pointed to evidence that while wholesale gas prices have shown some convergence, retail gas and electricity prices continue to diverge, with only limited “club convergence” among certain groups of member states.

For firms, the consequences are tangible. In the second half of 2024, medium sized companies across the EU paid on average around €0.19 per kilowatt hour for electricity and €0.06 per kilowatt hour for natural gas.

However, the ECB stressed that these averages mask sharp disparities, stating that electricity prices for firms in Cyprus were more than three times higher than those paid by companies in Finland, highlighting a structural disadvantage for Cypriot industry.

The paper also pointed out that industrial consumers face further variation depending on size, with larger firms often securing lower prices through long-term contracts, preferential grid access and tax exemptions.

It adds that governments have repeatedly intervened to soften price shocks, particularly after the 2021 to 2022 energy crisis, when many EU countries reduced energy taxation to shield consumers and businesses from volatility.

Looking forward, the ECB argued that the transition towards electricity and renewable energy will intensify, requiring deeper infrastructure integration and coordinated investment across the bloc.

It estimates that a more coordinated European approach to renewable deployment could significantly increase efficiency, raising average output by up to 42 per cent for solar energy and 110 per cent for wind energy, compared with less integrated national strategies.

Moreover, the paper made the case for a fully fledged European Energy Union, describing it as essential for improving energy security, reducing price volatility and restoring industrial competitiveness.

It set out five policy priorities, including expanding cross border electricity infrastructure, improving green finance mechanisms, investing in grid digitalisation and storage, harmonising energy taxation, and developing a coherent industrial strategy for clean technologies.

For Cyprus, these recommendations carry particular weight given its structural exposure to high electricity costs and limited interconnection with larger EU energy networks.

The ECB argued that stronger interconnectors and improved grid integration would allow renewable rich regions to supply power more efficiently to higher demand areas, helping stabilise prices and reduce disparities.

Relatedly, Independent power transmission operator Admie last week announced that it secured approval to request funding from the European Investment Bank (EIB) for a critical due diligence study to determine the updated cost and feasibility of the Greece-Cyprus electricity interconnector.

The decision, which followed a high-level meeting between Cypriot, Greek, and EU officials, aims to update the project’s techno-economic parameters to attract new investors and strengthen Cyprus’ energy resilience.

Elsewhere, the paper also stressed that the EU’s capital markets must be mobilised more effectively to fund the green transition, including through expanded green bonds and deeper capital markets integration under the savings and investment union agenda.

The paper further stated that a genuine Energy Union would function as a European public good, strengthening strategic autonomy, improving resource allocation and supporting long-term economic resilience.

It warned, however, that current efforts remain insufficient to meet the scale of the challenge, particularly as geopolitical shocks continue to expose the fragility of Europe’s fragmented energy system.