Who is responsible for high electricity prices?

This week saw the Electricity Authority of Cyprus and private energy producers trading barbs over who is gouging consumers and who’s responsible for the high electricity prices. So what’s the deal – is the EAC the 800-pound gorilla in the room, squeezing customers by taking advantage of its dominant market position? Or are private providers creaming off profits from renewables not even hooked up to the grid? The truth lies somewhere in the middle, say analysts.

Head of the Electricity Market Association Fanos Karantonis got the duel going when he came out guns blazing against the state-run power utility, which he accused of choking off the competition. Firing back the next day, the EAC said private RES producers charge their customers 27 cents per kilowatt-hour, whereas it costs them between just 5 to 7 cents to generate electricity.

“They don’t want the EAC to enter the [RES] competition because they would have to charge less,” EAC chairman Giorgos Petrou asserted.

A slam dunk for the EAC? Maybe.

According to Constantinos Hadjistassou, a professor at the University of Nicosia specialising in energy, there’s plenty of ‘blame’ to go around.

“Karantonis claims private producers help drive down electricity prices… OK that’s partly true,” opines Hadjistassou.

But, he qualifies, they could bring down electricity prices a lot more by lowering their commercial rates. Instead, they sell at just 10 per cent lower than the EAC does, and in doing so they rake in windfall profits.

“And is it true what the EAC says, that private providers sell to private customers and don’t channel their electricity into the grid? Yes for the most part it’s true.”

Whereas the EAC dominates conventional power generation, private producers hold a pretty large share of the renewables market. Effectively what it comes down to is a bizarre situation where competition is lacking in either sector, but for different reasons.

“You’ve got a relatively small number of companies in the RES sector, and at the same time not a great deal of capacity to go around,” the expert points out.

“I think the regulators might want to look into this. They should be more careful to whom they issue permits for photovoltaic parks, as in some instances these permits go to companies that already have a robust market presence. And meanwhile, companies like Cyfield are trying to ‘muscle into’ the conventional power generation business.”

PV parks and wind farms sell mostly to private consumers and businesses. And they sell to consumers who are geographically close to these power facilities, because they lack a grid like the EAC has. So they can’t sell to the whole of Cyprus. If they sold to the grid they’d have to pay a fee to the EAC.

On the other hand, says Hadjistassou, the EAC has its own ‘sins’ to account for.

“It is a cumbersome organisation, not as agile as a private business. And we all know about the high salaries paid to EAC employees, that’s a whole other can of worms. But while not an efficient organisation, they still manage to turn a profit.

“If you give everything to the private sector, they’ll gobble it up. And if you hand everything over to the public sector, they will delay a lot to make investments.

“You need to strike a balance.”

So criticism of the EAC is certainly valid. But at the same time, as a public utility they’re responsible for keeping the grid stable and keeping the lights on, so to speak.

While having a go at the EAC, Karantonis said private producers should be allowed to bid for the two new turbines which the EAC plans to purchase for the ageing Dhekelia power station.

The EAC quickly trashed the notion, saying the power plant is a public asset, so it made no sense for private businesses to want to get a piece of the action.

But beyond that, says Hadjistassou, there’s the technical aspect.

“My understanding is that the private providers would like to operate a whole new power plant to replace Dhekelia. And they’re not wrong that Dhekelia is an inefficient facility that spews out a great deal of pollution…it’s quite bad. However, building such a facility from scratch would require it to be situated next to high-voltage power lines. And those don’t grow on trees.”

Energy analyst Charles Ellinas highlights another technical facet: the transmission/distribution system is outdated and without serious upgrading it can’t take more renewables without stability problems.

In this sense, private RES providers do have a point when they complain that at certain times of the year up to 30 per cent of their generated power gets ‘discarded’ by the system.

But the way to go about these flaws is not to seek to shut out the EAC from the renewables business.

“There are problems on both sides,” Ellinas offers. “The EAC has not moved with the times, and the private providers are making untaxed super profits at the expense of the consumer. As a result, Cyprus’ electricity prices are some of the highest in Europe.”

As he sees it, “this debate between the private providers and the EAC is futile because it has nothing to do with the root of the problem and will not bring prices down.”

And he stresses that this problem will not be resolved until Cyprus’ electricity market is fully liberalised.

“But unfortunately, despite years of promising to do it, it is still way off. Without it there will not be any true competition. In order to bring prices down we need natural gas and we need open competitive bidding for new RES projects. Super profits should also be taxed, with money used to help vulnerable consumers.

“New RES projects must be bid competitively, with the main requirement being the price of produced electricity to be charged. Fixing RES prices artificially, and uncompetitively, at 10 per cent less than the price of conventional electricity will not bring prices charged to consumers significantly down.”

Ellinas calls for a “rules-based system, otherwise we risk unbalancing the whole thing, creating even more problems.”

Hadjistassou wraps it up – he says it’s time the government renegotiated the contracts with PV parks.

“These long-term contracts – 20 years or so – were granted when PV used to cost anywhere from 17 to 20 cents per kilowatt-hour to operate. Now with advances in technology, it’s far cheaper. The contracts should be flexible to reflect that changing reality.”