The gradual liberalization of the electricity market in Cyprus has created expectations for competition development in the areas of electricity production and supply, namely the two subdivisions of the energy sector that are not natural monopolies. However, despite the strong investment interest, the existence of high natural and artificial barriers to entry significantly delayed the operation of new businesses in the industry.
The biggest “natural” barrier to entry is the amount of capital investment that is necessary to initiate a new commercial activity in the section of electricity generation. Moreover, the long investment time horizon and the unrecoverable nature of the amounts invested raise additional barriers to entry in the energy market.
Another important factor that discourages new market entry is the absence of energy interconnections between Cyprus and other neighboring countries. This limitation essentially constrains the potential of electricity trade (in primary and secondary markets), which is an essential ingredient for the activation of the competitive process.
The slow pace of technological developments in the electricity sector is another critical factor that contributed to the suspension of investment initiatives by the private sector. In contrast to the telecommunications sector, where the rapid technological advancements have generated new lucrative opportunities for investment, the electricity sector did not exhibit analogous technological records.
In addition to the physical barriers, there are also several artificial barriers to entry, which are primarily created by the obsolete institutional framework that regulates the functioning of the electricity sector. For example, the vertical integration of the state-owned Electricity Authority of Cyprus (EAC), which enjoys a dominant position until today, in both production and supply of electricity, is a major inhibiting factor to the development of the sector. Another obstacle is due to the fact that the EAC not only owns but also manages the electricity distribution grid.
Nonetheless, the dynamism of the investment activity in the electricity sector is estimated to intensify in the coming years. New electricity generating units, mainly comprising of large solar and wind farms, are expected to receive licenses from the Cyprus Energy Regulatory Authority (CERA) to enter the market. At the same time, important infrastructure projects are in progress, while the preparations for the gas supply have set foot in more advanced stages.
Evidently, there will be a cosmogony of changes in the energy industry of Cyprus, which undoubtedly will change the energy map of the island. In my opinion, of equal importance are the changes needed to be made with regard to the modernization of the institutional framework as well as to the rules that govern the functioning of the energy sector.
It should be noted, though, that, in recent years, Cyprus has made several steps in the right direction. For example, minimum mandatory penetration limits of renewable energy sources were introduced in the energy balance. There were also financing programs, which provided incentives for private investments in the electricity generation. Progress was also achieved in relation to the interconnection of the electricity transmission networks between Cyprus, Israel and Greece, as well as with regard to the installation of smart meters pilot program.
Certainly, the sparse interventions in the institutional framework and the uncoordinated actions more generally, have limited effectiveness in addressing the challenges of the energy industry. Therefore, I believe that the targeting of the public decision-making bodies should be the thorough modernization of the institutional framework that regulates the sector. In this regard, the imminent public consultation by the CERA regarding the new model of the electricity market becomes particularly interesting.
In addition to the institutional changes, the equation of the electricity market design should incorporate various other variables, such as the confirmation of the existence of hydrocarbons in the Exclusive Economic Zone of Cyprus and the ensuing upgrading of the country’s role in the geopolitical chessboard. These issues could, however, be discussed, and rated, in a comprehensive manner, in the context of the Energy and National Strategy Council, the establishment of which is an election commitment of the President Anastasiades.
In conclusion, the future challenges of Cyprus with regard to the energy sector are both institutional and geopolitical. In my view, however, the bet to be won is to align, as soon as possible, the energy sector with the competitive sectors of the economy. To attain this goal there are at least three prerequisites: i) all artificial barriers to entry should be abolished, ii) the bureaucracy that impedes or completely blockades new market entry should be curbed, and iii) the independence of the regulatory authorities should be enhanced.
The outlook of the energy industry of Cyprus is bright; however several thorny challenges are ahead us. A fully competitive energy market would unquestionably create benefits for society as a whole.