Cyprus electricity: how did it get so bad?
A follow-up from last week's piece
Photo source Shutterstock. Dhekelia power station in the Larnaca region on the south-eastern cost. Most of this power stations runs on very dirty mazut.
Last week I wrote about why I was concerned that we might have long blackouts this summer in Cyprus. I realized that explaining how we got here was going to be ‘a longun,’ so this week I am tackling how the sunniest country in the EU got itself into this situation.
One cannot really throw all the blame the current government, as some have tried to do. It is a culmination of decades of bad decisions by multiple governments, largely owing to vested interests.
Below I lay out what I believe to be the collection all of the causes. If you can confirm or deny my hunches, or know the details better than I do, do feel free to reply in the comments. I spent a long time last year being bounced around the various organizations involved in energy and I still feel that I do not have the whole picture. I have kept comments open for everyone in this article, rather than only for payers.
Original sin: protectionism
The first reason why we got to crisis point decades later was an attempt to protect the state-owned, near-monopoly EAC. This meant begging the EU for derogations so that Cyprus did not have to introduce a fully free electricity market. This, in turn, meant late investment in upgrading the grid to cope with renewable energy sources (RES), and in the software needed to include private suppliers. (The current private suppliers are working on a “transitional” system which is not an open market).
This delay in investing in RES only started to weaken when the EU set binding targets and emissions penalties, which put up costs for EAC. The related high electricity prices started to have a political cost from around 2023.
I have another suspicion, and that is that there might also have been resistance to expanding the fuel sources of EAC in order to protect what has presumably been a wide array of interests involved in the shipment of dirty fuel to Cyprus.
Good idea, handled badly
Back in 2007 there was actually a recognition in some quarters that Cyprus would need to import natural gas. Natural gas is still a fossil fuel. But it is much cleaner than diesel and mazut, so is presented as a good “transition” fuel.
Some of EAC’s “combined cycle” turbines can run on natural gas, as well as diesel. For this reason the main policy has at least in theory been to switch most of the fossil-fuel electricity generation in Cyprus over to imported natural gas.
Plans were therefore afoot in 2007 to build a floating terminal that I assume must have been similar to the floating storage and regasification unit (FSRU) and the LNG import terminal that will, one day, bring gas to Cyprus (see below).
It was a good idea but the plan all fell through because of accusations of conflict of interest of the then president’s law firm, Tassos Papadopoulos & Associates. Mr Papadopoulos was not re-elected in 2008 and the idea of a floating structure did not re-surface again for years.
Hubris
In the intervening years it looked as though Cyprus had at least found a supplier. Back in May 2011, the government was in talks with Royal Dutch Shell to bring imported natural gas to Cyprus as a 20-year “stop-gap” measure. (Contracts need to be at least 15 years in the oil and gas sector otherwise they never make commercial sense.)
However, Cyprus was also preparing for the first offshore natural gas drilling, which took place in September of the same year. The big Leviathan field had been found in neighbouring Israel the year before in 2010 and everyone was excited about the prospects for Aphrodite. Perhaps because Cyprus was preparing to drill for its own gas and probably thought that it would soon not need to import any, the plan for temporary gas imports never happened. I even remember hearing a senior official proudly boasting that he had kicked Shell out.
Cyprus did discover gas in Aphrodite in 2011. But for reasons probably relating to the Cyprus problem, successive governments mishandled the opportunity to exploit it and the gas remains in the ground. Moreover, any gas that is eventually extracted will not support Cyprus’ power stations: it will go directly to Egypt.
Incompetence or worse?
At the same time, the gas import policy has been in endless trouble. Since 2005, there have reportedly been 10 attempts to import natural gas, all of which have failed. The last attempt involved commissioning a floating regasification and storage unit (FSRU) vessel and building a port terminal to import liquefied natural gas (LNG).
With this prospect in mind, some companies have invested heavily. A private, gas-fired plant called Power Energy Corporation (PEC) is being built by Cyfield, one of the largest real estate developers in Cyprus. Bank of Cyprus (BOC) lent Cyfield €120m. That is not a huge amount compared with BOC’s €10.3bn of gross loans. But the gas is still not here. If that €120m loan went sour, it would be a big amount now that BOC’s non-performing exposures (NPEs) are down to only €201m.
The latest attempt to import natural gas started off badly when the Greek member of the Chinese-led consortium had to pull out because it was facing corruption charges elsewhere in Cyprus. Then the consortium cancelled the contract in July 2024 after very public rows with the regulatory authorities and the launch of a probe by the EU public prosecutor’s office about the award of the contract, following complaints by the (since sacked) auditor-general, Odysseas Michaelides.
If we are lucky we might have a shiny new 11th tender in the next few weeks. The government has hopes we can get the gas by 2026. I think 2027 will be a safer bet.
Trying to be good (at last): part 1
My final reason relates to EU rules. Having dragged their feet for years, the various bodies involved in electricity finally had to abide by EU rules in a number of areas. This first meant fully separating the production, transmission and distribution of electricity.
In a fully functioning market with good infrastructure, separation is probably a good thing. But in a non-liberalized market with rickety infrastructure, my hunch is that it just leads to rows between parts of the old EAC over what to prioritize. The TSO has produced a 175-page document (in Greek) recommending investments. But it is up to the “Transmission Owner”, namely the EAC, as well as members of parliament who control parts of EAC’s budget, to decide where EAC spends its money.
I assume (though if you have better information please get in touch) that the result is disagreements between the EAC and the TSO, and therefore unnecessary delays.
Trying to be good (at last): part 2
A related issue is that the Cyprus Energy Regulatory Authority (CERA) has tried to ensure, in accordance with EU rules, that EAC does not become the dominant supplier of RES, in the same way that it is the dominant provider of electricity powered by fossil fuels. (In 2024, the EAC accounted for around 75% of production even though its fossil-fuel capacity is under 60% of the total.)
The unfortunate by-product of this is that we do not have economies of scale. Why would EAC invest in storage or the technology to handle the “ripple” effects better if it has no skin in the game?
Instead, we have lots of installed PV capacity dotted over the island but not enough storage and insufficient grid investment. There have also been accusations of “PV hoarding”: people getting licences and hoarding both the land and the licences in the hope of selling them at a higher price later.
But since this attempt to keep the EAC out of it arguably helped lead to the crisis, what we have now seen is an emergency scrabble to allow EAC to invest in RES and in storage.
Though private power producers will not like me saying this, I happen to think this is the only option we have under the current circumstances: namely let EAC and TSO and DSO and everyone with the technical know-how get us over this crisis, then find a way of slowly easing the EAC out of a dominant position in RES.
After that, parliament needs to get behind a total revamp of tender laws: to give greater weight to quality than merely price, to make it very costly for losers to litigate (which also means improving transparency and probity so we can be sure the right decision was made), and thereby ensure that we never get into the situation ever again.
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