(Adds background on renewables in sixteenth paragraph)
By Stelios Orphanides
Thursday’s inflation data, shaped by a 40 per cent annual increase in electricity prices has highlighted the continuing vulnerability of the economy to energy price shocks resulting from the over-reliance on heavy fuel oil used by the state-owned power producer.
A government source said that the state wants to reduce it by encouraging private investment in power generation.
In recent years, both households and industrial consumers benefited from the downward trend in oil prices, which allowed a drop of electricity prices, excluding taxes and other charges, in the second quarter of 2016 to €0.1285 and €0.1211 respectively, roughly half of what they were at the beginning of 2012, Eurostat data show.
Power consumers in the euro area, traditionally accustomed to smaller price fluctuations, saw their bills drop until the first half of 2016 only 16 per cent since early 2012 in the case of households and 0.5 per cent in the case of industrial customers.
Still, Cypriots paid on average significantly more over the past five years compared with consumers in the euro area. Households had been paying between 2012 and the first half of 2016 some 39 per cent more compared with what households in the euro area paid, while in the case of industrial customers, the difference was on average 92 per cent.
“The energy cost does have an impact on competitiveness,” said Marios Tsiakkis, secretary general of the Cyprus Chamber of Commerce and Industry in a telephone interview. “And it does not just apply in the case of industrial units, it also applies to hotels”.
The drop in energy prices which set off in mid-2014 coincided with the peak of the economic downturn that plagued Cyprus in recent years, and competitiveness gains helped economic recovery. The industrial production index stabilised in 2014 after it fell 13 per cent in 2013 and 10 per cent in 2012. In 2015 and 2016, it rose 3.3 per cent and 8.7 per cent respectively, according to Cystat data. Lower electricity prices also helped attract more tourists to the island, culminating into an all-time high last year.
According to a finance ministry document, the price of Brent oil rose from $47.14 (€41.35) per barrel at the end of April last year to $55.64 (€52.49) at the end of February. The prices in euro take account the change in the exchange rates.
The increase in electricity prices last month which contributed to accelerating the April inflation rate to 2 per cent, is not expected to result in comparable loss in competitiveness as in the past because wage indexation, which compensated workers for purchasing power losses, has been overhauled in the past few years as part of Cyprus’s bailout terms.
“A way had to be found to reduce the share of energy in overall cost for hotels and industrial units as it will take a long time before we see natural gas in power generation” Tsiakkis continued, adding that incentives for the use of renewable energy for self-producers had been helpful.
In the absence of market regulations which will allow investment by private producers and will give the right to consumers to choose their own supplier, the only alternative available to commercial customers who today have to buy power from state-owned monopolist Electricity Authority of Cyprus (EAC), is the production for own needs scheme which in the case of household consumers is called net-metering.
Currently, investors representing projects with a combined generation capacity of around 600Mw are waiting for the Cyprus Energy Regulatory Authority to announce and implement market regulations that are expected to put an end to the monopoly of the EAC, which was on the government’s privatisation list until 2015.
“The study carried out to examine and analyse all possible options regarding the future ownership status of EAC in 2015, has indicated early on that EAC monopolistic activities would definitely remain under public ownership for legal and financial reasons,” a government source said in an interview on condition of anonymity. “From the investors’ standpoint, the regulated Rate of Return would have to increase to be attractive. Such a development would definitely increase consumer cost”.
Instead, the government opted to unbundle the EAC into two separate accounting entities, one in charge of production and supply and the other in charge of transmission and distribution.
“The government is focusing on opening up the electricity market to allow competition both from renewable but also conventional generators,” the source continued in reference to the future of power generation.
For the time being, after a strong increase in the capacity of renewable energy sources, their share in power production declined last year to 8.4 per cent in 2016, from 8.5 per cent in 2015, even after output rose 3.5 per cent to 408 Gigawatt hours. Overall installed capacity stood at the end of 2016 at almost 253 Megawatts, compared to 243 Megawatts in 2016 and 202 Megawatts in 2013, according to the Transmission System Operator’s website.