Why our energy bills will spiral next year

Our power stations will emit 3.33 million tonnes of CO2 next year. And with no gas on the horizon, the EU will make us pay

By Elias Hazou

Soaring prices of carbon dioxide allowances owing to EU green policies, and Cyprus’ continued reliance on heavy fuel oil and diesel for electricity generation, are coalescing to brew the perfect storm for consumers.

As of next year, electric bills are due to spike and it looks like Cyprus has little wiggle room to provide relief to households. The Cypriot ‘last-minute syndrome’ has struck again.

For 2020, the Electricity Authority of Cyprus (EAC) has budgeted €85.6m in projected expenses for the purchase of CO2 emissions allowances. The cost of the allowances are directly translated into adjustments to the fuel rate on invoices.

Documents submitted by the state power corporation show that in 2020 the island’s power stations are expected to emit around 3.33 million tonnes of CO2.

Multiplying the tonnes by €25.75 (the May 2019 price per tonne of CO2 for emissions allowances under the EU’s Emissions Trading Scheme) yields the €85.6m figure.

It’s more than double the amount paid last year by the EAC (€38.5m) – due not to increasing CO2 emissions from power stations, but rather to the soaring price of emissions allowances over the past year.

At the beginning of 2018, the price of European emission rights, the right to emit one tonne of CO2, was around €8. A year later the price jumped to €25. It’s understood that over the next decade the EU will gradually ‘retire’ the number of tradable carbon credits, driving the price further upwards.

According to Panayiotis Keliris, senior officer at the Cyprus Energy Regulatory Authority (Cera), the EAC calculates on an ongoing, weekly basis how far its emissions will go above the threshold set for Cyprus by the EU, and it accordingly purchases emissions allowances on the market, in four installments every month.

The EAC forwards this data to Cera and seeks approval from it to adjust its weighted average fuel costs on its bills.

Over the last few years, the EAC – namely its customers – has been hit with a double whammy: emissions allowances are becoming more expensive, and meantime the EAC is being forced to buy more allowances.

The latter owes to the fact the EU is gradually restricting the number of ‘free’ allowances allocated to member-states. The Republic of Cyprus as a whole is entitled to fewer ‘freebies’ than it was before, meaning that the number of free allowances distributed by the state to the EAC has likewise been declining and the proportion of allowances that have to be paid for is rising.

What’s more – and this is key – as of 2020 the EU will halt the distribution of free allowances entirely.

When contacted by the Sunday Mail, both Cera and the EAC declined to cite indicative or even estimated price hikes on bills.

“As regards to pricing, CO2 allowances have increased dramatically over the last years, averaging up to now, an amount of about €26.00 per allowance for 2019. The allowance price is expected to rise even further for the next years,” offered Christina Papadopoulou, spokesperson for the EAC.

Asked what steps, if any, the EAC has taken to offset the coming hikes, Papadopoulou said: “The EAC is investigating the issue of lowering the CO2 emissions; this will be assisted by the introduction of natural gas as well as implementing into its energy mix clean technologies, such as photovoltaics etc.”

But in Cyprus, currently only about nine per cent of all electricity consumption comes from renewables.

All of this brings the conversation about the much-touted switch to natural gas and use of renewables.

The state of play leaves little to cheer about, says energy analyst Charles Ellinas.

“The target for Cyprus is to achieve a very modest 5 per cent reduction in emissions by 2020 in comparison to emission levels in 2005. However, between 2013 and 2017 emissions were actually increasing,” Ellinas said via email.

“But last year there was a small reduction, by 0.8 per cent. So far Cyprus has managed to reduce its emissions by just over 2 per cent in comparison to 2005. So it is not complying, hence the ‘fines’.”

According to the analyst, replacing diesel and heavy fuel oil with natural gas in power generation can reduce carbon emissions by 26-28 per cent. But given that electricity constitutes only about 20 per cent of all energy consumed annually in Cyprus, the maximum possible reduction is between 5-6 per cent.

“That would achieve the 5 per cent target, but since gas will not be available until probably 2022, it will be too late in terms of Cyprus meeting its 2020 target.”

EAC spokeswoman Christina Papadopoulou

And there is another twist.

Cyprus’ new target for reduction in carbon emissions is 24 per cent by 2030. This was considered inadequate by the European Commission, and Cyprus has been requested to revise it upwards.

“But even then, by the time gas becomes available any benefits will have already been overtaken by the new target. In order to reduce emissions further, Cyprus will have to tackle the transport sector. Options include use of bio-fuels and electric vehicles powered by renewable electricity.”

The history of attempts to use natural gas for electricity generation is a long and ignoble one.

The process to import gas for power generation started in 2005 when London-based Golar applied for a licence to build and operate a floating electricity power plant on a barge off the coast of Cyprus.

It was the first of nine failed attempts. The current endeavour is the tenth in a row.

A chief reason why the previous attempt in 2016 to tender building such a facility failed, was because the infrastructure costs were too high in relation to the low quantities of gas Cyprus needs to import.

In the announcement that followed the scrapping of that tender, the government said in a press release: “The import of gas for power generation will be delayed until at least 2020 when it is expected to start pumping gas from Aphrodite in Block 12 of Cyprus EEZ.”

But piping Aphrodite gas won’t happen anytime soon, Ellinas points out.

“The stark conclusion from this history was the lack of overall strategy and planning and Cyprus’ reactive approach to the issue. It left most companies responding to the various attempts to import LNG [liquified natural gas] very unhappy with the process, with many deciding not to bid such projects in Cyprus again. Cyprus’ credibility has been highly undermined.”

In August this year the Natural Gas Public Company (Defa) announced its decision to award the tender for the construction of an LNG import terminal at Vasilikos – comprising a floating storage regasification unit, a jetty for the mooring of the floating storage regasification unit, pipelines, port and other facilities.

At the time Defa said: “We believe that the future of the country is aligned with natural gas and we expect it to play a major role in the economic development of the country in years to come. The establishment of the natural gas market will boost the development of the whole energy and industry sectors of the Republic.”

Not so fast, says Ellinas.

Defa claims that state ownership of the project will allow the cost of importing and regasifying LNG to be kept sufficiently low to keep the cost of gas offered to EAC below $10/mmBTU (per about 1000 cubic feet) – the equivalent cost of oil at current prices.

Defa said that even if it’s unable to secure favourable long-term gas prices, it would buy on the spot market, where today LNG goes for $3-$4/mmBTU.

The solar plant at Nisou. Currently only about nine per cent of all electricity consumption in Cyprus comes from renewables

But Ellinas argues that by 2022 – the earliest date by which Cyprus will be ready to import LNG – demand is expected to outstrip supply, pushing prices up again.

Forecasts estimate the price of gas in Europe to average about $6.50/mmbtu in the 10-year period to 2030. Given the small quantities required by Cyprus – initially about 0.5 million tonnes LNG per year – the spot price for LNG to be delivered to Cyprus is expected to be higher.

Adding to this, the recovery of the cost of constructing the facilities, operation and maintenance – and other related costs and costs incurred by the EAC – are likely to bring the total cost above the $10/mmbtu level. Long-term supply contracts would cost even more.

“Given the above, it is not certain that electricity costs would come down. Gas could boost industry and benefit the economy if its introduction leads to substantial cost reductions in comparison to diesel. But this may not be the case. In fact it could be the opposite.”

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