Cyprus energy: No public consultation, no windfall profit tax

We should have submitted our publicly consulted energy and climate plan to the EU by now. There’s no sign of that

In a comparatively little-reported speech on June 27, at EAC’s presentation of the company’s progress in 2022 and its near-term plans, the energy minister, Giorgos Papanastasiou, outlined the government’s energy strategy. He said this is based on three key pillars: renewable energy (RES), energy security and support of vulnerable consumers. He said that the emphasis will be “to turn the crisis into an opportunity, accelerating and intensifying the transition to the green economy, by taking medium-term measures aimed at promoting self-production from RES, the large-scale renovation of existing energy-intensive homes, the energy upgrade of businesses and the promotion of green energy in agricultural activities such as irrigation.”

He added that the ministry has “redefined our energy policy in order to achieve the reduction of the impact of the cost of energy imports on the economy and to accelerate the alignment of our energy and climate goals with the wider European Fit-for-55 Policy.”

All good ideas that could bring us away from the frenzy of the last three months about natural gas, back to reality. These should be embodied in Cyprus’ updated National Energy and Climate Plan to 2030 (NECP), that should have been submitted to the European Commission (EC) by June 30. Prior to submission, the draft should have been issued for public consultation, but so far we have heard little about it. On June 27 the minister said that “it is in its final revision stages”.

The key objectives, targets, policies and measures to form the basis of the updated NECPs are described in great detail in the guidelines issued to member states by the EC. These impact everything energy-related in Cyprus, from electricity, to transport, industry, buildings, heating and cooling, shipping, aviation and agriculture. The NECP must comply and deliver EU’s Climate Law, ‘Fit-for-55’ and REPoewerEU policies. Particular attention should be devoted to RES, energy efficiency, energy security, and curbing emissions. The EC emphasises that NECPs should “ensure a fair and just transition, mitigating social and employment impacts, tackling labour and skills shortages, reducing energy poverty, and ensuring affordable access to essential services for all.”

The EC guidelines state “member states must develop the update of the NECPs in a dialogue with local authorities, civil society organisations, social partners, the business community, investors and other stakeholders. Article 10 of the Governance Regulation requires member states to give the public early and effective opportunities to participate in the elaboration of the NECPs.”

Further, the EC states “sound consultation implies that the public should have access to all relevant documents, reports and assumptions at the start of the consultation period,” and that “In the updated NECPs, member states are required to include a summary of the consultations… and explain how such comments have been considered.”

Given the critical importance and far-reaching impact of the updated NECP on the future of energy, affordability and energy security, the economy, on Cypriot consumers and ability of Cyprus to satisfy EU climate targets without incurring excessive penalties – as is happening now – giving time for adequate and meaningful public consultation should have been high priority. As often happens in Cyprus, we are very late – the submission deadline has passed – and I fear that public consultation may be sacrificed. If that happens, it would be a very unsatisfactory situation, going completely against EC guidelines.

Cyprus deserves an updated NECP that reduces emissions, brings energy prices down and accelerates energy transition responsibly, making full use of Cyprus available and abundant energy resources, while contributing to the achievement of EU’s climate targets.

And above all, new energy projects must be subject to open, transparent, competitive bidding. Once RES project tenders are approved technically, only then bidders should be invited to submit commercial offers based on reasonable cost-plus-profit and be held to it.

Natural gas

It has, by now, become obvious that bringing natural gas to Cyprus, either its own or from Israel, is fraught with difficulties and will not happen any time soon. Chevron has submitted its development plan for Aphrodite, based on exports to Egypt, probably by 2028. Eni will probably follow the same route, but has not given a timetable.

There is no gas in Israel for Cyprus. Chevron is proceeding with projects to expand gas production from Tamar and Leviathan. But the gas is destined for Israel’s domestic energy market, doubling of exports to Egypt and exports to Asia using a floating liquefaction facility placed over Leviathan. Energean has not discovered sufficient gas to justify new development projects and is considering selling it to the Israeli or Egyptian energy markets. Cyprus can buy some of this gas if it is prepared to pay the price and if somebody else invests in the required subsea pipeline. But the very small quantities of gas Cyprus needs, 0,5–1,0 billion cubic metres per year, make the commerciality of such a venture challenging.

That leaves the ongoing project to import LNG using a floating regasification facility at Vasilikos. An opaque project fraught with unending problems.

So, the way forward is to expedite doing whatever it takes to unlock and maximise RES adoption – fairly.

RES windfall-profits

During the presentation on June 27 the EAC stated that “the cost of purchasing electricity from private RES producers increased from €63.7million in 2021 to €103.9million in 2022, an increase of 63,1 per cent.”

When a RES producer company applies for a production permit, it submits a business plan that indicates what it considers to be ‘viable earnings,’ ie reasonable cost-plus-profit.

Based on the price of renewable electricity paid by EAC per kWh, and the reasonable cost-plus-profit, it is possible to estimate windfall-profits, made in 2022 as a result of the very high electricity prices, at not less than €60million.

In August last year the finance ministry said that it was studying the findings of a working group set up for this purpose and that if found that RES producers earned windfall-profits, these would be taxed.

The ministry went on to say that it had identified certain companies that “may have had unexpectedly high revenues due to the increased price of energy from renewables” and that following “a further economic analysis of the data, the working group will devise a methodology for possible taxation or imposition of a levy on windfall profits.”

2022 passed, the elections came and went and nothing has been done about recovering these windfall-profits. It is an outstanding action that must be completed. €60million can go a long way to help vulnerable consumers – one of the government’s three key pillars, especially now that subsidies have been removed and electricity and fuel prices have gone back to unaffordable highs.

Dr Charles Ellinas, @CharlesEllinas is a senior fellow at the Global Energy Centre of the Atlantic Council