The interconnector is not essential

Europe and the European Commission (EC) consider electricity grid interconnections between member states as strategically important, contributing to Europe’s energy security. They offer economic efficiency, provide reliability to the electricity systems and facilitate increased uptake of renewable electricity, thus speeding-up energy transition and emission reduction. In support of this, the EU has set an interconnection target of at least 15 per cent by 2030 to encourage EU countries to interconnect their installed electricity production capacity, thus unifying Europe’s electricity market. Most of Europe has achieved a rate between 10 per cent – 15 per cent, including Greece. Cyprus is the last EU member state to remain isolated without electricity interconnection.

The proposition to interconnect Cyprus and Crete first appeared in 2010 and by 2013 the Euro-Asia Interconnector project was included in EU’s list of ‘projects of common interest’ (PCI). Following feasibility and detailed studies supported financially by the EC, the project was awarded a grant of €657million in January 2022.

The first project-related inter-governmental agreement was signed by the ministers of energy of Cyprus, Israel and Greece in 2013. By 2018 the Energy Regulatory Authorities of Cyprus and Greece, Raek and RAE, agreed a cross-border cost allocation (CBCA). And on 14 October 2022 the inauguration ceremony heralding the start of the construction works was held at the Presidential Palace in Nicosia. Admie, the Greek independent power transmission operator took over the project in October 2023 and renamed it as the Great Sea Interconnector (GSI).

I felt it necessary to summarise the inception and historical evolution of the project because over the last few months it has become the centre of considerable coverage in Cyprus, often negative, as various interests have suddenly become aware of its significance. The project has been in existence for 14 years and during that period it has gone through exhaustive feasibility and detailed studies, both technical and financial, the positive outcome of which led the EC to support it with its biggest award to a PCI project. Throughout this period, all steps of the project, and its final outcome, were monitored and approved by Raek and RAE, receiving full support by the governments of both countries and the EC.

Why is the GSI so important?

The GSI is an important project for Cyprus, not only for ending its electricity isolation from Europe, but also in terms of brining electricity prices down from their currently exorbitant levels.

Unfortunately, the implementation of renewable projects in Cyprus is, at present, dysfunctional – it has not really contributed to lowering electricity prices. Most of them have been awarded without competition, with prices pegged just under EAC’s conventional electricity prices, leading to super-profits for the developers with little benefit for consumers.

Electricity prices can be brought down significantly only by:

• Replacing diesel/HFO with natural gas in electricity generation: this can bring prices down by as much as a third, due to the low price of gas and reduction in emission allowances, but requires completion of the LNG import project at Vasilikos
• Using batteries to store excess renewable power: this is limited to durations of 4-6 hours, thus making it complementary to interconnection – it is not a substitute
• Increasing the uptake of renewables: however, so far this has not helped bring prices down – needs competitive bidding
• Through the use of electricity interconnectors

I could have added the launch of a competitive electricity market, but not only there is no certainty when this will happen, if ever, but, given the way the market functions in Cyprus, there are also questionmarks as to whether this would be truly competitive.

Interconnectors allow electricity to flow from a market with excess supply to a market with excess demand, at any time this happens and for however long it lasts, which in turn pushes toward an alignment of prices between countries. They help strengthen energy security, especially in cases of a drop in local power production, and reduce electricity price volatility.

They are vitally important when the uptake of intermittent renewables increases, especially in response to EU’s renewable energy target of 45 per cent by 2030, to manage peak demand and ensure flexibility and stability of electrical systems and reliability of supply.

Intermittent renewables with unpredictable output represent one of the main energy transition challenges. The larger the share of renewables is the more the fluctuations in power generation. These can occur both during the course of a day but also throughout the year, for example, higher solar output during summer and higher wind in the winter. When this happens, it is not always possible to ramp-up renewable energy production when needed. Interconnectors can then play a role in smoothing out these power fluctuations. 

What’s next?

Admie is pressing Cyprus government to commit to its €100million equity participation in the project and Raek to approve imposing a fee on Cypriot electricity consumers from 1.1.2025.

Even though favourably disposed towards the project, Cyprus’ energy minister insisted, and rightly so, that Admie first submits a revised, detailed, cost-benefit analysis before committing to Cyprus’ equity participation. This is now expected on 11 July. Confirmation of Cyprus equity participation should strengthen project bankability and securing project finance.

This is important as it gives the state a say in what will be the island’s biggest, and most critical, electricity infrastructure project.

Admie’s analysis should update the project’s total cost, possibly over €2billion, confirm what is the project’s equity participation, including Admie’s share, and securing of project finance. And, of course, what will be the benefits to consumers in terms of reduced electricity costs when GSI starts operations in 2029. Admie has indicated that this could be up to 30 per cent but needs detailed confirmation.

Raek confirmed this week that cost recovery should start only when the cable becomes operational and not now as requested by Admie, in line with what the minister indicated in June. Even though Admie may be unhappy about this, it should not become a blocker. After all, all legitimate project costs will eventually be recoverable through the electricity fee, including any additional borrowing costs as a result of Raek’s decision. This regulatory fee is likely to be around 1-1,5 cents/kWh, far less than the benefit to consumers.

If Admie believes it has a case, it should present it and negotiate with Raek. Likewise, the ministry should evaluate Admie’s analysis when submitted on 11 July and not make a rush decision, under pressure, to join the project. GSI could bring benefits to Cyprus, but it is not essential at any cost.

Undoubtedly the construction of GSI will impact Cyprus’ protected electricity market. It will not be possible for this to stay out of the European system and directives beyond 2030. It is hoped that by the time it becomes fully operational, the market will be fully liberalised and competitive.

Charles Ellinas is Senior Fellow at the Global Energy Centre of the Atlantic Council. This piece is also posted on the blog of the Cyprus Economic Society https://cypruseconomicsociety.org/blog/blog-posts/