Has the market reduced total system costs, and are those savings reaching consumers?

Cyprus’ competitive electricity market completes its first year of operation on October 1. Technically, it is functioning. Electricity is traded through day-ahead, intraday, forward and balancing arrangements broadly aligned with EU’s Target Model.

But the test of an electricity market is not whether its software works or bids are submitted on time. It is whether competition produces greater efficiency, encourages appropriate investment and passes lower costs to consumers.

On those tests, there has been little visible progress. Electricity prices remain among the highest in Europe. The low production cost of solar power is not being translated adequately into lower bills. Consumers have little meaningful choice, while the market remains dominated by a small number of interconnected participants.

This is not simply because the market needs more time. Its principal weaknesses are structural.

A European model in a very different system

The EU Target Model was developed for large, interconnected electricity systems containing numerous generators, suppliers and traders. Competition is reinforced by cross-border flows: if domestic producers charge too much, electricity can be imported; if production is excessive, it can be exported.

Cyprus has none of these safeguards. It has a small electricity system, limited demand, no interconnection, one dominant conventional generator and relatively few private producers, aggregators and suppliers.

Many private producers, aggregators and suppliers are also commercially connected. Electricity may pass from a generating company to a supplier within the same group. Formally, this constitutes market activity. Economically, it may not constitute meaningful competition. It is not necessarily an illegal cartel, but aggressive price competition is not really taking place.

Expensive conventional generation

Cyprus still produces most of its electricity using fuel oil and diesel. These are expensive and carbon intensive, with emission allowances adding substantially to the cost.

Under marginal pricing, the most expensive generator required to satisfy demand influences the wholesale price. Solar producers with much lower costs therefore operate beneath an umbrella created by expensive conventional generation.

They do not need to offer electricity close to their production cost. They need only offer it sufficiently below the conventional alternative. The difference between the selling price of market participating photovoltaic generation and low solar generation costs is not reaching consumers.

The position is even less transparent for bilateral contracts. Contract prices, aggregation fees, related-party transactions and supplier margins are not published. It is impossible to determine how the benefit is divided between producer, aggregator, supplier and customer.

A market that does not disclose where the savings go cannot demonstrate that competition is working.

Most solar power does not set the market price

Most Cyprus photovoltaic capacity does not participate directly in wholesale price formation.

According to Energy Service data for April 2026, Cyprus had more than 1,055MW of PV capacity. About 471.5MW operated under net metering and 158.3MW under net billing. Approximately 76MW received feed-in tariffs, while about 326MW was intended for the competitive market.

Close to 60 per cent of installed PV capacity therefore operates under arrangements principally intended for self-consumption. This production reduces daytime demand but does not compete directly in the wholesale market.

Only utility scale commercial parks participate fully. Even there, extensive curtailment reduces the amount delivered. With renewable curtailment exceeding 47 per cent in 2025, theoretical installed capacity greatly overstates the electricity commercially available.

Cyprus has created a wholesale market in which the largest source of new generating capacity is either outside the price setting mechanism or frequently curtailed.

The missing flexibility

During sunny hours Cyprus may have more solar production than it can absorb. During the evening, it must return rapidly to expensive conventional generation.

A functioning market should turn this price difference into investment in storage, demand response and flexible generation. But Cyprus entered the market before sufficient batteries, smart meters or demand-response infrastructure were available.

The result is predictable: cheap electricity is curtailed at midday and expensive oil-fired generation returns during the evening.

Batteries will help, but storage is not free electricity. It adds capital costs, incurs energy losses and must earn revenue. Poorly designed support could create another layer of guaranteed private returns without ensuring lower system costs.

Retail competition remains weak

Competition matters only if suppliers pass wholesale savings to customers.

Consumers cannot readily compare the energy-acquisition cost, supplier margin, balancing charge and network component of competing offers. A discount against EAC’s tariff does not reveal whether the supplier is passing through inexpensive renewable electricity or merely pricing marginally below the incumbent.

As it stands, the market risks producing competition around the EAC tariff rather than competition around actual cost.

If suppliers purchase renewable electricity through bilateral contracts at prices just below EAC’s oil-based tariff, customers may receive a modest discount – but most of the difference between solar production cost and the conventional tariff remains within the private value chain.

The missing solutions may not provide cheap electricity

Natural gas, storage, grid modernisation and interconnection are often presented as the reforms that will eventually allow the market to work. All could improve the system, but none guarantees substantially lower prices.

The Vasilikos LNG project has suffered prolonged delays, disputes and escalating completion costs. Recovering high fixed infrastructure and operating costs over its limited throughput could add substantially to the delivered gas price. Once these are included, LNG-fired generation may not be materially cheaper than oil-fired generation under realistic conditions.

Imported LNG should now be viewed mainly as providing fuel diversification, lower emissions and greater security – not automatically cheap electricity.

Storage will reduce curtailment but will add its own cost. The Great Sea Interconnector could introduce external competition, but it remains exposed to financing, construction and geopolitical risks and will also require cost recovery from consumers.

These investments may make the electricity system more efficient and secure. They will not necessarily transform a small market into a genuinely competitive one.

Time to consider compatible alternatives

Cyprus should not abruptly abandon the market or return automatically to an EAC monopoly. It should first undertake an independent audit covering bilateral contracts, producer and supplier margins, related-party transactions, curtailment, balancing costs and the allocation of renewable benefits.

A clear test should then be applied: has the market reduced total system costs, and are those savings reaching consumers?

If the answer remains no, Cyprus should consider alternatives compatible with EU requirements, including competitive renewable auctions, two-way contracts for difference and an independent public procurement agency.

The conclusion after the first year is that Cyprus does not merely have an expensive generation problem. It has an electricity-market design problem.

The present model has introduced trading without creating the conditions required for effective competition. Continuing unchanged would preserve the appearance of a European market while failing to deliver its purpose.