High energy costs are no longer a problem only for household budgets and businesses. With oil and natural gas prices remaining elevated, the energy crisis is increasingly becoming a fiscal challenge, raising both the cost of supporting economies and the cost at which governments themselves borrow.
The issue is expected to be discussed at the EU Summit on 15 and 16 October, with several countries, including Cyprus and Greece, seeking greater flexibility in fiscal rules so they can support households and businesses without facing additional restrictions.
At present, reducing energy taxation is the only way to immediately lower the cost of liquid fuels and electricity. However, common European rules govern both excise duties and VAT.
Finance Minister Makis Keravnos has discussed possible exemptions and derogations from European rules with counterparts and European Commission officials, including rules on energy taxation and state spending ceilings, with the aim of making additional measures to reduce energy costs possible.
Cyprus is particularly interested in lowering excise duties and changing the way VAT on electricity is calculated. It is also seeking greater flexibility in spending ceilings for countries with low public debt and high budget surpluses.
Greek Prime Minister Kyriakos Mitsotakis, in a letter to European Commission President Ursula von der Leyen, has called for measures taken by governments to support citizens to be excluded from fiscal calculations.
He has also proposed allowing countries to use additional VAT revenue generated by unexpectedly high prices.
The argument is that surging energy costs cannot be tackled solely at national level using limited fiscal resources.
A new normal
Conditions in energy markets are increasingly pointing towards a new normal of high prices, with the effects spreading across the economy.
Von der Leyen told the European Parliament on Tuesday that natural gas prices had risen by 140% since the end of February, while diesel prices had doubled, resulting in an additional €100 billion cost for Europe.
“We are all feeling these higher prices,” she said.
She acknowledged that member states require support in the short term but stressed that Europe must simultaneously address the structural causes of its energy dependence.
In Cyprus, the government says it is monitoring price developments daily and continues to leave open the possibility of further intervention, without announcing specific new measures.
President Nikos Christodoulides said the government has allocated more than €1 billion to address the effects of rising prices, particularly in the fuel sector.
“We are here, evaluating the measures, the data and the prices on a daily basis, and we intervene, and I am pleased, I repeat, that we have the ability to intervene, wherever and whenever necessary,” he said.
His comments effectively leave the door open to new measures if conditions require them.
At the same time, DISY and AKEL have called for a more comprehensive approach to managing the effects of higher energy costs.
Parliament seeks answers
Pressure for further action was also evident at the House Energy Committee, which examined rising fuel prices and their impact on consumers and the economy.
The Consumer Protection Service argued that current prices in Cyprus remain at acceptable levels.
The service's head, Constantinos Karagiorgis, said price increases in Cyprus have been lower than the EU average, adding that Cyprus remains among the European countries with the lowest prices for 95-octane petrol and also ranks relatively low for heating oil prices.
The service said an upgraded monitoring model has been in operation since 1 September, taking daily account of international prices, exchange rates, import data and retail prices at petrol stations.
The model also uses historical data dating back to 2020 to assess whether market prices remain within acceptable limits.
The answers, however, did not satisfy members of the committee.
Committee chairman Nicos Georgiou argued that the relevant government departments had failed to clearly explain the pricing formula and the precise burden imposed on consumers through taxation, calling for greater transparency.
The discussion is expected to continue on 27 October.
The Cyprus Consumers Association also questioned the effectiveness of market monitoring, arguing that after an earlier fuel subsidy, several petrol stations failed to reduce prices by the full value of the relief.
Questions surrounding competition also remain unresolved.
The Commission for the Protection of Competition said it is examining whether prices are determined freely or whether there are coordinated practices between companies.
It was also confirmed that an investigation into the petroleum products sector has been under way since 2024.
Cyprus' particular vulnerability
Beyond petrol and diesel prices, the latest energy crisis is bringing an older and deeper weakness of the Cypriot economy back into focus: its dependence on imported conventional energy sources.
Andreas Charalambous, chairman of the Fiscal Council, told the House Energy Committee that inflation in Cyprus is largely imported and that price increases during energy crises tend to be disproportionate.
In his assessment, this is linked to Cyprus' heavy dependence on conventional energy sources and the insufficient use of renewable energy sources.
From energy prices to government bonds
The second and less visible blow concerns borrowing costs.
The energy crisis and rising inflation have raised concerns about the fiscal trajectory of some countries.
Those concerns are reflected in higher borrowing costs across eurozone member states, with Cyprus no exception.
France is in the most difficult position. Its borrowing costs have risen above those of Italy and Greece, while some large French companies can now borrow on financial markets at lower interest rates than the French state itself.
In Cyprus, the yield on the 10-year government bond has risen by approximately 33% over the past year.
That increase does not mean Cyprus is facing financing difficulties. It does, however, mean that fiscal interventions are becoming increasingly important in how sovereign bonds are assessed by markets.
Europe looks to grids and interconnections
Against this restrictive backdrop, EU leaders are being asked to find sufficient fiscal space to respond to elevated energy prices.
Von der Leyen said on Tuesday that she supported providing member states with tools and greater flexibility, recognising that there is no single solution suitable for every EU economy.
The European Commission is also promoting joint purchasing and better use of the EU's collective purchasing power.
Over the longer term, it is prioritising greater electrification of the economy and reduced dependence on oil and natural gas.
The development of electricity interconnections and power grids is also considered crucial to reducing long-term energy costs and allowing renewable generation to be used to its full potential.
Von der Leyen noted that despite rapid growth in Europe's renewable energy capacity, a significant share of new production remains unable to connect effectively to the grid.
The problem is particularly evident in Cyprus, where existing networks cannot always absorb the renewable electricity being generated.
The European Commission therefore views investment in electricity grids as essential to ensuring clean energy can be transported to areas where demand exists.
