By Dr Charles Ellinas*
The Competitive Electricity Market of Cyprus completes one year of operation on 1 October. From a technical point of view, it works. Electricity is traded through the day-ahead, intraday, forward and balancing markets, broadly in line with the EU Target Model.
However, the criterion for the success of an electricity market is not whether its software works or whether bids are submitted on time. It is whether competition increases efficiency, encourages the right investments and passes the lowest cost on to consumers.
Judged by these criteria, visible progress is limited. Electricity prices remain among the highest in Europe. The low cost of solar generation is not adequately translated into lower bills. Consumers have few meaningful choices, while the market is dominated by a small number of interconnected participants.
This is not simply because the market needs more time. Its fundamental weaknesses are structural.
A European model in a very different system
The EU Target Model was designed for large, interconnected electricity systems in which numerous producers, suppliers and traders operate. Competition is strengthened by cross-border flows: if domestic producers overcharge, electricity can be imported; if there is surplus generation, it can be exported.
Cyprus has none of these safeguards. It has a small electricity system, limited demand, no interconnection, one dominant conventional producer and relatively few private producers, aggregators and suppliers. Many of them are also commercially linked to one another.
Electricity can be transferred from a generation company to a supplier within the same group. Formally, this constitutes market activity. Economically, however, it may not amount to genuine competition. It is not necessarily an illegal cartel, but real and aggressive price competition is essentially absent.
Expensive conventional generation
Cyprus still produces most of its electricity using heavy fuel oil and diesel. These are expensive, high-carbon fuels, and the cost of emission allowances adds significantly to the overall cost.
In the marginal pricing system, the most expensive generating unit needed to meet demand influences the wholesale price. Solar producers, despite having much lower costs, thus operate under the "umbrella" of expensive conventional generation.
They do not need to offer electricity at a price close to their production cost. It is enough to offer it at a price slightly below the conventional alternative. The difference between the selling price of the photovoltaic generation participating in the market and the low production cost of solar energy does not reach consumers.
The situation is even less transparent when it comes to bilateral contracts. Contract prices, aggregator fees, transactions between related companies and suppliers' profit margins are not made public. It is impossible to determine how the benefit is shared between producer, supplier and customer.
A market that does not reveal where the savings end up cannot prove that competition is working.
Most solar energy does not set the price
Most of Cyprus's photovoltaic capacity does not directly participate in setting the wholesale price.
According to Energy Service data for April 2026, Cyprus had more than 1,055MW of photovoltaic capacity. Around 471.5MW operated under the net metering scheme and 158.3MW under the net billing scheme. Around 76MW were remunerated through avoided cost tariffs, while around 326MW were intended for the competitive market.
Consequently, almost 60% of installed photovoltaic capacity operates under schemes intended mainly for self-consumption. This generation reduces demand during the day, but does not compete directly in the wholesale market.
Only the large commercial solar parks participate fully. Even there, however, extensive curtailments limit the amount of electricity that is ultimately fed into the system. With renewable curtailments exceeding 47% in 2025, the theoretical installed capacity significantly overstates the amount of electricity actually available for trading.
Cyprus has therefore created a wholesale market in which the largest source of new generating capacity is either outside the price-setting mechanism or subject to frequent curtailments.
The missing flexibility
During sunny hours, Cyprus may have more solar generation than it can absorb. In the evening, however, it is forced to return quickly to expensive conventional generation.
A functioning market should turn this price difference into investment in storage, demand response and flexible generation. However, Cyprus launched the market before acquiring sufficient batteries, smart meters and demand response infrastructure.
The result is predictable: cheap electricity is curtailed at midday and expensive oil-fired generation returns in the evening.
Batteries will help, but storage is not free electricity. It requires capital expenditure, involves energy losses and must secure revenue. A poorly designed support scheme could create yet another layer of guaranteed private returnswithout ensuring lower costs for the system.
Retail competition remains weak
Competition matters only if suppliers pass wholesale savings on to customers.
Consumers cannot easily compare the energy purchase cost, supplier profit margin, balancing charge and network cost of competing offers. A discount against the Electricity Authority of Cyprus (EAC) tariff does not reveal whether the supplier is passing on the benefit of cheap renewable energy to the customer, or simply pricing marginally below the dominant supplier.
As it operates today, the market risks creating competition around the EAC tariff rather than around actual cost.
If suppliers buy renewable electricity through bilateral contracts at prices slightly below the oil-dependent EAC tariff, customers may receive a small discount. However, most of the difference between the production cost of solar energy and the conventional tariff remains within the private value chain.
The missing solutions may not bring cheap electricity
Natural gas, storage, grid modernisation and electricity interconnection are often presented as the reforms that will finally allow the market to work. All of them can improve the system, but none guarantees significantly lower prices.
The liquefied natural gas import project at Vasilikos has suffered prolonged delays, contractor claims and escalating completion costs. Recovering the high cost of infrastructure and operating expenses from limited volumes of gas could significantly increase its final price.
When these charges are factored in, electricity generated from imported LNG may not, under realistic conditions, be substantially cheaper than oil-fired generation.
Imported LNG should now be treated mainly as a means of fuel diversification, emissions reduction and enhanced energy security, and not automatically as a source of cheap electricity.
Storage will reduce curtailments, but will add its own cost. The Great Sea Interconnector could introduce external competition, but it still faces challenges.
These investments can make the electricity system more efficient and more secure. They will not necessarily turn a small market into a truly competitive one.
Time to consider compatible alternatives
Cyprus should neither abruptly abandon the market nor automatically return to an EAC monopoly. It must first carry out an independent audit covering bilateral contracts, the profit margins of producers and suppliers, transactions between related companies, curtailments, balancing costs and the distribution of the benefits of renewable energy.
A clear test must then be applied: did the market reduce the overall cost of the electricity system, and were those savings passed on to consumers?
If the answer remains negative, Cyprus should consider alternatives compatible with EU requirements, including competitive auctions for renewable energy, two-way contracts for difference and the creation of an independent public supply body.
The conclusion after the first year is that Cyprus is not simply facing a problem of expensive power generation. It is facing a problem of electricity market design.
The current model introduced trading without creating the conditions required for effective competition. Continuing to operate it without changes will preserve the image of a European market without achieving its purpose.
*Senior Fellow at the Atlantic Council's Global Energy Center
