Two months ago, Cyprus embarked on its journey with a competitive electricity market model, promising enhanced competition, increased consumer choices, and lower prices. However, the real-world implementation under the so‐called “target model” has revealed significant distortions that are driving up costs for the end user.
Market Distortions in a Small, Isolated System
The fundamental issue lies in the wholesale market’s pricing mechanism. Specifically, the clearing price is determined by the most expensive conventional generation unit of the Electricity Authority of Cyprus (EAC), which must meet the entire demand. This single pricing benchmark is then applied across all market participants, including renewable energy sources (RES). In a market characterized by just two main players—the EAC and limited RES providers—the distortions become inevitable. Moreover, Cyprus’ lack of interconnection with neighboring countries further exacerbates the situation, reinforcing a de facto monopoly where the EAC controls over 90% of production.
The Timing of Price Setting and Its Implications
An analysis of the hourly operations in the wholesale market reveals the inherent biases. During night and early morning hours (00:00-06:30 and 16:00-24:00), the EAC operates exclusively, setting prices solely in its favor. In contrast, during peak morning and afternoon periods, both the EAC and RES are active, benefiting both groups. It is only during brief midday windows, usually spanning 2-4 hours, that RES might operate alone, potentially lowering costs for consumers. However, given the modest share of RES operations (only 3.4% of daily demand), the overall pricing mechanism remains steeply skewed towards EAC’s most expensive units, leading to higher bills for consumers.
Data Insights From November 24, 2025
The Cyprus Grid platform data for November 24, 2025, offers a clear illustration of these distortions. For 22 hours of the day, the wholesale price is dictated by the highest-priced conventional unit, while RES participation remains marginal. Even when a small portion (1.2%) is negotiated at a zero wholesale price during low-demand periods, the remainder (2.2%) is still subject to the expensive pricing mechanism. Consequently, both conventional and RES operators are remunerated based on the EAC’s highest cost, further inflating consumer expenses.
Toward a Sustainable Solution
Immediate and long-term reforms are essential to realign the market with the interests of consumers. Two critical measures have been proposed:
1. Immediate Relief: Implementing a Wholesale Price Cap
Setting a ceiling based on thorough analyses of actual production costs could protect consumers. Any excess pricing over this cap would be automatically rebated as reduced bills. This approach, similar to the successful Iberian Exception mechanism implemented in Spain and Portugal from June 2022 to December 2023 for gas-powered generation, would provide immediate consumer relief without disincentivizing investment in storage and flexible generation units.
2. A Permanent Solution: Contracts for Difference (CfDs)
CfDs have gained prominence across Europe and in markets such as the United Kingdom, France, Poland, and Greece. Under this model, renewable energy producers secure fixed prices via competitive tenders for extended periods (typically 15-20 years). When the wholesale price falls below the fixed price, a dedicated CfD fund compensates the producer, and vice versa—if the wholesale price exceeds the fixed rate, the surplus is returned to the fund, ultimately reducing consumer bills. This approach not only stabilizes long-term electricity prices but also enhances investor confidence and ensures an equitable distribution of any premium charged.
Implementation Roadmap and Final Thoughts
Pragmatic steps must be taken immediately:
- 2026: Launch a pilot CfD program targeting 100 MW of new projects in solar and storage.
- 2027-2028: Transition to mandatory CfDs for all new renewable, storage, and hybrid projects.
- 2026 Summer: Amend the relevant legislation to incorporate these reforms.
The experience of markets like Greece and the UK shows that a well-organized, closely monitored tender system for hybrid projects (combining RES and battery storage) can ensure a fairer, more efficient market. The misfit of the current target model in Cyprus does not necessitate its abandonment but rather its rapid recalibration to suit local conditions.
Conclusion
By implementing a temporary price cap for immediate relief and transitioning to CfDs as a long-term solution, Cyprus stands to lower consumer bills, foster investments in renewable energy and storage, and build a fairer, sustainable electricity market. The time to act is now—not after another expensive five-year cycle of high electricity costs, but today, to build a more resilient and cost-effective energy future for every household and business in Cyprus.
