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Reassessing Cyprus’ Competitive Electricity Market: Structural Distortions and Pathways to Reform

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.

ECB Launches Geopolitical Stress Tests For 110 Eurozone Banks

The European Central Bank is preparing a new round of geopolitical stress tests aimed at assessing potential risks to major financial institutions across the euro area. Up to 110 systemic banks, including institutions in Greece and the Bank of Cyprus, will take part in the exercise, which examines how geopolitical events could affect financial stability.

Timeline And Testing Process

Banks are expected to submit initial data on March 16, 2026. Supervisors will review the information in April, while the final results are scheduled to be published in July 2026. The process forms part of the ECB’s broader supervisory work to evaluate financial system resilience under different risk scenarios.

Geopolitical Shock As The Primary Concern

The stress tests place particular emphasis on geopolitical risks. These may include armed conflicts, economic sanctions, cyberattacks and energy supply disruptions. Such events can affect banks through changes in market conditions, borrower solvency and sector exposure. Lending portfolios linked to regions or industries affected by geopolitical developments may face higher risk levels.

Reverse Stress Testing: A Tailored Approach

Unlike traditional stress tests that apply the same scenario to all institutions, the reverse stress test requires each bank to define a scenario that could significantly affect its capital position. Banks must identify a geopolitical shock that could reduce their Common Equity Tier 1 (CET1) ratio by at least 300 basis points. Institutions are also expected to assess potential effects on liquidity, funding conditions and broader economic indicators such as GDP and unemployment.

Customized Risk Assessments And Supervisor Collaboration

This methodology allows banks to submit risk assessments based on their own exposures and operational structures. The approach is intended to help supervisors understand how geopolitical events could affect institutions differently and to support discussions between banks and regulators on risk management and contingency planning.

Differentiated Vulnerabilities Across Countries

A joint report by the ECB and the European Systemic Risk Board indicates that countries respond differently to geopolitical shocks. The Russian invasion of Ukraine led to higher energy prices and inflation across Europe, prompting central banks to raise interest rates. Belgium, Italy, the Netherlands, Greece and Austria experienced increases in borrowing costs and lower investor confidence. Germany, France and Portugal recorded more moderate changes, while Spain, Malta, Latvia and Finland showed intermediate levels of exposure.

Conclusion

The geopolitical stress tests will not immediately lead to additional capital requirements for banks. Their results will feed into the Supervisory Review and Evaluation Process (SREP). ECB supervisors may use the findings when assessing capital adequacy, risk management practices and operational resilience at individual institutions.

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