Our View: Energy fiasco underlines that state unable to provide cost-effective solutions

Energy Minister George Papanastasiou’s decision to write to the Cyprus Energy Regulatory Authority (Cera), asking it to end the country’s status of ‘emerging’ market was long overdue and he should be congratulated for taking it. Cyprus had declared itself an emerging energy market, not because it was in the best interest of the economy, but so it would maintain the monopoly of the EAC for some years longer by creating another state monopoly for the supply of natural gas. The existence of monopolies is permitted in an emerging market.

Ironically, the pretext for setting up the Public Company for Natural Gas (Defa) as the only supplier of natural gas in Cyprus was to protect small producers of electricity, who were allegedly threatened by the dominant position of the EAC. There was some superficial rationality behind the decision. If a single company bought natural gas, it would secure the most competitive price, whereas if every producer bought gas separately the EAC would have an advantage because it would be able to secure a lower price than the small producers.

Defa was established for this purpose in June 2008, but 16 years later, it has still not imported any natural gas, thus keeping small producers out of the market and preserving the EAC monopoly intact. We have been paying staff, managers, directors for 16 years and the company is still nowhere near achieving what it was set up to do. It is not entirely its fault, because as a state-owned company it was under the control of politicians who were inclined to obey the diktats of the powerful EAC unions that were determined to preserve the monopoly for as long as possible. Defa – misleadingly labeled a public company – was a way for the electricity market to remain under the control of the state and, in effect, the EAC and its unions.

The EAC unions, which behave as if they own the authority, have blocked the opening of the electricity market for years, and only agreed to the establishment of an ‘independent’ transmissions operator as long as it was run by EAC staff. As for the opening of the market, it was continuously put off on the pretext that it is a complex operation, so complex that we are still waiting for it. This combination of unions and state has been a recipe for disaster. The fiasco of the Vasiliko natural gas terminal, which is set to cost the taxpayer at least a couple hundred million euros, was the direct consequence political incompetence (possibly corruption) and bureaucratic ineptitude. Private producers were willing to make their own natural gas supply arrangements but could not because of the Defa monopoly protected by law.

The abolition of the emerging market, assuming that Cera will do the right thing and approve it, is the best thing that could happen as it would end Defa’s monopoly and allow private companies to enter the gas market. Surprisingly, even the chairman of the EAC, Giorgos Petrou, said he supported such a move. The Vasiliko terminal would still have to be completed, but if the Chinese consortium refused to release the Prometheas floating storage regasification unit (fsru) another such unit could be leased. In fact, one idea is to give the half-completed Vasiliko terminal to a private company to complete and operate, while power stations could bring their own LNG and pay a fee for the use of the facility.

There must be as little involvement of the state and the EAC as possible in any new plans. In Germany, Petrou said, four natural gas terminals were set up in the space of six months. But we doubt they had clueless union bosses, self-serving politicians and state companies, run by incompetents to deal with. The state would still have an involvement as it must set up the framework for importing gas and then allow the market to come up with the solutions. Its involvement in projects that state employees and political appointees know nothing about, as we have seen, leads to disaster and huge economic losses.  

The way forward is to close down Defa, hire experts to set up a tenders’ procedure for completion of the Vasiliko terminal, which they would also supervise. If Prometheas remains in Shanghai, a fsru could be leased that would be paid for by energy firms bringing in their own natural gas. We must understand in this country that the most cost-effective solutions are rarely provided by the state but by businesses operating in free market conditions.