GSI costs will not automatically raise power bills, says former CERA chief

The Great Sea Interconnector (GSI) will not automatically translate into higher electricity bills because its costs are recovered through a detailed European Union regulatory framework rather than being passed directly to consumers, according to energy systems expert and former Cyprus Energy Regulatory Authority (CERA) chairman Andreas Poullikkas. In a recent piece of analysis, Poullikkas said public debate surrounding the project often focuses on headline figures running into billions of € or assumes electricity consumers will inevitably bear the full cost. “The reality is more complex and much more tightly regulated,” Poullikkas said. He explained that, as a Project of Common Interest (PCI), the GSI follows European rules under which cost recovery is neither arbitrary nor one-dimensional. Instead, he said, the process combines market revenues, regulated tariffs and the cross-border cost allocation (CBCA) mechanism. According to Poullikkas, the central question is not simply how much the project costs, but who benefits, what share of the cost each country assumes, how much is covered by the operation of the interconnection itself and what amount, if any, ultimately remains to be recovered through electricity tariffs. He explained that the European regulatory framework requires any European grants or subsidies to be deducted from the project’s overall cost before any regulated recovery begins. Only the remaining net amount is then recovered through a two-stage process, he pointed out. Poullikkas explained that the first source of recovery comes from the electricity market itself through revenues generated by allocating cross-border transmission capacity, commonly known as congestion rents, under EU Regulation 2019/943. Only if those market revenues are insufficient does the CBCA mechanism come into effect, he stated. Under EU Regulation 2022/869 governing Projects of Common Interest, national regulatory authorities allocate the remaining cost between countries that derive a net benefit from the project. “The net cost remaining after grants and market revenues follows the benefit and not simply the geography of the project,” Poullikkas said. He stated that this principle had already been applied to the Greece-Cyprus electricity interconnection. Based on studies and the investment dossier submitted under the European regulation, the regulatory authorities concluded that both countries would benefit from the project, although not equally. As a result, the cost of the Cyprus-Crete section is allocated at 63 per cent for Cyprus and 37 per cent for Greece, he explained. However, Poullikkas stressed that this ratio does not mean either country immediately pays that amount in cash, nor does it mean the entire burden is automatically transferred to households. Instead, it determines how the eligible recoverable cost of the cross-border section is shared according to the net benefits identified in the relevant studies. To illustrate the mechanism, Poullikkas presented a simplified example. If the annual allowed revenue requiring recovery amounted to €10 million, then under the commonly cited 63 per cent to 37 per cent allocation, €6.3 million would correspond to one country and €3.7 million to the other. However, he stressed that those figures still do not automatically become electricity bill charges because revenues generated by the electricity market are deducted first. Poullikkas explained that regulators first determine the annual allowed revenue required by the project promoter to cover operating costs, depreciation and a reasonable return on the regulated asset base. They then deduct revenues generated through the operation of the interconnection, primarily from auctions of transmission capacity. If those market revenues are sufficiently high, they reduce the amount that must be recovered through regulated network charges. If market revenues are lower, only the remaining balance is recovered through national network tariffs under each country’s regulatory framework. Each member state therefore establishes its own revenue requirement after taking into account operating costs, its share of capital expenditure, revenues from transmission capacity sales and any grants received, he said. “With this mechanism, the market bears part of the burden first and tariffs cover only the remainder,” Poullikkas stated. He added that this is why statements suggesting consumers will pay the project’s full cost are misleading. “European funding, cross-border transmission capacity revenues, the allocation of costs between countries and the national regulatory methodology all intervene before tariffs are affected,” Poullikkas mentioned. He then presented three hypothetical scenarios. If the project required €10 million in annual revenue and the electricity market generated the same amount, the entire requirement would be covered through market revenues and nothing would remain to be recovered through tariffs. “In this case, the consumer benefits without any additional direct charge from this part of the mechanism,” Poullikkas said. If, however, market revenues amounted to only €7 million, the remaining €3 million would be allocated according to the CBCA ratio. Using the 63 per cent to 37 per cent allocation, approximately €1.89 million would correspond to one country and around €1.11 million to the other. Poullikkas stressed that only this remaining amount, rather than the entire annual revenue requirement, could potentially be reflected in regulated tariffs. Conversely, if market revenues reached €13 million while the allowed revenue remained €10 million, the project would generate a €3 million surplus. “In such a case, there is no justification for additional charges on users for that year,” Poullikkas said. He added that, depending on the applicable regulatory framework, any surplus could be offset or otherwise taken into account for the benefit of users. Poullikkas also argued that the CBCA mechanism affects electricity bills in an indirect rather than linear way because it only determines how the recoverable portion of costs is allocated between participating countries. He further mentioned that the ultimate impact on electricity prices depends on whether the interconnection simultaneously reduces other costs within the electricity system. According to Poullikkas, this may be the most important aspect of the public debate. He explained that an interconnection could increase one regulated charge while reducing overall electricity costs through lower wholesale prices, improved security of supply, reduced reliance on expensive reserve generation and more efficient operation of the electricity market. “For this reason, the correct evaluation is not based on a single isolated number but on comparing the total cost with the overall benefit,” Poullikkas said. He concluded that the GSI should be assessed according to its overall impact on the electricity system rather than through a single cost figure. “The cost is first reduced through grants, then through market revenues, and only the remaining amount is subject to regulated recovery,” Poullikkas continued. “In this way, the burden is distributed according to the benefits, while consumers ultimately stand to gain not only from how the costs are shared, but also from how the interconnection contributes to more stable, more competitive and more secure electricity prices,” he concluded.