After estimating the potential costs for Cyprus, InBusinessNews examines the other side of the equation, namely the economic benefits that may arise from the operation of the Great Sea Interconnector ( GSI ). From cheaper electricity and reduced use of conventional fuels, to RES, exports and security of supply, the crucial question that emerges is how much is all this worth?
Yesterday, Tuesday, 29 September, as part of the GSI File, InBusinessNews attempted a working case for the likely cost to Cyprus, utilising the available official data and making specific numerical assumptions where there are still gaps. Based on the hypothetical exercise, the final financial burden for Cyprus approaches €2.56 billion. This is an estimate based on the exercise and not an official final cost.
Today, the analysis moves to the other side of the equation. What could the economic benefit of GSI for Cyprus be?
The logic of Cost-Benefit Analysis
The answer lies in Cost-Benefit Analysis (CBA), which compares two different scenarios:
-how the Cypriot electricity system will operate and how much it will cost without GSI and
-how it will work and how much it will cost with GSI.
The difference between the two scenarios forms the basis for calculating the economic benefit of the project.
In other words, the aim is not simply to record the benefits of interconnection, but to translate them, where possible, into real economic value. The potential benefits:
1. Access to the European electricity market
Today, Cyprus is an electrically isolated system. The electricity consumed in the country must essentially be produced domestically, as there is no possibility of importing electricity from the European market when it is cheaper.
GSI aspires to change this reality.
Through the connection with Greece and, by extension, with the European electricity system, Cyprus will be able to import electricity when the total cost of import is lower than the cost of domestic production.
In simplified form, the potential benefit arises from the difference between:
-the cost of electricity production in Cyprus
-and the cost of importing electricity through GSI.
The greater the difference and the greater the quantities of electricity that can be economically imported, the greater the benefit for the Cypriot electricity system.
2. Less conventional fuels
The ability to import electricity can limit the hours during which more expensive conventional generation units in Cyprus need to operate.
This can mean less consumption of conventional fuels and lower overall production costs.
Savings, however, are not a given and will depend on factors such as international fuel prices, Cyprus' future energy mix, and electricity prices in the markets from which the country will be able to import.
3. Reducing CO₂ costs
Another potential benefit concerns the cost of CO₂ emission rights in the European ETS system.
If the operation of the GSI leads to less electricity production from domestic high-emission units, the related expenditure on emission allowances may also be limited.
However, care must be taken here to avoid double counting. If the cost of CO₂ allowances is already included in the total cost of domestic production used in the CBA, it cannot be recalculated as a separate economic benefit.
4. More RES, fewer cuts
One of the most important potential benefits of GSI concerns Renewable Energy Sources (RES).
The large-scale development of photovoltaics creates periods during which RES production may exceed the capacity of the isolated Cypriot system to absorb it. In these cases, production cuts are required.
Electrical interconnection creates the possibility for part of this surplus energy to be channeled outside Cyprus, instead of being lost.
This could mean:
-fewer production cuts from RES
-greater utilisation of investments in photovoltaics and other RES
-ability to export surplus electricity
-greater potential for integrating renewable energy into the Cypriot system.
5. From importer and exporter
The GSI is not a one-way street. The interconnection is two-way, which means that Cyprus should not only be considered as a potential importer of cheaper electricity.
In periods of high RES production and low domestic demand, Cyprus will potentially be able to export electricity to Greece and the European market.
The economic value of this possibility will depend on the quantities that can be exported, market prices at specific times, transmission losses and the operating rules of the interconnection.
6. The value of energy security
There is, at the same time, a benefit that is not so easily reflected in the electricity bill: security of energy supply.
An isolated electrical system must be able to cope on its own with generation unit failures, periods of high demand, and other disturbances.
Electrical interconnection creates an additional supply possibility from abroad. The economic value of reducing the risk of outages can be assessed through internationally used methodologies, such as the economic value of unserved electricity.
This is, however, more of a socio-economic benefit than a direct reduction in the consumer's bill.
7. More competition in the market
Connecting Cyprus to a much larger electricity market can also strengthen competitive pressure in the domestic market.
With the possibility of importing electricity, domestic production will compete, at certain times, with electricity that may come from other markets.
The crucial question, however, is not simply whether there will be greater competition. It is to what extent this will translate into lower overall electricity costs for the end consumer.
The crucial question: How many euros is all this worth?
The above lists the main potential benefits of GSI. However, to truly assess the economic value of the project, these benefits must be converted into euros and compared to the total cost.
Here lies the essence of Cost-Benefit Analysis.
For each year of operation of the GSI, the following should be compared:
-The cost of the Cyprus electricity system without the GSI
-The cost of the Cyprus electricity system with the GSI
The difference between the two constitutes the main economic benefit of the project.
For example, if without the GSI the Cyprus electricity system costs €1 billion per year and with the GSI €900 million, the economic benefit would be €100 million per year.
The example is simplified, but it shows the logic behind the calculation.
The cost versus the benefit
This is ultimately the economic test of the GSI.
In yesterday's InBusinessNews Working Case, we attempted to calculate the cost that may be incurred in Cyprus, using specific assumptions for the final construction cost, European financing, cross-border allocation and Weighted Average Cost of Capital (WACC).
However, to complete the picture, the other side of the equation must be answered:
-How many billions of euros of economic benefit can GSI generate for Cyprus during its economically useful life?
-And how much of this benefit can ultimately reach the Cypriot consumer in the form of lower electricity costs?
These are the two numerical parameters that will judge, in economic terms, whether the cost of interconnection is accompanied by a corresponding value for the Cypriot economy.
(Source: InBusinessNews)
Also read: The GSI file: How much will it ultimately cost Cyprus?
