There is no doubt that prices in general are rising, and we need to have a plan to tackle this price hike, which is soaring.
This analysis is limited to the increase in the price of electricity, given that it affects not only business and production related activities but also all households.
We have heard suggestions to reduce, temporarily, the VAT rate from 19% to 5% for vulnerable groups or even lower the VAT on electricity to 5% for everybody for three months.
This matter will be discussed in Parliament and the House decision will affect all of us.
I believe that we need solutions for the future and not only remedies for the present. A meaningful discussion is the first step towards developing a comprehensive action plan to address the continuing price increase.
An analysis of the cost of electricity would help this discussion, in the hope that this will be the beginning in drafting a plan of action against rising prices.
The price of electricity includes the production costs, and oil – as a raw material – is an essential part.
Moreover, there are distribution costs and the cost for the use of the system, in addition to various adjustments and levies such as emission rights for pollutants (EUA).
There is also the VAT, at 19%, as well as the mandatory contribution to the Fund for Renewable Energy Sources and the Fund for Saving Energy.
The only way to cut down production costs is to open up the market which will result in reducing costs because of competition. Distribution costs will remain the same.
Oil prices is a matter for the international markets to decide and we cannot control them. Nonetheless, for years we have not done anything about using natural gas for the production of electricity and we continue to burn mazut. We are still, however, hoping to have natural gas, which is said to bring about a reduction in the range of 25% in the price of electricity. Achieving this objective, however, is still a long way away.
An area which seems to offer the possibility to intervene relates to the charge imposed by the EU on the pollutants (EUA), given that burning oil causes substantial pollution.
The amount paid as a levy is collected by the Cyprus state and could be used to develop and implement a plan to reduce the reliance on pollutant methods for electricity production and instead turn to Renewable Energy Sources.
This money should not be part of the state’s overall revenue and should not be used for the needs of the state budget.
The money must not only be used to help us convert to green energy sources for the future but in addition the VAT charge imposed on this levy should be abolished.
It is tragic to see the consumers pay penalty charges because of the pollution caused and on top of that have to pay a 19% VAT levy on this.
Charles Ellinas, an energy expert, estimates that if this VAT charge is eliminated, it will bring an immediate reduction in the region of 3% in the price of electricity.
Furthermore, taxes relating to Renewable Energy Sources and the Energy Conservation Fund, which the Cyprus Electricity Authority collects, can be returned back to the consumers, through a special programme, to enable them to reduce electricity consumption from the EAC, since they themselves will be able for example to produce electricity.
As a third step, action must be taken to facilitate the reduction in consumption, through savings via smart systems for the distribution, storage and in general the economizing in the consumption of electricity.
Finally, the proposed discussion on the reduction of the VAT rate could take place to provide immediate relief to all households. These issues must be debated with transparency as a matter of urgency.
Achilleas Demetriades
12 November 2021
