Navigating the Evolution of Cyprus’ Electricity Landscape: Drivers, Challenges and Future Prospects

Abstract

The energy transition of Cyprus presents a distinctive case study influenced by its geographic isolation, regulatory evolution, and the imperative to integrate renewable energy sources (RESs). This paper critically examines the chronological progression of Cyprus’ energy transition, beginning with the formulation of a liberalized electricity market aligned with the European Union’s Target Model. The analysis explores key drivers underpinning increased RES investments, while addressing the transformative impacts of global disruptions on energy security and policy priorities. Furthermore, it assesses pivotal regulatory reforms and the advancement of enabling infrastructure, such as advanced metering systems and cross–border interconnections, which underpin the island’s energy modernization efforts. Finally, this paper identifies opportunities for Cyprus to position itself as a regional smart energy hub, offering valuable insights into the challenges and prospects faced by isolated energy systems within the context of the European energy transition.

1. Introduction

Cyprus, located at the easternmost edge of the Mediterranean Sea, occupies a strategic position at the crossroads of Europe, Asia, and Africa. Despite its advantageous geographic location, Cyprus faces unique energy challenges as one of the few electrically isolated systems within the European Union (EU). The island relies entirely on local electricity generation to meet its demand, with no interconnections to neighboring grids. This isolation amplifies the complexity of integrating renewable energy sources (RESs) and ensuring energy security while transitioning to a liberalized and Competitive Electricity Market (CEM).

The electricity sector landscape of Cyprus has undergone significant transformations in recent decades, transitioning from a vertically integrated structure reliant on oil-based power generation to a system embracing market liberalization, renewable energy integration, and regional collaboration. During the recent decade, various studies have focused on Cyprus’ energy transition spanning from electricity production as well as generation forecasts to diversification of the island’s energy mix and cross–border interconnection. The study conducted in [1] represents one of the earliest attempts to systematically analyze Cyprus’ energy transition and impacts. Given the island’s isolated nature and dependence on conventional fossil fuel-based generation, this work provides a foundational framework for assessing the economic implications of increasing RES penetration. This study introduces an optimization model based on a unit commitment approach, aiming to quantify the unavoidable rise in electricity costs associated with higher shares of RESs. A key contribution of this research is the development of a genetic algorithm optimization procedure, which not only calculates the additional cost of electricity but also determines the necessary RES levy on electricity bills required to financially support large-scale RES deployment. The model integrates the Wien Automatic System Planning (WASP) (version IV) software [2] for optimal long-term expansion planning and the Independent Power Producers (IPPs) v2.1 software [3] for evaluating the cost-optimal electricity mix from both conventional and renewable sources. This methodological approach enables policymakers to estimate the level of an adequate enrollment of RESs under grant support schemes with guaranteed pricing, ensuring the economic viability of future RES investments. By applying this framework to Cyprus, this study provides crucial insights into the financial and operational challenges faced by small, isolated power systems transitioning toward higher RES penetration. This work laid the groundwork for subsequent analyses on electricity market liberalization, renewable energy integration, and policy design, making it a significant early contribution to the literature on Cyprus’ evolving electricity sector.

The work conducted in [4] presents updated energy demand forecasts for the Republic of Cyprus up to 2040, developed to support the renewable energy road map prepared by the International Renewable Energy Agency [5] for national authorities. This analysis incorporates previously unused end-use data from the residential and tertiary sectors, offering a more comprehensive perspective. The study defines four final energy demand scenarios with varying assumptions, capturing a wide range of potential outcomes through 2040. Sensitivity analysis is conducted using four alternative scenarios, two of which extend past trends observed in Cyprus prior to the economic and financial downturn of 2011–2014. The study highlights the potential of a fourth scenario, which assumes the rigorous implementation of energy efficiency measures in buildings and transport. Although this approach may incur higher costs, it presents an opportunity for Cyprus to align with long-term EU decarbonization targets, reduce fossil fuel dependency, and enhance energy efficiency as a vital climate change adaptation measure. The objective of [6] is to investigate the impacts of climate change on the electrical energy sector in Cyprus, focusing on vulnerability and adaptive capacity. The authors assess the spatial vulnerability of the island by employing the degree–day indicator to analyze heating and cooling demands, utilizing daily temperature projections from regional climate models. By leveraging current daily electricity consumption data, an impact model was developed to quantify the relationship between energy consumption and temperature. This model was then applied to future climate scenarios using the climate model data, assuming unchanged technology usage. The results reveal contrasting trends in energy consumption under future climate conditions. During the “cold period” (November to April), electrical energy consumption is projected to decrease due to warmer temperatures. Conversely, during the “warm period” (May to October), electricity consumption is expected to increase as higher temperatures drive greater cooling demands. Additionally, heating energy demand is projected to decline, particularly in higher elevation regions of Cyprus, during spring and winter. These findings provide critical insights into how climate change will affect energy demand patterns, underscoring the need for adaptive measures to ensure the resilience of the electrical energy sector.

The results presented in [7] address a gap in the literature by examining the linear and nonlinear effects of energy productivity on environmental degradation in Cyprus, incorporating variables such as economic growth, trade openness, and energy consumption. Using the nonlinear autoregressive distributed lag approach, the authors reveal that energy productivity has asymmetric effects on CO₂ emissions. Specifically, a 1% increase in the positive shock of energy productivity reduces CO₂ emissions by 0.265%, whereas a 1% increase in the negative shock leads to a 0.837% rise in emissions in the long run. The study also finds that gross domestic product is positively correlated with pollution under both positive and negative shocks, highlighting the environmental trade-offs of economic growth. The authors also advocate for prioritizing cross-cutting environmental technology policies to address climate challenges and align Cyprus with its long-term climate policy goals.

The authors of [8] present a study examining the electricity grid as both a manifestation and medium of energy dependency relationships, with a specific focus on the politically divided island of Cyprus over the past six decades. By drawing on recent research on cross-border interconnectors and the broader scholarship on the technopolitics, history, and geopolitics of energy, the authors analyze the dynamics and complexities of the grid in politically contested contexts. Four key findings are highlighted: first, while the grid is often perceived as a great connector, understanding its connections and purposes is crucial for its effective utilization; second, electricity grids exhibit non-linear histories, as they can expand, contract, lose functionality, and later be reactivated; third, the grid holds strategic importance and political significance, mobilized in Cyprus to assert sovereignty, achieve energy self-dependence, and foster collaboration; and fourth, the energy engineer emerges as a pivotal figure capable of transcending political divides through the grid. The study undertaken in [9] combines an energy forecast model, a cost-optimization model, and an input–output model to perform an economy-wide assessment of policy pathways for the energy transition in Cyprus. The authors present results indicating that implementing additional energy efficiency measures and promoting a modal shift in the transport sector can achieve a 10% reduction in final energy consumption by 2030 compared to a reference scenario. The macroeconomic analysis reveals that these measures have a moderate yet positive effect on economic growth, with the construction, metal products, and transportation sectors benefiting the most in terms of economic output. Conversely, the energy sector experiences the largest negative effects. The study underscores the significance of targeted investments to ensure that energy policies have a positive impact on the broader economy.

The analysis presented in [10] examines the current state and future prospects of the energy sector of United Kingdom, Japan, Indonesia and Cyprus, focusing on the development of a universal strategy for sustainable energy transformation. The authors highlight key achievements and barriers to sustainability, introducing a multiplier to assess the real situation in the energy sectors of island states. The findings reveal that institutional barriers are a central challenge to sustainable energy development, emphasizing the significant role of institutional and market structures in shaping a country’s energy transition. The study also provides a comprehensive analysis of how digitalization contributes to the development of sustainable energy systems. Through a comparison between the investigated countries, the authors conclude that the common EU sustainable energy strategy is more effective in promoting sustainable energy transformation for the case of Cyprus. Furthermore, they note that the institutional impact is less pronounced in developed countries, underlining the importance of tailored strategies for emerging and island economies. The challenge of integration of large-scale RESs to islands seems infeasible when the islands have isolated energy systems without primary fuel sources, with limited sources of RES and without energy storage systems.

The implications of the ambitious carbon neutrality target by 2050 on the energy system of Cyprus, an island member state of the EU that faces unique geographical and energy challenges, is presented in [11]. The authors showcase results from four scenarios, which are compared against the “Planned Policies and Measures” scenario outlined in the National Energy and Climate Plan of Cyprus [12]. This comparative analysis highlights the additional efforts and investments required to meet the enhanced targets for carbon neutrality. The study adopts a combination of technoeconomic and macroeconomic energy system models to assess the impact of achieving a carbon-neutral economy. Supported by the active participation of national stakeholders, the analysis not only identifies the necessary transformations in the energy system but also estimates the broader socio-economic implications, including potential costs, benefits, and societal impacts. By providing a detailed visualization of these pathways, the study offers critical insights into the feasibility and challenges of meeting carbon neutrality targets in the context of Cyprus.

The analysis performed in [13] involves various scenarios for the installation of photovoltaic (PV) roof systems in existing and future households in Cyprus, with the objective of achieving 100% renewable energy production to meet the electricity needs of the domestic sector by 2050. The study demonstrates that the domestic electricity demand can be fully covered when over 70% of existing residential buildings install a 3 kW PV system. Even with 50% of existing households adopting 3 kW PV systems, the additional capacity required from other sources, such as PV parks, would be 191 MW, which is deemed feasible. The study emphasizes that achieving a complete transition to 100% renewable energy across all sectors will require substantial efforts in developing renewable energy systems, sector coupling, smart grid planning, and energy storage technologies. Although the study primarily focuses on the potential expansion of the net-metering scheme in the domestic sector, it also highlights the barriers to achieving a full energy transition in Cyprus.

The work conducted in [14] focuses on identifying current and emerging challenges in the islanded electric power system of Cyprus, driven by the rapid increase in RES penetration, which has resulted in extremely low-inertia conditions. The authors present realistic future scenarios derived from prevailing trends and national policies, analyzing their implications for congestion, frequency and voltage stability, and overall system strength. A simulation for the integration of dominant renewable energy sources (solar, wind, and concentrated solar power) into the thermal power-based grid system of Cyprus is performed and presented in [15]. The study models scenarios for achieving 100% renewable electricity generation by 2050, based on a projected electricity demand of 8.3 TWh/year. Using the EnergyPLAN [16] simulation environment, the study evaluates deterministic factors such as power production and critical excess electricity production. Eight case scenarios are developed to identify the most feasible electricity generation pathways for reducing carbon dioxide emissions in Cyprus. The optimized analysis identifies a PV system integrated with oil-powered plants as the best-case scenario for electricity generation in 2050, capable of producing 1.68 TWh/year of renewable energy. For achieving 100% renewable electricity generation, the study highlights the feasibility of a system combining photovoltaic, wind, and storage technologies. This configuration would require an installed capacity of 4000 MW PV, 7500 MW wind, and 30 GWh storage. The findings provide valuable technical and economic insights, offering a foundation for policy reforms to support the energy transition in Cyprus.

The study of [17] investigates the operation of the isolated power system of Cyprus under high RES penetration, supported by fast-response storage systems. Using a two-layer, cost-optimal method, the study simulates system operation and evaluates the impact of battery energy storage systems (BESSs) on RES penetration, curtailments, and overall system economics. A market-oriented approach is also adopted to assess the feasibility of storage within a competitive electricity market environment. The analysis reveals that the integration of BESS significantly mitigates RES curtailments, enhances system flexibility, and increases the RES hosting capacity of the power system. Furthermore, the presence of storage substantially reduces generation costs, even after accounting for the full remuneration of BESS fixed costs. However, the study finds that revenues generated by storage from participation in energy and reserves markets are insufficient to ensure economic viability, highlighting the necessity of capacity remuneration mechanisms to support storage investments. Europe’s broader climate objectives have been compromised by the Ukraine War which has created numerous issues for EU Member States (MSs), with the resulting new emerging security structure changing objectives in both foreign and public policy.

The authors of [18] examine the challenges faced by EU MSs in the wake of this event, emphasizing the rise in energy prices which has triggered cost-push inflation, raising questions about macroeconomic stability, public finances, and social cohesion. According to the authors, this situation creates significant challenges for policymakers, including in Nicosia, where concerns about insufficient supplies of products and services to meet demand are growing. However, the study suggests that these difficulties could present an opportunity for Cyprus to reduce its oil dependency, expedite offshore energy development programs, and accelerate initiatives addressing climate change.

In response to the Ukraine War, the EU has intensified its commitment to diversifying energy sources, expanding renewable energy deployment, and strengthening interconnections to enhance market resilience. Although the immediate crisis exposed vulnerabilities in energy supply chains, it also served as a catalyst for long-term structural reforms aimed at achieving energy independence and sustainability. An overview of the European sustainable energy strategy up to 2050, with a particular focus on the transition to a hydrogen economy and the case of Cyprus is presented in [19]. The discussion emphasizes the critical role of electricity interconnections, highlighting Cyprus’ strategic importance in facilitating the Southeastern Mediterranean region’s transition to hydrogen-based energy systems. The study explores how these countries could leverage their renewable energy potential to become significant exporters of hydrogen to Europe. Additionally, a framework for drafting a long-term energy strategy for Cyprus, outlining key targets to guide the island’s transition to a hydrogen economy by 2050 is described. This perspective underscores the need for robust interconnections and strategic planning to position Cyprus as a pivotal player in the region’s energy transition. The study of [20] formulates fuel consumption and emissions to evaluate the transition strategies for meeting 2035 and 2050 energy targets. The experimental results demonstrate that transitioning to natural gas can significantly reduce total production costs by 2035. However, maximum economic and environmental benefits are projected to be achieved by 2050, with hydrogen serving as the sole fuel in modern power plants. This scenario not only minimizes electricity production costs but also eliminates carbon dioxide emissions entirely. The employed analysis further highlights that the growing integration of renewable energy sources across electricity, heating/cooling, and transportation sectors will necessitate the use of alternative feedstocks. These inputs can enhance production cost efficiency, improve utilization factors, and contribute to broader environmental goals, ensuring a more sustainable and cost-effective energy transition.

This work seeks to bridge the gap in the existing literature by following a comprehensive approach that interlinks the challenges, key drivers, and future prospects shaping Cyprus’ electricity landscape. Although previous studies have largely focused on isolated aspects of Cyprus’ energy system—such as renewable energy integration, regulatory reforms, or market dynamics—this study uniquely combines these elements by presenting an integrated understanding of how Cyprus can transition from an energy-dependent island system to a sustainable and competitive electricity market. The novelty of this study lies in its comprehensive approach to analyzing the interplay of historical, regulatory, and socio-economic factors that have influenced Cyprus’ energy transition. By synthesizing these elements, the study provides critical insights into the unique dynamics of an isolated, energy-dependent island transitioning to a sustainable and competitive electricity market. The contribution of this work lies in the holistic examination of the evolution of Cyprus’ electricity landscape by analyzing the interplay of regulatory developments, technological advancements, and economic factors shaping the country’s energy transition. It uniquely integrates historical insights with contemporary challenges and emerging opportunities, providing a comprehensive perspective on Cyprus’ trajectory toward a competitive and sustainable electricity market. These insights are not only valuable for Cyprus but also offer transferable knowledge that can be considered by evolving countries with similar characteristics, such as small islands or regions with limited interconnections and high dependence on imported fossil fuels. The study’s findings on overcoming structural barriers, integrating renewable energy sources, and fostering regulatory reforms can serve as a blueprint for other nations navigating the complexities of energy transition in constrained and isolated systems. Furthermore, the research identifies actionable opportunities for Cyprus to position itself as a regional energy hub and a leader in innovative energy solutions, highlighting the potential for other countries to replicate these strategies in their own transitions toward sustainability and energy independence.

The remaining sections are organized as follows: Section 2 provides a historical overview of Cyprus’ power system and identifies the major drivers behind its energy transition, offering the context necessary for understanding its current state. Section 3 explores how global events, such as the COVID-19 pandemic and the war in Ukraine, have influenced Cyprus’ energy landscape, exposing vulnerabilities while also accelerating policy and investment priorities. Section 4 presents the key challenges to Cyprus’ energy transition, including market concentration, infrastructure limitations, and the integration of renewable energy sources in an isolated system. Section 5 identifies opportunities for Cyprus to become a smart energy hub by capitalizing on its geographic location, regulatory frameworks, and emerging technologies. Finally, Section 6 offers concluding remarks, synthesizing insights and providing actionable recommendations to advance Cyprus’ energy transition and enhance its role as a sustainable energy leader in the Eastern Mediterranean. This comprehensive approach ensures that the study not only analyzes the existing energy landscape but also offers a forward-looking vision for Cyprus’ energy future.

2. Historical Background of Cyprus’ Power System and Drivers to Energy Transition

The electricity market in Cyprus has undergone a gradual transformation from a vertically integrated, state-controlled model to a liberalized framework aligned with EU Directives. This transition has been driven by regulatory reforms aimed at introducing competition, increasing transparency, and fostering renewable energy integration. However, as an isolated power system with a dominant incumbent player, Cyprus has faced unique challenges in implementing market liberalization. This section outlines the historical evolution of the electricity sector, the regulatory and institutional changes that have shaped the competitive electricity market.

Cyprus has historically relied on fossil fuels as the primary energy source for electricity generation, a dependence largely dictated by its geographic and economic constraints. For decades, heavy fuel oil and diesel were the dominant fuels used in power generation, reflecting the lack of indigenous fossil fuel resources and the absence of interconnections to neighboring energy systems. Historically, the state electric utility, namely Electricity Authority of Cyprus (EAC), was still operating as a Vertically Integrated Utility (VIU), which was basically a monopoly, controlling generation, transmission, distribution, and supply. This monopolistic structure ensured system stability but limited competition, innovation, and consumer choice.

With Cyprus’ accession to the EU in 2004, the energy sector faced increasing pressure to reform. The first significant step in Cyprus’ energy transition was the introduction of support schemes aimed at promoting renewable energy adoption, aligned with the European Commission’s (EC’s) Renewable Energy Directives (2009/28/EC: Renewable Energy Directive I—REDI) [21], which required Member States (MSs) to establish national renewable energy action plans. The journey began with the introduction of feed-in tariffs (FiTs), a pivotal policy tool that offered renewable energy producers guaranteed pricing for the electricity they generated over long-term contracts. This financial predictability incentivized investments in solar PV and wind energy projects, laying the foundation for the country’s renewable energy capacity.

Net-metering was first introduced in Cyprus in 2013 as part of the country’s efforts to promote renewable energy integration and enable consumers to produce their own electricity through PV systems [22]. The scheme allowed residential and commercial consumers to offset their electricity consumption with self-generated solar power, with any excess energy fed into the grid and credited against future consumption. Over time, as the renewable energy market matured and building on the foundation of REDI, European Directive (EU) 2018/2001 (Renewable Energy Directive II—REDII) [23] further emphasized market-based mechanisms and consumer empowerment, leading to the implementation of the net-billing scheme in Cyprus. Both net-metering and net-billing schemes empowered residential and commercial consumers to offset their electricity consumption through self-generated renewable energy. Excess energy produced by these systems was fed back into the grid, providing further financial benefits to participants. Building on the success of net-metering, the implementation of net-billing systems marked a significant evolution in policy. This mechanism allowed renewable energy producers to sell their surplus electricity at market rates, aligning consumer incentives with market dynamics and promoting a more economically viable model for renewable energy adoption. These schemes remain a cornerstone of Cyprus’ renewable energy strategy today, fostering decentralized energy generation, reducing reliance on imported fuels, and driving the country closer to its sustainability goals. The ongoing applicability of these mechanisms highlights their critical role in shaping the trajectory of Cyprus’ energy transition, addressing both environmental imperatives and economic opportunities. The introduction of Carbon Pricing under the EU Emissions Trading System (ETS) [24] has also had a profound impact on Cyprus’ energy transition, acting as both a driver for clean energy investments and a source of price volatility. The ETS, which imposes a cost on carbon emissions, aims to incentivize reductions in greenhouse gas emissions by making fossil fuel-based electricity generation more expensive. Carbon Pricing has emerged as a critical driver for the energy transition in Cyprus.

Other EU Directives, including the EC’s Third Energy Package in 2009 (Directive 2009/72/EC [25], Directive 2009/73/EC [26] and Regulation (EC) 714/2009 [27]), introduced several reforms to enhance market integration and the promotion of RES. These directives laid the foundation for a series of regulatory and structural changes aimed at transitioning MSs toward a competitive and sustainable pan-European market. The transition from independent national grids to a highly integrated pan-European electricity network has been shaped by key regulatory milestones, with the European Electricity Market Target Model being a foundational step toward the creation of a unified electricity market. This model serves as a structured regulatory framework aimed at facilitating cross-border electricity trade, fostering market competition, strengthening energy security, and ensuring the seamless integration of renewable energy sources. As a core component of the EU’s energy strategy, it enables efficient electricity flow across national boundaries, ensuring that consumers benefit from greater market transparency, competitive pricing, and a secure energy supply. The Electricity Market Target Model establishes multiple market timeframes that operate sequentially to optimize electricity trading and system balancing. These include long-term mechanisms such as forward energy and transmission markets alongside capacity mechanisms, while the wholesale market segment consists of day-ahead and intraday trading. Additionally, balancing markets ensure real-time system stability through balancing capacity and balancing energy markets, whereas transmission re-dispatch mechanisms (reservation for re-dispatch and re-dispatching markets) ensure that network constraints and grid congestion are effectively met [28].

In order to comply with the EC requirements, the Electricity Market Law was enacted, leading to the establishment of the Cyprus Energy Regulatory Authority (CERA) in 2004. CERA’s mandate is to oversee the liberalization process, promote transparency, and safeguard fair competition. Initial reforms included unbundling EAC’s operations and preparing the regulatory framework for competitive market entry. However, the small size of the market, coupled with infrastructural and administrative challenges, slowed the pace of these efforts.

The transition from a monopolistic structure to a CEM began with Regulatory Decision 03/2014 [29], which mandated the accounting unbundling of EAC’s operations. This measure aimed to separate financial records for generation, transmission, distribution, and supply activities, preventing cross-subsidization and fostering a fair competitive environment. Accounting unbundling also included the implementation of standardized accounting practices and detailed financial reporting requirements to enable more effective regulatory oversight. This financial clarity served as a critical precursor to further liberalization measures. Building on this foundation, Regulatory Decision 04/2014 [30] introduced the functional unbundling of EAC’s operations. This decision marked a significant milestone by requiring structural and operational independence for EAC’s different activities. Functional unbundling involved establishing distinct management structures and operational autonomy for each activity, ensuring transparency and preventing conflicts of interest. Furthermore, strict confidentiality protocols were implemented to safeguard commercially sensitive information, promoting competitive neutrality. These measures laid the groundwork for the entry of IPPs and the gradual development of a CEM.

In parallel to the transposition of EC Directives, Cyprus has been granted specific derogations, acknowledging its unique challenges as an isolated, non-interconnected energy system with a relatively small market size. Under Article 66 of Directive (EU) 2019/944 [31], Cyprus secured a derogation from certain electricity market rules, recognizing the difficulties of implementing full market liberalization without interconnections. Additionally, under Article 10c of the amended EU ETS Directive [32], Cyprus was allowed a transitional free allocation of emission allowances to support the modernization of its electricity generation sector, facilitating investments in energy diversification, infrastructure upgrades, and clean technologies. Furthermore, Cyprus obtained a derogation under Directive 2003/55/EC [33] (repealed by Directive (EU) 2024/1788 [34]) from Article 9, which pertains to the unbundling of transmission systems and transmission system operators. This exemption was granted due to the country’s small-scale market and energy isolation, allowing the continued operation of a vertically integrated system under specific conditions. These derogations have been instrumental in enabling Cyprus to gradually align with EU energy objectives while addressing its structural constraints and ensuring a stable transition toward a liberalized and sustainable energy market.

The trajectory toward liberalization continued with Regulatory Decision 01/2015 [35], which introduced the framework for the CEM. This decision outlined the structure of the market, including the establishment of key market segments such as the day-ahead market (DAM), real-time balancing mechanisms, and ancillary services. The roles of critical market participants, such as the Transmission System Operator of Cyprus (TSOC) and the Market Operator (MO), were clearly defined to ensure system operations and market transparency. Additionally, the framework incorporated provisions for integrating RES, aligning Cyprus with the EU Target Model and promoting competition, efficiency, and sustainability. As illustrated in Figure 1, Cyprus’ CEM is structured to align with the principles of the European Union’s Target Model for electricity markets. This design delineates the chronological sequence of market operations and clarifies the distinct responsibilities between the TSOC and the MO. The framework emphasizes the integration of forward planning, real-time market balancing, and settlement processes, ensuring the efficient and transparent operation of the electricity market. At the top of the structure, the forward market and the day-ahead market form the foundation of electricity trading activities.

The forward market enables market participants to secure long-term contracts for electricity delivery, offering price stability and risk management. The day-ahead market operates as a centralized platform where participants submit their bids and offers for electricity one day before actual delivery, facilitating an optimized and cost-effective generation schedule. These markets are under the jurisdiction of the MO, which is responsible for ensuring transparent and equitable market operations. In the subsequent layers, operational activities transition to the responsibility of the TSOC. The Integrated Scheduling Process is a critical mechanism managed by the TSOC to ensure the technical feasibility of the schedules generated in the day-ahead market. This process validates that the planned generation and consumption schedules comply with technical constraints, such as grid stability and reliability requirements. Additionally, the TSOC oversees the real-time balancing market, which operates in real time to address any discrepancies between scheduled and actual electricity generation and demand. This market is crucial for maintaining the energy balance and ensuring the secure operation of the power system. The final stage in the sequence is the Settlement Process, which reconciles financial transactions among market participants based on actual market outcomes. This process occurs approximately one month after the delivery of electricity and is under the MO’s responsibility. Settlement ensures that all parties are compensated fairly, considering the deviations and balancing actions undertaken in real-time operations.

Recognizing the delays caused by the System Operators (TSOC and Distribution System Operator—DSO) due to the complexities of adopting their roles for fully implementing the CEM, CERA has formulated Regulatory Decision 04/2017 [36], which introduced transitional market arrangements to bridge the gap between the monopolistic structure and a fully liberalized market. These arrangements allowed for bilateral contracts between producers and suppliers under regulatory oversight and included consumer protection measures to ensure reliable supply and prevent market abuses. The decision also facilitated gradual testing and refinement of market mechanisms, creating a controlled environment for the market to evolve while maintaining system stability.

The evolution of Cyprus’ energy transition has also been significantly shaped by a series of complementary frameworks, formulated and engineered by the CERA. The process began in 2018, where CERA’s Regulatory Decision 02/2018 [37] has set the foundations for the deployment of Cyprus’ Advanced Metering Infrastructure (AMI), a network of smart meters, communication technologies, and data management systems that enable two-way communication between utilities and consumers. This infrastructure would facilitate real-time monitoring, accurate billing, and enhanced energy management. In this domain, CERA’s Regulatory Decision 02/2019 “Undertaking of an in-depth techno-economic study for the redesign of the transmission and distribution system 2021–2030” [38] via which CERA invited the TSOC and DSO to jointly proceed with the preparation of a thorough techno-economic study of the redesign of the Transmission and Distribution networks for the period 2021–2030, so as to enable the installation of more RES and to eliminate the problems of lack of capacity to absorb the power of new RES units, as well as to increase the percentage of RES in the gross final consumption of electricity. Progress continued in 2019 with Regulatory Decision 03/2019 [39], titled “Establishing Basic Principles of the Regulatory Framework for the Operation of Upstream Electricity Storage Facilities in the Wholesale Electricity Market”.

Recognizing the critical role of storage in stabilizing the grid and accommodating high penetration of RES, this decision introduced clear guidelines for integrating BESS into the electricity network. CERA established technical and operational requirements, licensing criteria, and market participation mechanisms to ensure that storage systems could effectively support grid reliability and optimize RES utilization. By incentivizing investment in energy storage technologies, this decision paved the way for a more resilient and flexible electricity infrastructure, directly contributing to national energy security and sustainability goals. In 2024, regulatory efforts expanded to empower consumers and enhance market flexibility in alignment with national energy objectives. The Regulatory Decision 02/2024 “Regulatory Framework for the Engagement of Active Customers and Renewable Energy Self-Consumers” [40] eliminated technical and administrative barriers, allowing consumers to generate, consume, store, and sell renewable energy. By enabling participation through direct engagement or aggregation, the framework fostered a more inclusive energy market. This shift empowered individuals and businesses to contribute directly to the energy transition while promoting transparency and efficiency within the electricity sector, as envisioned in Cyprus’ broader energy strategy. The same year also saw the release of the Regulatory Decision 03/2024 “Regulatory Framework for the Promotion of Demand Response through Aggregation” [41], an essential step toward enhancing demand-side flexibility. This policy encouraged collective adjustments in energy consumption in response to market signals, enabling consumers to play a more active role in balancing supply and demand. Through CERA’s facilitation, the integration of demand response mechanisms into electricity markets supported decarbonization goals by reducing reliance on fossil fuel-based balancing and enhancing overall system efficiency and reliability. Additionally, the Regulatory Decision 04/2024 “Regulatory Framework for the Promotion and Facilitation of the Development of Citizen Energy Communities and Renewable Energy Communities” [42] advanced the development of collective energy initiatives. This framework provided a legal and operational structure for communities to engage in energy generation, storage, and sharing. By ensuring equitable access and benefit distribution, the policy encouraged social inclusivity and local participation in the energy transition. The emphasis on community-led energy projects reflected national priorities of fostering renewable energy adoption and collective action in achieving sustainable energy goals. Although implemented under CERA’s jurisdiction, these measures collectively serve national targets to support a CEM and advance the country’s climate objectives.

3. Impact of Global Events on the Cyprus’ Energy Landscape

Despite the formulation of a robust structure for a CEM and concerted efforts toward energy transition, Cyprus, like every nation, has faced global disruptions that have highlighted and exacerbated vulnerabilities within its energy system. Events such as the COVID-19 pandemic and the war in Ukraine have intensified supply chain disruptions, exacerbated price volatility, and accelerated the urgency of energy diversification. This section examines the short- and long-term impacts of these crises on Cyprus’ electricity market, particularly in terms of energy security, investment trends, and the acceleration of renewable energy deployment.

3.1. The COVID-19 Pandemic

The COVID-19 pandemic profoundly disrupted global energy markets, altering demand patterns and reshaping investment priorities. For Cyprus, as for much of the world, the pandemic underscored the importance of resilience and adaptability in the energy sector. The pandemic caused unprecedented fluctuations in energy demand. During the early phases of the pandemic, lockdowns and restrictions on economic activities led to a sharp decline in industrial and commercial energy consumption. In Cyprus, sectors such as tourism and hospitality, which are energy-intensive, experienced significant downturns, reducing overall electricity demand. Conversely, residential energy consumption increased as people spent more time at home, leading to shifts in peak demand patterns. These changes posed challenges for grid operators and market participants, who had to adapt to new consumption behaviors and manage imbalances. Reduced demand also affected revenues for electricity providers and delayed investments in energy infrastructure, further complicating the energy transition.

The pandemic emphasized the need for robust and resilient energy systems. In Cyprus, the market witnessed an increasing trend towards the installation of net-metering and net-billing PV systems as consumers sought to minimize electricity bills. The evolution of electricity generation in Cyprus from 2005 to 2023, categorized by different energy sources, is depicted in Figure 2. The limited investment in conventional generation in Cyprus is primarily due to the lack of natural gas import infrastructure, which has restricted the transition to lower-cost, less carbon-intensive fuels. Unlike other European markets where natural gas serves as a bridge in the energy transition, Cyprus remains heavily reliant on oil-based power generation, which is increasingly expensive due to rising carbon pricing. Wind energy growth has remained stagnant due to the lack of new financial incentives, suitable siting limitations, and grid integration challenges. The most striking trend in the figure is the increasing contribution of PV capacity, particularly from 2014 onward. Initially, electricity production was almost entirely dominated by conventional sources, with RES playing a negligible role. However, a noticeable shift occurs after 2013, where PV capacity starts to expand significantly driven by high solar irradiance, declining technology costs, and policy mechanisms. This growth aligns with the implementation of support schemes such as net-metering and net-billing, as well as national policies promoting distributed solar generation. By 2020, PV penetration had reached a substantial share of the energy mix, with its contribution visibly expanding compared to previous years. The trend continued into 2023, where PV made up a significant portion of the total electricity supply, complementing wind and biomass. This steady increase in PV generation highlights the growing reliance on solar energy in Cyprus, reflecting advancements in renewable energy policies, cost reductions in solar technologies, and the push for energy transition to meet EU climate targets.

By 2024, in terms of nominal generation capacity, as shown in Figure 3, PV technology accounts for a substantial share of total installed capacity, with wind energy maintaining a steady presence. Biomass remains a minor contributor, while conventional generation capacity has remained relatively stable in recent years.

In regard to the electricity generation profile, a distinct pattern emerges where electricity generation reaches its highest levels during the summer months, coinciding with increased cooling demand due to high temperatures. As shown in Figure 4, these peak demand periods are evident in mid-2019, mid-2020, mid-2021, and mid-2022, with electricity generation frequently exceeding 20 GWh per day. During these peaks, the contribution of PV generation becomes more pronounced, particularly during mid-day hours when solar irradiance is at its highest. However, conventional generation continues to dominate, highlighting the reliance on fossil fuels for meeting peak demand. Conversely, during the winter months, electricity demand tends to be lower, except for brief spikes during cold weather events that increase heating loads. These off-peak periods, especially in late 2019, early 2020, early 2021, and early 2022, show a reduction in overall electricity production, often stabilizing around 10–12 GWh per day. During these times, PV generation is significantly lower due to reduced sunlight availability, and wind power shows intermittent behavior depending on weather conditions. Biomass remains a minor but stable contributor throughout the period.

Despite the progress achieved in RES penetration levels, conventional sources still dominate the generation mix, indicating that while RES have expanded, further efforts are needed to accelerate decarbonization and reduce dependency on fossil fuels.

3.2. The War in Ukraine

The geopolitical conflict resulting from the war in Ukraine has had far-reaching implications for the global energy landscape, significantly influencing energy security policies and diversification strategies. For Cyprus, the crisis underscored vulnerabilities linked to its reliance on oil and the impact of carbon pricing on electricity costs. In Cyprus, the relatively high carbon intensity of the electricity sector, owing to its historical reliance on heavy fuel oil and diesel, has translated into significant cost increases under the ETS. These costs are typically passed on to consumers, resulting in heightened electricity price volatility. The evolution of residential electricity prices in Cyprus over time, including value-added tax (VAT) and contributions to the renewable energy sources (RESs) and energy conservation fund, is presented in Figure 5. The trend reveals significant price fluctuations, shaped by demand conditions, regulatory policies, and external geopolitical and economic factors. In the earlier years, electricity prices exhibit relative stability, with a slight decline followed by a gradual increase, reflecting moderate fuel price variations and incremental changes in policy-driven charges. From 2016 to early 2020, prices remained relatively stable, with minor fluctuations. However, a notable drop in prices occurred during 2020, coinciding with the COVID-19 pandemic, which led to a global decrease in energy demand and significant reductions in fuel prices. This period of lower electricity costs reflects the economic slowdown and lower energy consumption due to lockdown measures. Post-pandemic, from mid-2021 onward, electricity prices began to increase sharply, aligning with the global energy crisis triggered by the war in Ukraine that led to supply chain disruptions. This upward trajectory peaked in 2022, when prices reached their highest recorded levels, exceeding 0.40 €/kWh. Following the peak in 2022, electricity prices began to stabilize and slightly decline throughout 2023 and 2024, mirroring the moderation of fuel costs in global markets. Despite this decrease, prices remain substantially higher than pre-2020 levels, suggesting that structural factors, such as Cyprus’ dependence on imported fossil fuels and ongoing investments in the energy transition, continue to exert upward pressure on electricity tariffs.

It should be noted that while the war in Ukraine caused sharp increases in the prices of natural gas and oil globally, its effects on Cyprus primarily stemmed from rising carbon prices, given the country’s reliance on oil and RESs rather than natural gas. These cost pressures translated into higher electricity bills for consumers and businesses, reinforcing the urgency of reducing dependency on carbon-intensive energy sources. The evolution of CO₂ prices from 2017 to 2024 is illustrated in Figure 6. A key observation from the figure is the growing significance of CO₂ prices, particularly after 2018, when carbon pricing began to escalate due to more stringent EU climate policies. Initially, CO₂ costs represented a smaller share of the total electricity cost structure; however, by 2021–2022, they became a dominant component, reaching their peak in mid-2022. This increase aligns with the EU’s commitment to reducing greenhouse gas emissions, leading to higher CO₂ prices, which have significantly impacted electricity generation costs in Cyprus, given its reliance on carbon-intensive fossil fuels.

In response, national energy strategies prioritized integrating renewable energy into the electricity mix. Solar PV and wind energy, already significant components of the Cypriot energy landscape, received further investment as a means to mitigate exposure to price volatility driven by carbon pricing. The focus also included policies to accelerate grid modernization and improve system flexibility to accommodate higher shares of RESs.

4. Cyprus’ Current Energy Mix, Electricity Demand and Market Concentration

The EAC, the principal generator, constructed thermal power plants designed to burn imported fossil fuels, ensuring energy security but at a significant environmental and economic cost. This reliance on imported fuels rendered the energy sector vulnerable to global price fluctuations, adversely affecting electricity prices and the competitiveness of the economy. The environmental implications of fossil fuel dependency became increasingly apparent in the early 2000s, coinciding with Cyprus’ accession to the EU. The adoption of EU energy and climate directives placed pressure on Cyprus to diversify its energy mix and reduce greenhouse gas emissions. Despite initial resistance due to high capital costs and infrastructural limitations, this period marked the beginning of a gradual transition towards cleaner energy sources, underscoring the imperative to reduce fossil fuel dependence.

4.1. Cyprus’ Energy Mix Evolution

In terms of installed capacity, the conventional capacity remains the backbone of the energy system, accounting for 1478 MWe. However, the island has been progressively integrating renewable RESs into its energy portfolio. By the end of 2024, the total installed operational capacity reached 965 MWe, with PVs accounting for a substantial portion of this capacity. In particular, PV systems represent the largest share of RESs with an installed capacity of 797.11 MW. This figure highlights the rapid adoption of solar energy, capitalizing on Cyprus’ abundant solar irradiance. The widespread deployment of both large-scale solar parks and decentralized PV installations under net-metering and net-billing schemes underscores the role of solar energy as a cornerstone of the island’s renewable strategy. Wind energy also contributes meaningfully to the energy mix, with an installed capacity of 155.1 MW from onshore wind farms. Although wind energy’s share is smaller compared to solar, its consistent generation during non-peak solar hours complements the variability of PV systems, contributing to grid reliability. Additionally, biomass systems, with an installed capacity of 12.4 MW, provide a renewable option for energy generation. Although biomass has a smaller footprint in the overall capacity, it plays a critical role in waste-to-energy initiatives and supports the circular economy by utilizing organic waste materials for electricity production. As of 2024, Cyprus’ electricity generation mix reflects a diverse array of energy sources, where the EAC remains the predominant producer, accounting for approximately 72.33% of the total electricity generated. It is noted that the IPPs participating in the market contribute about 10.25%. Among the RESs, wind parks operating under FiTs generate 3.46% of the electricity, biomass systems contribute 0.13%, and PV plants under FiTs add 2.27%. Additionally, PV systems installed under net-metering and net-billing schemes provide 11.11% of the electricity, indicating a significant uptake in decentralized solar energy generation. Biomass systems under net-billing contribute a smaller share of 0.44%.

Currently, the natural gas market in Cyprus is non-existent, since natural gas is not yet available in the country’s energy mix. The absence of natural gas as a fuel source in Cyprus significantly impacts the country’s electricity prices, particularly in the context of rising carbon pricing. Unlike many European countries that have transitioned to natural gas—a lower-carbon and relatively cheaper alternative to oil-based fuels—Cyprus remains reliant on heavy fuel oil and diesel for electricity generation. This dependence on carbon-intensive fuels not only incurs higher emissions costs but also translates into elevated final electricity prices for consumers. The lack of access to natural gas exacerbates these challenges, leaving Cyprus more exposed to the economic pressures of carbon pricing and limiting opportunities to lower electricity costs through cleaner, more cost-effective generation alternatives.

In summary, while Cyprus has made notable progress in integrating RESs, fossil fuels (particularly oil) continue to play a significant role in its energy generation mix. Ongoing efforts to expand renewable capacity and improve energy efficiency are crucial for the island to meet its future energy demands sustainably.

4.2. Cyprus’ Electricity Demand

Electricity demand in Cyprus exhibits notable seasonal variations, with peak loads typically occurring during the summer months due to increased air conditioning usage. Forecasts for Cyprus’ electricity system over the period 2024–2033 indicate a steady increase in both maximum capacity requirements and overall electricity consumption levels, driven by economic expansion, electrification of various sectors, and the continued integration of RESs. By 2033, the maximum total RES capacity is expected to exceed 1500 MW, underscoring the need for substantial investments in infrastructure, particularly grid modernization, energy storage and interconnections, to ensure that the system can reliably handle peak demand and accommodate higher shares of RES. Total electricity consumption is anticipated to grow at an annual compound rate of approximately 2–3%, reflecting population growth, urbanization, and the adoption of electric technologies across residential and industrial sectors. Seasonal variations remain a defining characteristic of Cyprus’ energy demand, with peak loads occurring during the summer months due to widespread use of air conditioning. Winter demand is also expected to increase as more households transition to electric heating systems. By 2033, peak loads during extreme summer conditions are projected to exceed 1400 MW, further emphasizing the importance of enhancing system resilience and flexibility.

4.3. Cyprus’ Electricity Market Concentration

The Herfindahl–Hirschman Index (HHI) [43] is a commonly used metric for measuring market concentration that is calculated by summing the squares of market shares of all firms in the market:

$$HHI=\sum _{i=1}^N{s}_i^2$$

(1)

where N is the total number of firms in the market and $s_i$ is the market share of firm i (expressed as a proportion or percentage).

The classification of HHI values is carried out as follows:

• HHI = 0–1500: indicates a competitive market.
• HHI = 1500–2500: represents a moderately competitive or partially concentrated market.
• HHI > 2500: reflects a highly concentrated market, lacking competitiveness.
• HHI = 10,000: denotes a monopoly with a single participant dominating the market.

During the period covered in this analysis, Cyprus operates under a transitional regulatory framework for its electricity market. As of 2021, alongside the regulated supplier EAC–Supply, there are eight additional suppliers active in the electricity supply sector, while numerous RES Independent Power Producers (IPPs) have also entered the electricity market. The dominance of EAC, as a VIU, is evident in both wholesale and retail electricity markets. In the wholesale market, the EAC–Generation activity holds a position of significant market strength, classifying the market as highly concentrated and lacking competition. Although IPPs are present, they account for a relatively small portion of the market, further emphasizing the structural imbalance. Similarly, in the retail market, the EAC–Supply activity is characterized by a dominant market position, with HHI data confirming it as a highly concentrated market without effective competition. More specifically, the EAC Supply division maintains a dominant position, supplying 90.63% of the electricity to consumers. This dominance in both sectors underscores the significant role of EAC in shaping Cyprus’ electricity market dynamics. Historical concentration levels for Cyprus’ wholesale and retail markets are illustrated in Figure 7 and Figure 8, respectively.

5. Challenges to Cyprus’ Energy Transition

Global disruptions have not only reshaped international short-term priorities but also underscored long-standing structural challenges in the Cypriot energy landscape. The transition to a fully liberalized and decarbonized electricity market in Cyprus is hindered by several structural, regulatory, and operational challenges. These reflect the island’s unique energy context and broader limitations as well as technical barriers that complicate efforts towards sustainable market reforms and energy modernization.

The energy crisis triggered by the war, along with the anticipated full operation of CEM, renewed emphasis on expanding local renewable energy production in Cyprus. Solar PV, benefiting from the island’s abundant solar resources, became the central focus of energy planning for market participants. In parallel, the installation of rooftop solar systems under net-metering and net-billing schemes surged, providing consumers with a direct means to reduce their reliance on grid electricity and offset costs. However, this rapid expansion revealed critical challenges. The increasing deployment of PV systems led to significant grid congestion, limiting the network’s capacity to accommodate additional installations. Currently, a commonly adopted solution by DSOs around the world is enforcing passive schemes to reduce the volume of reverse power flow. This includes the use of the Volt–Watt functionality found in commercially available inverters as well as the adoption of a fixed limit on the household exports, in kilowatts or as a percentage of the installed PV capacity [44,45].

The daily PV curtailment percentage over the period from 2022 to 2024 is presented in Figure 9. A clear seasonal pattern emerges, with peak curtailments occurring primarily during the autumn and spring months. These periods are characterized by moderate temperatures, resulting in lower electricity consumption due to reduced heating and cooling demand. Consequently, the electricity system experiences an oversupply of solar energy during midday hours, leading to significant curtailment events. In contrast, during the winter months, curtailment levels are relatively lower as heating demand increases electricity consumption, allowing for a greater share of PV generation to be absorbed. Similarly, in the summer months, although solar generation is at its highest, higher electricity demand due to air conditioning usage helps mitigate extreme curtailments. The data also reveal a pronounced increase in PV curtailments in recent years, particularly in 2023 and 2024, as the share of installed PV capacity continues to grow. The rising frequency and magnitude of curtailment events, with instances exceeding 60%, indicate that grid constraints and the lack of sufficient flexibility measures—such as energy storage, demand response, and market-driven solutions—are preventing the full utilization of solar energy. This trend underscores the necessity for strategic interventions, including grid reinforcement, advanced forecasting techniques, and regulatory incentives for flexibility services. Without these measures, the increasing levels of PV curtailments could undermine the economic viability of renewable investments and hinder Cyprus’ broader energy transition objectives. Addressing these challenges is essential to ensure efficient solar energy integration and to support the decarbonization of the power sector.

As already introduced in Section 2, since September 2017, Cyprus has been operating under a transitional electricity market framework, allowing bilateral contracts between producers and suppliers as an interim measure before the full implementation of the CEM. This framework was introduced to gradually transition from a monopolistic to a competitive market structure, while ensuring market stability and giving stakeholders time to adapt to the complexities of full liberalization. Although the transitional model represents a step toward market opening, its design has both advantages and limitations that affect overall market efficiency and competitiveness. One of the key benefits of the transitional framework is that it has facilitated the entry of independent suppliers, slowly increasing competition in the retail electricity market. By allowing private entities to participate in power transactions, the arrangement has encouraged competition, offering consumers a broader range of electricity supply options. Additionally, the mechanism has provided price stability, as market clearance operates on a monthly basis, preventing abrupt fluctuations in electricity costs that could arise in a fully liberalized real-time trading environment. Furthermore, the transitional model has played a crucial role in enabling IPPs to secure long-term contracts, fostering investment in private generation and clean energy projects. Despite these advantages, the transitional market model still exhibits structural weaknesses, including the absence of real-time market mechanisms, such as day-ahead, intraday, and balancing Markets, which are essential for ensuring efficient price formation and optimal dispatch of generation resources. The monthly clearance of bilateral contracts restricts market liquidity, reducing opportunities for short-term trading and price competition.

Another significant obstacle, tied to increased congestion issues, is Cyprus’ geographical isolation from other EU MSs. The absence of electrical interconnections with neighboring countries prevents Cyprus from participating in cross-border electricity trade, a cornerstone of the Target Model. This limitation not only undermines market liquidity but heightens system vulnerability to demand and supply imbalances. Moreover, as an electrically isolated system, Cyprus relies entirely on local generation to meet its electricity needs. Integrating variable RESs, such as solar and wind, introduces additional complexities, including grid stability and balancing challenges. Without access to external balancing resources, the grid must absorb the full impact of RES intermittency, necessitating advanced grid management tools and energy storage solutions.

In terms of market liquidity, the market concentration level remains a significant barrier to the development of a true CEM in Cyprus. The EAC continues to dominate both the generation and supply segments, limiting opportunities for new entrants and hindering the diversification of market offerings. Insufficient market participants and demand reduce liquidity, essential for effective price formation and fostering competition, particularly in the day-ahead and balancing markets. Inadequate levels of market participants and demand reduce liquidity, essential for effective price formation and fostering competition, particularly in the day-ahead and balancing markets. Independent Power Producers (IPPs) have entered the market, but their impact has been constrained by structural barriers, such as limited access to infrastructure, and operational challenges, including securing long-term contracts. The concentration of market power has several implications. It stifles competition, leading to higher electricity prices and reduced incentives for innovation. Consumers face limited choices, while new market entrants struggle to establish a foothold.

An additional critical obstacle, associated with the full commercialization of the CEM, lies in the delay for the completion of the Market Management System (MMS) as well as the Meter Data Management System (MDMS). The MMS is a sophisticated platform designed to coordinate all market activities and transactions. The MMS will serve as a vital tool for the TSOC and the MO to ensure transparent and efficient market operations. However, the slow pace of its development has hindered the operational readiness of the CEM, prolonging the transition to a fully competitive market. Compounding this issue was the challenge of adequately staffing the TSOC and MO with skilled personnel. The shortage of human resources has impeded the effective deployment and management of the MMS, further delaying market reforms. The MDMS, operated by the DSO, serves as a critical component in the management and optimization of electricity distribution networks. This system is designed to collect, store, and analyze vast amounts of data generated by electricity meters across the network, including both conventional and smart meters. It acts as a centralized platform for handling metering information, ensuring data accuracy, and enabling efficient energy management. Additionally, the MDMS plays a pivotal role in empowering consumers by enabling access in detailed information about their energy usage, promoting greater awareness and encouraging demand-side management. Despite these challenges, opportunities exist to address these barriers and advance energy transition in Cyprus.

The deployment of AMI represents a cornerstone of Cyprus’ efforts to modernize its electricity system. As per CERA’s Regulatory Decision 02/2018 [37], the rollout of AMI in Cyprus is being implemented in phases, targeting both residential and commercial sectors. Initial deployments have focused on urban areas with high electricity consumption, where the benefits of improved demand management and operational efficiency are most pronounced. Smart meters provide consumers with detailed insights into their energy usage patterns, empowering them to make informed decisions about reducing consumption and optimizing costs. From the utility perspective, AMI enhances grid management by providing real-time data on consumption, enabling quicker identification and resolution of outages, and improving load forecasting. This is particularly important as the share of intermittent RESs in the electricity mix continues to grow. The ability to monitor and manage energy flows dynamically ensures greater stability and reliability in the system. Despite the progress, challenges remain. The high initial costs of AMI deployment, coupled with the need for regulatory frameworks to ensure data privacy and security, have slowed the pace of implementation. However, these obstacles are being addressed through national policies and EU funding mechanisms, underscoring the commitment to completing the AMI rollout in the coming years.

The establishment of electrical interconnections is another pivotal transformative initiative aimed at addressing Cyprus’ status as an energy island. Currently, the country operates in isolation from the European electricity grid, relying entirely on local generation to meet demand. This lack of interconnection limits access to balancing resources, increases vulnerability to supply disruptions, and constrains the integration of RESs. The first concrete step towards the inclusion of Cyprus in the pan-European electricity network is the Great Sea Interconnector (formerly known as the EuroAsia Interconnector), which seeks to link the electricity grids of Cyprus, Greece, and Israel [28]. As a high-voltage direct current (HVDC) interconnection, the Great Sea Interconnector is designed to enable the bidirectional flow of electricity between the three countries. This capability will provide Cyprus with access to regional electricity markets, allowing the import of cheaper and cleaner energy during periods of high demand and the export of surplus renewable energy during periods of peak generation. Furthermore, the interconnector will significantly enhance grid stability, enabling better integration of RES into the Cypriot energy mix and reducing the risk of blackouts.

Geopolitical factors play a significant role in the development of the Great Sea Interconnector. The project strengthens Cyprus’ strategic position as an energy hub in the Eastern Mediterranean, fostering regional cooperation and energy security. However, the complex political relationships in the region pose challenges, particularly in coordinating efforts among the participating countries. Technical challenges also exist, including the design and implementation of HVDC technology over long underwater distances and ensuring compatibility with the electricity grids of the involved nations.

6. Opportunities for Cyprus as a Smart Energy Hub

Despite the challenges faced, Cyprus is well positioned to leverage its strategic location, abundant renewable energy resources, and ongoing regulatory advancements to become a leader in the Eastern Mediterranean energy transition.

As Cyprus continues to modernize its energy system and align with EU objectives, the nation is positioned to emerge as a smart energy hub in the Eastern Mediterranean. Innovation and the integration of emerging technologies further underpin Cyprus’ strategic vision. By embracing innovations across RES, storage, hydrogen, digitalization, and advanced nuclear technologies, the country can address existing challenges while unlocking new opportunities. One of the most promising areas is hydrogen, which offers a versatile solution for decarbonization across multiple sectors. Cyprus can leverage its renewable energy potential, particularly solar PVs, to produce green hydrogen through electrolysis. Green hydrogen can serve as a fuel for industry, transportation, and power generation, reducing dependency on imported fossil fuels and enhancing energy resilience. Investments in hydrogen infrastructure, including storage and distribution, will be essential to realizing this vision. Small Modular Reactors (SMRs) represent another transformative technology with the potential to complement renewable energy deployment [47]. SMRs offer a low-carbon, reliable baseload power option that can operate in synergy with intermittent RESs, such as solar and wind. Green hydrogen, produced through electrolysis powered by renewable energy sources, such as solar and wind, offers a versatile and sustainable solution to the challenges of energy security and climate change. With its exceptional solar irradiance and rapidly growing renewable energy capacity, Cyprus is uniquely suited to scale up the production of green hydrogen. This clean energy source can serve domestic needs while also being exported to meet the increasing demand in neighboring regions. By establishing itself as a producer and exporter of green hydrogen, Cyprus could significantly contribute to the global energy transition while diversifying its economy.

Vehicle-to-Grid (V2G) technology is another critical area for innovation [48]. As electric vehicle (EV) adoption grows, V2G systems allow vehicles to act as mobile energy storage units, feeding electricity back to the grid during peak demand periods. This bidirectional energy flow enhances grid flexibility and supports the integration of RES. Policies and incentives to accelerate EV adoption and V2G technology deployment will be key to maximizing these benefits. Digitalization also plays a fundamental role in Cyprus’ transition to a smart energy hub. Advanced data analytics, artificial intelligence (AI), and blockchain technologies enable real-time energy management, optimize grid operations, and enhance transparency in energy markets. The integration of AI-driven forecasting models can enhance the predictability of renewable energy generation, reducing curtailment and improving grid stability. Similarly, smart grid technologies leveraging AI can facilitate real-time demand responses, optimize battery energy storage utilization, and support dynamic electricity pricing mechanisms. Digital platforms for peer-to-peer energy trading, demand response, and grid monitoring are already demonstrating their value in creating efficient, decentralized energy systems. Moreover, as Cyprus transitions towards a higher share of RESs and a dynamic electricity market, modern hardware tools will be playing an increasingly vital role in ensuring grid stability, flexibility, and reliability. Beyond traditional infrastructure enhancements, advanced power electronics and smart grid technologies are critical for maintaining system inertia, voltage regulation, and frequency stability in an islanded power system with rising RES penetration. A key technological development is the deployment of grid-forming inverters, which enable RESs and BESSs to actively contribute to frequency and voltage stability. Unlike conventional grid-following inverters, which rely on an existing stable grid to operate, grid-forming inverters can establish and maintain grid frequency independently, effectively replacing some of the stabilizing functions traditionally provided by synchronous generators. This technology is particularly important in Cyprus, where high PV penetration and limited interconnection capacity necessitate alternative sources of synthetic inertia and grid stability support. Hybrid energy storage solutions, combining batteries with fast-response power electronics, further contribute to grid flexibility by providing ancillary services such as fast frequency response and peak load shaving. As BESSs continue to expand, their integration with smart control algorithms and AI-driven optimization tools will further enhance Cyprus’ ability to balance supply and demand in real time. These hardware advancements represent critical enablers of Cyprus’ energy transition, allowing the system to maintain reliability while accommodating increasing levels of RESs, reducing dependency on fossil fuel generation, and preparing for future interconnections. Their deployment is expected to become increasingly instrumental in achieving a stable, competitive, and decarbonized electricity market. Supported by regulatory frameworks and market incentives, these hybrid systems, combined with advanced hardware, can drive Cyprus toward achieving its renewable energy targets.

By embracing these emerging technologies and leveraging its unique geographical and regulatory advantages, Cyprus has the potential to become a pivotal player in the regional energy transition. Cyprus’ strategic location at the crossroads of Europe, Asia, and Africa provides significant opportunities to become an energy hub. The island’s proximity to key markets and its role as a gateway to the Eastern Mediterranean region allow it to facilitate energy trade and foster regional cooperation. Cyprus’ strategic vision as a regional leader in sustainable energy is multifaceted, integrating key elements such as regional collaboration, renewable energy expansion, technological innovation, and workforce development to achieve a low-carbon future. Central to this vision is green hydrogen, a clean energy carrier that holds the potential to decarbonize multiple sectors while positioning Cyprus at the forefront of global energy innovation. The realization of this vision requires the development of advanced infrastructure for hydrogen production, storage, and transportation.

Large-scale hydrogen storage facilities would ensure a consistent supply to meet both domestic and export demands, while dedicated pipelines and specialized shipping routes could facilitate the movement of hydrogen across borders. One of the central pillars of this vision is establishing Cyprus as a regional energy hub through projects like the Great Sea Interconnector. This landmark initiative not only connects Cyprus to the European electricity grid but also positions the island as a critical player in cross-border energy trade beyond the pan-European energy network. By facilitating the import and export of electricity, including renewable energy, the interconnector enhances energy security for Cyprus and its neighbors while supporting the EU’s broader decarbonization goals and fostering the establishment of a Mediterranean Hydrogen Corridor, allowing the seamless flow of green hydrogen to energy-demanding markets.

The economic and environmental benefits of this transformation are profound. Economically, the export of green hydrogen and associated technologies would generate substantial revenue, create high-value jobs, and foster innovation. Environmentally, Cyprus would contribute to global efforts to combat climate change by supplying clean energy to regions heavily reliant on fossil fuels. Domestically, the increased reliance on renewable energy and hydrogen would reduce emissions, improve energy resilience, and help Cyprus achieve its climate targets. Partnerships with neighboring countries would bolster Cyprus’ geopolitical significance and strengthen its role in enhancing energy security and accelerating decarbonization across the region. Such initiatives would position Cyprus as a nexus for innovation and cooperation, driving global progress toward sustainable energy systems. A conceptual illustration of the future super smartgrids, highlighting Cyprus as a key energy hub interconnecting Europe, Africa, and Asia, is depicted in Figure 10. The figure showcases Cyprus’ strategic role in regional energy exchange towards the establishment of transcontinental grid that shall facilitate energy security, decarbonization, and cross-border electricity trading. This envisioned transformation of Cyprus emphasizes the integration of cross-border electricity interconnections, leveraging RESs and green hydrogen production to facilitate energy trade across multiple continents. Key infrastructural elements, such as electrical interconnections, hydrogen supply chains, and energy storage systems, are depicted to highlight Cyprus’ role in enabling sustainable energy exchange. The conceptual framework underscores the island’s strategic geographic position and its potential to serve as a critical node in the future energy transition.

7. Concluding Remarks

Cyprus’ electricity landscape is undergoing a significant transformation, driven by regulatory reforms, increasing renewable energy penetration, and the challenges posed by geopolitical and economic disruptions. The ongoing transition reflects the island’s commitment to modernizing its electricity sector, enhancing energy security, and aligning with European decarbonization objectives.

This study has provided a comprehensive examination of the historical evolution, key drivers, and obstacles shaping the island’s energy transition, highlighting the interplay between national policies, regional cooperation, and market dynamics. The findings illustrate that while substantial progress has been made in integrating renewable energy sources—particularly solar photovoltaic (PV) and wind—critical challenges remain. The continued dominance of conventional generation, grid congestion, and the absence of cross-border interconnections hinder full market liberalization and decarbonization efforts. The geopolitical instability after the beginning of the Ukraine War has further exacerbated Cyprus’ exposure to volatile energy prices, underscoring the urgency of diversifying its energy mix and accelerating the deployment of renewables and storage solutions. The lack of natural gas infrastructure continues to limit investment in lower-carbon conventional generation, reinforcing Cyprus’ dependence on imported oil and exposure to fluctuating carbon costs under the EU Emissions Trading System (ETS).

Despite these challenges, Cyprus is uniquely positioned to capitalize on its strategic location and renewable energy potential to rise as a a pivotal player in the regional energy transition. The expansion of energy interconnections will serve as a catalyst for market integration, cross-border electricity trading, and enhanced grid resilience, positioning Cyprus within the broader European and Mediterranean energy network. Moreover, advancements in energy storage technologies, grid-forming inverters, and artificial intelligence-driven energy management systems will facilitate greater renewable energy penetration and improving system stability. Cyprus’ emergence as an international energy hub powered by green hydrogen encapsulates the potential of innovative technologies and regional cooperation to reshape the global energy landscape. By harnessing its geographic and renewable energy advantages, Cyprus could play a pivotal role in advancing sustainability, fostering economic growth, and supporting the global transition to a low-carbon future. This vision not only aligns with global energy objectives but also redefines Cyprus as a leader in the green energy revolution, bridging continents with sustainable solutions.