THE VASSILIKOS power station is gone. This event is the largest negative shock to our economy since the invasion of 1974. One could ask how is it possible that in a country living under the threat of a possible war, our capacity to generate electricity was centred on just one source.
Although the plant was 60 per cent of our capacity, it must be realaised that it was by far the cheapest source of energy on the island, and hence its 60 per cent was almost always in use.
The ability to produce electricity was about to receive a massive boost from the unused new power unit at Vassilikos, comfortably being capable in boosting production to above 900 MW hours, the average peak demand in the summer.
The destruction of the power station and the new and unused power unit meant that we are suddenly not in any position to satisfy the projected summer demand since our maximum capacity has been cut way below the peak demand. Even if the projected capacity rises over time, we are doomed to still face power cuts and disruptions since no electricity grid can operate without some capacity going offline for repairs and maintenance.
So despite the government’s encouraging announcements is it very clear that we will be in this situation for at least a year: barring building a new power station in record time, the measures suggested by the government can only provide an additional 10/100 MW each.
Floating electricity plants can provide more than 200MW which would ease the situation, but such big electricity systems can really operate in calm waters such as rivers and in areas where the electricity infrastructure has been adapted to its use. We will need to construct the capability to house such a unit, which might take at least a year. They are also usually very expensive to run and maintain.
Assuming the fact that we can operate at full 750MW capacity at all times, we could not cover the electricity needs of last year needs during weekdays, as demand in peak time is way above our cut off of 750MW.
However the cost of this explosion does not just affect in terms of rebuilding, compensating and repairing. The dynamic effects on companies will ensure a return to deep recession, especially if you factor in the effects of the electricity crisis is having in Cypriot companies. The electricity shortage causes three devastating blows to our economy: reliability, capability and cost.
The lack of reliability in electricity provision is a great drag to the economy. Already power cuts are taking place and sadly it seems that since our electricity system is operating at full capacity the authorities have not been able to announce when and where such cuts should occur. As a result business are already suffering from lost labour time, repairing software and hardware issues relating to cuts, and an ever greater need for technical support, all in a period where the focus has been to cut costs and thus remain competitive with other European companies.
The lack of reliability makes it necessary for the imposition of flexible working hours immediately. Government offices especially should move to working hours that go around the peak time, and thus reduce the load on the network. There should be an immediate agreement with the unions to adopt the model of the Cyprus Central Bank, where staff work in several shifts with varying starting times, from 8am to 12:30pm and various leaving times from 5pm to 8pm.
This will spread electricity demand enough to ensure we stay below our maximum capacity and this will aid in reliability. Emergency legislation should be put in place to allow companies to schedule working time around the power cuts without fear of union action for as long as the shortage is an issue.
Secondly, electrical capability is an issue usually faced by less developed countries, whereby several innovative ideas and machines can fail due to the fact that electricity is rationed. Electricity is what we call a “general purpose” technology. It allows for other machines and people to do their jobs more effectively. Any restriction in our ability to use electricity also restricts our ability to use other machines, which are constructed for countries where electricity is not a rationed good. As a result the rationing of electricity lead to a slower dissemination of productive technology in the economy.
A good example of our diminished capability and the additional cost to society is the traffic chaos that the electricity cuts have been causing, since traffic lights switch off, causing accidents and delays, and needing an ever greater number of traffic officers diverted from more important duties.
The third and most pressing issue is cost of the current electricity provision. Power stations have massive economies of scale, This means that the cost per unit of electricity produced gets cheaper and cheaper the bigger the power station. Vassilikos was the biggest and most modern power station in Cyprus, and thus it produced the cheapest electricity per unit.
The remaining power stations were effectively backups, Their cost per unit of electricity was much higher, and their capacity was effectively only used when the power needs were higher than Vassilikos’s capacity to cope.
In addition running factories from these dramatically raises costs.
The raising of the cost of production leads to the big issue that all politicians avoided: A new increase in the electricity bills is inevitable. The Electricity Authority, which has also posted large losses, already substantially increased the electricity bills by 33 per cent in April.
Let us be clear: this is not an additional cost to repair (or rebuild) the Vassilikos power station. This is additional cost that we have to pay for the current electricity we receive from other sources, now that the cheapest source of electricity has been destroyed.
This is the most terrible of news for our economy. When companies are faced with increased cost of production, they reduce the quantity the produce at any price. If the company was willing to produce 1,000 shampoo bottles for €2 euro, it will now have to produce less if market price remain the same. The result is more companies on the verge of bankruptcy and more unemployed workers, just as the economy is struggling to get back on track after the recession.
This accident has singlehandedly led us back into recession, with very serious consequences both for our level of unemployment, our society and our credit rating. Quick, decisive action is needed. In a crisis a government that leads with brevity, rapidity and open to radical solutions can act as a positive catalyst. Sadly, two and a half years in power show that this government lacks, the strength, will and ability to do anything substantial.
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