By Dr. Andreas Poullikkas

• Professor of Energy Systems, Frederick University

In the public debate on the GSI electricity interconnection, which is an EU Project of Common Interest, we often hear sweeping statements about costs running into the billions or alleged automatic surcharges on electricity bills. The reality is more complex and much more regulated, because in Projects of Common Interest, cost recovery is neither arbitrary nor one-sided, but through a specific European framework that combines market revenues, regulated tariffs, and the cross-border cost allocation mechanism, known as CBCA (cross-border cost allocation). This is important because the discussion about a project like the GSI cannot be limited to a single large aggregate figure. The crucial question is not simply “how much does it cost,” but who benefits, what share of the cost each country bears, how much is covered by the interconnection’s own operations, and what, ultimately, remains to be recovered through tariffs.

For Projects of Common Interest, the European regulatory framework stipulates that the project’s cost is first reduced by any European grants or subsidies, leaving only the net amount to be recovered through regulation. Subsequently, the recovery of the remaining costs takes place in two stages. First, through the electricity market itself—that is, from revenues generated by the sale of cross-border transmission capacity (congestion rents) in accordance with Regulation (EU) 2019/943; only for the portion not covered by the electricity market is the Cross-Border Cost Allocation (CBCA) mechanism activated. Regulation (EU) 2022/869 on Projects of Common Interest provides that, through the CBCA, national regulatory authorities allocate the residual cost of a project among the countries that derive a net benefit from it, and the logic is simple. The net cost remaining after subsidies and market revenues follows the benefit rather than simply the project’s geography.

This is precisely what was reflected in the case of the Greece-Cyprus interconnector in the relevant CBCA. Based on the studies conducted at the time and the investment dossier submitted in accordance with Regulation (EU) 2022/869, the regulatory authorities determined that both countries derive a net benefit from the project, albeit to different degrees. For this reason, the cost of the Cyprus-Crete section is not divided equally, but is allocated in a ratio of 63% for Cyprus and 37% for Greece. This ratio does not mean that one country directly pays the corresponding amount in cash, nor that the entire cost is automatically passed on to residential consumers. It means that, for the cross-border portion of the project, the eligible recovery costs are allocated between the two countries based on the net benefits identified in the relevant studies.

To put it more simply, if—for example—we assume that the annual allowable revenue to be recovered for a given year is 10 million euros, then using the simplified logic (which we often hear in public discourse) of 63%–37%, 6.3 million euros would correspond to one side and 3.7 million euros to the other. However, this still does not mean that these amounts are automatically and entirely converted into a bill charge, because the contribution from electricity market revenues comes first.

The recovery method is twofold. First, the annual allowed revenue is calculated—that is, the amount the project operator must recover within a year to cover operating expenses, depreciation, and a reasonable return on the regulated asset base. Next, revenues generated by the operation of the interconnector itself—primarily from capacity auctions—are deducted. If market revenues are sufficiently high, they reduce the amount that remains to be recovered through regulated tariffs. If they are low, the remainder is recovered through network charges in accordance with each country’s national regulatory framework. Each Member State sets its own revenue requirement to cover operating expenses and its share of capital costs, after taking into account revenues from capacity sales and any subsidies.

Under this mechanism, the market bears the initial portion of the burden, and rates cover only the remainder. This is why absolute statements such as “this is how much it costs, so this is how much the consumer will pay” are misleading. European funding, the allocation of cross-border transmission capacity, the country-specific allocation, and the national regulatory methodology for cost recovery all play a role.

Let’s assume that for one year, the allowed revenue to be recovered is 10 million euros. If, through the electricity market, the interconnector also generates 10 million euros, then the allowed revenue is fully covered by the market, and nothing remains to be recovered through tariffs. In this case, the consumer benefits from this specific component of the mechanism without any additional direct cost.

If, however, electricity sales yield only 7 million euros, then a balance of 3 million euros remains to be recovered. This amount is not allocated arbitrarily, but according to the CBCA ratio. Assuming a 63%-37% split, approximately 1.89 million euros correspond to one country and approximately 1.11 million euros to the other. It is this amount that can be passed on to regulated rates, not the entire annual allowable revenue.

Conversely, if the market generates 13 million euros while the allowed revenue is 10 million euros, then there is a surplus of 3 million euros. In such a case, there is no additional charge to users for that year, and the surplus, depending on the regulatory framework, may be offset or taken into account for the benefit of users.

The CBCA mechanism affects the final electricity bill not in a simple and linear way, but through the allocation of the portion of costs that may be recovered in each country. The effect on the final electricity price depends on whether the interconnection reduces other system charges. This is perhaps the most important point in the public debate. An interconnection may increase a specific regulated charge while simultaneously reducing the overall cost of electricity through lower wholesale prices, greater security of supply, a reduction in costly reserve capacity, and better utilization of the market. For this reason, a proper assessment cannot be made based on a single isolated figure, but rather by comparing total costs and total benefits.

The bottom line is that the electricity interconnection should not be evaluated based on a single, isolated figure, but rather on its overall impact on the system. Its cost is first reduced by subsidies, then by market revenues, and regulatory recovery is applied only to the remaining balance. Thus, the burden is allocated based on the benefit, while consumers ultimately stand to benefit not only from how costs are allocated, but also from how interconnection contributes to more stable, more competitive, and safer electricity prices.