The Third Package allows EU energy islands to be exempted from most if not all of the acquis communautaire in energy, both on market design and the regulatory framework. However, even if a supply monopoly is the most efficient market structure in a given situation, this monopoly in theory still needs to be regulated. Therefore, has the EU struck the right balance in this area? This paper first disentangles the complex system of derogations open to EU energy islands. It focuses inter alia on the unbundling regime and what it means to have an express derogation from Article 9 (ownership unbundling). The second part looks at the opening of the Cyprus gas market and the concrete effects of the derogation system on the powers of the Cyprus Energy Regulatory Authority, the national regulator, in monitoring this market. Cyprus is considered to be both an isolated (Article 49(1) of Directive 2009/73) and an emergent (Article 49(2) of Directive 2009/73) market under the new legislation and, as such, is an interesting case. The paper argues that, beyond the complexity of the derogation regime applying to energy islands, the scope of possible derogations from the Third Energy Package seems to be exceedingly wide. The Package allows for full vertical reintegration and a loss in regulatory independence and powers which does not seem justified. The Third Energy Package’s derogation system for energy islands should, strictly, be used to ensure the viability and attractiveness of the investments and, in particular, should not reduce the role, power and responsibilities of the national regulatory authority, especially on the issues of security of supply, transparency and consumer protection through the proper regulation of tariffs, bearing in mind that the market will be monopolistic.
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