When liberalization of the Bulgarian electricity sector began back in 2004, nobody foresaw the process to be as lengthy and painful as it has been. Advantages of a free market approach seemed clear at the time - it would eliminate inefficient state intervention, drive-out parasitic intermediaries between producers and consumers, and reduce costs. Despite advantages, deregulation has taken longer than expected to implement. This year, however, a major development is expected to transform the electricity market in Bulgaria. As of 1st of January all electricity is sold only at the Independent Bulgarian Energy Exchange (IBEX), and from the second half of the year producers with preferential purchasing contracts will gradually be obliged to sell on the energy exchange as well.
Market fundamentals are clear: in order to create a competitive market for electrical power both supply and demand sides should reach a critical mass of volumes traded and numbers of players. However, the liberalization process in Bulgaria's energy market was twisted from the outset. To date, the market had been opened on the demand side in stages - first for large industrial consumers, then for smaller businesses and finally, at least on paper, for households and small enterprises which have no price incentive to join the liberalized market. Prices for them are set by the country's energy regulator, the Commission for Energy and Water Regulation and are below the free market prices. Simultaneously, a large portion of the supply-side remained regulated in order to provide electricity for the households and small businesses.
To date, free market remained dominated by three state-owned suppliers: the nuclear power plant at Kozloduy, the coal-fired Maritsa East 2 facility, and the National Electricity Company (NEK). According to financial reports of the three suppliers, as published by the Ministry of Finance during the first three quarters of 2017, together, the three produced and/or purchased a total of 28.3 TWh of electricity and sold about 54% of that volume, 15.3 TWh combined, on the open market. Third quarter results, however, show that only roughly one-third of the open market sales were offered on IBEX energy exchange, while the rest was sold through tenders organized on the online trading platforms of the three state-owned companies.
When IBEX opened its day-ahead market (DAM) segment in January 2016, the state-owned Bulgarian Energy Holding (BEH) began to offer electricity in compliance with its commitments to the European Commission's DG Competition. DG Competition investigated BEH for destination clauses in its contracts. In order to evade a fine, BEH decided to cooperate with the European Commission. According to the non-confidential version of the commitments, BEH's average hourly offers on the energy exchange in 2017 had to be 373 MWh and must reach 807 MWh by 2020. Such compulsory commitments provide great support to the development of the DAM segment but they do not define the BEH subsidiaries' behavior regarding other market segments including daily, weekly, monthly, quarterly, or annual contracts.
In response to limited supplies of electricity on the energy exchange during the last quarter of 2017, traders and large industrial consumers took to complaining about "missing energy." During the first weeks of 2018, constricted supply led to higher prices, which were described by business organizations and industrial customers as unjust and unreasonable. Traders themselves, caught in the middle, attempted to ascribe rising prices to expensive peak load electricity (several times more expensive than the baseload, supplied when there is no high demand), as well to rising prices throughout Southeast Europe.
Even if there had been a problem of "missing energy," (e.g. diminishing sales by state-owned power plants in the last two quarters of 2017), the real challenge is one of "missing trust." Historically, state-owned producers have been selling large portions of their free-market energy to a small number of traders, often under very obscure terms. Such was the case with the sales of large volumes (100 MW baseload for 2018 and 70 MW baseload for H1/2018) through the Continuous Trading platform of the IBEX in a matter of minutes in August 2017, which triggered an investigation by the energy regulatory authority.
The market tensions have led to several significant new legislation changes. The first, hurriedly adopted in the closing days of 2017, obliged all producers with capacities of over 5 MW (excluding the volumes they sell through long-term or preferential tariffs) to offer their output via the power exchange platforms. The second, announced on February 1, 2018, provides for the integration of industrial and heating co-generation plants into the free market as of July 1, 2018. To do that the so-called Contracts for Difference (CfD) are introduced, allowing producers to sell at market prices and claim the difference to their preferential tariffs. The most recent legislation, proposed in mid-February as a deal between the government and the business associations, would place onto the open market lignite power plants, AES Galabovo and ContourGlobal Maritsa East 3, both holding long-term power purchase agreements (PPA). Their PPAs provided that almost all of their electricity production is bought by NEK. All renewables with capacity of over 4 MW would also be placed on the open market. For the two power plants with PPAs the model is not clear yet, while for the renewables there will be a CfD scheme as well.
Opening of the market presents risks that urgently require evaluation. Bulgaria has been a long-time exporter of electricity, with export revenues supporting the country's state-owned energy companies. These revenues have also provided a cushion for domestic prices, enabling, over the past decade legislators, the regulator, and the management of state-owned energy companies to cross-subsidize domestic prices with higher incomes from abroad. If the energy-only prices (i.e. prices minus the additional fees paid by the domestic consumers) go down, state-owned power plants may lose financially, unless they start to export additional quantities on their own, which can possibly create a deficit at home. Another risk concerns the so-called difference in the CfDs, i.e. the lower the energy-only price, the higher the difference would be which is paid by all consumers with additional fees.
Bulgaria's policy-makers have been slowly but steadily developing the demand-side of the free energy market since 2004. Now, if all proposed new legislative amendments become fact, there would be a significant boost to the supply side as well. If there is a large disproportion between supply and demand after mid-2018, free-market prices could fall which could prompt households to choose free market option as well. This will be a positive development, after all, signaling that the years-long effort towards liberalization may be finally complete.
* Assoc. Prof. Dr. Atanas Georgiev is publisher and Chief Editor of Publics.bg and Utilities magazine. He is full-time associate professor and director of the "Industrial Economics and Management" department and director of the M.A. program in energy economics in the Faculty of economics and business administration at Sofia University St. Kliment Ohridski. He is also a member of the extended faculty of the Bulgarian Diplomatic Institute and a frequent guest author at energy-related publications. Mr. Georgiev is member of the Managing Board at the Bulgarian World Energy Council Committee and of the International Association for Energy Economics.