Changes in the energy sector are usually slow and difficult. This spring, however, the parliament surprisingly quickly and smoothly approved a package of amendments to the Energy Act, which are largely aimed at deregulation in the sector and are expected to bring more competition and market-determined prices.
The amendments are related mainly but not only to further deregulation of electricity production, the requirement for electricity distribution companies to buy part of their supply on the Independent Bulgarian Energy Exchange (IBEX) and expansion of the powers of the energy regulator. The IBEX will become much more liquid, which inevitably will solve a major problem highlighted by businesses - the lack of electricity volumes available for trading which often leads to a rise in prices.
The full effect of all these amendments will be felt most probably in 2019 when the government is expected to renegotiate the long-term Power Purchasing Agreements (PPAs) of AES Galabovo and ContourGlobal Maritsa East 3 power plants. The two coal-fired power plants will greatly enhance the supply of electricity on the free market, if their PPAs are amended with requirement to sell all their production at the IBEX.
The reform does not concern directly the regulated market, which comprises all domestic consumers.
Heat power plants, cogeneration plants, factory plants as well as renewable energy suppliers (RES) with installed capacity of more than 4 megawatts (a total of 147 companies), whose electricity is currently being purchased by the National Electricity Company (NEK) at fixed feed-in tariffs, will start selling all their energy at the IBEX. They will have to sign premium contracts with the Power System Security Fund (PSSF) by 31 October to offset the difference between the market price achieved and the price set in their long-term contracts.
Unlike the current contracts, this premium will pose a risk to producers. It will be fixed for each producer and will be calculated by the energy regulator for a year ahead. A reference (estimate) market price will be determined, with the calculations of the regulator showing it should be 70 levs per megawatt hour for the period from 1 July 2018 to 30 June 2019.
There will be different estimate prices for different producers. Some of them, like wind farms achieve their peak at night when prices are low, others like heating power plants are more flexible.
According to simulations of the production modes of the respective producer groups made by the regulator, the fixed estimate market price for solar power plants will be 78.98 levs/ MWh. This means that if a photovoltaic park now has a feed-in tariff of 400 levs/ MWh, it will receive a premium contract of 321.02 BGN / MWh. If the market price is lower than the forecast, the producer will suffer losses and vice versa.
For wind power plants the fixed component determined by the regulatory authority is 67.06 levs/ MWh, for hydro power plants with installed capacity of up to 10 megawatts it is 68.98 levs/ MWh, for producers of electricity from biomass - 69.87 levs/ MWh, and for cogeneration plants it is 70.65 levs per megawatt hour.
Pending the entry into force of the new contracts between those producers and PSSF, NEK will continue to buy their energy. From July 1, when the new regulatory period starts, it will start selling the energy at the IBEX. The state-owned company will also receive a premium from the fund to offset the difference.
Calculations show that when all these power producers enter the market, the total quantities offered will increase by at least 4.4 teratwatt hours per year (with a total volume of 6.3 TWh traded on the exchange in 2017). In order to balance supply and demand when this huge volume hits the market, the power distribution companies of CEZ, Energo-Pro and EVN, as well as the Electricity System Operator (ESO) will start to buy the electricity needed to cover the technological losses from the free market, rather than through quotas set by the energy regulator. Their needs total approximately 4 TWh per year.
At present, the electricity distribution companies and ESO have fixed costs for the purchase of energy needed to cover technological losses. As of July 1, this will change. Therefore, the forecasted market price of electricity will play a crucial role for them. Unlike the producers, in case of a drastic discrepancy between the real cost and the estimated one, compensations will be paid in the subsequent regulatory periods.
The regulator gains more power
In addition to being granted increased powers to monitor the energy exchange for possible abuse of prices by electricity traders, the Energy and Water Regulatory Commission (EWRC) is now authorized to approve deals in the energy sector such as the ongoing takeover of the assets of Czech group CEZ in Bulgaria by the little known Bulgarian company Inercom.
The regulator will be able to grant or withhold clearance for transactions involving subsidiaries and shares that represent more than 20% of the capital of companies licensed for the transmission of electricity, heat and natural gas.
It remains unclear, however, on what basis the regulator will agree or refuse to authorize such transactions and whether its increased powers will apply to procedures initiated prior to the adoption of this change to the Energy Act. Without the introduction of clear and precise criteria the regulator may, at its own discretion (or under political influence, although it is a formally independent authority), suspend any sale in the energy sector. Which is another bad signal for private investors.
The problem had to be solved by the parliamentary energy committee but the MPs did not venture to propose specific criteria, on which the EWRC would approve transactions. Instead, the Consultative Council on Legislation to the parliament was asked to carry out a legal analysis of the possible criteria.
We want see if the new market rules represent a fair investment protection
What was the main event in Bulgaria in energy according to you in the last three month and why?I will focus on two events, because both are significant. The first are the amendments of the Energy Act requiring renewable enenrgy generators (RES) and co-generation producers above 4MW to sell their electricity on the Independent Bulgarian Energy Exchange (IBEX), published on 8th of May. The Power Purchaisng Agreements (PPA) of the generators impacted by the amendments will be substituted by Contract for Premium as of January 1 2019. Following this approximately 50% of wind and solar generation in the country will be sold on the free market.
The second is the intra-day segment on IBEX started on April 11 this year. It enables trading much closer to real-time allowing in particular intermittent RES generation to decrease their balancing costs.
What will be the event you would be looking at in the next three months in energy field?Following the Energy Act amendments there will be consequent amendments to the Electricity Trading Rules and Ordinance for Regulation of Electricity Prices by the end of June. And we will be looking at how these develop as they will set the details for the transition of the RES PPAs to Contracts for Premium and how will RES generators will participate on the balancing market. In particular these amendments will provide much needed clarity as to whether the Contract for Premium represents a fair investment protection for RES generators.
We are also following the ongoing discussion of the Clean Energy for all package and in particular the EU's 2030 target for renewable generation where the discussions are in a range from 27% to 35%. Olivier Market took over the responsibilities of the president of the AES-Bulgaria in June 2015. Before moving to Bulgaria he was vice president for business development of AES in the Dominican Republic, business development manager of AES in the US, business development director for AES in Singapore and vice president for business wevelopment of AES in Brazil. His career in the energy sector began in 1995 with the French company Electricité de France, where he worked for 9 years before joining AES.