Risky energy games

A little earlier, Russia's Gazprom confirmed that it is considering booking capacity in the proposed pipeline in Bulgaria that will stretch some 500km from the border with Turkey to the border with Serbia. It will open the way to the EU for the second leg of TurkStream pipeline, which bypasses Ukraine across the Black Sea.

The government has set both projects as its priority since 2014 and Ms Petkova is constantly engaged in driving them through. She maintains that the new gas link will reap more than four billion levs in profits over the next 20 years. Belene NPP is being promoted as a possible replacement for Bulgaria's fleet of coal-fired power plants, as well as a way to recover close to one billion euro spent thus far on its construction, for which Russia's Rosatom was originally contracted.

However, both projects are mired in controversy, with Belene NPP facing considerable domestic opposition. The construction of the nuclear power plant was terminated in 2012 over lack of funds, scant market prospects for the sale of its electricity output and problems with the project management. The project for expansion of the current transit gas network on Bulgarian territory follows the demise of the gigantic South Stream, a Gazprom-run project to carry Russian gas to Europe across the Black Sea and via Bulgaria, circumventing Ukraine. Now, this legacy taints the government's new plans.

Resurrecting Belene

The tender for Belene NPP will open in January 2019 and the government hopes to pick a winner by the end of that year, Ms Petkova announced. The investor will need to build the new power plant over a span of eight years for an estimated total cost of 9 billion euro.

The deadline is probably chosen to coincide with the expected date for decommissioning the coal-fired plants which now apply derogations from the EU rules. The power plants will need to meet much higher environmental standards after the derogations expire in 2027. The projected investment matches an earlier assessment of HSBC, the consultant hired in 2011 to find investors for the then wobbling Belene NPP project. Back then, the investment bank calculated the total cost of the 2000 MW power plant at 10 billion euro. Bulgaria's state-run National Electricity Company, the initial investor in the project, has already poured more than 1 billion euro into it, hence the 9 billion euro price tag.

Even though the cabinet has been canvassing investors for more than three years, few details of the revived project are known. Some of them apparently have still not been clarified by the government itself.

Only a month ago the energy minister seemed surprised to learn that the European Commission views the restart of Belene NPP project as a new undertaking which will require a new notification; i.e. Brussels must confirm the project meets EU's standards. The process could delay the project for many months.

Ms Petkova explained in parliament that the selected winner will need to guarantee that 30% of construction works will be assigned to Bulgarian companies. However, this requirement would run against the EU's state aid rules. Bulgaria already had to face the European Commission on another project that had such a feature - South Stream. It was one of the reasons for the infringement procedure initiated by the EU's executive against Bulgaria in 2014.

The few other known details point to a preferred investor. According to Ms Petkova, the future investor won't have the right to alter the Russian-made equipment (the reactors are already supplied) and will need to provide the first fuel load. This points to Russia's Rosatom, the original contractor of the power plant project. China's CNNC, which has expressed some interest in the project, and hinted that it wants to supply its own equipment. The same is true for South Korea's KHNP, which is also mentioned as a possible investor.

As for other prospective investors, rather like France's Areva or even Montenegro, they are probably only wishful thinking. France's nuclear equipment producer was part of the original consortium building Belene NPP and has said several times that it is only interested in supplying its technology. The other French firm cited - EDF, has never publicly confirmed its interest.

As for the small Balkan country mentioned by Ms Petkova, it is far from certain that it could become a shareholder in the project. In the past decade, practically every Southeast European country has been touted as a possible shareholder, but none came on board. In 2010 former Bulgarian President Georgi Parvanov went all the way to Syria to discuss possible electricity export from Belene NPP.

A new lease of life for Gazprom's project

Bulgaria's state-owned gas transmission network operator Bulgartransgaz will publish the result of the third, binding phase, of its market test for expansion of its pipeline grid on December 17, after this edition of KQ has gone to print.

Two days later, Bulgartransgaz will take its Final Investment Decision on the construction of the new 469 km-long pipeline from Provadia (60 km. west of Varna, in eastern Bulgaria) to the Serbian border with a throughput capacity of 12 billion cubic meters per year.

The new pipeline will connect to the existing transit pipeline which is now carrying Russian gas via Ukraine, Romania and Bulgaria to Turkey. As Gazprom plans to cease gas transit via Ukraine and supply Turkey directly through the TurkStream pipeline running across the Black Sea, the new pipeline on Bulgarian territory is planned to take some of the gas flows to Central Europe.

Bulgartransgaz has said that five companies expressed interest in shipping gas through Bulgaria's network. Gazprom, which has been in negotiations with Sofia since early 2014, has already announced it is considering the option and a decision will be made "depending on the booking conditions".

The project is important to the Russian gas monopoly as well because it has a shipment contract with Bulgartransgaz until 2030. The value of the booked capacity for the period exceeds 1.5 billion levs (770 million euro). The new pipeline from Turkey to Serbia will compensate the Bulgarian gas network operator for the lost revenue.

The financial model unveiled by the Bulgarian Ministry of Energy forecasts 9.7 billion levs (5 billion euro) in revenues for 20 years and a staggering 4.3 billion levs (2.2 billion euro) of accounting profits. This is in stark contrast to what Bulgartransgaz earns now. In 2017 the company made 371 million levs (190 million euro) in revenues and 60 million levs (31 million euro) net profit.

Of course, there is a catch in the forecast because the Energy Ministry presented all potential revenues from the existing and the new pipeline infrastructure, mixing existing contracts and potential revenues.

According to data from the market test that Bulgartransgaz is conducting, the company seeks to receive 225 million levs (115 million euro) annually at the Turkish entry point and at the Serbian exit point of the gas grid. The company, however, offers a hugely increased capacity on the Turkish border, which has no reasonable chance to be fully booked. If those phantom revenues are subtracted, Bulgartransgaz could only hope to maintain its current earnings at best. Given the sharp rise of the company's future liabilities due to its investments in new infrastructure, this poses a serious risk for its financial viability.

Bulgartransgaz could avoid those looming financial troubles only if Gazprom decides to book more capacity than it needs. The Russian company is known for its charitable gestures but they usually come with some political kick-backs for the Kremlin. If so, this does not augur well for Sofia.

Krassimir Nenov, CEO of Contour Global Maritsa East 3: Bulgaria runs a risk of electricity scarcity

What was the major event in the field of your business sector in Bulgaria in the last quarter?

The recent hike in the price of CO2 allowances had the highest impact on the competitiveness of lignite-fired power plants which account for 45% of electricity output in Bulgaria. CO2 costs now exceed fuel costs. Meanwhile, Bulgaria will continue to rely on its lignite fired power plants, one of which is ContourGlobal Maritsa East 3, for many years to come due to their flexibility which cannot be substituted in the near future by other technologies.

What do you see as the next major development in the field of your company's business in the forthcoming quarter or further? Winter is coming, therefore the main priority for the next few months is to continue to contribute to the security of supply. And our power plant is fully prepared to do so. Going forward, appropriate solutions ensuring the continued operation of the Maritsa East complex need to be found. This concern is especially relevant in the light of the most recent report on resource adequacy conducted by ENTSO-E, the association of the transmission system operators in Europe, in which Bulgaria is identified as one of only a few countries with a risk of resource scarcity.

Krassimir Nenov has been the CEO of ContourGlobal Maritsa East 3 since 2017. He has led the commercial division from 2003 and in 2014-2015 held leadership roles in power generation in Russia. He is a graduate of Cornell University and the Catholic University in Leuven.