Bulgaria is about to end the long-term contracts of US investors in TPPs

AES Galabovo

Bulgaria is about to end the long-term contracts of US investors in TPPs

It is a complex process that requires time for negotiations and preparation, which is now lacking

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AES Galabovo

© Ей и ЕС Гълъбово


The Bulgarian government is facing a serious test. On the one hand, there will be a general election in April, a new parliament and a new cabinet will be formed. But on the other, one of the biggest energy reforms must be carried out by June 30th.

There is a very slight little chance everything will happen without hiccups. Feuds with foreign investors and even the possibility of power outages are likely instead.

In brief: by June 30 this year, regulated electricity prices must be abolished, the sector must be opened to all, the state-owned National Electricity Company (NEC) no longer will be the default public supplier. That's all good and well, but there is a catch. In order for all of this to happen, Bulgaria wants to terminate its 15-year power purchase contracts with the respective owners of the two coal-fired power plants - AES Corporation and ContourGlobal. AES Galabovo's contract will expire in 2024, whereas the agreement with ContourGlobal Maritsa East 3 will expire in 2026.

This will be a hard thing to do: governments have been trying to do it in one way or another for several years, yet the contracts are still in place. But Borissov's cabinet already proposed the plan to the European Commission, which leaves little room for maneuvering.

In addition, there are no public discussions and a feeling of chaos is creeping in.

What is it all about?

The main goal of the proposed changes is the introduction of the so-called capacity mechanism - big energy producers win state contracts from NEC, but then sell their capacity on the free market. If the free price is lower than the regulated one, the difference is covered by the state.

This is the only legal way to continue supporting the financially troubled state-owned thermal power plant (TPP) Maritsa East 2 and coal mining company Mini Maritza East.

In order to approve such a mechanism, the European Commission wants full liberalization of the wholesale electricity market. This can only happen if NEC ceases to be a public energy supplier - i.e. acting as a buffer and buying energy at regulated prices and then selling it again at regulated prices to electricity supply companies.

This leads us to the US energy companies: if NEC has to compete on the open market, it would no longer be possible to fulfill the long-term contracts with AES Galabovo and ContourGlobal Maritsa East 3, because it will have no way of compensating the difference in prices, except with state aid.

A long deadlock

ContourGlobal Maritsa East 3 and AES Galabovo produce nearly one-third of the electricity in Bulgaria. Investments in them - about 2 billion euro, were agreed two decades ago. Bulgaria had little options on the table back then: due to the forthcoming shutdown of the four smaller units of Kozloduy nuclear power plant and the expected decommissioning of old thermal power plants, the energy system needed new capacity and new investments. So it sold the old Maritsa East 3 and also allowed for a new thermal power plant near Galabovo to be built.

Both contracts provide a commitment by the state to guarantee the return on private investment through the prices at which NEC is buying the produced electricity. This approach is because companies do not operate on a free market - the state is sellingt them the coal at regulated prices and determines the final prices of electricity.

Ever since the "guaranteed profits" of US investors have been a constant political issue and there has been pressure to renegotiate. In 2013, the parameters in the contracts were changed after investors agreed to make some discounts. Now, however, the state has announced to the European Commission the termination of their contracts by June 30. This is just 4 months away but there are still no negotiations underway.

A unilateral termination of the contracts is of course a possibility, but there will be large penalties to pay. Without contracts, the plants could decide to stop working, and this will lead to the collapse of the country's energy system.

Analysts at the non-governmental Energy Management Institute believe that the termination of the contracts with the two power plants by June 30 seems unrealistic due to the complexity of negotiations. "The European Commission will give an opinion for comments on the plan in 4 months. Only then will the real talks on the capacity mechanisms begin," said Ivanka Dilovska, a member of the institute's board.

The owners of the two power plants themselves say they are willing to move to an alternative mechanism to compensate for their costs, as long as such is presented, discussed and introduced so that they can use it before creditor banks as a substitute for their long-term power purchase contracts with NEC.

What is the way out

This is exactly the mechanism the Ministry of Energy wants to introduce for the state-owned TPP Maritsa East 2. Other power plants, including those of US investors, will be also able to benefit from it. Now NEC receives compensation of about 200-250 million euro per year through the Electricity System Security Fund for the preferential prices of electricity from TPP AES Galabovo and TPP ContourGlobal Maritsa East 3. Under a capacity mechanism, the plants themselves will receive compensation from the fund for the difference between the price achieved on the energy exchange and the one they requested in the capacity tenders.

The end result will be positive: with similar electricity costs for the state, there will be much more security and predictability in the electricity market.

However, that looks like a deadend - in order to introduce a capacity mechanism, NEC's contracts with ContourGlobal Maritsa East 3 and AES Galabovo must be terminated, but in order to terminate the contracts, the power plants want a working mechanism for capacities.

Yet there are options. For example, NEC can sell electricity from the power plants of the US investors on the energy exchange by continuing to buy it from the plants under the current contracts until the capacity mechanism in question becomes operational. It will cost NEC some money, but offers a working solution.

However, such an option is not being discussed and does not appear in the plan sent to the European Commission.

The Bulgarian government is facing a serious test. On the one hand, there will be a general election in April, a new parliament and a new cabinet will be formed. But on the other, one of the biggest energy reforms must be carried out by June 30th.

There is a very slight little chance everything will happen without hiccups. Feuds with foreign investors and even the possibility of power outages are likely instead.

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