Energy crisis: all the questions, answered

Energy crisis: all the questions, answered

Gas, electricity and coal - the combustible mix that blew up the economy

© Надежда Чипева

In the last few months Bulgaria, as well as the rest of Europe, suffered an energy shock. With prices soaring, demand rising and possibly a cold winter approaching, things do not look good in the energy sector.

Due to the continuing complicated relationship with Russia, it does seem that the energy crisis could last quite long and it could be useful to look at all the details in order to comprehend where Bulgaria goes from now on.

What happened?

It is hard to say who suffered a stronger blow, as small enterprises and big industrial companies have both been pushed to the brink. For example, a small corner shop in the town of Sozopol had a 55% energy bill increase for August 2021 compared to last year's August. Consumption has not really changed but instead of BGN 126, the invoice now says BGN 196.

The National Railways Company, water supply and sewerage companies, kindergartens, hospitals and other public entities are all in the hot pot and yet to be exposed to the difficult energy market.

In the heavy industry the problem was first felt in metallurgy and once the prices on the free market exceeded 330 levs (165 euro) for MWh, several companies decided to simply stop working. Among them was KCM, a major lead and zinc producer which reportedly was accumulating a loss of 200 thousand levs per day at those prices. The same approach was undertaken by Metal Technology Group - Angel Balevski Holding (MTG). The group includes the plants Osam - Lovech, Alukom - Pleven, and Centromet - Vratsa, in which electricity accounts for about 15% of the overall production costs.

Household consumers are not endangered yet because they do not depend on the free market, as household tariffs are state-regulated. However, it is now certain that come January heating and hot water bills will go up significantly.

This is going to be the biggest rise in energy prices since the winter of 2013 when the first government of Boyko Borissov had to resign due to mass protests. Unlike then though, it is impossible now to ease tensions by administratively reducing prices.

Can something be done?

There is no acting parliament in charge and effectively Bulgaria is going through a political transition process in the post-Borissov era. On the other hand, state interference in the free market of electricity and natural gas is inadmissible under European rules, especially given the already existing electricity market coupling with neighboring countries.

Bulgaria fully liberalized its electricity market for business consumers from 1 October 2020. All business customers had to switch to the free market and sign a contract with a supplier of their choice. However, most companies did not take any action and this resulted in nearly 55% of small and medium-sized companies ending up with a state-appointed supplier of last resort selling electricity at higher prices.

Why is water supply suffering?

In Bulgaria, each water supply company buys electricity at free market prices but sells water at regulated prices for a year ahead. The regulated prices are usually forecasted in the middle of the year and therefore they can rarely grasp any significant changes upfront. This was the case this year with October average price of 400 levs/MWh, something that no one could foresee.

Overall, this significant increased costs for all water companies, as electricity forms 30 to 60% of their expenses but their revenues have remained unchanged at pre-energy shock levels.

Take the city of Burgas' August bill. The regional water supply and sewerage company consumed 5012 MWh, paying 1.32 million levs. A year earlier, the consumption was somewhat close - 4254 MWh, but the bill was lower by more than a half - 601 thousand levs.

Ok, so can gas be the answer?

A change in the pricing formula for Russian natural gas imports really impacted gas prices in Bulgaria, heavily due to the newly introduced indexation taking into account the Dutch Title Transfer Facility (TTF). Moreover, from November onwards natural gas will be 32% more expensive if the energy regulator accepts Bulgargaz's proposal of 126.76 levs/MWh. That will be the second increase after a price rise of 36% in October which would translate into an annual surge of nearly 450% since November 2020.

This will be a massive problem for heating utilities and big industrial consumers.

In general, household gasification is not very popular in Bulgaria. According to the latest annual report of the Energy and Water Regulatory Commission, the total number of customers of gas companies at the end of 2020 was a little over 132 thousand of which 124 thousand were households.

Still, the number of customers has increased by 10.6% in a year. Overgas Networks serves the largest number of customers, nearly 60% of all.

Where is the Azeri gas?

Which leads us to the next question: why is Bulgaria not buying more Azeri gas especially given the fact that it is significantly cheaper than the Russian supplies. Roughly, the price is 40-50% lower.

Bulgaria has been given an opportunity to take gas from Azerbaijan under a 2013 agreement for deliveries of 1 billion cubic meters per year (about 33% of national consumption). For this quantity to be imported, however, it needs to go through a gas link with Greece. Which probably explains why the GERB-led coalition government in the past 3 years keenly avoided finishing the construction of this gas link, focusing on the TurkStreeam's section in Bulgaria instead. As a result, the interconnector is nowhere near completion.

Besides the obvious tendency to lean towards Russian gas, there are also purely commercial reasons that hinder Azeri gas from reaching the Bulgarian market. As of late September, the gas price on the Italian market was 75 euro/MWh, while the Bulgarian average was 40 euro/MWh. Therefore, it is not surprising that Azeris prefer to sell their gas elsewhere, not bothering with the messy Bulgarian market.

How is the state responding?

The Association of Industrial Capital, an organisation that includes businesses from about 90 sectors of the Bulgarian economy, has already come up with a concrete proposal. The idea of the employers' organization is for the state to cover 70 levs from the price of each megawatt-hour of electricity bought on the free market in the next 6 months. This would cost the government budget about 840 million levs.

According to the proposal, the aid has to come from the "excessive profits" of electricity producers such as Kozloduy nuclear power plant (NPP). Such a possibility is not out of the realm as countries like Spain and Greece are taking similar protectionist approaches, although energy suppliers there are protesting the measure.

The caretaker government of Stefan Yanev reacted with a financial support scheme covering around 110 levs from the price of each MWh, or roughly 30% of the current electricity cost for those depending on the free market tariffs. The support measure was introduced to compensate for the continuing growth of electricity prices since September.

This aid scheme is estimated to cost 450 million levs in October and November, and even more during the upcoming freezing winter months. The aid will be secured from the extra profit of Kozloduy NPP.

The other measures announced by the cabinet, which will have a more direct impact on business, is the creation of new products on the energy exchange and temporarily suspending the insurance payments for electricity transactions.

What about the future?

Bulgaria's acting Minister of Energy Andrey Zhivkov emphasized in a recent interview for Capital that Bulgaria's energy transition fully depends on the National Recovery and Resilience Plan which the government submitted to the European Commission in mid-October. The energy minister argued that one of the major priorities of the government is to accelerate the construction of the gas link with Greece.

During the Annual Meeting of Government and Business, organized by Capital on October 12, Zhivkov said that Bulgaria's energy transition plan targets carbon neutrality by 2038.

In the last few months Bulgaria, as well as the rest of Europe, suffered an energy shock. With prices soaring, demand rising and possibly a cold winter approaching, things do not look good in the energy sector.

Due to the continuing complicated relationship with Russia, it does seem that the energy crisis could last quite long and it could be useful to look at all the details in order to comprehend where Bulgaria goes from now on.

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