What is the most expensive electricity for companies in Bulgaria? The one used beyond the preliminary set schedule.
When it is needed, the emergency price is about BGN 100/MWh higher on average than the market price on the energy exchange - about BGN 500/MWh for October. To minimize these costs, electricity traders, their customers and energy producers are assembled into an organization called Balancing Group Coordinators.
Thus, a large part of the surplus and shortages can be reset within the group. In some cases, when an exchange of energy within is impossible, a solution is sought outside, in the state-run Electricity System Operator (ESO), where prices are a lot higher. In such cases, ESO turns either on or off Ahmed Dogan's Varna thermal power plant (TPP) or the power plants linked to Hristo Kovachki.
This model may soon be reversed so that all needs, called energy imbalances, go directly to ESO. At the same time, another proposal is cutting down the limits on prices of electricity generated by the facilities of Dogan and Kovachki, which will inevitably increase the electricity bills of Bulgarian business. In general, the balancing costs represent 5-10% of the final electricity price, with the highest levels recorded in winter months. According to the Association of Electricity Traders in Bulgaria (ATEB), the proposed reform will double these costs.
Who wants the change?
The proposed changes are set up in a report by the Energy and Water Regulatory Commission (EWRC), which suggests that balancing groups should not be allowed to compensate for the surplus or shortages of energy.
Sources of Capital have argued that the proposed changes are part of a package of measures against high electricity prices which are only formally undertaken by the caretaker cabinet. The EWRC report claims that their implementation will reduce balancing costs but actually adopting them in this form will lead to more costs for companies and will have a positive effect on only one third of business that does not participate in balancing groups. According to sources from the Council of Ministers, Prime Minister Stefan Yanev was misled or not well informed about the nature of the proposed changes. With no official position of the cabinet on the issue, it is hard to make conclusions what the true perspectives are.
This is the third time a reform like this has been proposed and so far the initiative has always been thought to be launched by ESO's managing director Angelin Tsachev. Tsachev is under investigation for conflict of interests relating to contracts worth millions he had himself assigned to his former businesses.
Whether the proposed changes will be accepted is hard to say now as the process has to go through public discussion in EWRC, a 14-day period for the filing of official complaints and only then will the proposals be put to the vote. An important factor will be the outcome of the November 14 general election and the formation of the new parliament which will certainly affect the process, although no one really knows yet in what way.
Pros and cons
For many companies that are members of balancing groups, balancing costs are indeed lower, but for the remaining ones that do not want to join the groups, costs are higher.
Here is an example that shows the logic behind the proposed changes. If there are two balancing group coordinators and one has an electricity surplus of 5 MW and the other a shortage of 5 MW, there is no imbalance for the system as a whole. In this case, ESO will have no role and will receive nothing from the netting of the quantities between the two coordinators. However, if the proposed changes become fact and both coordinators have no right to exchange imbalances, the first one, which has a surplus, will have to sell to ESO the respective 5 MW at a price lower than the tariff of BGN 10/MWh set by the state. The other coordinator will have to buy 5 MW from ESO at a price of about BGN 500/MWh. In this case, ESO will earn BGN 2,450 (it will buy 5x10 and sell 5x500), without actually performing a service.
"This will create additional administrative costs for market participants, which will ultimately affect consumers," said Martin Georgiev, Alpic Energy Bulgaria and chairman of ATEB.
However, according to the EWRC report, if the whole system is balanced solely by ESO, everyone will pay equally and overall costs will decrease - the costs for those inside the balancing groups will rise, while for those outside of the groups the costs will fall.
About half of electricity consumers in Bulgaria are members of the largest balancing group in the country - CEZ, and accordingly they have extremely low balancing costs at the moment. In addition, there are several Chief Market Coordinators and in total, they serve over 80% of the consumers. What is interesting is that once the proposed reform is approved, they will have to pay more, so that the remaining 20% can reduce their costs.
Several EWRC experts explained to our media that there is another problem whose solution is sought with the reform - due to the merger of balancing groups coordinators, a large part of the renewables' production (power plants that are part of these groups) does not reach the free market, but it is being used for balancing, and possibly other hidden purposes.
However, this statement is not entirely true because the economics behind it do not make sense. In recent months, it is much more profitable to sell renewable energy on the free market where prices are higher. And consumer invoices in one of the large balancing groups that our media was provided with clearly show that the balancing energy traded through the group is much cheaper than in the free market.
"The argument that the proposals are an anti-crisis measure is untenable and misleading, as well as the claim that energy is exchanged in market groups in order to detour the obligation to sell on the Independent Bulgarian Energy Exchange," local photovoltaic and wind energy associations said in a joint statement. In addition, the current electricity trading rules explicitly prohibit renewables producers and consumers from participating in the same group.
New name for the reserves
Regardless of whether this reform proposal will be accepted or rejected, the payments from ESO to energy magnate Ahmed Dogan's Varna TPP and the power plants of Hristo Kovachki will continue. After a brief pause during the long anti-graft protests last year, at the beginning of 2021 ESO resumed the reserve capacity auctions, which are essentially like the old winter reserves but with a different name, and practically started paying millions to Dogan and Kovachki.
Breakdown figures provided to Capital by an electricity trader show that in certain hours in recent months electricity tariffs paid exceeded BGN 1,000/MWh. In the summer, caretaker Minister of Energy Andrey Zhivkov presented data in parliament, according to which ESO paid between BGN 245 and BGN 381 per megawatt-hour to Varna TPP even though in this period the average prices on the energy exchange were between 90 and 185 BGN/MWh.
However, once the reform proposal is approved, the price limits for the power plants that provide balancing energy will be dropped, and it will not be surprising if we see prices as high as BGN 5,000/MWh or even BGN 10,000/MWh.
ATEB says that the model of operation of the energy balancing market needs shift to two different tariffs ( 1. shortage, 2. surplus ) to a single tariff. According to ATEB, a similar transformation has been introduced in most European states, including Serbia and Romania. For example, if there is a general shortage of electricity in the system, all market participants that have a shortage, should pay a single balancing price. And those who are in surplus receive the same price. And the same thing happens if the system is in surplus.
The advantages of this system are that electricity traders and electricity producers work against the imbalances of the electricity system, trying to reduce the overall imbalance. As a result, the liquidity increases during the day and it starts to compete with the balancing market.
A more transparent balancing market reform was introduced by the energy project sent by the government to the European Commission in early 2020. It included a mechanism for financing power plants that are not in motion, but once they are needed, their output can be used in the energy mix. This was a condition under which the state could continue to pay for coal-fired power plants. However, the proposal did not go through. What is worse, in November 2021 another non-market solution was put forward which does not really solve the Bulgarian energy issue.