I. The history behind the Final Report on the Bulgarian Electricity Market Reform
Following the electricity crisis in the spring of 2013, upon request of the President of Bulgaria on 27 May of the same year the Interim Bulgarian Government was provided with a Short assessment of the Bulgarian energy sector[i], containing an analysis of the reasons behind the issues that the sector had been facing.
In the middle of 2015 the Bulgarian Energy Holding (“BEH”) engaged the consultancy support of the World Bank for further assistance with the purpose of elaborating a road map for transition in the electricity sector in view of achieving financial recovery and market liberalization. The scope of the Report includes provision of technical assistance and support to BEH and the Bulgarian authorities through the elaboration of the presentation of the options for the stabilization of the energy sector and liberalization of the energy market.
On 30 November 2015 BEH received an interim report, which was discussed with BEH and representatives of the Ministry of Energy (“MoE”) and the Energy and Water Regulatory Commission (EWRC) in the period 7 – 11 December 2015. In the period 4 – 7 April 2016 the World Bank presented a draft Final Report to the Bulgarian authorities. Following this, on 14 April 2016 the World Bank participated in a consultative meeting, organized by the MoE, during which the main principles of the Report were presented.
This Final Report, which is likely to be made available to the interested parties for consultation sometime in July 2016 reflects the provided feedback and analyses of the options for the policies to be adopted by the Bulgarian Government during the discussions.
The Report is structured around the following topics: (i) diagnosis of the current situation, (ii) measures for achieving financial stabilization, and (iii) market organization and transitional measures for market liberalization.
II. DIAGNOSIS OF THE CURRENT SITUATION
The World Bank strongly appreciates the existing significant strengths of the Bulgarian electricity market, including the “sufficient installed capacity and diversified generation mix”. Furthermore, Bulgaria enjoys strong electricity inter-connector connections with the neighbouring states, thus providing higher reliability. The comparatively lower cost of generating electricity in Bulgaria provides for serious export opportunities for the future with the potential opportunities for export for the period 2016 – 2020 being forecast between 9-11 TWh annually. The forecast peak consumption is expected to increase to about 7,817 MW in 2020, compared to just over 7 GW in 2015.
Nevertheless, ever since 2010 increasing costs related to electricity supply and the shrinking share of the regulated sector provides some serious pressure on tariffs. The revenue requirements for covering these costs have increased by about 20% for the regulated sector, while at the same time the regulated sector has shrunk from a 71% share of the production during 2010 to barely 34% in 2014.
The regulated sector experienced serious shortages amounting at BGN 550 million during 2013 and 2014, thus leading to deficits exceeding BGN 2.2 billion at the National Electricity Company (“NEC”).
Furthermore, the Report points out the “limitations on the availability of lignite” from the mining complex “Maritsa East” in the coming years.
III. MEASURES FOR ACHIEVING FINANCIAL STABILIZATION
The World Bank strongly appreciates the measures taken over the last 12 months by EWRC and the MoE for the significant decrease of the tariff deficit to BGN 71 million annually in 2015. The Report provides an overview of the challenges experienced by other EU Member States with a specific case study on Spain.
IV. THE NEW MARKET DESIGN FOR BULGARIA
The World Bank recommends the introduction of “day ahead” and “intra-day” markets at the newly- established and functioning Bulgarian Independent Electricity Exchange (“BIEE”) and the target date for the implementation of these markets is 1 July 2017.
BIEE has been the chosen service provider for the delivery of the electronic trading platform of the bilateral trading market and it is expected that the platform will be fully operational by the third quarter of 2016.
The Report finds the participation at the BIEE as “promising”, with 36 registered members and gradual increase in daily trading volumes. According to the available data, in April 2016 the total trading volume reached 188 GWh, at an average price EUR 26.3/MWh. In the future, the challenge will be to strengthen the day-ahead market by increasing liquidity in order to become a reliable source of reference price for effective trading.
The Report suggests that for Bulgaria one option for market consolidation is to join the 4MMS project that integrates the electricity markets of OTE in the Czech Republic, HUPX in Hungary, ORSOM in Romania and OKTE in Slovakia. The implementation of the import/export zones is considered as an interim solution prior to full market liberalization, as the import/export zones are used for transitional measures for electricity trading with neighbouring countries before the unification of their markets. The options for creating import/export zones include Turkey (a country which is not a member of the EU), Greece (not fully realized the target model of the EU) and FYROM.
Nevertheless, the first task would be internal – the Bulgarian state authorities will have to decide on their preferred organization and the key parameters of the import/export zone.
Under the BEH commitments under the case of the DG “Competition” (Case number 39 767[ii]), BEH subsidiaries have entered into an agreement to provide liquidity to IBEE and to provide certain quantities of electricity to the day-ahead market platform with a price ceiling determined on the basis of their marginal costs. Under the contract, quantities offered to IBEE will increase from 293 MW (9.2% from net consumption in the country) in the first year to 807 MW (23.696 from the net consumption) by the fifth year. This contract will have a positive effect on market liquidity.
Integration of the wholesale market of independent power producers and producers from RES
One of the peculiarities of the Bulgarian energy market is that there is significant capacity contracted under long-term contracts for the purchase of electricity (PPAs) or taking advantage of preferential prices (PP). Production from independent power producers (IPP) under PPAs was 5.3 TWh in 2014, while electricity produced from renewable energy producers benefiting from PP has reached 4.1 TWh. Together, they accounted for 23% of production. In both cases, production volumes and prices are determined on special clauses/provisions laid down in the contracts/regulations.
During the discussions with the Government and BEH, two options were chosen for consideration in the Bulgarian case: (i) virtual production and (ii) voluntary renegotiation.
During the consultations with the Government and BEH, the discussion focused on CfD as the preferred transitional mechanism for IPPs. The Report provides a detailed explanation of the EMR as introduced in the UK, together with the CfD mechanism and the concept of the “strike price”.
Key parameters as envisaged by the World Bank include:
- Strike price: based on the initial conditions set out in the contract/legislation;
- Counterparty: the “Security of electricity system” fund. This fund can be considered as an approach similar to the creation of LCCC by the British Government to cover the structure of CfD.
- Physical delivery: although CfD will lead to financial flows between the parties, it keeps also a main physical volume, which must be produced or consumed.
The report also provides for a detailed Roadmap of its implementation.