After over a year of research and discussions with stakeholders, in November 2016, the World Bank presented its report “Bulgaria Power Sector: Making the Transition to Financial Recovery and Market Liberalization” (“Report”) to the government. The Report is part of the technical assistance and advisory services provided to the Bulgarian Energy Holding (“BEH”) as part of a World Bank Reimbursable Advisory project. The project seeks to provide analysis and options to BEH and the Bulgarian Government for financial recovery and liberalisation of the Bulgarian power market.
Below are some of the Report’s findings:
1. Financial stress of the power sector
World Bank quite rightly points out that Bulgaria’s power sector has been under considerable financial stress; past government policies resulted in a BGN 1.9 billion accumulated financial deficit in the regulated sector at the end of 2015. Recently introduced measures have, however, helped to significantly reduce the tariff deficit to BGN 71 million in 2015 from BGN 435 million in 2014.
The Report recommends two additional measures to improve the financial condition of the sector: (1) government support to reduce the cost of repayment of the accumulated debt (two, five-year bonds issued by BEH with interest rates between 4.25 and 4.75%) and (2) an increase in the ‘obligation to society’ fee for all consumers by about 5% per year until 2019. Adjusted for inflation, the second measure is expected to result in an increase in the regulated final tariff by 2% per year.
2. Market liberalisation
The Report concludes that the de facto single-buyer model currently in place for the regulated sector has reached its limit and a new approach is needed to transition to a competitive power market compatible with the European Union’s internal electricity market.
The establishment of the Independent Bulgarian Energy Exchange (“IBEX”) and the organisation of the Day-Ahead Market (“DAM”) represents significant progress in liberalising the Bulgarian electricity market. The next steps, recommended by the Report, relate to the increase of the market’s liquidity so that the market can become a credible price referent through (a) the implementation of market-based purchase of losses and (b) the integration of generators with long-term power purchase agreements that benefit from feed-in tariffs. The second objective will be implemented by introducing contracts for difference (“CfD”). The Report finds no need for new installed capacities until at least 2020 as the sector has a diverse supply mix.
The process of full market liberalisation should continue in a stepwise approach through the gradual implementation of market-based regulated pricing for households and ending with the full removal of regulated tariffs. Critical to ensuring the social sustainability of the financial stabilisation and transition to market-based pricing will be the protection of the poor via improvements in social assistance programs and efficiency of energy use. According to the report, the government’s currently proposed social tariff will help mitigate the poverty impacts of tariff adjustments and of removal of regulated tariffs.
3. Implementation challenges
The Report envisages implementation challenges and highlights a need for the Energy and Water Regulatory Commission (“EWRC”) to have capacity to enforce market surveillance and ensure its effective independence. The professional management and operational independence of IBEX, EWRC and the Security of the Electricity System Fund is important to add further transparency and address management concerns raised by stakeholders.
The resignation of the current Bulgarian Government, which had prepared a roadmap to implement most of the Report’s recommendations, is a further challenge that will mean delays and possible disregard of the Report.
The focus on state-funded generation projects and especially the Belene nuclear project is another challenge to the financial recovery of the Bulgarian energy sector. As the Report rightly points out, the governmental policy in the years 2012-2014 caused sufficient financial deficit and the focus should be to overcome it in the coming years.
4. Concerns over some findings
It is quite understandable that the World Bank is trying to apply the modern CfD concept to the restructuring of the Bulgarian renewable energy sector retroactively, but the suggestion that the lignite-fired IPPs with long-term power purchase agreements will benefit from the new CfD system is inaccurate . In fact, it conflicts with Annex 4 of the Report where the World Bank concludes that the integration of these producers shall be achieved through contract buyout, voluntary negotiations or virtual generation/managed contracts.
The Report also fails to focus on some of the feasible generation options available in the market: uprating of the nuclear units, uprating of the hydros, energy from waste facilities utilising steam for heat generation, etc.
The Report is a very valuable and in most cases accurate picture of the current electricity sector in Bulgaria and of the need for change in the coming years. In order to properly implement the Report’s suggestions, the next Government and Parliament will need to modify the Energy Strategy of Bulgaria until 2020 and then focus on amending the primary and secondary legislation. The delay in the completion of the Report brings uncertainty of whether its recommendations will be honoured by the new decision-makers in the Bulgarian electricity sector.
Nevertheless, the Report is a very important milestone for the successful market liberalisation and financial recovery reform, both of which are much needed. It also clearly shows that what the sector really needs is not the unrealistic multi-billion euro generation projects, which have the potential to derail the sector from the much needed focus over the next years.