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There are many questions about the liberalization
Karel Kral, Regional Manager of CEZ for Bulgaria

Mr. Kral, you have been regional manager of CEZ for Bulgaria since October last year. What are the main goals that you would like to achieve for the company in the local market?

Similar to other incumbent operators in other sectors – such as telecoms, we are now facing a big change. The business environment is changing for us and this does not mean only liberalization. There are also changes in the way that energy is generated and distributed to consumers. We have to react to that and on top of this natural development we have also been hunt by some negative campaigns which ruined the trust to the sector.

Based on that, my goals are linked to: successfully leading the company through the changes – liberalization and the changes of the sector as such and also to get back the trust in the company and generally in the sector as a whole.

You have been part of the management team of CEZ in Romania and Albania as well. What are the similarities and the differences between their national energy sectors and the Bulgarian one?

It is hard to say, because every country has a slightly different starting position and different level of development of the energy sector. Also, one of the big differences is that Bulgaria and Romania are part of the EU and have to follow its regulations, while Albania is not, even if they are in the Energy Community of SEE. Also, Albania has a generation mainly from hydro capacities – meaning difficulties in dry years, while Bulgaria and Romania have other resources in their energy mix: nuclear, thermal, hydro, etc. Also, there are differences regarding the implementation of EU directives. But the markets are not really comparable.

Romania for instance has already implemented a long time ago the energy exchange and coupled with the neighboring markets of the Czech Republic, Slovakia, and Hungary. This is one of the prerequisites for successful market liberalization, which is still ahead for us in Bulgaria.

Regarding the similarities, there is definitely the underinvestment in the distribution grids, inherited from the past – meaning from the past 50 years.

What are the good practices from the Central European energy market, where CEZ is very active, that could be implemented in Bulgaria?

There are both good practices and mistakes, which may be used as lessons learned from the experience of Central Europe.

One of the best practices is the working power exchanges. From Romania we could take the example of the compulsory bilateral contracts trading on the power exchange – at least for the first few years, as this would create liquidity within the power exchange. Then, as far as I know, Romania is now, after three years of operation of this model, starting to ease the rules and to allow bilateral contracts that are not traded, but just registered on the exchange platform.

Another good practice, this time from the Czech Republic, is related to preventing bad behavior of some suppliers through the implementation of the “Code of Ethics of Energy Suppliers”, adopted by the Energy Regulatory Office. Also, the rules for switching avoid misbehavior of some of the newcomers in the market, who in some cases in the past cheated the customers. The code includes instructions on avoiding take-or-pay clauses as well as other types of misconduct by suppliers. One of the bad practices there was related to small companies who claimed that they are sent by the regulatory office and mislead the customers, forcing them to sign new contracts with them. We can definitely learn from there some good practices on customer protection.

What are your expectations regarding the implementation of standardized load profiles and the opening of the market for household customers?

The SLPs are one of the prerequisites for the market opening for households and small businesses. The implementation of SLPs is a task which may look simple, but there is a lot of complexity behind it, especially in terms of the platforms for data exchange between the market operator and the market players. There will be a lot of data from the distributors from a number of suppliers.

Currently, the data exchange is easy, because for example CEZ Razpredelenie Bulgaria meters the data and one set from it is given to CEZ Electro Bulgaria for invoicing. After the implementation of the SLPs, CEZ Razpredelenie Bulgaria will have to know who are the suppliers at each metering point and has to supply the respective metering data. But the suppliers as well will have to provide the predictions for all their sites. And the market operator will be forced to be able to put together the predictions and the actual metered consumption, apply the SLPs, calculate properly the balances and imbalances – as the metering periods are not always on the first date of the month – so there is a big question mark on how to calculate the balances for the days after the metering period and who would be responsible for the difference between the predictions and the metered data. If this is not calculated properly, it may create an absolutely unfair redistribution of costs between the market players.

In other countries, there are different models – there is sometimes rounding of the data, there is sometimes a preliminary two-month period for clarifying the data, etc. So this is a bit unclear for us – how this will really work.

Regarding the opening of the market, there are many open questions. Still, the report of the World Bank is not in place, so we do not really know what would be the suggested targeted market model and what will be the steps to get there. The target model itself is probably something not quite difficult. The most important part is to define the phases and the steps how to get to the desired model and that is what we would be curious to see – what the World Bank proposes.

To fully liberalize the market, you need some prerequisites, which are not fully met – a working power exchange, the elimination of cross-subsidies, the data exchange between market participants regarding balancing, etc. There are a number of questions, which are still not answered and therefore these are the things that need to be clarified.

What are the next transformations in the electricity market that we may witness soon?

I would answer this question with a mid-term vision. It is clear, that the way electricity is generated and distributed is going to change. The so-called distributed generation will come, sooner or later – either if we talk about rooftop panels with storage for households or small cogeneration for small factories, schools, hospitals, etc. From the model of big power plants, providing energy to big and small consumers, we will move to a grid with much more generation points and most likely many of them will be renewable and this will create a much larger demand on the grid regarding dispatching – both from TSO and from the distribution companies.

One of the big questions is on storage and how fast it will be developed or more specifically when the price of the batteries will drop. We have experienced a sudden drop of solar panel prices with mass production and the same will most probably happen to storage systems. Then it will start to be more interesting for consumers to think about distributed generation. A big part on that may be as well played by the electric vehicles, as their batteries may also be used as storage, so we are in front of a big revolution in the energy sector.

This will bring a number of questions in the regulatory field as well, because the question is how to pay for the energy. This issue is now heavily discussed at European level, because if you own generation, but you still connection to the grid for reserve, you will either consume or sell net energy quantities to the grid. The question is how to calculate the price for distribution, which is now based mainly on consumed quantities. The clear path for regulation is going toward a fixed price for the access to the grid, which would be a kind of insurance for having the electricity in the moment when your solar panels are not producing. So the future is also related to introducing fixed prices for distribution connection to households as well.

The wholesale electricity market in Bulgaria is still not mature enough. There is an energy exchange operating, but what else should be done in terms of transparency and competition?

Currently, we have only the day-ahead market on the power exchange. What we need is definitely long-term products and balancing through the power exchange. Then, from the mid-term perspective, an intraday platform would be also needed.

What needs to be done in terms of transparency is competition, is similar to what I already mentioned regarding other countries. In order to ensure more liquidity, one solution may be similar to the Romanian example – for a period, to introduce mandatory bilateral contracts trading through the power exchange.

However, traders in Bulgaria are not quite happy with this perspective. What would be the negative effects of such compulsory bilateral contracts trading through the power exchange?

It is indeed a philosophical question with mixed feeling. If you are not allowed to do bilateral trading outside the power exchange, then there are more risks and troubles on traders’ side. The largest one is the counterparty risk. If I do the transaction on the power exchange and could not choose the counterparty, I may be forced to buy from someone that I do not trust has the possibility to deliver. If I want to buy and this energy is not available due to the counterparty’s fault, I may turn out with a contract to sell to my customers – with a fixed price – without the energy in place.

On the other hand, this practice is positive for the liquidity on the market. All the energy will be there and you may be sure that there will be no non-transparent contracts. You will get a real price from the power exchange platform. Definitely in the long term to have mandatory trading on the power exchange is not good, but for a short and defined period of time it may be a way to secure liquidity on the market.

What is the current status of electricity sector regulation from your point of view? Do you see positive changes and what are the next challenges?

I think that it is very clear that we are not absolutely happy with the status of regulation. We have been very unhappy in the past. We do see some positive steps now and believe that this direction of the current regulatory commission is the right one. We cannot say yet that the regulatory environment is at the point where we would like to be – a standard environment. There are still some steps to be done.

The trend, set especially by the July 2015 decision is in the right direction, especially regarding the ex-ante approval of our capital expenses. This is something that is mandatory for the distribution companies – to know in advance that they would be able to invest in the grid and that the investment will be paid back in the tariffs.

Interview questions by Atanas Georgiev

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