News

From Bulgaria

In the beginning of June, the Bulgarian State Energy and Water Regulatory Commission (SEWRC/DKEVR) announced its decision, requiring the public supplier NEK EAD and its contracting parties in the existing power purchase agreements (PPAs) – ContourGlobal Maritsa East 3 AD and AES Maritsa East 1 EOOD – to start renegotiating the long-term contracts, concluded on June 13, 2001. The national energy regulatory authority has required at least a 30% reduction in the price of AES Maritsa East 1 TPP and half of its energy to be sold at the liberalized segment of the market, and a 20% reduction of the price of ContourGlobal Maritsa East 3 TPP and half of its produced energy to be sold at the liberalized market. Also, the SEWRC suggested to the finance minister to approach the European Commission because of the need to reconsider the conditions of the current PPAs.

Reckless actions with high social price

According to the CEO of ContourGlobal Maritsa East 3, Mr. Garry Levesley, the suspension of the PPAs is a reckless action, which will ultimately be paid for by the tax-payers. The energy company had no preliminary notice from the public supplier NEK or from any other institution or company regarding the SEWRC decision to ask for a change in the long-term contracts. Even more embarrassing in this case is the decision of the Board of Directors of NEK EAD to ask for a renegotiation of the contracts even before the decision of the SEWRC. This is the latest action in a series of decisions, which cast many doubts regarding the independence of the regulatory commission, and is a proof of an administrative intervention in commercial relations. Last, but not least, this is an example of the so called “reverse engineering”: first the regulatory body decides on a socially-acceptable price for the end consumers – which are entirely regulated, and then the wholesale prices are defined using the following steps: (i) defining prices and quantities that NEK should buy from each generating company; and (ii) defining the prices that NEK should pay to its suppliers (which then sell to the end customers).

The actions of the Commission are another attempt at redistributing revenues inside the energy sector value-added chain in a way, which is mostly beneficial for the public supplier NEK and deprives the private companies in the sector from part of their revenues. After the electric distribution companies and the end suppliers, as well as after the reduction of revenues for the renewable energy producers, it seems that now it is time for the conventional lignite thermal power plants in Maritsa East basin. In the case of the ContourGlobal Maritsa East 3 TPP the situation is even more peculiar because of the shares held by NEK EAD in the generating company, amounting to 27%. The private power plant confirmed that its management has expressed readiness for a dialogue and possible negotiations, but this did not result in setting up working groups because of the changes in the management of the state-owned company. Even if such negotiations start, they could not be finished before the July 1 deadline, according to the intention announced by the SEWRC, because of the voluminous contracts and their large number of clauses. Moreover, ContourGlobal Maritsa East 3 declared the conditions demanded by NEK and SEWRC as absolutely unacceptable.

Large-scale populism, small-scale actions

Despite the numerous political suggestions regarding the PPAs from the last three governments, not a single one of them has taken any concrete measures towards renegotiation of the contracts. The only actions were related to generating discussions and announcing intentions without any consequences. According to the representatives of ContourGlobal Maritsa East 3, one of the options for restructuring of the long-term contracts is the state to acquire their stranded cost. The management of the power plant considers this would make it one of the cheapest producers in the country, because in recent years there were considerable investments in improving the efficiency of its turbines, and the number of employees is considerably less than the bloated staff of the large state-owned power plants. AES still has not shared its position on the issue.

Even before the implementation of such an option, the power plant may generate electricity with a lower unit energy price, if its whole capacity is dispatched. According to the plant’s data, currently its price is 60% higher than this option, because it includes all capacity payments, that NEK owes the power plants, irrespective of whether they operate or not. A similar solution, which is entirely in the powers of the SEWRC, was considered last spring after an analysis of the situation by the interim energy minister Assen Vassilev. The idea suggested by his team within the format of the “Public Council” at the ministry was to change the quotas for the market and to restrict the energy. which is not produced under contracts. According to the analyses of the Ministry of Economy and Energy and of the SEWRC, published since last year until now, the electricity produced by the ContourGlobal Maritsa East 3 TPP is the third cheapest producer price after the prices of the state owned Kozloduy NPP and Maritsa East 2 TPP.

The state also forgets the socio-economic effect of the investments

It is arguable whether the energy-sector decision makers could fully comprehend that the different generating assets (and their prices) could not be compared directly – some of them have already repaid the investments and other do it at the moment. As an example, ContourGlobal Maritsa East 3 TPP was fully refurbished in the period 2004-2009 and this was made with a 650-million Euro investment. It became the first environmentally compliant conventional TPP in Southeast Europe, which meets all EU environmental requirements.. One third of the amount was invested in environmental measures aiming at environment protection and meeting the environmental requirements that Bulgaria has undertaken to implement. In addition, the TSO has mentioned more than once, that the power plant is observing the highest standards and is one of the most (if not the most) reliable power plants in Bulgaria, ensuring uninterrupted power to Bulgaria and the region. Also, the analysis of the newly-built power plants in the last 10 years in Bulgaria shows, that they all have different indicators regarding total invested amount, investment effects on the energy sector and on the general socio-economic environment.

The very negotiation before the investment in the lignite power plants took up several years. The two projects – for the refurbishing of Maritsa East 3 TPP and for a green-field investment in Maritsa East 1 TPP amounting to 1.3 billion USD, are the result of implementing a series of conditions for Bulgaria’s joining the EU, negotiated in the late 90s. Among them – the requirements for improving the air quality in the Stara Zagora region, which was one of the most polluted in Europe until 2005-2006 and posed serious threats to the health of the local population.

The Bulgarian energy system – contrary to the principles in the EU

The relations with the state-owned NEK are also additionally aggravated because of its worsened liquidity and the late payments to energy producers. We have seen different numbers in the last weeks. Last week, ContourGlobal Maritsa East 3 announced, that on June 10, 2014, the public supplier NEK owed 210 million BGN (107.3 million EUR), and 141 million BGN (72 million EUR) of them are overdue. According to the plant’s management, this poses difficulties for their day-to-day payments and could even lead to an inability to manage the plant and pay its suppliers, including the state-owned Maritsa East Mines, which is the sole supplier of coal for the TPP.

More and more experts in Bulgaria now think, that the way the Bulgarian energy system works is contrary to all the principles in the EU. This position was shared more than once by different participants in the Bulgarian market, especially after the abrupt changes in the legislation, the secondary legislation and the regulations. This is a counterpoint to the populist comparison between Bulgaria and Poland or Hungary regarding the renegotiation of the PPAs. Probably the fact that the conditions are very different is being omitted– in Bulgaria only 20% of the market is defined by PPAs with conventional TPPs, while in Poland its share was significantly higher and in Hungary it reached 100%.

What would be the ultimate effects of the proposed decisions?

The long-term contracts are there because of the nature of the energy-sector project finance. When such projects are considered, the amount needed for investment is huge and the attraction of investors is possible only if the host government could provide acceptable conditions, guaranteeing an adequate return. Such contracts, present also in other EU countries, guarantee the security of supply in the energy system and eliminate the risk of insufficient generating assets.

Last, but not least, the long-term contracts themselves are not contradicting the liberalized market, when it is still missing and when the regulated market is based on production quotas and prices, defined for each producer and supplier. The main purpose of such contracts is to ensure the repayment of the capital costs through predictable and reliable revenues – this was the needed condition for ensuring the long-term financing at minimal costs by leading international financing institutions and without using state guarantees.

One of the possible negative scenarios is the suspension of the contract with any of the energy companies. Then, the full amount of the compensation will have to be paid by the state and the consumers. This would automatically deteriorate the investment environment in Bulgaria and will ultimately lead to a very low or even zero economic growth. These contracts are backed by a number of European and international finance institutions, which will have the right to trigger all guarantee mechanisms related to these contracts, if the suspension of the contracts is not combined with the proper compensation. Until now, neither NEK, nor the SEWRC or the government have clearly shown, that they are aware about the harsh consequences that could follow after such a reckless action.