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Is This the End to Command Economy in the Energy Sector?
A sustainable and efficient energy sector could be achieved only through good social policy, environmental compliance, and optimization of the generating assets – and not through artificial price subsidies
AUTHOR: Atanas Georgiev

Over a year ago, the interim government of Bulgaria received the analyses of the World Bank and the European Commission regarding the Bulgarian energy sector. The consultations with the two institutions were initiated by the minister of economy and energy in the interim government – Assen Vassilev, and the occasion was the protests of citizens against energy prices in the beginning of 2013 as well as the imbalances in the power sector, which reached a peak during the spring of last year. Part of the conclusions of the institutions were related to the inefficient energy mix, which includes generators that are neither efficient, nor environmentally compliant, but still continue operating and participate in the formation of the regulated market. Meanwhile, the State Energy and Water Regulatory Commission (SEWRC/DKEVR) had a sort of a catharsis, as it first denied the existence of deficits in the regulated segment of the market – in order to justify the several reductions in the end prices during 2013, and after that acknowledged them, but still did not give any clear time frame for their overcoming. The energy ministry has not published yet its proposal for a new energy strategy either, thus confirming the existing model of a quasi-command economy in this sector.

From Deficit to Overproduction

The long-term forecasts of the public supplier NEK and the transmission system operator ESO for the consumption of electricity have been traditionally exaggerated for the last decade, in order to justify the non-regulated investments in new generation capacities by the state energy company in the Belene NPP and Tsankov Kamak HPP projects. The forecasted deficits were maybe one of the reasons that foreign investors inflated too much the green energy sector, because they expected rising consumption not only in Bulgaria, but also in the entire Balkans. The realities are exactly opposite – on one hand, the forecasted decommissioning of part of the old and non-refurbished generating capacities did not happen, while at the same time energy consumption did not rise with the forecasted rate because of the economic crisis and the wrong extrapolation of the current growth in the beginning of the previous decade.

As a result of this development, in May 2013 the European Commission and the World Bank reconfirmed the thesis of many analysts that Bulgaria is – and will be – suffering not from deficit, but from overproduction of electricity. The data, presented by both institutions, show, that this status quo will be valid up to 2030. One of the proposed solutions to reach a balance again was to sell the excess green electricity to neighboring countries, which lack the natural or technical resources to accomplish their renewable energy targets, and the second main measure – to close all generating assets, which do not observe the requirements for high efficiency and environmental compliance.

Ecology or Jobs – Is There a Direct Connection?

In the beginning of July, as a confirmation to the European Commission and World Bank reports, Greenpeace published the results of its own research, according to which all outdated capacities, which do not have adequate and sufficient flue gas desulphurization facilities and environmental control such as Bobov Dol TPP, Brikel EAD, and Maritsa-3 TPP in Dimitrovgrad, should be closed. This was one of the main recommendations by the European commission from last year – to analyze the generating assets and to close the ones, which do not observe the current requirements for economic efficiency, environmental compliance, emission limits, etc.

The World Bank, again in May 2013, stated in its report that one of the most vicious policies in the energy sector is related to the priority dispatch of certain generators as a result of a mistaken social policy, related to keeping the workplaces in the old and non-refurbished capacities. This is valid for the cogeneration plants at industrial sites as well – they were built to satisfy the energy needs of the respective industrial operations and currently used for generating overrated revenues through feed-in tariffs, while at the same time the industrial consumers could buy cheaper energy from NPP Kozloduy and TPP Maritsa East 2. One of the most staggering examples of mistaken social policy is Brikel EAD, which had to be decommissioned in 2010 after the construction of TPP AES Galabovo, but still operates. There was also an option to re-employ part of the workers from the old TPP-1 to the new AES Galabovo, through objective selection, according to its needs and in observance of the anti-corruption rules, but this did not happen either.

A similar analysis should be done for the cogeneration plants and the ones that are not efficient in terms of EU-directive requirements – they should receive neither priority dispatch, nor subsidized prices. This is also valid for the renewable energy producers, which work in breach of their permits. As the interim energy minister Vassilev said last year, the Bulgarian tax-payers should not subsidize inefficient generation and generation which works in breach of the rules.

While it is clear that the social effect from the closing of old power plants will be definitely negative in the short term, in the same time the state should take its genuine role in terms of optimization of the energy sector and implementation of an adequate social policy, and react timely through plans for alternative employment in the interim period. Such social policy, combined with subsidies only to the energy-poor consumers, would give a significantly better result while representing real measures for improving the economic state of the energy consumers.

Blaming “The Guilty Ones”

Instead of doing all this, the SEWRC attacked some of the most efficient thermal power plants in the energy mix – the refurbished ContourGlobal Maritsa East 3 TPP and the newly built AES Galabovo TPP. ContourGlobal Maritsa East 3 TPP states, that their plant has been an environmentally compliant TPP since the beginning of 2009, and their project demonstrates high standards in terms of environment, efficiency, business practices, etc. The plant operates in full compliance with the environmental legislation, the rehabilitation does not use any state guarantees, it ensures stable production in the sector, maintains full transparency in selecting suppliers, has a strict anticorruption policy, creates employment and projects of great significance for the local population, and last but not least – has a serious share in the local and national budget. Just as a reminder, the project for rehabilitation of ContourGlobal Maritsa East 3 TPP was for 650 million EUR with additional investments in environmental and operational upgrades. AES Galabovo TPP had an investment of 1.3 billion EUR and is practically the newest TPP in Bulgaria and in the Balkans. Despite all these facts, the attacks are against these two plants and not against some of the old capacities.

Instead of taking all these factors into account and starting a real dialogue, the SEWRC decided to go for direct confrontation on the topic of “contracts and prices” against the two American power plants. Moreover, in its attempt to keep the end prices unchanged again from July 1 this year, the regulatory commission breached the principles for formation of required revenues of the public supplier NEK and thus will increase the already admitted deficit in the regulated segment of the market. In addition to this, the confrontation may lead to legal consequences in Bulgaria and abroad – the power plants have already objected the decisions in front of the Supreme Administrative Court and most probably will do so as well in international arbitration institutions. This argument about prices however is not strong either, because ContourGlobal Maritsa East 3 TPP has the third lowest regulated price among conventional power plants – right after Kozloduy NPP and Maritsa East 2 TPP, and at the same time this price is below the average price of the energy mix, managed by NEK. Thus, by generating a negative attitude towards only certain participants in the market, the regulatory body wants to justify its actions. Unfortunately, these measures are only palliative, and the propagandized “social policy” is extremely wrong – it will lead to more long-term negative effects than the short-term claimed “benefits” for the end customers.

The Solution?

The holding of prices as a “social policy” has come to an expected failure. It is time to have a sensible approach to the market and pricing model in the electricity sector in combination with suitable social measures – both for the support of energy-poor households and for ensuring alternative employment and a gradual transition during the decommissioning of the inefficient and non-environmental plants. The command economy thinking should exit from the energy sector as well in order to keep at least the environmentally compliant and efficiently operating generating capacities. A failure to do so will mean that all power plants in the country will become victims of the short-term political dividends, gathered through the artificial decreases in the end consumer prices.

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