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Are we really ready for the full liberalization?
What needs to be done first?
AUTHOR: Atanas Georgiev

When the European Union pressed forward the liberalization of electricity and gas markets, the main purpose of this process was to put competition at work and get its benefits: lower prices for energy consumers, more sources and suppliers with better services, and greater security of supply. The three legislative liberalization packages increased the level of liberalization gradually, starting from 1996, then in 2003, and the latest one – in 2009. This is fully in line with EU’s vision of common markets for electricity and gas.

Are we going forward in Bulgaria?

The Bulgarian electricity market, despite some efforts in the last 10 years, is still quite far from the EU liberalization practices. According to the quarterly reports of the European Commission, Bulgaria’s estimated household retail electricity prices are 3.3 times smaller than the prices in the most expensive market – Denmark. In the same time, the Bulgarian industry is still paying more than companies in other EU countries, putting pressure on local competitiveness.

The government in Bulgaria has been announcing in the last year its plans for further liberalization of the market – by providing access for households and SMEs to alternative suppliers. Despite this, there are still no amended approved rules for switching of supplier by the national regulatory authority which to relieve the existing procedures. The standardized load profiles (SLPs) proposed by each DSO are still not unified for the territory of Bulgaria, but even if they become a fact soon, there are more important prerequisites for a real market opening without causing greater regulatory misbalances. On top there is no official instruction or rules for application of the SLPs. One more interesting question is what will happen if the approved SLPs are not precise enough and who would be charged to pay the differences – the consumer, the trader, or the grid companies.

Wholesale competition needs improvement

In order to make liberalization work, there has to be a restructuring of the wholesale market. Even when more and more consumers are given the right to choose their alternative supplier (all large business customers have done so and every day smaller and smaller companies join them), we still have a highly regulated “supply side” of the market. The public supplier NEK still has to buy energy by quotas, defined by the energy regulatory body – from the NPP “Kozloduy”, from TPP “Maritsa East-2”, and from other conventional sources. In addition, NEK is not only the clearing house, but also the main purchaser of subsidized electricity – from the PPAs with TPP “AES Galabovo” and TPP “ContourGlobal Maritsa East 3”, from renewables, and from cogeneration.

The regulated prices decision of the EWRC from last summer left NEK with the obligation to buy 1.4 times more energy through regulated quotas and prices than it was actually forecasted to sell to the end suppliers. If more consumers go to the liberalized market (and if there is no change in NEK’s obligations), this ratio will grow. In order to make the market work, there has to be a certain “untying” of electricity and subsidies – to separate the “clearing house” function from the “single buyer” function and thus to create more liquidity on the supply side. Even the newly operational Independent Bulgarian Energy Exchange could not improve the situation without such legislative and regulatory measures. They could be implemented through certain “contracts for difference”, “feed-in premiums”, or other models. A new Oxford University Press book from 2016 actually gives a very good perspective on EU countries and many ideas – “Capacity Mechanisms in the EU Energy Market” by Leigh Hancher et al.

A market without cross-subsidies

The Bulgarian market and its consumers have developed a list of addictions during the process of gradual liberalization and unbundling in the period after 1999. The first one is the most dangerous – subsidizing household consumers through higher prices for business consumers. It is based on constant fine-tuning of regulated expenses and prices, increasing in complexity as more and more components of the energy bill are defined in a separate way. The result of this addiction is the escape of all business consumers from the regulated segment of the market. The side effect is new misbalances at the end suppliers’ accounts, as their low regulated prices for household consumers have been constantly supported by higher prices for business customers. It is still unclear who would pay these differences once that these cross-subsidies are not possible anymore. These uncertainties are also transferred from the regulated segment to the liberalized one. One of the latest examples is the sudden increase of “obligations of society” fee last summer. There was at least one sure loser from this unexpected change – the first household consumer, who managed to switch to an alternative supplier from August 1 after a contract, signed a month before the change took place.

The second addiction is to subsidize national prices through exports. It was (and still partially is) possible in an uncoupled regional electricity market where wholesale prices at neighboring markets have been historically higher. However, with the Energy Union (and one of its main purposes – implementing the Third Package), as well as with the diminishing wholesale prices in the region, and the DG Competition’s push for stopping such practices, this option is now also gone. We saw Bulgarian exports dropping to historical lows in the beginning of 2016 as a result of this.

Before any further liberalization is possible, cross-subsidies have to be fully removed. As announced in December 2015, the Ministry of Energy will work on defining the group of vulnerable clients and propose new measures for their support. This time – not through lower prices, but through larger social payments, directed to the ones that need them and not to everyone else.

The Big Data challenge

Most of the stakeholders in the electricity market are quite obsessed with the mentioned above challenges, but do not consider enough the technical aspects. The SLPs are just the tip of the iceberg. New market relations will require new data exchange arrangements. There has to be a secure and constant data flow between incumbent suppliers, alternative suppliers, distribution system operators, and the transmission system operator. Experiences from other EU countries show, that this step is on the top of the liberalization “to-do list”.

If the process of switching for households and/or SMEs starts before the data exchange is well set up, this may lead to errors in change of supplier process, surcharges for households and/or SMEs, and/or great losses for traders (higher deviation costs, higher excise duty, higher amounts for obligation to society duty). Some of the issues to be solved include the metering periods, aggregation of data, the balancing market relations, and the ratio of staying/going customers at the end suppliers’ accounts.

Meanwhile, we see that no one can stop customers from looking for better prices. When there is not enough competition, when there are cross-subsidies, and bad pricing at the regulated segment, switches may become dangerous for the system as a whole. In the same time, we already witness some strange business practices occurring – i.e. “letterbox” companies acting as brokers collecting personal data of consumers. SMEs and households have to be very prudent and aware of these practices, especially when they sign contracts with alternative suppliers.

So, are we really ready for the full liberalization of the market for the households and/or SMEs?

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20.03.2022  Teodor Bobochikov, Managing Partner, V-Ridium
Energy Transformation – Trends and drivers
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