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Cross-Subsidies – the Archenemy of Liberalization
Wrong regulatory decisions are harming all participants in the non-regulated segment: power plants, traders, business consumers, and households
AUTHOR: Atanas Georgiev

The government started discussing a new measure for tackling energy poverty: low-priced tariff blocks for energy-poor households. The initial plan is to have them for about five years until the full liberalization of the market is a fact. However, there is one strong enemy of the liberalization, which has been present ever since the process began – the cross-subsidies in the electricity market. Unfortunately, the proposed measure for supporting vulnerable consumers is just another form of this tool.

How to tackle energy poverty?

The share of energy-poor households in Bulgaria is substantially higher than in the other member-states of the European Union. Even though there is no exact statistics (the latest one in the “State of the Energy Union” from November 2015 is a proxy indicator), because of the high share of poor people and the lowest GDP in the EU, combined with low energy efficiency, many people have difficulties in paying their bills. The Ministry of Energy announced, that its new subsidies will support about 1,1 million citizens. Ever since the resignation of the Bulgarian government in February 2013, the topic of energy pricing gets additional attention by politicians. The easy solution until now – in a fully regulated market for households and SMEs – has been to cross-subsidize prices for these two customer segments.

The latest decision of the Energy and Water Regulatory Commission from November 2015 reiterates this approach. A household on the territory serviced by CEZ, in Sofia for example, pays regulated day/night prices of 0.12724 BGN/kWh and 0.05427 BGN/kWh, while business customers at the same level of the grid pay about 40% more – 0.17768 BGN/kWh and 0.07319 BGN/kWh respectively. The price differentials are similar for the customers of the other two large distribution grids – the ones operated by EVN and Energo-Pro. Business consumers with three tariffs pay for the peak-energy even higher prices – between 0.20000 and 0.22057 BGN/kWh. Everywhere else in the EU the retail prices for households are higher than the ones for small business customers – the logic being, that businesses purchase higher quantities.

The effect of this policy currently is that households are comfortable in the regulated segment of the market, as they could not get a better price from alternative suppliers. The wholesale price of electricity plus the additional costs of traders in the liberalized segment are higher than the comfortable prices, ensured by the regulatory commission. In the same time, small business customers have a strong incentive to switch their supplier. Prices in the non-regulated segment of the market are lower than the regulated ones for SMEs, even when the additional costs for balancing are included in the alternative offers. These factors generate several imbalances: households are not able to choose alternative suppliers; meanwhile, there is a false incentive for small businesses; and the final effect is, that the “source” of the additional payments in the regulated market for this cross-subsidy is quickly disappearing, leaving end suppliers with less revenues for covering the underpriced electricity for household consumers. This is a recipe for disaster, as soon there will be no more business customers in the regulated market to pay “the bill” for these subsidies.

Export the subsidies!

Another part of the “solution” of the energy poverty in Bulgaria relied for many years on the high regional prices of electricity in South-East Europe. Bulgaria has been the 5th largest exporter of electricity in the EU in 2014 and a traditional supplier for its neighbors – Greece, Turkey, Serbia, and Macedonia. The regulatory decisions and the actions of state-owned energy companies have been ensuring two main types of cross-subsidies for the consumers in Bulgaria: high “export fees” for all energy going out of the country and price discrimination between local and foreign buyers of electricity.

The “export fees” have eventually lead to a serious drop in energy exports in the Spring of 2013, which resulted in a political decision to diminish substantially – but not fully remove – additional grid payments for the electricity exports. This measure has been subsidizing both grid prices in Bulgaria and additional payments for green, cogeneration, and long-term contracted electricity inside the country.

The full price discrimination was possible until several years ago, when the European Commission’s DG Competition accused Bulgaria for twisting the regional market. Now the wholesale prices of state-owned power plants are the same for both domestic and foreign customers. However, the regulated prices for NPP Kozloduy and TPP Maritsa East 2 are still lower than their production costs. They have to compensate this through higher prices for the non-regulated segment of the market, partly through exports of electricity.

The coupling of national energy markets and the further integration within the EU actually means that all producers and consumers share the same marketplace. A true market may not have different prices based only on the nationality of its consumers. Thus, when wholesale prices in South-East Europe began to go down, the volume of Bulgarian power exports followed them. According to data from the Bulgarian TSO for the period 01.01.2016 to 22.05.2016, this year’s Bulgarian electricity exports are 57.49% lower than the exports for the same period in 2015.

Final days for the cross-subsidies?

One may think that cross-subsidies have lost the battle with market liberalization. After all, this is what the real competition in the market, combined with removal of national energy borders in the EU, should bring. Then why does the government want to introduce new ones? The reason may be the fear to show the real price levels to household consumers.

Another option would be quite better – to allow regulated prices to reach their real level and ensure higher amounts of direct subsidies for the energy-poor households. Social payments should cover both current consumption and energy efficiency investments for reducing future demand. This may be the only way to deal with the archenemy of liberalization – the ever persisting cross-subsidies.

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