Bulgaria’s caretaker cabinet takes energetic measures

By bne IntelliNews September 2, 2014

Sandy Gill in Sofia -


Ekaterina Zaharieva is on the warpath. So, for that matter, is Vasil Shtonov. They are, respectively, the deputy premier and the minister of economy and energy in the caretaker cabinet of Georgi Bliznashki, appointed in August by Bulgarian president Rosen Plevneliev pending early elections on October 5. With Plevneliev at the time defining the country’s troubled energy sector as one of this government’s priorities, the interim cabinet is engaged in considerably more than a seat-warming, caretaking exercise in this area.

Understandably so, as the situation’s a bit scary. The National Electricity Company (NEK) - supplier of the privatised regional distribution companies (DISCOs) that get power to households - is heavily indebted, its debt burden having topped BGN2.9bn (€1.5bn) in mid-2014, with over BGN1.1bn of that owed to nuclear and thermal supplier plants. Further losses are running at BGN50m a month, according to Zaharieva who, shortly after taking office, predicted collapse of the system as early as October if urgent measures were not taken. She was probably thinking in terms of the knock-on effects of those debts to producers, but heavyweight energy expert Professor Atanas Tasev has also pointed to underinvestment in transmission and distribution grids as a likely source of breakdowns, especially if the winter is hard.

Not everyone’s apocalyptic, but nobody’s happy about the situation. Electricity has been an obvious problem area for two years - and a problem waiting to happen for a good deal longer. High electricity bills in early 2013 - reflecting a 13% price hike in mid-2012 - brought down the centre-right government of Boiko Borisov. Since then, a supposedly independent regulator has decreed three successive price cuts, one being Borisov’s parting shot and two the work of the left-led successor government of Plamen Oresharski. That’s part of the reason for NEK’s debts (though over-budget or abortive investments, notably in the ill-fated Belene nuke, explain around half of that BGN2.9bn). Revised prices weren’t covering the costs to NEK of an embarrassing renewables boom in 2012 or of relatively pricey electricity from two US-owned lignite-fired plants, one newbuilt and one quite recently renovated, that operate on inflexible power-purchase agreements (PPAs).


Meanwhile, that regulator - the State Energy and Water Regulation Commission (SEWRC) - has been subservient to governments and wayward to investors. Political replacements meant that it had no less than five different chiefs in 2013. In September 2012 - at an unheralded Friday-evening session - it imposed a punitive “temporary grid access fee” on renewables producers, a move later ruled illegal by the courts. In February 2013 and March 2014 it showed its “independence” by obeying government instructions to initiate pretty well baseless proceedings to yank licences from foreign-owned DISCOs. There’s long been skirmishing between SEWRC and the DISCOs about what investment costs are allowable for the latter - which is one reason why distribution networks are making Tasev nervous.

And, if businesses have been SEWRCed by the regulator, the Oresharski government wasn’t all that nice either: in December it slapped a 20% “fee” (effectively a tax) on renewables - recently overturned by the constitutional court. The court decision followed a suspensory veto by president Plevneliev, one of the few Bulgarian politicians with a good word to say about either DISCOs or renewables.

Taking care

Plevneliev’s caretaker cabinet has moved fast. It’s generally been activist in personnel policy, in respect of regional governors, for instance - so much so that leftist former president Georgi Parvanov has suggested that it really ought to stick to organising elections. The energy sector has been no exception: for example, it has replaced two out of three members of the governing board of the Bulgarian Energy Holding, the state-owned sectoral behemoth that is the mother company of, amongst others, NEK.

More radically, on August 27 it demanded the resignation of SEWRC chairman Boyan Boev and two members of his commission -  - successfully in the case of Boev and commissioner Lilyana Mladenova, though deputy-chair Elenko Bozhkov is so far holding out and denying conflict-of-interest charges. The fifth incumbent of 2013, and coming straight from the top job at BEH, Boev was criticised by the cabinet for not creating balance in the sector and instead making “political statements”. And he was singled out in April 2014 by European Commissioner Guenther Oettinger as someone whose appointment didn’t instill confidence in the independence of the regulator - though some sceptics are wondering whether his forced resignation does that either.

Faced with NEK debts, Zaharieva has also done a little digging into who is getting paid and who isn’t - and come up with interesting results. The state-owned Maritsa Iztok 2 Thermal Power Plant (TPP) and the politically-connected Bobov Dol and Maritsa 3 TPPs are getting 90% payment, while those two US-owned TPPs - AES Galabovo and ContourGlobal Maritsa Iztok 3 - are rating around 50%, being owed BGN288m and BGN216m respectively (though the state-owned Kozlodui nuke is getting roughly the same treatment). And percentage payment rates to two foreign-owned cogeneration plants are down in the low 20s, Zaharieva’s probe established.

Board games

Finally, there’s the “Energy Board” (EB) that was set up by government decree on August 27. Its title consciously echoing the Currency Board arrangement that brought stability to Bulgaria’s monetary system after the 1996-97 meltdown, the EB is designed to bring some transparency and consultation to a sector that’s been dogged by regulatory and governmental arbitrariness or hostility over the years. The EB’s status is to be that of a consultative council to the government, meeting at least once a month, and comprising almost 30 members representing a variety of sector players and associations. BEH and NEK are in there, but so are the three foreign-owned DISCOs and the two US-owned TPPs - and, incidentally, none of the other power plants. Miscellaneous associations - hydroelectric, wind, photovoltaic, district heating, factory cogeneration, electricity traders, and electricity consumers big and small, for instance - have seats, as do trade unions, employers’ associations, and the country’s banking association (not least, one imagines, because the banks have financed renewables rather heavily). Outside experts can also be invited to sessions, with Zaharieva - who, as deputy premier for the economy, is ex officio chair - making it clear that she has her eye on the World Bank, the European Commission, and the European Bank for Reconstruction and Development (EBRD) as potential sources of expertise. The EB can comment on decisions and drafts and make its own suggestions. And its first task is to do a study of the sector and work out what on earth is the way forward.

Which isn’t a bad question. Few if any actual or potential decision-makers are under any illusion that things can go on as they have done. Boiko Borisov, the most probable premier once elections are held, is attacking the Bulgarian Socialist Party for irresponsibly cutting electricity prices - somewhat rich for someone who ended his last premiership by dictating a 7% cut. As SEWRC chief in June, aside from edging household tariffs up by 2%, Boev had pinned his hopes of moderating further rises on the success of appeals just lodged with Brussels against long-term PPAs with the US-owned TPPs (as “unjustified state aid”) and with pricey renewables producers (as “disproportionate state aid”), with the SEWRC-generated part of NEK’s debt to be liquidated over a five-year period. Boev’s ideas on what might be saved on PPAs were, well, a little radical: earlier he’d made proposals amounting to price cuts of a third in one TPP and a fifth on the other, while he was mulling legislation to make only half of renewables output eligible for preferential feed-in tariffs. Boev’s deputy Bozhkov said, at the time, that if the appeals weren’t successful, a 45% price increase would be needed to achieve the build-down on NEK debt, though this increase would be phased over several years.

Caretaker energy minister Shtonov - who, admittedly, will presumably not be around for very long - has pointed out that, if mid-2014 prices remain in place, NEK will be BGN900m further in debt by mid-2015, but has also sounded a note of gradualism. While a hike of 50% would be needed to correct matters immediately, he said last week, that has obviously to be implemented over five to 10 years, not only to avoid disruption but also because “without reforms” sudden rises would just be followed by further accumulation of debts.

As to those PPAs, it’s not clear whether Boev-type appeals are going to cut much ice in Brussels or whether future governments are going to go down that route. It was announced in mid-August that talks were about to commence with renewables producers and the US TPPs. Shtonov’s attitude to renewables was interesting: interviewed at the time he commented that "legislation has permitted for the installation of renewable energy sources, there is no way back. But renewable energy producers also realize that this [situation] is unsustainable because there is no money in the system.”.

It’s a dilemma. An Energy Board may be ever so consultative and transparent. It could be that consultation and transparency may breed compromise - as, indeed, may the prospect of serious disruptions in the energy system. And it will certainly be interesting to see what conclusions the EB’s initial study yields. On the other hand, real conflicts of interest exist. Big money - and in some cases, probably solvency - is at stake for renewables producers. And the response of the chief of the AES TPP to Boev’s demands was effectively: “Fine, scrap the contract if you’re willing to give us €600m compensation.”

Above all, the protests of February 2013 - which prompted a brief efflorescence of grass-roots populist radicalism and demands for DISCO renationalisation - are a reminder that board games aren’t everything. The EB is consultative only: its presence will certainly make it appreciably more difficult for politicians and regulators to do daft things - but won’t be as constraining as the Currency Board which, in the end, isn’t so much as a “board” as a set of cast-iron rules about money supply and foreign exchange reserves. And if politicians act daft, it’s not to be ruled out that the streets will act even dafter.


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