Bulgarian renewable energy law is no green light

By bne IntelliNews May 4, 2011

Sandy Gill in Sofia -

As Kermit the Frog once observed, it's not easy being green. Legislatively speaking, Bulgaria's decision-makers have been trying for the last 15 months. In that period, they've gone through draft after draft of a new Law on Renewable Energy Sources that's supposed to update the rules on green energy and bring them into line with the latest EU norms and policies.

The latest draft cleared parliament just before Easter and, it emerged on May 3, President Georgi Parvanov has chosen not to exercise his suspensory veto on it, as some thought he might. And if you believe industry representatives, it seems that Sofia's Kermits have come up with something guaranteed to horrify Brussels, not to mention also trample on the Bulgarian constitution and, incidentally, kill off a rather promising fledgling industry that promised to bring in several billion euros in foreign direct investment. A destructive feat, one might say, that's worthy of Miss Piggy herself.

Wind in its sails

There's a background. The new law replaces a 2006-vintage one which had, in some senses, rather overdone things. Those producing electricity on the basis of renewable energy sources, it said, were entitled not just to attractive (though annually adjustable) feed-in tariffs - a payment the state guarantees to pay for all the green electricity produced - but also, unconditionally, to grid connections immediately once their project was built. They could apply for such connections at an extremely early stage of project development and the grid operator - national power company NEK for big projects, the country's foreign-owned distribution companies (discos) for smaller ones - was legally bound to take notice.

Possible projects proliferated: it cost little to have a project up your sleeve and, if nothing else, it enhanced the value of the land on which it was to be sited. Figures reached surreal levels. Bulgaria's total installed capacity at present - nuclear, conventional, the lot - is around 11,500 megawatts (MW). And, hydroelectric power plants apart, existing renewable capacity comprises just 465 MW worth of wind and 21.4 MW of solar. But add up all the renewable-based projects that have been, in some sense, proposed and you get upwards of 14,000 MW. Even those for which preliminary or final grid contracts have been signed add up to more than 6,000 MW.

Now, nobody thinks more than a fraction of what's proposed or even contracted will actually happen. But not knowing which fraction presents something of a grid planning problem for NEK and the discos. There's a geographical dimension, too: the windy northeast - Bulgaria's most aeolically fashionable neighbourhood by far - is also home to one of its least developed grids.

There's also the question of how much capacity from renewables Bulgaria actually needs. According to its EU commitments, the country must meet 16% of its final energy consumption from renewables by 2020. That, says energy minister Traicho Traikov, means generating around 21% of electricity from renewable sources, compared with 15% now (which is mostly down to the country's well-established large hydro sector).

For this, say sceptics, around 2,000 MW worth of wind, solar and biomass capacity is needed: more would be wasteful because renewable-based power is expensive, though green investors say otherwise. "Even in Bulgaria, the EU nation with the lowest retail price, the wind energy tariff matches retail prices," says Sebastian Noethlichs, executive director of the Bulgarian Wind Energy Association (BGWEA). "So if there is any effect at all on prices, it should be a positive one. While fuel prices continue to rise and the real costs of nuclear multiply, [renewables] is the one power source that's bucking the trend by getting cheaper every year."

Assorted other viewpoints and interests have fed into the political equation. Earlier lax environmental regulation produced a crop of ornithologically doubtful wind permits that got current Environment Minister Nona Karadzhova into hot water with Brussels, making her something of an renewables-sceptic. Agriculture officials - and those with an interest in containing land rents - have raised the (arithmetically implausible) spectre of Bulgaria's best farmland being gobbled up en masse by wind turbines. Arguments about the supposedly cheap power offered by the controversial Belene nuclear project have formed a backdrop to the debate. NEK has certainly been concerned about grid investment costs, not just grid planning. And some pretty scary drafts came up last year: one, for instance, envisaged precisely the sort of grid capacity tender system that ruined Hungary's wind prospects.

All in all, however, what had emerged by March this year was a draft law that investors could work with. A system combining hefty advance payments for grid connections and annual regional quotas for grid capacity seemed to be a rough-and-ready way of weeding out projects that weren't serious and averting potential grid problems. The periods for which feed-in tariffs were available - 25 years for solar, 15 for wind - were retained.

And one tariff concern of solar investors was met: hitherto, annual adjustments applied to all capacity of a given category (for instance, wind turbines operating more than 2,250 hours a year, or photovoltaic modules of more than 5 kW), regardless of vintage. Those adjustments depended partly on general power prices (expected to rise), but partly also on costs (subject to the qualification that the cost-based element couldn't drop by more than 5% in any given year). With solar technology costs expected to fall radically in the next few years, early solar investors thus stood to lose out badly. The draft put that right, applying the same tariff to a given project throughout its feed-in period - the tariff in force when capacity was allocated.

Admittedly, the draft also removed that 5% limitation for adjustments and made the price-based element 70% rather than 80% of average power prices. Admittedly, too, this wasn't particularly welcome for wind developers, whose capital costs are lower than solar and unlikely to fall much over time, and who had been looking to a price-based upside... But overall, says Noethlichs, while the draft was "sufficiently unpleasant to stop all but the most determined - and hopefully capable - developers and investors, it was at least still workable."

And then, unluckily for said investors, came April 13.


Possibly emboldened by disparaging remarks on pricey renewables a week earlier by tough-talking premier Boiko Borisov, the relevant parliamentary commission introduced last-minute amendments that were promptly passed by MPs on April 21.

Three points in particular have peeved green investors. First, feed-in tariff periods have been cut for wind and photovoltaic projects, to 12 and 20 years respectively (though currently fashionable biomass has been favoured with a 20-year period, up from 15). Second, a project's feed-in tariff is to be reckoned from, effectively, the date on which its construction is completed. That, the investors say, will make projects unbankable: income flows just won't be predictable at the stage in the investment process when banks need to participate. And third, projects already operating will be subject not to the existing tariff-adjustment procedure, but to the new system of flat tariffs, which could be very bad news for them if they are wind projects. "As a sector we could have lived with the initial, restrictive regime," laments Noethlichs. "This final version, however, goes far beyond this in being outright prohibitive and destructive. With this law we will see the destruction of years of work, future investment and jobs along with trust in Bulgaria as an investment destination."

And those EU obligations? "No way will they get 2,000 MW with this law," he says. "In fact, they'll probably get nothing beyond what's already in place and what's almost built. So they'll be lucky to reach 800 MW."

Noethlichs and his friends still have a trick or two up their sleeves, however. They had hoped for a suspensory veto from the president - who had seemed sympathetic - though this hasn't materialised. Positioning himself for politics after he leaves office this autumn, Parvanov may not be too keen to champion the less-than-populist cause of renewables.

But there's also Brussels. The law in its present form violates all manner of EU principles to which Bulgaria is committed, argue the green investors: that renewable-based power should have priority access to the grid, for instance; that there should be no unnecessary hindrances to grid access; and that power regulation should be of a "proportionate level." All this will be pointed out to the European Commission.

There's also the national constitution. That forbids retroactive and discriminatory legislation. And this law is both, argues BGWEA. True, appeal to the Constitutional Court is possible only by the president (who seems to have declined) or a minimum of 40 MPs, and Noethlichs isn't too optimistic about those. But you never know. As any princess will tell you, frogs can sometimes come good in the end.

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