Power problems in Bulgaria bug Boyko again

By bne IntelliNews July 30, 2015

Sandy Gill in Sofia -


Boyko Borissov, the mouthy once-and-present prime minister of Bulgaria, never did have much luck with electricity. Back in 2013, his first premiership ended in resignation when citizens took to the streets in protest at high electricity bills. And, with Boyko back in office since last November, it’s power politics again – as it is all over the region.

In June, it was industrialists who rebelled about plans to shield households from tariff rises at their expense. In July, government – affiliated MPs have scrambled to get through hasty legal amendments to allow congenial decisions. The country’s notionally independent sector referee – the Energy and Water Regulation Commission (EWRC) – having waited patiently on the sidelines, its decisions delayed a month as politicians shift the goalposts, is preparing to announce tariffs on the last day of the month. And meanwhile, neither the industrialists nor, it seems, Borissov himself are happy with what’s likely to emerge.

Laggard Bulgaria

If truth be told, the real problem is two-fold.

First, Bulgarian household tariffs are just too low, unrealistically so. Eurostat data, referring to the first half of 2014, puts them at 31% below those of the next cheapest EU country, Hungary. True, they’ve gone up a bit since then (around 13%). True also, average incomes are also the EU’s lowest. But tariffs are still too low. And, moreover, they’ve been used as, in effect, an indiscriminate social policy instrument, with those who could afford more using most of the electricity – and no targeted help available for those who couldn’t.

Second, if energy reform is a good thing, Bulgaria hasn’t had too much of it. There’s been free -market pricing for high-voltage (HV) consumers for some years and, more recently medium-voltage (MV) ones have joined in the fun. But households – though in legal theory they’ve had the right to choose suppliers since 2007 – will be getting it in practice only next year. And, by the way, the “free market” hasn’t run to anything as fancy as an electricity exchange. Romania’s had one since early this century. And Bulgaria talked about one for years. But it will only actually get a functioning exchange at the beginning of next year (tests are due to start early this November).

Social embarrassment

Meanwhile, concerns have been a bit less ethereal – and the game played somewhat akin to “pass the parcel”. The history is tortuous, but let’s oversimplify. While political manipulation and accidentally long billing periods certainly played a part – maybe a decisive one – 2013’s protests followed a 13% tariff hike in mid-2012. That partially reflected an unexpected “solar boom” in the first half of 2012, the result of a renewables law more encouraging than it was meant to be, and the cause of a bill reflecting pretty generous feed-in tariffs (FiTs).

Lumped together with renewables under the mealy-mouthed rubric “Obligations to Society” (OS) were the costs of two other relatively expensive forms of power. First, that produced by “efficient” cogeneration (cogen) plants along with heat, at industrial factories and district heating utilities. And second, that produced by two US-owned lignite plants – one newly built, one recently refurbished – under long-term power purchase agreements (PPAs).

To a large extent, sector policy since has centred on what to do about OS – and on not really managing to do it. The departing Borissov, and the left-centre coalition government that succeeded him after May 2013’s elections, presided over three household tariff cuts by obliging regulators in 2013. Balancing the books was another matter. With bashing of Bulgaria’s three foreign-owned regional power distribution companies (discos) much in vogue, their revenues had been squeezed (with serious consequences for the state of the grid). There were attempts (mostly overturned by the courts) at back-door adjustments to FiTs for electricity produced from renewable energy sources (RES), legally fixed for 12-20 years from the date of commissioning. And, in spring 2014, there were imperious noises from regulatory chief Boyan Boev – not long before the fall of the left-led government that had appointed him – about a 20-30% price cut in those American lignite PPAs. Assumed in his tariff decisions, this didn’t happen.

Pain in the NEK

But mostly, there was, well, pain in the NEK. The National Electricity Company is the much-unbundled remainder of what, once upon a time, was a vertically integrated national power utility. Nowadays, it does some free-market power trading and runs the country’s big hydroelectric plants. But its other function, as “public supplier”, is to buy electricity from producers and sell it on at regulated prices to those discos for resale to their protected customers. With a lot of the electricity it buys coming from those “expensive” sources, but household prices kept down, NEK has been – and still is – selling at a loss.

Result: NEK’s in debt. Now, there’s a BGN2.3bn (€1.2bn) debt resulting from lousy investment decisions – mostly taken by politicians, not NEK – but let’s forget that. More relevant for our purposes is that there’s a “regulatory deficit”, the cumulative result of that loss-making sale over the last three years or so. That’s currently a very uncool BGN1.4bn, and rising at BGN50-60mn a month. And NEK’s disruptively in arrears to various suppliers: it currently owes those US lignite plants around BGN750mn, while those plants in turn owe over BGN200mn to the lignite mines (whose total overdue receivables exceed BGN300mn).

Born-again Boyko?

Re-elected at the head of a rather tricky coalition government last autumn, Borissov seems seized by the need to straighten things out in the energy sector. His tenure started with a present: under the aegis of a reform-minded caretaker government and just before elections, the regulator had hiked household power prices by around 10% last October. Over winter, Borissov was obsessive about ensuring discos didn’t bill excessively or for excessive periods. And his government has been loudly pushing a big EU-funded apartment block rehab scheme that could seriously reduce energy bills for many citizens.

But Borissov also started talking in February about “zeroing NEK” – meaning elimination of its current deficit – and the apocalyptic consequences of not doing so. And there’s been action.

For instance, energy law amendments in March overhauled the regulator, with its members appointed by parliament rather than government – a step somewhat quaintly expected to make it more independent. They also tightened the regulations on what cogen plants qualify as “efficient” (one in-house plant at a tyre factory has been disqualified because the company is producing a lot of electricity and almost no tyres).

And a more conciliatory approach produced preliminary results with those US-owned lignite plants: an MOU signed in April envisaged capacity-availability price cuts, equivalent to around BGN100mn a year, in return for full arrears payments.

EWRC-some measures

Meanwhile, the noble cause of “zeroing NEK” hasn’t proved too straightforward, as Ivan Ivanov has found out. He’s the rightist politician from Borissov’s junior partner the Reformist Block who was elected to head the regulator at end-March. There’s an old regulator’s joke that, if everyone hates you, you’re probably doing a good job. By that criterion, Ivanov’s performing splendidly.

With an annual revision of tariffs due mid-year, Ivanov and his colleagues came up with a pretty radical solution in a draft produced at end-May. With a gap of getting on for BGN400mn still to be filled – which would translate into a 17% hike if households had to bear it – he proposed a household hike of just 2%, with the strain taken instead by a more than doubling of the “Obligations to Society” (OS) element payable for electricity sold on the free market, from BGN18.93/MWh to BGN40.21.

Equivalent to around a 22% price hike for industry, this predictably incensed industrialists, whose associations warned direly of lost competitiveness and threatened protests – and Borissov himself, who said he would join them! While Borissov’s parliamentarians promised that the effect would be cushioned by big and widespread discounts, the EU-compliant draft decree on the subject produced by Borissov’s ministers disappointed, with an 85% discount offered to less than 40 big consumers and turning out to mean 85% only of the specifically RES element of the OS (which still spelled a 13% price increase). Protests, in the form of a one-hour token stoppage in late June, went ahead.

And Borissov rushed amendments through parliament enabling EWRC to delay its decision by a month, to buy time. Time for legal changes to be made. Time for that discount decree to be revised. And time for checks to be carried out by state financial inspectorate ADFI on allegedly mendacious RES producers. Rather bewildered by the barrage of invective from industrialists – and sniffily observing that NEK would be losing money for another month – Ivanov and colleagues agreed on delay, with as much dignity as they could muster.

High-speed legislation

Talks between government, unions and employers took place early in July, yielding apparent consensus on various issues. The energy ministry, it was agreed, would take a good hard look at state-owned energy companies and come up with optimisation measures to ensure 10% cost-cuts for each of the coming three year. These companies had been the subject of much vitriol from employers in June’s polemics for excessive manning levels and salaries, though Energy Minister Temenuzhka Petkova promptly insisted that job and wage cuts weren’t on the cards: she’d be looking at optimising external costs.

But the main agreement was on legal amendments designed to squeeze renewables costs and create an alternative method of OS funding. Borissov’s henchmen can’t be faulted for speed. Pushed above all by erstwhile energy minister – and current parliamentary energy commission chief – Delyan Dobrev, a batch of amendments to the energy and renewables laws cleared first reading in the second week of July and (with modifications) second reading in the third week, were triumphantly gazetted on July 24.

One key measure shifts some of those OS burdens by setting up an Electricity System Security Fund (ESSF), which will make payments to NEK and would be fed by CO2 emissions rights proceeds – and, more controversially, by a 5% tax on the sales of electricity producers. That tax, it’s reckoned, would raise around BGN206mn a year. Weirdly, however, NEK itself would be paying about 30% of it, partly as a hydro producer but mainly because it’s bound by its PPAs to absorb any such charges imposed on the US-owned lignite plants.

That was discrimination against state-owned power plants, Socialist MP Tasko Ermenkov fumed vainly in parliament at first reading, referring above all to the Kozlodui nuke and the lignite-fired Maritsa Iztok 2 — both of which would also lose out from revocation of a 2013 exemption of power exports from the OS charge. With Kozlodui profitable but facing hefty modernisation costs in the next few years and Maritsa Iztok 2 lossmaking, this could be troubling.

Green squeeze

But it’s not just state-owned conventional producers that are feeling discriminated against. The private RES sector reckons that — not for the first time — it’s being bashed. With FiTs fixed, that 5% tax will eat into their revenues. They also stand to lose from a tighter definition of how much electricity qualifies for FiTs and from an unfavourable shift in the way electricity that doesn’t qualify is priced (defined by balancing market spill price rather than the much higher public supplier price).

It could have been worse. In line with the hallowed sectoral tradition of making legally daft decisions under pressure, Dobrev and friends got a very controversial shift concerning FiTs themselves through first reading.

Fixed for 12-20 years after a project’s commissioning, these have been calculated on the base of industry costs — including investment costs — estimated by the regulator. (With solar panel prices plummeting between regulatory fixes, that was actually one of the reasons for 2012’s “solar bubble”). The draft amendments suggested that EWRC should have the power to negotiate case-by-case lower FiTs if it were found by ADFI that a project’s actual investment costs were more than 5% below the investment element assumed in the original regulatory fix.

Predictably there was an outcry on retroactivity from embassies, chambers of commerce and producers, with the latter also noting that messing with renewables could have destabilising consequences (€2.5bn worth of local bank finance is tied up in RES). The amendment disappeared at second reading, leaving EWRC with the financially rather less promising task of following up on any small renewables projects ADFI found to have been claiming full FiTs after receiving EU investment finance.

Hitting the fan

And one form of RES actually emerged better off from the amendments: namely, livestock manure. Apparently at the insistence of the Movement for Rights and Freedoms (MRF) — an opposition party intermittently cooperative with Borissov — the construction deadline for installations running at least 60% on dung to qualify for FiTs was extended from January 1 next year to July 1. Estimates of the likely cost to NEK vary: one Reformist Block MP thought it could be as high as Lv190m a year, though most estimates of what’s likely actually to be built yield much lower figures. MRF energy expert Ramadan Atalay argued EU directives on nitrogen emissions in the measure’s favour. Others hinted at MRF - connected business interests. And the industrialists are not amused. Evgenii Ivanov, representative of one of the employers’ organisations, talked of an “energy mafia”, and bitterly observed that, “it turns out that Bulgaria’s future lies, not in industrial exports, but in farmyard manure.”

The situation’s tense. ERWC is due to issue its decision on electricity prices on Friday (July 31st) and Ivan Ivanov — Ivanov the Regulator, that is — has made clear that, under June’s legal amendments, it’s not possible to delay the decision any further. He’s mentioned no figures, but he’s made it clear that — though the legal changes mean that tariffs will be lower than the numbers he first thought of — EWRC will be sticking with the strategy of raising the OS for free-market consumers.

The employers are apparently not optimistic about what cost-cutting the amendments have achieved and certainly aren’t waiting for Friday. As this article went to press they’re preparing for nationwide demonstrations and hoping to get 5,000-6,000 people out on the streets in Sofia. They’re demanding a freeze on the level of OS till the beginning of next year, a good hard look at “reserves” in the system meantime, and a clear roadmap for reform. And they’re accusing the government of having reneged on just about all its promises except setting up the ESSF.

Meanwhile, there’s a bit of mobilisation on the other side: energy producers have been warning in public letters of the destabilising consequences of any such delay, while some mining and heating plant workforces were demonstrating on Tuesday against the 5% charge — which could mean job losses, they argue.

And Boyko? Well, the prime minister appears to be in classic have-it-both ways form. Talking at a public meeting in the provinces, he stressed the total independence of the regulator, while giving his opinion that the June’s measures meant there was no reason for price rises. Saying that people were free to demonstrate as much as they liked, he also drew attention to what had happened last time there were protests over electricity: the country lost Lv10bn and EU funds were suspended — a reference, of course, to the fall of his previous government, whose successor wasn’t too popular with Brussels. What arguments Borissov will come up with once Ivanov’s figures are out remains to be seen.

Politics, politics

A final twist: with local elections due in the autumn, there’s politics. Not least from the Patriotic Front (PF), a nationalist coalition critically supportive of Borissov in parliament. About a month ago, the PF reviewed government performance in seven areas of dissatisfaction, and came to a Sting-like conclusion that “we’ll be watching you” on two of them. One was power prices: it didn’t think any should rise, for anyone. The PF has also developed a fine line in rhetoric against “the American power plants” — not very popular with industrialists either, incidentally — and PF leader Valeri Simeonov even said earlier this month that he’d got a draft law up his sleeve to cancel the contracts. Which puts a bit of a damper on the month’s good news: that one of the plants’ owners (AES) has squared that April MOU deal with creditor banks (the other, ContourGlobal, is taking a bit longer). One wonders how Simeonov will react when the government raises the subject of the BGN800mn loan needed for NEK to pay those arrears.


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