The full liberalization of the Bulgarian Energy market has been the main focus in the sector for the last 18 months and continues to be the government’s objective.
Step one of this liberalization was the introduction of renewable energy projects and co-generators with installed capacity of 4 MW and above 4 MW to the free market as part of the regulated market through long-term Power Purchase Agreements at preferential prices (PPAs), obliging producers to sell electricity on the Independent Bulgarian Energy Exchange (IBEX) solely or through their balancing group coordinator. Co-generators were the pioneers starting on July 1, 2018, but the RES producers enjoyed a transition period until January 1, 2019. As of the beginning of 2019, all affected producers (147 companies in total) have become active players on the Energy market in Bulgaria.
The main challenge facing lawmakers was to secure the already-undertaken engagement by the State for the financial stability of the investors and the repayment of the investments in accordance with the approved business plans and the statutorily-determined rate of return throughout the years, which varied between seven and nine percent. After wide-ranging public debates and numerous conferences, roundtables, and expert meetings, the solution found was to replace the PPAs with new Contracts for Compensations with Premiums (CfPs) with the State Energy Safety Security Fund (the “Fund”). The changes to the Energy Act and the Energy from Renewable Sources Act divided the income for the producers into two components: (i) from the sale of electricity on the free market, and (ii) a premium determined annually by the Energy and Water Regulatory Commission (the “Commission”). Thus, the financial burden for the Energy market from participating RES producers and co-generators was partially transferred to the producers.
It is important to emphasize that the launch of the new selling mechanism has already faced difficulties directly affecting some of the solar, wind, and hydro power plants. At the end of February 2019, the Fund ceased payment of the said premium for the energy projects, as no net specific production of electricity had been determined by the Commission. This situation is expected to be resolved quickly, as otherwise the stability of the sector could be jeopardized.
Next Steps and Development of the Energy Market
As part of the Bulgarian government’s long-term plan to achieve full liberalization, a new Bill to the Energy Act was announced on March 22, 2019, requiring those RES producers with installed capacity between 1 MW and 4 MW having PPAs to participate in the free market as of July 1, 2019. This is seen as the natural next step in the liberalization process and is welcomed by the various stakeholders in the industry. More than 620 new companies, with a total installed capacity of over 1,360 MW, are expected on the IBEX. In comparison to 2018, when a transition period was provided to the RES producers, this time around the government is unlikely to apply such an approach, in spite of the numerous and intense requests from the affected producers and branch organizations.
Another obstacle for the development of the Bulgarian Energy market is the import and export taxes for transmission and access currently imposed on cross-border energy deals. Their removal – which is also part of the new Bill – is a crucial and long-awaited improvement for the entire Energy sector. This is seen as a step towards the full liberalization of the Bulgarian Energy market and its harmonization with neighboring markets, as, with this financial burden removed, its capacity can rapidly expand.
Another vital step in the development process of the Energy market currently under public discussion is the mandatory participation of industrial consumers in the free market. It is not yet clear when this will be implemented, but it is a crucial component in strengthening the connection between the demand and the supply chain, securing liquidity and transparency in the Bulgarian Energy market.
The remaining challenges to full liberalization are numerous, but the Bulgarian government has taken many steps to stimulate competition and free trade, while the specific effects of the new mechanisms on the Energy market will be subject to a detailed analysis in the next few months.
By Dobrina Pavlova, Head of Energy and Capital Markets, Gugushev & Partners Law Office
This Article was originally published in Issue 6.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
