Power Politics
Bulgarian politics is fraught, and power’s at the centre of it. "Power" not just in the political sense, that is, but also in the sense of "electricity". With early parliamentary polls due on October 5th, and a presidentially-appointed caretaker government holding the fort till the resultant parliament cobbles together some sort of successor—which could take a month or two if pollsters are to be believed—its electricity as much as the election that’s preoccupying the temporary incumbents.
True to right-of-centre president Plevneliev's mandate, which singled out energy as a problem area, they've been doing a lot more than "taking care". The feisty Ekaterina Zaharieva—top presidential aide turned caretaker deputy premier—has been sounding the alarm, since she was appointed in early August, about the possible "collapse" later this year of a power system plagued with grid underinvestment and debt. She's said that the debtor-in-chief—state power company NEK—is losing over BGN 50 million a month, quite a problem when its mid-2014 gross debt was upwards of BGN 3.1 billion. Her direct report, Economy and Energy Minister Vasil Shtonov, has been giving even more alarming figures: lousy regulatory decisions taken at mid-year will, if left unamended, have NEK another BGN 900 million into the red by the middle of next year, he reckons.
Current concerns
Which means it's no surprise that, late last month the cabinet demanded—successfully—the resignation of Boyan Boev, chief of the State Energy and Water Regulatory Commission (SEWRC), the notionally independent sector watchdog and setter of regulated prices. He’d been neglecting his duty to “balance” the sector and "making political statements", the government complained.
That put it mildly. The beneficiary of two appointments last year by the Socialist-led cabinet of Plamen Oresharski, the finance expert Boev got the sector's top executive post—at the head of the Bulgarian Energy Holding (BEH)—in September, then moved to become top regulator in December. His installation was even held up by Brussels in April as an example of an appointment that didn't inspire confidence in regulatory independence. Along with Boev, two other commissioners have departed—with Shtonov growling publicly that it should have been more. Boev’s replacement Svetla Todorova has a track record of 35 years in energy—15 of them in the regulator itself.
The caretaker cabinet has also set up a consultative council—the Energy Board—representing major stakeholders in the sector, which is to meet at least monthly, and is to comment on proposed official decisions, present suggestions and drafts of its own, and, as an immediate task, study the sectoral situation and make recommendations on the way forward. It held its first meeting on September 2nd. The next is due on September 15th.
It’s inclusive. The energy and labour ministries are represented, as is BEH, which incorporates state-owned energy companies, and its daughter companies NEK and transmission-grid operator ESO. So are unions and employer organisations. So is a miscellany of energy branch organisations, for wind power, for solar power, for hydroelectricity, for district heating firms, for factory cogeneration (heat-and-power) firms, for power traders, for power consumers, and so forth. So, significantly, are several individual foreign investors, including the three foreign-owned regional power distribution companies (DISCOs)—owned by Austria's EVN and the Czech firms CEZ and Energo-Pro—and two big lignite-fired power plants owned by US firms AES and ContourGlobal.
All in all, the Energy Board represents an attempt to mobilise wisdom and consent to get the sector out of quite a considerable hole. It’s also an attempt to reassure players that decisions are more transparent, informed by expert opinion, coherent, and consistent with the law. Which they haven’t been, mostly. For a couple of years, it's been politics, more politics and an energetic search for scapegoats.
Upward pressures
The key issue has been power price. That’s a ticklish one for several reasons.
First, Bulgaria—while it has the lowest household tariffs in the EU—also has the lowest incomes. Second, its consumers are unusually dependent on electricity: with household use of gas underdeveloped and district heating, where it exists, relatively expensive, the use of electricity for space heating is common. Third, there’s energy efficiency: with relatively little progress yet made on insulation of communist-era housing stock, it’s been calculated that, though Bulgarian households are paying just a third of what German counterparts pay per kilowatt-hour of electricity, they’re using three times as much power per square meter of housing. So electricity can loom large in the bills of households—especially poor ones.
The issue's been sensitive too because, in recent years, the costs on which SEWRC is supposed to base the regulated tariffs it sets for households increased. The fairly unreformed system that has prevailed in recent years is that NEK buys from producers the amount of power that "protected customers" (mostly nowadays households), at prices defined by power-purchase agreements (PPAs) or by the regulator, and sells it at regulated prices to the DISCOs, who then sell it on (also at prices fixed by SEWRC) to those customers. For two reasons, NEK has lately been buying more expensive power.
Reason One was power production from renewable energy sources (RES), basically wind and solar. From 2006, for EU-compliant reasons, Bulgaria wooed these with generous feed-in tariffs (FiTs), a lot more successfully than it bargained for: targeting around 300 MW of solar photovoltaic (PV) capacity—the most expensive type of renewable—in 2020, it actually ended 2012 with around 1000 MW, with around 600 MW commissioned in the first half of 2012 alone! Attempts to put on the brakes with new legislation in 2011 had worked only partially, while poorly formulated pricing rules had skewed incentives as world PV equipment prices tumbled in 2011-2012.
With NEK (and, for smaller plants, the DISCOs) obliged by long-term fixed-price contracts to buy all the power renewables plants produced, that upped costs and, in some cases, crowded out cheaper sources of power in a system that has a lot of generation overcapacity. Since 2012 the authorities have, by several measures—notably grid restrictions and drastic FiT cuts for new capacity—pretty much slammed the door on new RES development (except the not-so-popular biomass). But they're still stuck with a lot of existing capacity that’s been created by investors in good faith, often with local bank finance, and that’s locked into inflexible FiTs determined by date of commissioning. Not that RES investors are kindly regarded by everyone: many Bulgarians see them as influence-peddling, politically connected fatcats making unjustified profits.
Reason Two are those US-owned lignite plants. ContourGlobal's is an old state-owned plant beautifully refurbished to 906 MW between 2004 and 2008, while AES's is a 670-MW newbuild fully commissioned in late 2011. Both subject to long-term power-purchase agreements (PPAs) with NEK that ultimately date back to 2001, these produce power at prices way higher than the state's own (fully amortised) lignite plant, Maritsa Iztok 2, or its sole, now two-reactor nuclear power plant (NPP) at Kozlodui.
Street cred
The upshot was that the regular mid-year tariff adjustment for households in mid-2012 came out as a 13% hike. Which didn't cause much of a stir at the time—Bulgarians tend not to get too political over the summer—but grabbed the headlines in February 2013, when alarming winter bills began to hit home, exacerbated in many cases by unusually long intervals between meter-readings. Consumers all over Bulgaria took to the streets in thousands in protests that lasted weeks and became steadily more radical, broadening into anti-government and anti-DISCO affairs, with resignation of the former and renationalisation of the latter widely demanded. Justified or not, the DISCOs' unpopularity was intelligible. Direct contact with consumers means they are the ones sending you the bills—and cutting you off if you don't pay them. They're widely suspected of bill-inflating chicanery, and being foreign-owned doesn't help them, especially in the eyes of nationalist politicians.
When violence—of a modest Bulgarian sort—flared a couple of weeks into the protests, macho centre-right premier Boiko Borisov resigned, but not before promising to take away CEZ's distribution licence "that very day" and cut tariffs by 7%—matters, legally, for the "independent" regulator, not the prime minister. SEWRC duly implemented the cuts and initiated necessarily rather lengthy de-licensing procedures (which were quietly terminated as unfounded six months later).
The precarious left-led Oresharski government that emerged from elections in May 2013 was long harried by demonstrations, but these were of a more "middle-class" kind and had nothing to do with power prices. On these, the cabinet "watched its back" by going further than Borisov, with the regulator cutting tariffs by a further 5% at end-July and—shortly after Boev replaced a less compliant regulatory head—by 2% at year-end. Corresponding to no reduction in objective energy costs—any more than Borisov’s 7% had done—these were exercises in regulatory arbitrariness under political pressure.
DISCOntent and green power blues
Not least for the long-suffering DISCOs. Chronically subject to regulatory efforts to disallow investment proposals seen by the DISCOs as indispensable for meeting service targets, DISCOs were squeezed further by arbitrary and unrealistic assumptions about the feasible pace of reductions in the amount of electricity lost in the distribution network (the last Borisov revision made this 8% for EVN at a point when it stood at 10.8%). DISCO-bashing recurred too, with a dispute over an attempt by DISCOs to offset receivables in March leading to almost certainly illegal and disproportionate threats of de-licensing by the government, with procedures again obligingly launched by SEWRC—and rather tailing off when threats of arbitration suits and EU displeasure made it clear that it would be a costly step.
RES producers were targets too, in the attempt to pare costs. With NEK hitherto liable to refund all renewables costs paid by DISCOs for feed-in tariffs on small installations—including most solar plants, disproportionately located on the sunny south-east Bulgarian territory of EVN—legislators had tried in 2012 to ease financial burdens on NEK by confining this to those installations correctly forecast as operating by DISCOs. Since the unexpected solar boom had taken EVN by surprise, this left a hole in EVN finances that, it said, was threatening bankruptcy by September. SEWRC responded—with no prior consultation and with a decree passed after office hours on a Friday—by slapping a “temporary grid access fee” on renewables producers, differentiated by commissioning date and claiming as much as 39% of the revenue of some solar plants. Disallowed eventually by the courts, this nevertheless had to be paid for some months.
Eventually overturned, too, was a blanket "20% fee" on renewables imposed by parliament in December 2013: this time it was the constitutional court that disallowed it recently—as discriminatory and as, in effect, a tax not a fee—though only after around BGN 100 million had been collected.
Further, legislation in December 2013 chipped away at renewables revenues by making only the average annual hours of operation specified in licences—not actual hours, if these were more numerous—eligible for preferential FiTs. And the introduction of a balancing market in electricity—one of the Oresharski government’s few reformist moves in the energy sector—at the beginning of June 2014 provided what renewables producers claimed was an opportunity to cheat them: obliged to pay for deviations from the production they had forecast, they were disadvantaged by NEK tampering with those forecasts.
In short, DISCOs and RES producers were engaged in constant skirmishing with a regulator and a government showing both hostile intent and a propensity to take steps that turned out to be illegal. Which can't have done much for their belief in an even-handed government or an independent regulator. Which, in turn, illustrates the sort of "power politics" to which the Energy Board is intended as an antidote.
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