European Commission report points to electricity tariff deficit in Bulgaria

Written by on October 3, 2014 in Bulgaria - Comments Off on European Commission report points to electricity tariff deficit in Bulgaria

A new report by the European Commission indicates that there is an electricity tariff deficit in Bulgaria – the result of retail electricity prices being set below the costs borne by energy companies.

Released on October 3, the report by the EC’s directorate-general for economic and financial affairs, coincidentally, emerged two days after energy prices for consumers in Bulgaria were increased by an average close to 10 per cent and just before an election in which a number of parties have sought to make electricity prices a key issue.

The report, covering a number of EU countries, said that the causes of such deficits were more than just a bad economic situation. Several factors related to the design of the electricity markets influence the prevalence of a tariff deficit, the report said.

Bulgaria is among five EU countries – the others are Latvia, Hungary, Malta and Romania – where there was evidence of possible electricity tariff deficits based on the financial performance of the regulated companies.

The report noted that in Bulgaria, the three largest distribution companies owe a combined 347.6 million leva to the state-owned National Electricity Company (NEK) due to disbursements for subsidies to renewable and combined heat and power generators since 2010.

The report said that retail prices of electricity for households in Bulgaria were in nominal terms by far the lowest in the EU and had hardly changed between 2008 and 2010.

On the other hand, over the past five years there was an upward trend in generation costs due to the recent expansion of renewables stimulated by generous subsidies for solar power and cogeneration.

Other factors like the long term purchase power agreements and delays in market liberalisation also played a role, the report said.

Investment in wind and solar power installations over the past year in Bulgaria was estimated at more than four billion euro, which needs to be repaid by surcharges on electricity prices in the coming years.

The EC report quoted a World Bank report and the utilities saying that the integral tariff is not sufficient to match the corresponding costs borne by electricity utilities.

However, in contrast to Spain and Portugal, the existence of this tariff deficit had not been recognised by the authorities as a public liability.

Thus, the Bulgarian government had not given the utilities credit rights to recover the corresponding amount.

“The situation is further complicated by lack of accounting standards for regulated utilities, lack of cost benchmarking, as well as by market distortions such as cross subsidies and purchase power agreements,” the EC report said.

The report said that the deficit has accumulated in the energy system, especially in the foreign-owned distribution companies (which also collect the revenues from energy consumers) and in the incumbent state-owned electricity supplier NEK.

“The financial situation of the latter is deteriorating quickly; at the end of 2013, NEK is considered to have a debt of 2.3 billion leva (three per cent of GDP) and one third of this amount were liabilities to energy producers.”

Foreign-owned energy distribution firms had announced their intentions to sue Bulgaria over non-compensated obligations for purchasing electricity from renewable energy sources, and claim to have accumulated substantial losses due to these obligations, the report said.

It noted that NEK and the distribution companies were also in dispute over the amounts of renewable subsidies, which are collected by the distribution companies and should be paid to NEK.

“While there is no official estimate of the electricity tariff deficit, the annual deficit in 2013 has been estimated by the World Bank to be between 800 – 1200 million leva (1 – 1.5 per cent of GDP) and is expected to increase further in the coming years if no measures are taken,” the report said.

The Bulgarian energy regulator had tried to increase electricity prices for households by 14 per cent as of January 2013 to match the rising electricity system costs, the report said, but noted that this decision, however, had triggered dramatic street protests and finally led to the resignation of the government of then-Prime Minister Boiko Borissov in February 2013.

Following these events, the energy prices for households were cut in several steps by an average of 13 per cent in 2013, the report said.

Other measures to reduce the energy system costs include the introduction of grid access tariffs for renewable energy producers and the prohibition of access to the energy system for a part of the gridconnected renewable capacity.

The report noted that these measures were contested by the renewable investors and some international financial institutions, who claimed they were breaching the law.

The first of these measures was revoked by the Constitutional Court as discriminatory.

The report added that in December 2013, Bulgaria’s Parliament imposed a 20 per cent charge on income from wind and solar power installations in 2014. This measure was also sent to the
Constitutional Court by the President, who considered the fee on wind and solar power producers as a form of discrimination against other electricity generators.Electricity power-generating windmills at wind farm Kaliakra Bulgaria photo (c) Clive Leviev-Sawyer

Electricity power-generating windmills at wind farm Kaliakra Bulgaria photo (c) Clive Leviev-Sawyer

As Bulgaria has an excess generation capacity, one of the recommendations in the World Bank’s 2013 report is to facilitate exports which would require better interconnections.

The World Bank also addresses the energy poverty aspect and suggests increasing the heating allowance and other social benefits for the poorest, as they had decreased dramatically in recent years, the report said.

(Main photo: John Mason/freeimages.com)

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