On 2.08.2021 the Energy Management Institute provided the Deputy Prime Minister for EU Funds Management in the Caretaker Government its opinion and comments on the announced on 20.07.2021 version 1.3 of a National Recovery and Resilience Plan.
We present to you the full text of the opinion below:
TO
Mr. ATANAS PEKANOV
DEPUTY PRIME MINISTER
FOR EU FUNDS MANAGEMENT
IN THE CARETAKER GOVERNMENT
Re: OPINION ON THE DRAFT OF THE NATIONAL RECOVERY AND RESILIENCE PLAN
DEAR DEPUTY PRIME MINISTER,
I bring to your attention comments of the Energy Management Institute on the National Recovery and Resilience Plan draft – version 1.3 (RRP), announced on 20 July 2021[1].
As you are aware, the Energy Management Institute (EMI) is a non-for-profit organization, which has been implementing the principles laid down in its statute for ten years now, namely, to operate in favour of sustainable development and integration of Bulgarian energy sector as regards policies, strategic guidelines and mechanisms promoting energy transformation in the European Union. In our capacity as a public policy institute, we have always strived to offer workable solutions for both the energy sector and the public, and to foster involvement of Bulgarian institutions and companies at EU-level decision-making process by supporting them with our impeccable analytical expertise, well-established partner network and membership in EURELECTRIC, the largest electricity industry association in Europe, with EMI being the sole Bulgarian representative.
I take this opportunity to inform you that EMI have been presenting its formal positions on the initial RRP version[2] as well as on the essential documents, defining energy development sector at national level referenced in RRP, such as the National Integrated Energy and Climate Plan[3], the Electricity Market Reform Plan[4], and the draft of the Energy Strategy of Republic of Bulgaria[5]. These opinions are publicly available, and have been submitted repeatedly to the relevant Bulgarian institutions via our official communication routes or have been announced publicly by EMI representatives via various media formats.
TWO POSITIONS OF PRINCIPLE
The letter herein contains our position on the last RRP version proposed by the government and builds on, rather than repeating, our comments on principle already submitted. However, there are two positions in principle that we would like to emphasise on explicitly: these are related to the rule of law and to the strategic view on replacing capacity determination.
On the rule of law and the role of the State
First, it is important to recall the role played by the State and the business in the process of RRP implementation. For us, the rule of law along with respecting contracts and treating equally state-owned and private businesses on the part of the State continue to hold an enduring value, whose violation would have a negative influence on meeting RRP targets as well. Let us also recall that the projects are not implemented by state institutions but by businesses, which have to be fostered and encouraged via state mechanisms.
On the strategic view and energy mix
All RRP versions, devised and presented thus far, do not make it clear what is the overall vision on shaping the energy mix and how would RRP actions, as laid down, contribute thereto. Particularly illustrative happens to be the fact that the role of natural gas as a replacement fuel is being changed in the different RRP versions without substantiating the calculations and the assumptions made, and without any notion on the actual effect of the respective projects. For instance, it remains unclear how it is determined that the high-efficiency gas turbine combined cycle power plant, planned to be build, would replace the existing 1 GW ‘Maritsa East–2’ TPP coal capacity, etc.
For us, the rationale behind such a type of projects (which, in general, we support as an approach) is of paramount importance and deserves to be expressed lucidly. This relates also to the fact that energy transition decisions should be made at the smallest possible costs for the public while ensuring energy security, which in turn, calls for a thorough technology-independent analysis.
ON THE CHANGED RRP FOCUS
We find it positive that recourses allocated to energy sector reforms and investments, set forth in the last RRP version (dated 20 July 2021) are increased – to about BGN 8.3 billion compared to BGN 3.8 billion in the previous version (dated 16 April 2021).
Funds under the Recovery and Resilience Facility (RRF) are raised from about BGN 3.6 billion to about BGN 4.3 billion. This is due entirely to the two new investment proposals, which have not been discussed since October 2020:
- A scheme to support a minimum of 1.7 GW RES and batteries,and
- A scheme to support decarbonisation – building a high-efficiency gas turbine combined cycle power plant to replace a minimum of 1.0 GW of ‘Maritsa East–2’ TPP coal capacity.
In parallel, there is a reduction in funds for designing, building and putting into operation hydrogen transmission and law-carbon gaseous fuel infrastructure to feed power plants and other consumers in Bulgarian coal-mine regions, to support energy efficient municipal systems for external artificial lighting and energy efficiency of building stock, etc.
Furthermore, a substantial increase in national co-financing is envisaged, especially for private co-financing, namely, from BGN 216.3 million to a bit over BGN 4 billion. Close to 90% of these funds are to be allocated for the Scheme to support a minimum of 1.7 GW RES and batteries, for the Scheme to support decarbonisation – building a high-efficiency gas turbine combined cycle power plant to replace a minimum of 1.0 GW of ‘Maritsa East–2’ TPP coal capacity, and for energy efficiency of building stock.
While energy efficiency of building stock has been a topic of discussion since long and has been present in all of country’s strategic documents pertaining to the energy sector, the other two large investment projects come as a surprise.
Even though such matters have been lingering in the public domain in the recent years, they have not been brought forward for a public discussion. This refers directly to the procedure for drafting and coordinating the Integrated Energy and Climate Plan (IECP). Similar matters have not been considered in relation to the draft of the Sustainable Energy Development Strategy of Republic of Bulgarian until 2030, with a 2050 horizon, announced recently, though still a long way off its formal adoption as prescribed by law.
We point out the above because it is our understanding that national recovery and resilience plans do not constitute new strategic documents. In fact, they should be regarded solely as defined commitments on reforms and investment plans to enable achieving the targets already set and adopted under the respective strategic frameworks. This pertains to actions aimed to reduce carbon emissions, digitalize and transform the economy, improve business environment, ensure social inclusion, etc.
Against this background, EMI welcome the proposals made since they rectify some gaps and contradictions in IECP but we believe that these proposals should also be subjected to public discussion so as to seek maximum efficiency and effectiveness of funds’ spending. This suggests providing an assessment of the social and economic impact, particularly in the context of coal-mining regions in transition.
ON SOME SPECIFIC PROJECTS
Here below we provide brief comments on some projects, as laid down in RRP.
A scheme to support decarbonisation – building a high-efficiency gas turbine combined cycle power plant to replace a minimum of 1.0 GW of ‘Maritsa East–2’ TPP coal capacity
The project proposed seems to be a natural continuation of another investment project under RRP, namely, design, build and put in operation a hydrogen and low-carbon gaseous fuel infrastructure to feed power plants and other consumers in Bulgarian coal-mining regions. The financing lines stipulated are: 30% from the Recovery and Resilience Facility (RRF), 30% from a financing tool under the Modernization Fund and 40% from private funding.
First, we would like to note our understanding that this represents a state aid under the Treaty on the Functioning of the European Union as regards the following:
- Provision of public funds – close to 2/3 of the investment would be financed via RRF and the Modernization Fund;
- The investment confers an advantage to a single power plant because the plant itself cannot secure the funds needed;
- The advantage is selective – not only it is conferred to a single energy subsector but it is also limited to a specific power plant;
- Distortion of competition – electricity to be generated as a result of the investment would be at a considerably lower price because of the dramatic drop in expenses on carbon emission allowances and because 2/3 of the investment would be a grant, thus reducing future financial repayment costs of the investment;
- Impact on the trade among Member States – lower price of power generated may affect both power export and import to/from neighbouring countries.
All these have to be considered in the indicative project timeline, which currently envisages launching the project in the first quarter of 2021[6] and in parallel connection of the power plant in the second quarter of 2021. It is obvious that the timeline has already been disrupted, and there is yet a notification on state aid eligibility to be submitted. Furthermore, the indicative timeline foresees conducting an environmental impact assessment (EIA) after the tender procedure is completed. EMI believe that EIP should precede the procedure. All of that should be considered in the context of the obligation to negotiate 70% of the costs under RRF by the end of next year, which puts into question timely project implementation, with all ensuing complications.
From a more general perspective, such a decision does not set a level playing field for state-owned and private electricity producers. In fact, sought for is an emergency solution to serve a state-owned company and offered by a decision that is neither largely discussed nor approved in a transparent manner. As for private companies, they are forced to wait for government vision on the coal-mining sector development. Moreover, this decision is not restricted to producers alone but has a large-scale impact on mining companies and all other companies in the value-added chain linked to them. Last but not least, government policy on coal-mining future will have a direct impact on electricity prices, which in turn will have spill-over effect on the entire economy. Since coal-mining industries are concentrated in particular country regions, they will experience the most the social and economic implications of such a policy. In other words, an investment decision on changing a thermal power plant fuel should be accompanied by a number of other decisions on mitigating negative effects on the specific regions.
Irrespective of the abovementioned, EMI welcome the line of reasoning presented in the last RRP version, which coincides with our view expressed in the previous opinion on RRP earlier version, namely, ‘to develop a timeline for their [coal-fired TPP] planned replacement with modern dispatchable low-carbon capacities while preserving system adequacy and security of electricity supply’. However, we express our deep concern that this line of reasoning is confined to only state-owned companies and it is too short-sighted with respect to the waves of effects that are yet to follow. Coal-mining regions will sustain the highest impact but it will spread over the economy as a whole, affecting its competitiveness as well as household purchasing power.
Electricity network development
Both IECP and the previously mentioned draft of the Sustainable Energy Development Strategy do not elaborate on the electricity distribution networks. Given below is a brief argumentation viewed through the prism of RRP investments in ESO.
In general, EMI welcome the project on ESO digital transformation and information system development and ESO real-time systems under the conditions of a low-carbon economy. The short rationale behind the project is the following:
‘The purpose of the project is to modernize planning, management and maintenance of country’s electricity transmission network by introducing contemporary digital tools and methods to ensure versatility, security, reliability and rapidness of electricity system management under low-carbon electricity generation conditions, faster penetration of renewable energy sources and non-regular generation, improvement of operational management flexibility and electricity system monitoring’.
The 2020 Activity Report of the Energy and Water Regulatory Commission shows[7] that some 358 MW wind-power and 300 MW PV-power capacities has been included to the transmission network while the addition to the distribution network has been 360 MW wind-power and 822 MW PV-power capacities. As envisaged in IECP, by 2030 there would be some new 249 MW wind-power and 2174 MW PV-power capacities included.
In this context, we note that the current RRP version anticipates implementation of the Scheme to support a minimum of 1.7 GW RES and batteries by the end of 2023. Thus, if the proportion of new capacity included to the transmission and distribution networks, respectively, is maintained, then 50% of the new wind-power and 27% of the PV-power capacities are to be incorporated to the ESO transmission network. Against this background, investments in the distribution networks are even more required since 50% new wind-power and 73% new PV-power capacities are expected to be added to these networks. This is so because ‘introducing contemporary digital tools and methods to ensure versatility, security, reliability and rapidness of electricity system management under low-carbon electricity generation conditions, larger penetration of renewable energy sources and inconstant generation, improvement of operational management flexibility and electricity system monitoring’, given as argument in RRP, is equally applicable to both the transmission and the distribution networks.
Moreover, energy transition philosophy, low-carbon economy, decentralized generation, the so-called consumers-producers (prosumers), electric car usage, etc. are based on reliable and resilient medium- and low-voltage electricity networks, on the one hand, and on the other, on network constant transformation. Much to our regret, we note that such matters fall outside the scope of attention and are not presented in either legislative or regulatory practices, or in strategic documents at national level, including the current RRP version. This is yet another example of reasoning that is limited to only state-owned companies while neglecting key sectors in the value-added chain, associated with electrical energy generation and supply. These are not only vital to smooth system operations but are also instrumental to the energy transformation process.
Such a neglect of the growing distribution networks’ importance, and respectively, the role of distributions network operators in the forthcoming energy transition may put in jeopardy the targets and changes aimed, namely (but not limited to):
- development of decentralized and self-generation;
- active consumption (consumption management);
- electrical mobility;
- energy storage;
- modernization of heating/cooling.
It should not be forgotten that networks are natural monopolies and their development taking one or another direction will be predetermined by the vision and decisions of the national regulator, in particular, by the investments approved and the regulatory incentives for innovation put in place. Referring (though unofficially) to the relatively low purchasing power in Bulgaria, the regulator tends traditionally to suppress regulated revenues of distribution network operators in order to limit regulated price growth. This approach does not foster increase in network investments, neither creates regulatory stimuli for actions towards an unobstructed implementation of national commitments on the ‘green transition’. It also impedes and postpones energy transformation and leads to a number of other complications, such as delaying full retail market liberalization.
A look at the IECP investments indicates that distribution network development in the next decade is to absorb investments that are comparable and lower than the ones actually approved by EWRC in the recent years. In the best case scenario, these investments will be sufficient to maintain the network in its current state but hardly capable of responding to the inevitable changes associated with energy transition.
DEAR DEPUTY PRIME MINISTER,
In view of the abovementioned, we kindly ask you to consider EMI’s recommendations on furthering the work on matters discussed herein, and at your discretion, have these recommendations reflected in the final RRP version as well as in the approach of government institutions to future energy sector development.
With respect to reforms, we propose activities aiming to apply contemporary approaches to price regulation, use of dynamic regulation tools allowing for adaptation to the rapidly changing environment, etc.
With respect to investment projects, we kindly ask you to take into account the abovementioned comments and consider including projects on:
- Devising a timeline with clear parameters for replacing electricity metering devices with ‘smart’ devices (Bulgaria is one of the few countries that does not have such a timeline);
- Building facilities for energy storage as part of the distribution networks (the so-called utility scale storage);
- Digitalization/‘smart’ distribution networks;
- Management/consumption response.
At the end, please allow me to express hope that the entire legislative, regulatory and investment environment in Bulgaria will support the country in overcoming substantial delays in the energy sector. Certainly, an overall change in the strands discussed as well as in RRP and its effective implementation may be very helpful in that respect. This will give an actual opportunity to ensure viable investments at present and in the future. Unfortunately, our country still does not enjoy positive external assessments regarding the matters discussed herein. (see, for instance, ‘Investment Climate Statement for Bulgaria’ by the US Department of State[8], which ranks our country at 151th position regarding access to electricity). Undoubtedly, this situation has to change.
While sincerely hoping that EMI’s opinion will be of benefit to the relevant institutions, we remain at your disposal for further information and communication under operational order.
Yours faithfully,
SLAVCHO NEYKOV
CHAIRMAN OF THE MANAGEMENT BOARD
ENERGY MANAGEMENT INSTITUTE
[1] https://nextgeneration.bg/#modal-one
[2] Opinion of Energy Management Institute on the Draft of the National Recovery and Resilience Plan, 03 Nov 2020.
[3] See e.g. Conclusions of International Conference on The European Green Deal Post COVID-19 and the Bulgarian Energy Transition and How did EC Assess the Bulgarian IECP
[4] Opinion of the Energy Management Institute in the frame of Consultation on a Bulgarian market reform plan, 10 Feb 2021
[5] Position of EMI on the Draft of the Bulgaria’s Energy Strategy, 09 March 2021.
[6] Project H1, page 4, Project implementation timeline, including activities, stages
[7] 2020 Activity Report of the Energy and Water Regulatory Commission, pages 37-38; https://www.dker.bg/uploads/2021/god_doklad_2020.pdf
[8] https://www.state.gov/reports/2021-investment-climate-statements/bulgaria/
