The SEWRC’s three price decisions of 2013 in figures

Early in 2013 numerous data was published, indicating clearly that a financial turmoil had occurred in the energy sector. This assessment was confirmed consistently by all three governments, which ruled the country in 2013:

• “Black hole in the energy sector – severe liquidity crisis in NEK of 2.5 billion BGN” (Delyan Dobrev);
• “We found a system that is nearing financial bankruptcy” (Marin Raykov);
• “Ailing sector – between 0.8 and 1.1 billion BGN is the deficit in the energy system for a year” (Asen Vasilev);
• And at the end the Government of Oresharski dedicates an entire section of its program to the rescue of the Bulgarian energy sector, in which it is found that “The sector is disbalanced” and there is a need of “Overall financial economical rebalancing of the sector”;

This assessment is also shared by several public organizations, representing practically the entire spectrum of energy companies in Bulgaria, which in open letters of June and August warned the institutions about the deepening deficits and the severe consequences for the sector of abrupt and populist actions.

Against this background the three price decisions of the Regulatory Commission on electricity price reduction, as that for the households reached 15.5%, seem paradoxical from the point of view of economic logic and oppressive towards the energy companies.

If the energy sector had been a perpetuum mobile, then it would have worked with an ever lower income and an ever higher quality. However, since it is not the case, against the security and high quality requirements more revenue should be in place. And this should be best understood by the State Energy and Water Regulatory Commission. The Commission’s goal of achieving a balance between the interests of the energy companies and the customers cannot be met by making unbalanced decisions. Otherwise, the financially disarmed energy companies, with no funds for improvement and development of the system, will have difficulties or will not be able to offer a reliable supply. Here’s why:

Eligible (approved), but not calculated in the price costs 

*or the contribution of SEWRC to the global regulatory theory and practices

There are two regulatory aproaches – “post ante”, where the eligible investments are calculated in the prices after they are already made and “ex ante”, where the eligible investments are calculated in the revenue at the beginning of the regulatory period.

With its price decision of August 2013, SEWRC approved 430 million BGN eligible costs of the energy companies, incurred during past periods for the purchase of green energy, but did not include them in the prices. Thus SEWRC contributed to the global regulatory practices.

Impressive in size costs, which cannot be postponed, remained out of the prices as well,  such as the cost of carbon emission allowances, of balancing and of investments. 

RES: two regulatory inaccuracies amounting at 600 million BGN and 20% new tax

In the price decision of August 2013 in the calculations of the revenue required for the purchase of green electricity two inaccuracies were admitted, totaling 600 million BGN. The quantity of electricity generated by RES plant is underestimated first and second, the revenue from CO₂ allowances trade was overestimated, which was dedicated to covering part of the obligations for feed-in-tarrifs support. If we add to that the claims of the RES producers for repayment of the access fees, the deficits in this area reach 1 billion BGN.

In addition, the decision for the 20 percent tax over revenue of the wind and solar electricity producers, added to the money shortage also tangled legal cases, bearing future financial risks with no smaller dimensions.

Revenue taken away: from whom, how much or “All of it to NEK”

With the three price decisions of 2013 the revenue of the electricity sector companies is decreased with a total of 585.6 million BGN, of which 510 million BGN or almost 90% are taken away from the network companies. The seized amount of 585.6 million BGN is utilized approximately equally by two “users” – half of it is granted to NEK and the rest is spent to reduce the prices of the end users.

We added the recapitulation of the end suppliers to these figures, which have long been known to be in dire straits – their losses from sales to households are 180 million BGN on an annual basis and they do not decrease. After the last price decision their buy “exchange rate” is with 18 BGN higher than the sell “exchange rate” for the household customers.

While it appears that producers do not suffer major losses of the revenue taken away, it is noteworthy the situation of “Kozloduy” NPP, which price, applicable from 01 January 2014, falls below 40 BGN/MWh. The SEWRC’s decision is in contrast with the ongoing development of a major investment project for modernization and extension of the lifetime of the Bulgarian sole nuclear plant with at least 20 years, that is intended to be implemented with plant’s own funds. This could not happen given the price levels and the less than 2 percent rate of return, approved by SEWRC. A reasonable regulatory policy involves such important investments to be promptly reflected in prices, so as the plant to be able to implement the project, on the one hand, and not affect stressfully the end user prices, on the other. As an example of reasonable prices let us recall that the low prices, at which energy from the old French nuclear plants is sold, by internal market quota, are approximately 42€/MWh, i.e. – two times higher than those approved by SEWRC for the Bulgarian NPP.

As for the grid, the punitive action by SEWRC is obvious. The surprising reduction of nearly 220 million BGN of the HV grid revenue (from 382 million BGN to 164 million BGN), can be explained in two ways: either unnecessarily into this grid company over 200 million BGN per year were previously poured, or these 220 million BGN were utilized for other “non-grid” purposes.

With regard to the medium and low voltage grid, the consecutive revenue reduction is attributed to nearly double reduction – from 15% to 8% – of the technical losses. This technological revolution is based on an unpublished report, prepared for SEWRC from unknown by now experts.

As a positive step it may be assessed the purchase by ESO of availability by means of public auctions, but the revenue cap, set by SEWRC is such, as it is doubtful whether ESO is able to purchase enough capacity – the company’s revenue is decreased by over 150 million BGN (from 262 million BGN to 109 million BGN). Furthermore, it is alarming that ESO ceased purchasing cold reserve power from the plants, which have signed power purchase agreements (PPAs). The existence of the PPAs with “take or pay” causes implies intensive use as of their energy, as well as their availability, which is paid anyway. If this availability is not bought by ESO in order to provide the security of the system, it will inevitably be paid by the purchaser, namely NEK, pursuant to the PPAs’ terms, thus creating pressure to increase energy prices.

Status – from critical to catastrophic

Is it really a tragedy to take several million BGN from the energy sector? According to the Prime Minister, the energy sector can bear the three price reductions, but not the forth. The figures however show the opposite. It becomes clear from the nine-month reports of the energy companies, as well as from the transcripts of the hearings of state energy companys’ managers in front of the Parliamentary Energy Committee, that the internal debt in the sector, along the production – supply chain, has reached critical levels, creating risks for the supply reliability. Let us recall, that the security of the energy system is equivalent to the security of its weakest point (and there haven’t left any strong ones).

As an example, here is how it looks like the sticky indebtedness situation in only one of the segments, namely NEK, ESO and the plants:

It is not hard to imagine how these hundreds of millions of shortage, owed by NEK and ESO to the plants, spread over to the plants’ suppliers and further – to the entire economy. As to the amount of 214 million BGN, it is due to PPA plants, but it is not clear who is the debtor – NEK or ESO. Similar disputes are already a fact among the companies along the chain, which trying to survive financially pass the “hot potato” in the form of debt where they can.

In conclusion

When the graph below was published, to many it looked unreasonably dramatic. When we look at it now, seven months later, it becomes clear that we confidently follow its upward trend, proving that at the World Bank might have even underestimated our rush to total collapse of the energy sector.