Opinion of the Energy Management Institute in the frame of Consultation on a Bulgarian market reform plan
Following the invitation by the European Commission for public consultation, the Energy Management Institute (EMI) presents its opinion on the draft Implementation Plan, prepared by Bulgaria along the requirements of Article 20 (3) et seq. of Regulation 2019/943 of 5 June 2019 on the internal market for electricity.
Pursuant to Article 20 (3) et seq. of Regulation 2019/943 of EU (The Regulation), some EU Member States would have to draw up a specific road map in application of the principles laid down in the new electricity market model. Such a road map should be able to respond to the social and economic realities in the respective Member State. An Implementation Plan on electricity market reforms should be submitted to the European Commission for opinion. In the context of Regulation’s provisions, an Implementation Plan is preceded by resource adequacy assessment while on the ground of the Plan itself, the Member State may request permission from EC to introduce a capacity mechanism as a measure to resolve residual problems (outside the Plan scope), which prevent from ensuring the necessary level of security of supply/adequacy of electricity system’s generation capacities.
This current opinion is structured in the following sections: general comments; comments on reforms in the wholesale and retail markets, as envisaged in the Implementation Plan; recommendations for further development of the Implementation Plan.
II. GENERAL COMMENTS
As mentioned above, EMI’s opinion is based on the draft Implementation Plan (the Draft) published on EC website. Since this draft does not refer to, nor does it draw on other publicly accessible documents, it has been difficult for us to assess with sufficient thoroughness, the impact of measures on electricity system functioning proposed therein, and respectively, to position it correctly in the overall context of forthcoming development of the national electricity sector in the period 2020-2030.
For clarity sake, we would like to emphasise on several aspects in this context.
First, neither in advance, nor at present the Draft has been offered for public discussion by the responsible Bulgarian national institutions. Stakeholders have been attracted neither directly (by way of working groups), nor indirectly (by way of consultations, discussions, etc.) in the process of devising the Draft. In particular, the majority of measures in the Draft and the respective implementation timelines have not been formulated or further developed in concrete co-operation with market participants.
Second, we do not have at our disposal any information on existing studies of 2020-2030 Resource Adequacy, which is necessary to confirm the need of interventions (by way of capacity mechanisms) to secure the availability needed over time. Probably the outcomes of such studies have been integrated in the Draft; however, adequate in-depth assessment of the latter is also hindered by absence of publicly accessible documents, consultations etc. This respectively leads to lack of clarity and justification on possible scenarios in this context.
Third, it is not clear to what extent the Draft adheres to and/or develops further the policy objectives for the next decade, confirmed in the integrated National Energy and Climate Plan (NECP) by 2030 of Republic of Bulgaria, yet again due to the absence of both data as already pointed out and reference or referral to NECP. This gives rise to a set of questions regarding e.g.:
- the way the economic analysis, contained (probably) in the studies and assessments of resource adequacy, inferring to closure of the large lignite power plants (page 12 of the Draft), is compatible with the long-term continuation of coal capacity operations set forth in NECP;
- what consumption projection for the coming years is used to determine system adequacy (there is no information on energy efficiency);
- how are forecasts and RES electricity share projected and under what incentives for RES investments(there are no data on RES)
Finally, the Draft form and content give rise to doubts about the institutional commitment to the Draft. There is no information on the procedure employed to discuss, adopt and approve the document in a proper manner by the institutions in charge (as is the case with the Implementation Plans of other Member States). It has been drawn up by a consultant and reflects consultant’s understanding rather than any clear commitments on the part of responsible parties. Even more – the responsible parties referred to in Section III of the Document have been erroneously indicated or incomplete in their majority (e.g. the regulatory institution with a leading role in market reforms appears to be a responsible party for only one of the reforms in conjunction with the national TSO – ESO EAD). As mentioned above, there is no connection with the existing government documents, i.e. we may say that this Draft comes out of ‘nothing’.
III. WHOLESALE MARKET (ITEM 1 SUPPLY AND DEMAND IRREGULARITIES ON THE WHOLESALE MARKET)
In order to remedy supply and demand irregularities on the wholesale market, the Draft foresees two reforms (1.1 and 1.2.) as a basis for wholesale market liberalization and as a prerequisite for acceptability of introducing a capacity mechanism, namely:
- Termination of long-term contracts of the National Electricity Company EAD (NEK) with Maritsa East 1 TPP and Maritsa East 3 TPP;
- Removal of existing regulated market quotas and the role of the Public
It is anticipated to have the first measure/reform implemented by 30 June 2021 and the second one – immediately after implementation of item 1.1 with the introduction of a capacity mechanism in parallel.
(1). Implementation of nine out of the ten market reforms as identified in the Draft is projected to occur within short timespans, in the current or next year. The measures are complex and interdependent, which requires particular attention to deploying them properly within such a short time window, i.e. implementation consistency has to be secured to achieve the outcomes desired.
From this perspective, it is absolutely necessary to be more attentive to the need of synchronizing any steps towards termination of long-term contracts and integrating properly them with other market changes identified, mostly with the introduction of a capacity mechanism. This, however, presupposes that one should take due note of the availability and the role of these contracts both from legal and policy perspective. In light of this and of the complexity of the envisaged trade negotiations among the two power plants on the one side and the institutions and NEK on the other, related to contract termination, we recommend replacement of the indicated fixed period of 30 June 2021 (p.43) by a more flexible definition. Such definition should clearly bind the period with finding a mutually agreeable approach for all parties towards the contracts, which will also allow effective and non-disputable introduction of capacity mechanism.
Bringing in capacity mechanisms in parallel with long-term contract terminations will facilitate and simplify, on the one hand, the process of market integration that both power plants need to undergo, while on the other hand, flexible periods allowing room for successful negotiations will contribute to improving investment environment and to reducing political risk. This, however, presupposes clarity on the capacity mechanism, which should be implemented, prior to the termination of the contracts, combined with the needed market reforms, thus allowing adequate maintenance of the energy system as whole.
(2). The Draft treats termination of long-term contracts as a reform aiming to remedy ‘supply and demand irregularities’ in the context of the objective to attain higher wholesale market liquidity. However, this measure should not be expected to suffice when defects in the Bulgarian wholesale electricity market have to be rectified. In 2015, EC defined Bulgarian electricity market as ‘highly illiquid and opaque’. Given the market domination of three BEH (Bulgarian Energy Holding) subsidiaries (Kozloduy NPP, Maritsa East 2 TPP and HPP of NEK), which resulted in a high concentration and limited competition, BEH/its subsidiaries committed to supply gradually increasing quantities of electricity, taking due account of the load profile of the day-ahead market (DAM) at the newly established Independent Bulgarian Energy Exchange (IBEX) and abiding by the rules/restrictions in the determination of offer prices for a five-year period, from January 2016 to January 2021.
The last five years did not witness any changes in the state-owned electricity producers (BEH) neither did the Bulgarian wholesale market as regards substantial alterations in its characteristics noted above. From this stand point, redirecting energy generated by power plant holding long-term contracts, from NEK to IBEX directly will reduce the share of energy supplied by BEH but will not eliminate its dominating market position (share of energy produced by BEH).
That is to say that even after accomplishing this step, conditions for an effective completion in the national electricity market will not be created as yet. This compels the need to assess and answer the question whether interventions are required (by Energy and Water Regulatory Commission / EWRC) and if they are required, what should they be so as to avoid the risk of competition distortion while bearing in mind the approaching deadline of EC decision cited. Certainly, it can be expected that the forthcoming national electricity market coupling with the neighbouring markets (item 2 of Section III) will contribute to creating a relevant market, and hence, a fair competition with no dominant participants. However, the transition period still remains susceptible to the aforementioned risks and doubts.
We agree with the consultant and are aware that Regulation 2019/943 does not stipulate an explicit criterion for an effective prevention of market abuse, which is why it is not mandatory for the Draft to analyse it. But, on the other hand, markets with dominant participants prove to be a barrier for attracting investors. That is why an analysis of the extent to which national wholesale market sets conditions for a fair competition should be part of the Implementation Plan.
(3). As described in the Draft (1.2., Section III), the existing model of the national electricity market is heterogeneous – with a regulated and free (liberalized) segment. Energy for the regulated segment is provided via quantities/quotas determined by the national regulator on annual basis and the respective producers have the obligation to sell the energy to NEK in its capacity as a Public Provider. Accordingly, the latter sells this energy to the End Suppliers and they sell it further to low-voltage consumers of the regulated segment. As noted above, it is planned to remove existing regulated market quotas along with the role of Public Provider immediately after terminating the long-term contracts and in parallel with introducing a capacity mechanism.
This change will have a favourable effect on the wholesale market because energy quantities supplied (and demanded) on IBEX platforms (decentralized bilateral contracts platform, day-ahead market and intraday market) will increase. At the same time, however, the risks this measure might give rise to and the implications thereof have to be accounted for, if they come into being. As indicated in the Draft, Bulgarian wholesale market is still in a relatively early phase of liberalization (IBEX has been operational since 2016). Liberalization is under development and the attached regulatory provisions and practices are yet to be defined. It is difficult to contemplate on how the wholesale market would function under fully liberalized prices, given that in IBEX 5-year history, it has operated under a specific arrangement (commitments of BEH) from 2016 to January 2021, as mentioned earlier.
These circumstances hinder assessments that delineate with a sufficient degree of accuracy future IBEX functioning (demand, supply, price projections). For this reason, we would recommend a stepwise, instead of a parallel, implementation of measures for the wholesale market – to maintain the energy provision arrangement for the regulated segment within a transition/test period until a well-established and efficiently operating wholesale market is set up under the new circumstances (more energy, more participants, with or without restrictions, as noted previously), with no risks for reliability of supply, transparency and price predictability. In other words, we propose a test period during which the quotas will play а buffer-type role against possible market risks associated with prices and quantities. It is reasonable to contrive a gradual reduction in quotas within the transition period (by criteria contingent to the way the market operates). What is important here is to have a transition period equipped with a safeguard mechanism to avoid stress situations that the responsible companies and consumers might be faced with.
IV. RETAIL MARKET
Section III, item 4 of the Draft includes two reforms:
- Liberalization of retail market prices (4.1)
- Definition of the notion of vulnerable consumers and energy poverty, protection of vulnerable consumers (4.2)
A phased transition to a full liberalization of prices (including for households) is planned, which is expected to be finalized by 31 December 2024 but a clear road map and stepwise approach is still missing. Setting up a platform for price offer comparisons is also noted. The platform has been launched.
The need to have a mechanism for protection of vulnerable consumers and for tackling energy poverty has also been indicated in the Draft. With respect to transposing Directive 2019/944 at national level, a commitment has been taken to define criteria for identification of households in energy poverty by 31 December 2021. These criteria will be devised in line with the ones set forth in the Directive: low income, high energy expenditure and poor energy efficiency households. This will enable an assessment of energy-poor households as per Article 3 (3)(d) of Regulation EC 2018/1999 and identify feasible measures to reduce their number. Explicitly emphasized is that at this stage, Bulgaria does not plan to introduce public interventions.
(1). We recommend removal of some inaccuracies in the Draft text, namely: item 4.1. on page 51 to become item 4.2.; to refine responsible parties indicated in column 2 of item 4.1. – to replace Ministry of Energy with EWRC, and of item 4.2. – to add Ministry of Labour and Social Policy. This remark is also of a more general nature and pertains to the entire Draft – the national regulator is missing as an institution all through the Draft and in particular, in Section III where responsible parties for each of the reforms are specified.
(2). The underscored intent of Bulgaria to neither plan, nor introduce public interventions for protecting vulnerable consumers means that the country does not consider requesting derogation under items 1 and 2 of Article 5 of Directive 2019/944, and accordingly, intends to provide protection via a social policy or via options different from public interventions in defining the prices for electricity supply. We support and admire this position.
(3). At the same time, we draw attention to item 1 of the same Article, namely, on the requirement for Member States to undertake adequate actions to guarantee effective competition among suppliers. If the market does not provide for effective competition conditions, it is possible for the national regulator to introduce temporary and targeted price limits until the time such conditions are established. At this stage, it is still early to comment on eventual measures, though a discussion on the matter will most likely be conducted when more specific retail market analyses and plans for retail market liberalization are made.
Apart from the above comments referring to specific elements of the Draft considered, we recommend supplementing the Implementation Plan with some new measures (without being exhaustive) as a prerequisite for a successful and timely introduction of an improved market model, which is capable of attracting the investments needed and renders unnecessary effecting a capacity mechanism.
(1). We want to underline that Section I and Section II of the Draft contain useful recommendations made by the consultant. However, they have not been confirmed nor presented as planned reforms in Section III. Here below we offer a list (non-exhaustive) of some of these recommendations, which we propose the Implementation Plan be supplemented with, namely:
- Introducing smart measuring systems as a key factor to use the demand potential to the benefit of the system (Demand Side Response) and accordingly, to improve flexibility and adequacy of the electricity system and meet energy efficiency requirements. The Draft notes the importance of smart measuring devices and also the need of a cost-benefit analysis as regards smart metering device use, but Section III does not include this measure as a commitment on the part of the State.
- Article 20 (3) of Regulation 2019/943 sets forth a list of issues requiring consideration by Member States upon introducing CRM, with item (e) addressing self-generation, energy storage, demand side measures and energy efficiency by adopting measures to eliminate any identified regulatory distortions. Yet again, these issues are present in the analytical sections of the Draft but are missing as planned reforms in the document.
- Repeal the regulatory intervention, in effect since 2015, for collecting 5% of power producers’ revenues in an Electricity System Security Fund; on the one hand, requirements of Regulation 2019/943 mandate it, and on the other hand, in light of the risk involved in damaging profitability and competitive positions of local producers is mitigated.
(2). We also recommend to supplementing the analytical part of the Implementation Plan as well as the list of reforms with:
- measures/reforms associated with the objectives of efficient use and optimal development of network infrastructure (transmission and distribution network) under the terms of an open market. Deployment of smart measuring devices will create opportunities for the network to be used and managed as effectively as possible. Furthermore, the network has to support and accelerate energy transition towards a decentralized generation, energy storage facilities, and demand As regards network evolution, the extensive approach (building a new network infrastructure) should also be gradually substituted by a more flexible and optimal approach, which makes full use of the potential of the new market design and players. Since network companies are regulated companies, a prerequisite for implementing these changes will be for EWRC to devise a targeted framework, including financial provisions and promotion of well-suited innovations.
- Energy transition in the coming decade will gradually transform the existing networks, turning them into increasingly interdependent and interlinked. Measures aiming towards operational co-operation between ESO and distribution network operators, on the one hand and at distribution level – on the other hand, also should be thought through and included in the Implementation Plan. This will set the foundation for developing digital network architecture capable of ensuring the required more direct connection between consumer behaviour and electricity system functioning as a whole. And once again, we emphasize that a key prerequisite to set in motion such a process will be EWRC vision and active role.
INSTEAD OF CONCLUSION
We would like to draw attention on the Draft missing a comprehensive view on the energy transition in the period 2020-2030. This is also linked to the general necessity of preparing such documents on the ground of clear long-term strategic view for the development of the energy sector in line with clear strategic considerations and relevant roadmaps for their achievement.
On this ground, the measures as included in the Draft, though fragmented and incomplete, give certain perspective of the market changes by 2024 only. It remains unclear what would be the changes post-2024, and respectively, when and how would the Energy Only Market be created given the transitory nature of the capacity mechanism.