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Home NewsAnalysisEventsIvanka Dilovska: Part of the Green Deal introduces a fundamentally new idea – a carbon tax at the borders of EU

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Ivanka Dilovska: Part of the Green Deal introduces a fundamentally new idea – a carbon tax at the borders of EU

Ivanka Dilovska: Part of the Green Deal introduces a fundamentally new idea – a carbon tax at the borders of EU

Interesting times lie ahead. New ideas need to be adopted but it might be harder to let go of the old onesOften domestic debates on power industry look like the fuss stirred by people who got on the wrong train

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07-02-2020 

Ms Dilovska, a number of significant topics in the energy sector will highlight this year. Some refer to delayed reforms in the sector, others – to the Green Deal. How do these two aspects correlate and what can we expect?

Comparing the 2020 national objectives laid down in the Energy Strategy with the achieved thus far, we will establish a delay in several important strands. For instance, one of the failed objectives is the 30% gasification of households. Current data indicate less than 5% of households use natural gas for heating and hot water while the share of heating based on wood, coal and any other ‘biomass’ source burnt in the most inefficient devices, does not decrease.

Another failed objective refers to stabilising and developing the central heating sector. Heating energy in the energy balance diminishes. No financial assistance is provided to modernise heating networks that aim to lower losses and interruptions. The current discourse on central heating runs mostly in light of waste incineration suspicions. So it can be concluded, that the gasification objective is successfully replaced by ‘wastification’ heating.

On the other hand, the European Green Deal package puts on the discussion table even more ambitious objectives for clean energy and economy by 2021-2030. This is where we come to the issue of Member States’ uneven progress and, respectively, the different starting points in the dawn of the new decade. If a Member State has develop sustainable mechanisms to move in the right direction, then upgrading to meet new 2030 and 2050 objectives albeit higher than the discussed so far, would proceed smoothly and probably successfullyHowever, for Member States in delay such a focused effort would hardly be sufficient. They need catching up on the 2020 objectives and change fundamentally obsolete mechanisms and measures proven to be inefficient.

Interesting times lie ahead. New ideas need to be adopted but it might be harder to let go of the old ones. Domestic debates on power industry look like the fuss stirred by people who got on the wrong train.

Electricity market consumers are most anxious about liberalisation next phaseThere is talk about several ideas. In your view, what would be the most successful model?

Actually, a single approach is under discussion and this is household electricity prices to be liberalised in a stepwise manner. You probably recall that such an approach was first proposed by the World Bank in 2015 when the Bank was implementing a BEH funded project on energy sector financial stabilisation and market reform.

A stepwise liberalisation means that suppliers (CEZ, EVN and EnergoPro) must purchase a portion of the energy necessary for households from the electricity exchange at free market prices rather than at regulated prices (from NEC). The quantity of electricity to be purchased from the electricity exchange will increase annually to reach 100%. Then NEC will finally loose its function as a public supplier. The concept is crystal clear. What remains to be clarified is process duration, i.e. whether transition to full liberalisation will take 3, 4 or more years. It would be wise to avoid setting a fixed duration in advance and give EWRC some room of flexibility to accommodate appropriate decisions depending on outcomes. Let us not forget the wholesale market problems such as high concentration, non-integration with European electricity exchanges, and the forthcoming introduction of capacity mechanisms. All these need to be resolved in parallel. There is no way for a faulty wholesale market to render a successful retail market.

What will change for low-voltage network consumers, both household and non-household customers?

There will be no obligation for households to switch suppliers. However, electricity bills will be slightly different: along with quantities to be paid per day/night tariffs, a new line will appear indicating quantities in kWh to be paid at free market prices. This last figure will grow stepwise.

As for non-household clients, currently they have the option of choosing between the free and the regulated market. It will probably be made mandatory for them to leave the regulated market while allowing them sufficient time to prepare and make an appropriate decision on a new supplier.

The next liberalisation stage entails new amendments to the Energy Law and a roadmapIs there any apprehension among EDCs, the public supplier and all downstream companies in view of the regulatory timelines?

The apparent answer is yes. Apprehension is the highest among those directly affected, the electricity distribution companies (EDC). Assuming that retail market liberalisation is intended to start at the beginning of July, we are faced with a serious delay from the perspective of legislative, organisational and technological changes. We are also in delay with respect of making the general public aware of the forthcoming arrangements. The purpose of this transition is to develop free market awareness and trust among households so that in 4-5 years’ time they can choose to switch from traditional to new suppliers instead of being forced to do so by a regulation.

According to preliminary information, the last version stipulates for energy vulnerable customers to remain in the regulated market.  Does such a model pose risks and if so, what do they entail?

Any use of prices as a social leverage bears risks. The best option is to secure social protection via social policy. Nonetheless, as a transitional mechanism, this model is feasible, and is in line with European understanding and practices. However, to make it work, the state has to develop tools to identify energy vulnerable customers and determine their number in a sustainable manner within a specific period of time to facilitate end providers billing such customers at regulated prices for the respective regulatory period.

Yet, this implies unnecessary and complicated administration of social protection. Practice shows that eventual misunderstandings and delays in communication among institutions result in customer rage and discontent poured over electricity supplier.

It goes without saying that electricity market liberalisation option is associated also with capacity mechanisms. At this stage, however, the general public is unaware of either the mechanism type to be applied to TPPs or the public supplier role. Is our country in delay? If capacity mechanism validity is for 5 years only, what should the next steps be?

Let us once again consider the main elements. The need for capacity mechanisms has emerged because of defects in the European market model that, figuratively speaking, shuts down necessary and viable conventional power stations. These mechanisms come into play when a Member State proves that without payments for power station capacity, problems with security of supply will arise.  For this very reason, capacity mechanisms are springing up in multiples in the European states.

Capacity mechanisms are well-known in Bulgaria. Examples are payments for cold reserve and for capacity availability of power stations with long-term contracts. The issue here is to devise an overall mechanism that can guarantee security of supply, and be approved by EC.

The topic is incessantly contemplated in forums, presentations and interviews, and this has been going on for two years now. In contrast, however, information coming from institutions is rather scarce. That is why my outline of the next steps will be only theoretical. The deadline of capacity mechanisms applicability to coal-fired power plants that are of major national concern and worry is 1 July 2025. Within this timeline an electricity market model has to be improved in order to gain trust and become attractive to investors. It has to set financial conditions for not only robust operations of existing power plants but building new ones as well. This means significantly higher prices.

Ms Dilovska, the European Commission announced its initial intentions on the so-called Green Deal. How distant is our country from this Green Deal and what reforms will the sector require?

Looking at the presentation of the Ministry of Energy regarding the draft of the National Energy and Climate Plan delivered before the Parliamentary Committees on Energy and on Environment in December 2019, we can get the picture of the prospects for Green Deal implementation in the country. By 2030, about 2000 MWh or half of the coal-fired power plants will be closed down and will be replaced by 600 MWh from natural gas and 2000 MWh from new photovoltaicsBy 2045 coal-fired power plants will generate less than 1000 MWh. Wind energy will produce new 2000 MWh and nuclear energy – 2000 MWh. In brief, this is a brand new national energy landscape.

With respect to energy efficiency, by 2030, energy savings will have to double against 2020 objective. Obviously, this will reduce emissions radically and will support attaining climate objectives. Since the National Plan has been prepared in view of more modest objectives, before Green Deal announcement, it can be expected that a more ambitious National Plan draft will be drawn up. However, the guideline will persist.

Yet, these are abstract figures. More important are the measures to achieve them. As of today, measures still remain unknown. For instance, about coal industry regions: what will be the timeline of coal-fired power plants close-downWhich ones, how many workers and families will be affected? What transition is planned for them? How is the transition going to be financed?

These are questions of public interest and everyone will seek their own answers. So far, no answers are available.

Moreover, the phraseology used speaks of the opposite. Both the government and the National Assembly talk about maintaining the future of coal-fired power plants rather than closing them down, as it has been laid down in the National Energy and Climate Plan. In addition, there are three completely different approaches revealed in the institutional and public narrative regarding these power stations: ‘save’ the state-owned TPP; ‘terminate’ the non-state-owned ‘American’ TPP; and ‘turn a blind eye on the non-state-owned non-American TPPs’.

Well, expectations come down to having the National Plan published so that a spotlight is thrown on the specific intentions. Without information about the transition views set out in this Plan and its links to territorial plans evolving subsequently from it, the country will not be able to defend and receive financing from the Fund and the mechanisms designated to a just transition. As a matter of fact, a regulation about the latter is under discussion.

What do you expect to see as ‘a must-have’ in the Energy Strategy? It is supposed to be submitted to the National Assembly for discussion and adoption this year.

First, in parallel with the Energy Strategy, we need to see also the National Energy and Climate Plan, along with the territorial plans about coal mining regions. These three documents should be perceived as an indissoluble and complementary single entity.

Second, in my view, the Energy Strategy should contain three different strategies: first, a strategy for a short-term transition by 2025 that could provisionally be called strategy for security of supply; second, a 2030 strategy aiming to set better market environment and lay the foundation for a cleaner and more modern power industry; and third, a 2050 strategy outlining a completely different national energy landscape.

I expect to have more electricity grid. Though remaining invisible to politicians, the grid constitutes the backbone of the future energy landscape. A survey of the Energy Management Institute shows that over the last decade Bulgarian network prices have dropped by 26% against the background of multibillion investments made in distribution networks. Such investments have been a mandatory condition for a low-carbon transition in other EU Member States. Here again, we have some catching up to do because we pay only for maintaining viable last-century networks, and we do it by inertia. Since we are about to entrust companies involved with more complex and more numerous tasks in the transition period towards the energy of the future, we need to tell them, loud and clear, how much this will cost and how it is going to be financed.

And last but not least, I expect to see realistic programmes about heating modernisation.

Nonetheless, regardless of how smooth the narrative in the Strategy is or how well designed it is, I doubt that anyone will be moved by its virtues. Misalignment between words and deeds, and often between words and words, has become a mundane reality.

How should the Bulgarian energy sector develop in the next five years in order to facilitate achieving 2030 and 2050 EC objectives?

Proactive participation in the Green Deal package efforts is of crucial importance. It is not only because of the forthcoming transformation of objectives into pragmatic mechanisms and their distribution among Member States. It is because of the principal issue demanding solution and that is how to achieve objectives set without affecting economic growth and well-being of European citizens.

You have heard about the so-called ‘carbon leakages’. This coinage denotes the danger of European industries moving away from EU to avoid direct and indirect (via electricity prices) emission payments. Currently, the danger is tackled by relieving European energy-intensive industries from payments for RES, co-generation, capacity, etc. Each country applies its own national policies to support the industry but in turn the approach gives rise to discontent from unequal treatment and distortion of competition among industrial enterprises within the Union.

For instance, in applying this approach, Germany has ended up with a paradox of having one of the highest and one of the lowest industrial electricity prices in the world. The highest is for non-relieved enterprises, mainly small and medium-sized, paying the full amount of add-ons for environmental policies, and the lowest – for the big energy-intensive industry. In Bulgaria, industry has been increasingly enjoying similar state support over the years.

However, this approach will hardly be sufficient to meet the great ambitions of the Green Deal. Part of the Green Deal introduces a fundamentally new idea and that is the carbon tax at the borders of EU. This tax serves the same purpose – to protect European industry and energy sector position, currently burdened by CO2 emission costs. None-European states do not have to worry about such costs. The new notion is of particular importance for countries like Bulgaria as an EU external border. Just as an example, carbon tax relates to electricity trading and to big domestic energy-intensive industry. How will this idea be put into practice and will it be in a manner suitable to Bulgaria? Well, this will depend also on the proactive position of Bulgarian government, EMPs and non-governmental sector.

The word ‘transition’ will be the hallmark of the next five years. We are yet to witness whether the transition will be a success or not, and whether it will proceed in the right direction

Ivanka Dilovska is a Member of the Management Board of the Energy Management Institute (EMI).

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