On the price chain -part 5/ How much does the electricity from the first private TPP in Bulgaria cost?

ON THE PRICE CHAIN: Power Generation

How much does the electricity from the first private TPP in Bulgaria cost?

General Information

ContourGlobal Maritsa East 3 (or shortly Maritsa East 3) is one of the power plants in Maritza East Energy Complex, burning lignite local from the pits of “Maritza East Mines”.

The power plant is located 250 km from Sofia, and 60 km from the Turkish border. It is connected to the Bulgarian and Turkish power grids through 400 kV substations.

In the period 1978 – 1981, the plant with an initial installed capacity of 840 MW provided by four 210 MW Russian-built generating units, was connected to the electricity grid and commissioned.

In 2001 a Joint Venture was created between NEK (minority shareholder) and Entergy Corporation, lately replaced by the Italian Enel. The private investors took a majority share of Maritsa East 3 and took obligation to invest substantial funds for the modernization of the plant also in compliance with the EU environmental requirements. A long-term (fifteen-year) power purchase agreement (PPA) was concluded between the power plant (Seller) and NEK (Buyer).

In the beginning of 2013, with a decision of State Energy and Water Regulatory Commission (SEWRC), prices were endorsed in accordance with the clauses and formulas of the PPA and thus it entered effectively into force.

A large-scale modernization completed in 2009, which boosted electricity output to the current 908 MW. The plant became the first Bulgarian power producer fully compliant with European environmental standards.

ContourGlobal bought the majority share of the power plant from Enel in the Joint Venture Company with NEK in 2011.

Installed capacity and generation

As it was mentioned above, the plant had an installed capacity of 840 MW, provided by four 210 MW Russian-built generating units. The output boosted considerably to the current 908 MW after large-scale modernization, completed in 2009.

For the period July 2011 – June 2012 (source: SEWRC, according to Decision No TE-020/29.06.11) Maritsa East 3 TPP would generate 7,5 million MWh. According to the SEWRC decision the power necessary for plant’s own needs is 12.65 % or 0.95 million MWh. Therefore the power plant would have the opportunity to sell (the total availability minus the availability covering its own needs) 6.55 million MWh. Part of the availability, namely 1.03 million MWh would be purchased by Electricity System Operator (ESO) for cold reserve, necessary to maintain the system reliability. Likewise ESO would purchase another 0.58 million MWh for ancillary services. The remaining capacity would be used for generation, which is planned to reach 4.94 million MWh. This quantity corresponds to 13% of the planned total net generation in the country with a volume of 37.9 million MWh and would be entirely purchased by NEK – Public Provider.

Power Purchase Agreement

According to the signed PPA the plant sells electricity at two component fixed price. The contracted fixed prices for energy cover the variable generation costs and the capacity prices cover the fixed costs of the plant plus a certain return on equity.

The initially contracted capacity&energy prices are periodically updated according to price escalation formulas, which are also an element of the agreement. The energy component is amended mostly under the influence of the prices of the utilized fuel and the availability component reflects external, mainly inflation and currency factors.

The plant burns lignite coal from “Maritza East Mines”. According to the Energy Law, the prices of coal are not subject to regulation but anyhow SEWRC assesses whether the requests for price raising of local coal are justified, taking into account the foreign markets price formation.

Prices, revenue, financial results

The up to date public information on the prices at which NEK – Public Provider buys energy and capacity from Maritsa East 3 TPP could be found in the SEWRC 2010 report. They are as follows:

· Energy price – 36.21 BGN/MWh and

· Capacity price – 46.14 BGN/MWh.

If we make a comparison with the other plants in the Maritza East Power Complex, we will find out that Maritsa East 3 is in the golden mean – with capacity prices higher than Maritza East 2, but below Maritza East 1. And it is reasonable – a new power plant is always more expensive than a similar old one and an entirely modernized plant is more expensive from a partially modernized one.

Taking into account these prices and the a.m. quantities of energy and levels of availability, which will be sold to NEK – Public Provider and to ESO, the following revenue of Maritsa East 3 TPP for the analyzed one year period could be calculated:

73.8 million BGN revenue from ESO, as a result from the sales of 1.6 million MWh capacity at a price of 46.14 BGN/MWh
227.9 million BGN revenue from NEK Power Provider as a result from the sales of 4.94 million MWh capacity at a price of 46.14 BGN/MWh
178.9 million BGN revenue from NEK Power Provider as a result from the sales of 4.94 million MWh electricity at a price of 36.12 BGN/MWh

or a total of 480.6 million BGN revenue from the sales to ESO and NEK at fixed prices, in accordance with the long-term agreement.

The financial results of the plant (earnings before taxes) for 2009 and 2010 are respectively 96 million BGN and 93.7 million BGN.

Prospects

In the beginning of 2013 the price of the electricity generated by TPPs will rise because of the introduction of the new European emissions trading scheme. It requires the polluter, in our case Maritsa East 3 TPP, to buy allowances for all emitted greenhouse gases from especially organized auctions. With an emission factor of the plant of 1.1 tons of CO₂/MWh and a price of 15 euro/ton of the CO₂, the price will rise with 32 BGN/MWh.

The obligations for payment of the emissions undermine significantly the competitive positions of the lignite power plants, compared to the existing zero emissions nuclear plants. They could compete successfully against them only if the following conditions are present:

Intensive capacity utilization

Low prices of the local lignite coal
Relatively low prices of the CO₂ allowances
Successful introduction of new technologies for CO₂capture and storage/use

Taking into account the long-term Power Purchase Agreement, for the period it is in effect till 2017, the prices, the emissions trading and the competition issues will mainly challenge the buyer.

According to the ESO’s Plan for the transmission network development till 2020 the available capacity and the generation respectively of Maritsa East 3 TPP, is expected to decrease sharply in the next years – from 6 million MWh in 2010 to 1.8 million MWh in 2013 and to 1.2 million MWh in 2020. The difficult decisions concerning if, when and what kind of replacement capacity will emerge instead of the existing units at the end of their operational lifetime, are to be taken by the owners of Maritsa East 3 TPP – ContourGlobal.