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WHAT WILL ELECTRICITY PRICES BE IN THE NEXT 12 MONTHS?

WHAT WILL ELECTRICITY PRICES BE IN THE NEXT 12 MONTHS?

In line with the latest amendments in the Energy Law (promulgated in SG 57, dated 26 June 2020) low-voltage non-household consumers will have to leave the regulated market and conclude contracts with new electricity suppliers by the end of September 2020. This will result in a change in one of the elements in their electricity bills, namely, the price of electricity (so far usually calculated by a fixed daily and night tariffs), which will be subject to a free negotiation. The other elements will not change – these are the prices for access and transmission through the power transmission and power distribution network, and the price of Obligation to Society – regulated and defined by EWRC. And last, one should not lose sight of VAT and excise duty in the final bill.

The link ‘wholesale price – retail price’ of electricity

Retail suppliers/traders of electricity shape their own energy portfolio, ensured by the free market at wholesale prices. Trader portfolios usually consist of futures contracts concluded for energy supply and quantities of electricity purchased on the electricity exchange – day-ahead market and intraday market. Each trader aims to balance quantitative and price risks, and present attractive competitive offers to the respective target customer group by a combination of long-term and short-term products.

Electricity exchange prices, mostly day-ahead market prices, are volatile and react instantly to short-term trends and occasional events. Practice shows that the larger part of energy is secured via bilateral contracts, whereby energy suppliers conclude deals for longer timespans with a view to hedge precisely the risk associated with day-ahead market uncertainty.

It is the quantitative and price characteristics of retailers’ portfolio that will determine the price offers presented to potential customers. And it is the traders‘offers that are of particular interest to the final customers/end-users. To a major extent the wholesale market remains unknown and of no interest to them. However, as far as retail prices are a function of wholesale prices, understanding their specifics and projections may assist end-users in the selection of the most advantageous offer, and will protect them from making an unfortunate choice among appealing yet unrealistic offers.

Expensive – in wintercheap – in spring

Factors exercising a downward pressure on energy prices are the usual ones for any market, namely, reduced demand and/or increased supply. In the case of Bulgaria and the region, this is the situation in the second/third quarter of the year – upturn in hydropower generation upon high water coupled with diminished power demand due higher temperatures. The larger number of sunny days in the transition periods leads to enhanced supply of power generated by solar facilities, which is also a prerequisite for lower prices.

Reversed is the situation in the first and fourth quarters of the year, which are characterised by considerably higher prices due to increased demand of electricity for heating, especially in colder winters. During these months, changes in demand, for instance, even in planned shut-down of basic capacities, leads to unexpectedly high price levels.

Surely, economic activity is of substantial importance. For example, isolation due to COVID-19, respectively, the economic uncertainty and reduced demand, has resulted in unusually low IBEX prices since March. A snapshot of day-ahead market prices looks appealing to consumers who are yet to move from a regulated to a free market. However, it should not be forgotten that it is just a snapshot – a trend of returning to the normal price levels, prior to the isolation, is observed.

What will the wholesale prices be in the next 12 months?

By the end of the year and the first half of next year, European electricity prices will depend, apart from the common factors, on the spread and deepening of COVID-19 pandemic. Some of the forecast scenarios picture a rapid V-shaped recovery of economic markets, which will affect recovery of energy demand in Europe. Other scenarios project slow economic recovery, respectively, a more contracted electricity consumption and tardy price growth.

In Bulgaria, electricity wholesale prices are projected to increase in the next 12 month, based on futures prices in the region. EWRC report on prices contains data on average values of futures deals for the next quarters:

This figure above presents clearly wholesale price movement pattern in the region, described above – higher prices in the fourth and first quarters due to higher demand, and the lowest prices in the second quarter due to shrunk demand and increased supply.

Based on that, EWRC has defined a reference market price of BGN 90/MWh for the period of 01 July 2020 – 30 June 2021.

What about retail pricesWhat will the traders’ price offers be?

Finding themselves in the free market for the first time, low-voltage electricity consumers will most probably prefer price offers that are similar to the ones they have used thus far (under regulated market conditions) – fixed prices (BGN/MWh), which remain unchanged within a longer time period. It should be clear that this type of offers holds high-risk for traders and for that reason they will be relatively more expensive compared to other options.

As for price parameters, it would be good for consumers to use as reference the annual reference price, defined by EWRC and amounting to BGN 90/MWh. If this is the purchase price, the trader will top it up with the costs for negotiation, balance, reporting, invoicing and settling relationships with all downstream counterparts – energy suppliers, network companies and balance group coordinator. It goes without saying that for such an ‘all inclusive’ role, the trader needs to make a well-deserved profit. That is why consumers can expect offers at an annual price higher than BGN 90/MWh since the trader will complement it by the costs and return on investment, including a risk premium. To a certain extent, this will also depend on the specific customer – if customer consumption (load profile) is predictable; if customer business is sustainable; if the customer is realiable and pays the electricity bills regularly – all these will reduce trader’s risk and the additions on top of the wholesale price, and vice versa.

When shorter negotiation periods are chosen, for instance quartely based, consumers should expect high-price offers for the fourth quarter of 2020 and the first quarter of 2021 because of anticipated upturn of wholesale price levels to over BGN 100/MWh within this period and the higher risks of energy shortages. For the second and third quarter, however, price offers cheaper by over BGN 20/MWh can be expected because of wholesale price dropping.

On the other end of the possible price scheme scale reside the active consumers. If the consumer is equipped with a smart electrometer, then the electricity bills can be reduced by an active consumption management, which means that probably the consumer will prefer another type of a price offer based on, for instance, actual hourly prices of IBEX day-ahead market. This choice will redirect the price risk from the trader to the customer and will lead, respectively, to a decrease in retailer premium. In such a situation, however, the customer has to assume the responsibility and risks associated with price volatility and ever-changing electricity bills.

Variations between retailer’s and customer’s responsibility encompass a broad spectrum of possible price schemes and offers. Assuming more risks and responsibilities on the part of the customer requires time for two key prerequisites – smart electrometers and awareness.

The effective weighted average electricity prices for low-voltage non-household consumers until the end of June, ranged between BGN 97/MWh and BGN 107/MWh, depending on the provider. Price projections for the upcoming one-year period, described above, do not give reason to expect substantial price rise upon the free market transition of these consumers.

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