COLUMN-Bulgaria is a warning on regulated power markets: Wynn
(The author is a Reuters market analyst. The views expressed are his own.)
LONDON, Feb 26 (Reuters) - Bulgarian street protests over electricity prices illustrate the problems with a regulated approach where several European countries are preparing to step back from fully liberalised markets.
Protesters have complained about a lack of transparency in the way Bulgarian power prices have been set, questioning the logic of stinging rises in household electricity prices as coal costs fall but power companies try to pay themselves more.
The European Commission last November reported that both Bulgaria's electricity and gas markets ranked in the bottom two across the EU for trust and overall satisfaction.
Bulgaria may also be rewarding solar power too generously, a problem where many European countries have intervened too open-handedly and where Germany, for example, is struggling to shield consumers from spiralling costs.
Foremost, however, the Bulgarian protests are a warning against regulated power markets where bilateral, negotiated tariffs for fossil fuel power appear poor value for money.
Three of the country's four large coal-fired power plants are presently earning more than their counterparts in power sales on liberalised wholesale power markets in Scandinavia and central Europe.
Britain, Germany and other EU countries are considering introducing a planning mechanism where they would set future generating capacity through auctions or bilateral negotiations with utilities, in a partial break with liberalised markets.
Such central planning is intended to overcome concerns over capacity shortages and blackouts, but runs the risk of actual or perceived over-compensation of power generators.
Chart 3: http://goo.gl/d3NRH
Bulgaria's regulator, the Bulgarian National Regulatory Authority, the State Energy and Water Regulatory Commission (SEWRC), last July approved hikes in consumer bills of 9.84 percent to 10.84 percent. (Chart 1)
That sparked a violent reaction only in the past few weeks as temperatures fell and power consumption rose.
The regulator last week said it was now exploring options to cut national residential power bills from March and would revoke the Bulgarian licence of Prague-based Cez, one of four electricity suppliers.
Bulgaria has a highly regulated power market where generators have to negotiate directly with the regulator over the tariff they receive, or else engage in long-term contracts with the transmission operator Natsionalna Elektricheska Kompania (NEK).
The fully state-owned power firm Bulgarian Energy Holding appears to have excessive control, owning most of the country's power generation assets as well as its only electricity transmission operator NEK.
The European Commission has also expressed concerns over the independence of the regulator.
"Its budget is insufficient to cover oversight of all the sectors it is responsible for and there are concerns about the stability of its management. The government has intervened in regulatory and management matters," it said in a report on EU energy markets last November.
The country has no power exchange, one of just six such countries in the EU as of 2011, and it has some of the lowest electricity imports in the EU, at just 3.1 percent of consumption in 2010, despite bordering five countries.
The result seems bad value for money.
In the latest round of price agreements approved last July, three out of four of Bulgaria's main coal-fired power plants were awarded more than 84 leva ($56.53) per megawatt hour (MWh). (Chart 2)
That is more than power plants are earning at present on wholesale markets in far wealthier European countries, where the benchmark German year-ahead contract, for example, was trading at 42.4 euros ($55.81) on Monday, and year-ahead Nordic power was 36.9 euros ($48.57).
Bulgaria's three main hydropower producers were awarded far more, at more than 100 leva ($67.57) per MWh.
Bulgaria still has the lowest retail power prices in Europe, reflecting exceptionally low network costs, taxes and charges.
Tariffs are agreed between the regulator and individual power plant in a negotiation where inevitably there is an information asymmetry between the private sector operator and government bureaucrats.
That could be a warning for countries embarking on similar negotiations, where Britain is in negotiations with French utility EDF for a long-term tariff for nuclear power, and with power plants to fit carbon capture and storage.
In one Bulgarian example, ContourGlobal, the U.S. owners of the 908 megawatt Maritsa 3 coal plant, last year demanded a massive increase in its regulated tariff to 123.5 leva per MWh from 69.5 leva the previous year, shortly after acquiring the power plant.
The Bulgarian state regulator accepted higher charges to reflect the company's investment in sulphur scrubbing technology.
But it complained that a projected 17 percent hike in fixed costs in part reflected an "unjustifiable increase in salaries, insurance, maintenance and rent", while an expected increase in variable costs it concluded was partly founded on an unreasonable projection of coal prices.
The regulator eventually awarded 84.1 leva per MWh.
Like most other European countries, the Bulgarian government also intervenes to subsidise renewable energy.
That is passed on to consumers through a green energy charge of 0.011 leva per kilowatt hour, or about 7 percent of residential bills.
Given Bulgaria is already near its mandatory 2020 renewable energy target, it seems unnecessary to offer generous subsidies.
Nevertheless, under the latest pricing round last July, consumers ultimately pay for a solar tariff worth 0.4 leva ($0.27) per kWh for smaller roof-top installations. (see Chart 2 above)
That is more than Germany's corresponding tariff of 0.18 euros ($0.24).
It makes no sense for Bulgaria to support solar more than Germany, when it has about a third more sun at around 1,400 kilowatt hours per square metre annually. (See Chart 3)
There is no escaping higher bills to pay for upgrading ageing assets, as Bulgarian energy companies are doing, but the country has options to limit such hikes where the first priorities might be to establish a power exchange and enable greater electricity imports from its neighbours. ($1 = 1.4801 Bulgarian levs) ($1 = 0.7567 euros)
(Editing by Keiron Henderson)