Lachezar Bogdanov: The postponement of investments in power distribution networks hinders the economic development

If the infrastructure does not develop, after revival of the economy, it will not meet the needs of business, says managing partner in Industry Watch

SEWRC said that the tariff of power provided to EDC will be increased only between 1.22 and 1.7 percent on the background of stated need for appreciation of 13.12 percent of CEZ, 14.3 percent of E.ON and 5 percent of EVN. How do you as an economist explain the difference in estimates of the regulator and the companies and what this implies?

- Naturally, each user is satisfied if the tariff of power will be increased by less than expected. The problem is that one needs to think long term - what will happen to the system from generation to supply. News about power tariffs should hold in the media the same place together with information about electric shocks, erratic voltage, power failure in certain resorts. Obviously the security and reliability of supply and quality of service is related to investments that are made in the sector. Of course in short term the system may be driven by inertia, but eventually at some point the grid needs to be updated.



People must understand that in order to receive better service and quality, which must include constant voltage, reliability, are required investments in upgrading the grid. In the longer term development of the Bulgarian economy depends on the realization of new investment projects and expansion of business, whether it comes to tourist attractions, industry or new residential and administrative buildings. These new consumers have to use power, which again means that in infrastructure should be made new investments.



How would you comment on the argument that tariffs should remain low, because people's incomes are low?

- Of course, there is some connection between the incomes of people, businesses and the state of industrial users and the power tariffs . In short term it is always possible any investments to be postponed for a month, three months or at most a year. It is understandable in times of severe crisis larger projects to be postponed, to avoid shock on end users



In Bulgaria at present market conditions and household incomes do not suggest this type of crisis behaviour. If a crisis point in the household budget occurs - for example, both in a family lose their jobs, it is evident that the bath repair will be terminated. But eventually people cannot live permanent without water and pipes, to say, and in this respect at some point the launched repair must be finished. The same is in electricity sector.



It was obvious that in the period 1996-1997 within approximately a quarter in the conditions of severe macroeconomic crisis, tariff increases had to be held at the expense of part of investments. This is logic. When society is extremely poor and business is very bad, hardly a top priority is quality of supply and reliability of services. That’s why I’m saying Bulgaria is not currently in this situation to use a similar argument.



Are there other mechanisms by which, without artificially depressed tariffs, could be helped people who cannot pay and really have a low income? Is this commitment of companies, i.e. do they need to ensure that social protection, or there are other mechanisms?

- It is obvious that energy in Bulgaria continues to be used for various purposes apart of delivering quality services at best tariffs for customers by this sector and, of course, to ensure business opportunity for those who produce the product. Cross-subsidizing is seen almost everywhere. The pricing of generation is quite biased in favor of some companies at the expense of others.



The same is valid for pricing for business users and households. Statistic figures show that in practice business users in some way subsidize households energy. The same happens with the purchase of power from TPPs that have CHP at extremely high tariff. This obviously is done to keep some TPPs financially in good condition. But this is still a hidden subsidy to some TPPs. The whole system is made up and filled with mechanisms for internal subsidies and for manual management.



To ensure the development of energy infrastructure, without dramatically increasing the tariff to end users, is it possible in case of better internal redistribution of the tariff chain to achieve better results?

-What can happen is to be managed better the model for renewable power, i.e. hardly one that worked so far is the best possible in terms of customers. There are other schemes, used in different countries, that, on the one hand, encourage investment in renewable energy, and, on the other – are less burdening. This means on the macro level, the subsidy is less and correspondingly the aid is less, but still the investments are encouraged.



On the other hand, it is not concern of electricity sector to save TPPs which are unable to collect its receivables. If half an Sofia did not pay its heating and "Sofia TPP" operates at a loss and must be subsidized, it is not concern of power consumers in Varna, Bansko or elsewhere. If there are any problems they must be solved, but not to use power tariffs and the value added all over the power chain to seek some hidden way to subsidize an enterprise.



Ultimately what is the effect on the quality and state of power infrastructure in Bulgaria?

- In the last few years to great extent downward pressure on operating maintenance costs or investments has fallen on EDCs. Probably the logic is that none of these investments aren’t urgent and the operations can be optimized. Maybe the companies use the personnel in an ineffective way. We must not forget, however, that years ago they have been huge companies. This means that the entire financial burden of savings falls on the grid, which reaches the final customer. Most probably this will worsen quality of delivery to the inability to implement new investment projects, because there will be no possibility for joining the network.



With the exit of crisis can be expected surge in needs and expectations of business for development of grids and increase of accessions and the need for greater security and quality of supply. In this context is it possible the postponement of investments in power infrastructure to have negative impact on economic development?

-Of course, that may have negative impact. The investments should be made preventive. If you remember 10 years ago there was very heavy debate over whether to build a second terminal of the airport "Sofia". Then many said that there is not enough traffic at that time and it is preferable to wait for increasing of passenger traffic. The same, by the way, is spoken about any pending infrastructure. It became clear that the airport traffic increased and the process of building a new terminal took many years.



So if you do not think in advance about the future, no wonder the need for better grid and greater capacity for accession to raise very sharply. Then you will need to invest and wait for 3-4 years for the grid to be expanded and improved. The effect of time delay have to be foreseen. Now may be there is no urgency, largely because the investment need is depressed, but in few years if the investment interest to Bulgaria increases, there will be no ready capacity to take on this new wave.



There are already signs for some companies that closed their offices in Bulgaria and moved to other countries due to the inability their power parks to join the grid. Is there a danger the underdevelopment of the grid and its poor condition to lead to a decline in investor’s interest in Bulgaria?

- The question should be divided into two parts. Bulgaria offered very generous subsidies to guarantee tariffs for a very long period and extremely high premium for renewables. This incentive for investment was too high compared to the capacity of the Bulgarian economy to pay and secure it. There was a need for change and of certain discouraging, i.e. to shrink this stimulus, so that only the most effective companies that can offer the lowest possible tariff from renewable energy sources to remain in the country.



I do not think that all who are going to build wind farms and solar parks, are eligible for mandatory purchase of energy. Those that are most competitive, should receive a larger subsidy - otherwise it comes out a double squander, because they are building capacity with a subsidy, but it is not used and paid for. All innovations in electricity sector at the same time require the grid to become "smarter." It also costs money and if we do not have money, we are doomed to power generation from 15 capacities of conventional type and it obviously isn’t the future in next decades.



Bulgaria is one of the exceptions in the EU, where in recent years the tariff for industrial consumers rose by a higher rate than the tariff for households. How would you comment this trend?

- This is part of the policy for the use of energy for any other purposes, including social. The fact that unions speak about the tariff of power and heating shows clearly that none of Bulgaria's leading political parties in recent years had the courage to say that the generation and supply of power is business. This is a business and should be governed by the laws of efficiency, quality, etc., and is not an element of social policy. It has to be pursued by incomes, rather than subsidies for various goods and services. This is the modern way in a market economy.

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