Is the energy market wrong and why is liberalization still impossible in Bulgaria?

Political talk, implemented and in a corresponding mechanism, distorted the measures to compensate businesses for high electricity prices. This was the conclusion reached by the participants in the energy conference on the topic "Market and Regulations".

The design for possible compensation for consumers for high electricity prices should be simple and have minimal distortion of market relations, and not, as is the case now - with a price ceiling that distorts them. This is how the chief economist of the Energy Management Institute Kaloyan Staykov briefly summarized the opinions of the participants in the discussion. Moreover, in the panel, which discussed the options in terms of the current situation with high electricity prices, the opinion was clearly expressed that our country is not ready for liberalization of the household consumer market. One of the main reasons - the lack of smart electricity meters.

The process with high electricity prices is a consequence of a mistaken energy market. This is how the former Minister of Energy Rumen Radev briefly assessed the situation, putting on one side the current energy connectivity, which is at a different level in Eastern and Western Europe, but with the same claims for a free market and criteria for distribution and pricing, but with dominant national support mechanisms to preserve the ability and competitiveness of its economy. "We doomed a newly formed single market to failure from the very beginning," he said. From this perspective, he recalled the various measures implemented over the years to compensate businesses in Bulgaria, recalling the EU's temporary framework after Covid. "But there is one detail, we are still reaching some deformation, distortion. This is a basic thesis that I have defended," said Radev.

He was categorical that after the first hint of compensation with 200 leva/MWh, everything has entered "the stream of political discourse and as of July we have a threshold of 180 leva with one option - everything that is above 180 leva for non-household consumers is compensated. This will affect the FSES and should raise the question of alternatives," he was categorical. According to him, compensation should be a subsequent process.

"In Europe, we have generally got the electricity system wrong. I say this responsibly," Rumen Radev pointed out.

"In order to move in the direction of improvement, we must move in an extremely electro-intensive energy connectivity. Thank God we have taken steps in this direction in the country (the decision to modernize 110 and 400 kilovolts). This must also happen at the level of all member states," he added. According to him, otherwise, no benefit can be derived from the flows along the so-called energy corridors at all. "This also implies a different philosophy on the part of ENTSO-E and the work of the system operators."

"We also need a serious backbone of baseload energy, which is extremely emission-free. Not coal. Nuclear energy is one of these pillars, but each member state must derive the best conditions that it implies," the former energy minister added.

The Director of the Electricity and Heat Energy Directorate at KEWR Plamen Mladenovski agreed with what Rumen Radev said regarding the connectivity of our region with Western Europe. This, in his words, is among the reasons, "which is why we sometimes fall into so-called regional crises".

Mladenovski expressed a positive attitude towards compensations due to the energy crisis, but reminded that they are "only a short-term instrument".

"In the long term, the solution is to improve connectivity", he was categorical. The director of the EWRC reminded that the reason, including for the current "beginnings of a regional crisis", is the transformation of energy - switching to more and more solar power plants, achieving peak consumption levels that cannot be covered by conventional power plants.

"The reason for this crisis is, in addition to the lack of flexibility and limited connectivity. If there were no limited connectivity, we would not receive energy from Western Europe and there would not be such a difference in prices between Western and Eastern Europe and, accordingly, compensation". According to him, compensation is seen as a short-term instrument in the long term and great care must be taken with the design of the support scheme. However, despite being short-term, "compensations are also a very powerful tool," Mladenovski pointed out, reminding that they are often used for populism by MPs. As an example, he also gave the current compensation businesses scheme for high electricity prices.

"Only the compensation threshold is lowered, but the principle is followed - everything above this amount is compensated. This is a principle because of which there are consequences from the compensations. I give an example, the electricity market is practically closed in Bulgaria. We do not have traders who make products that offer different contracts, different conditions. The market is limited to "Borsa Plus" contracts, the director of "Electricity and Heat Energy" at EWRC was categorical.

"Moreover, this measure is completely incompatible with European legislation. The directive states that if a compensation mechanism is adopted in a regional crisis, it should be compensated for no more than 80% of the energy consumed, which was the original idea of ​​the design of the compensations during the energy crisis. And in addition, the scheme itself should contain incentives for reducing consumption," explained Plamen Mladenovski.

In response to a question from the moderator in the person of Kaloyan Staykov about what the framework, the design of the compensations should be, the expert from the energy regulator used the maxim - "The devil is always in the details".

As for the liberalization of household consumers, he was categorical that we are not ready.

"We are not yet ready for real liberalization as a real measure. What do we need? We need real digitalization of the networks, installation of so-called smart meters, so that each of these compensation measures can be combined. That is, even the household consumer, any consumer, should be compensated only if he has reduced his consumption. The energy system helps, but you also help the energy system. By reducing your consumption during peak hours, when the system is choking. In this way, the energy transition is also supported and we will not observe incidents," said Mladenovski.

Former Energy Minister Rumen Radev expressed some disagreement, stating that business also helps. As a future model for business, he advocated the model of the North American market

"In terms of potential measures, the fact that there were compensations for this period of time meant that Bulgaria suffered minimal damage. This allowed the Bulgarian industry to overcome this period of time. The question is whether it is not becoming lazy. One of the things that is being proposed is a swap model, by analogy with the Italians," Radev pointed out, outlining the relevant benefits.

"Will there be compensations or not? The devil is in the design of the schemes that have predictability for this," concluded Plamen Mladenovski. He reminded that the negative experience of years ago, when it was decided every month what the price would be, showed that the expected effect of reducing inflation was not achieved.

"Potential compensations are voted on by the National Assembly and create conflict between the relevant institutions. And it is understandable that there should be clarity, and the design should be clear, simple and have minimal distortion for market relations, not like now with a price ceiling that destroys them,” concluded Kaloyan Staykov, Chief Economist at the Energy Management Institute.