There are several issues that are not addressed in the Energy Act or are worrying the market with regard to the upcoming liberalization of the gas market. It is not clear, for example, at what prices the public supplier (Bulgargaz) will sell natural gas to industrial customers from 2020 (excluding the services of public interest). It is unclear what will happen to the existing natural gas supply contracts concluded with the public supplier, for which there will be no fixed price. There are also uncertainties about the natural gas release programme about its conditions and prices. This was stated by the Deputy Chairman of the Bulgarian Gas Association Kiril Temelkov at the conference “Natural gas for clean air and clean energy”, organized by the Bulgarian Association “Natural gas”.
Currently, there is one major gas supplier in the natural gas market in Bulgaria, whether for the customers of the transmission network or the public supplier. Unfortunately, the market structure in Bulgaria in 2019 is still dependent on this one supplier. Each natural gas customer in Bulgaria has a contract with either Bulgargaz or the gas distribution company. On the other hand, the public supplier supplies gas only at exit points. As of this year, it does not deliver to virtual point of sale, ie where trading is taking place and only supplies to end customers. This is how the law and the trading rules and its license are structured, which severely restricts competition from other players, since quantities cannot be exchanged between market participants, including the public provider as a market participant, Temelkov explained.
As he put it, competition is only with end customers at the exit points of the gas transmission network. With regard to the gas distribution network, we still have only a few attempts by small-scale retailers to enter the market, Temelkov explained. According to him, at this stage it is important to first open up the wholesale market, become competitive, and then reach end consumers.
Another characteristic of our market according to him is that there are fixed prices, which are set every quarter by the energy regulator. Because of that we have no competitive basis for pricing. The prices are determined on an administrative basis, which makes it difficult for the consumers their yearly costs for gas. While in other countries participants can monitor gas futures, in Bulgaria we do not have such an opportunity. With the anticipation of the gas exchange and the possibility of trading futures on neighboring exchanges, we will be able to navigate where the gas market goes and make our own estimations.
Market development is also being hampered by existing contracts with the public supplier, according to which there are annual quantities that customers have to accept. If they change their consumption by plus or minus 10%, they are penalized. However, the imposition of sanctions impedes the development of competition on the market and, in particular, the possibility of offering alternative products. The difference of these plus/minus ten percent is the free market. Through contractual restrictions, the free market cannot be opned at the moment, Temelkov noted.
The Vice-President of the Gas Association at the same time stated this year there is already competition in Bulgaria for natural gas sources. Something that has never happened before. This indicates that the market is beginning to develop, he noted. But nevertheless the supply from Russia, which is a traditional supplier through the pipeline gas is expected to provide about 80% of the final consumption in our country. Alternative deliveries from Greece, mainly through the so-called virtual trade flow comes mainly through liquefied natural gas from the Greek (Revituza) terminal, which has provided perhaps more than 15% of final consumption in the country, Temelkov said. The expert also recalled the purchased of natural gas from Bulgargaz after the organized auction which diversified the gas sources of the public service provider. This in practice means that there is already some competition on the Bulgarian market in the sources of natural gas supply.
It is not yet sufficient to substitute the basic supplier, but we already have an enabling market, he said, also hoping for a recent positive change in the supply of gas from Romania. Now, in total, deliveries are about one percent. There are two fields in Romania that are in the process of commercial exploitation and if they are operational in the near future, Romania could become a net exporter of natural gas and, respectively, we will be obtaining another source of gas, Temelkov said. Next, he put the Chiren gas storage facility with active gas of about 550 million cubic meters as a source, of which only 200 million cubic meters of free capacity was released in 2019 due to administrative obstacles. The rest go into the “security of supply” column, the expert explained. According to him, the current exploitation of the gas storage can be changed.
Natural gas is not just a commodity for trading, it is a strategic product, the expert also recalled. He also specified that compressed natural gas is currently transported through pipelines. Then it is compressed. So, in the gas trading, compressed natural gas providers appear as customers of the gas distribution network, otherwise they only provide compression and resale services to end users who are not connected to the gas transmission and gas distribution systems. In the market, traders of compressed natural gas are seen as end customers. In this sense, the market participants are the gas transmission operator, which in addition to the transmission carries out commercial and physical balancing of the network. The public service provider represented by Bulgargaz, end suppliers, consumers and traders. There is no license for natural gas trading in Bulgaria and therefore any person who is connected to the network and has the specific contracts can trade.
In addition to the participants from 2019 in 2020 the new participants include: operator of exchange market that provides a platform for trading, as well as market maker participants and liquidity providers. They provide demand and supply of natural gas in order to provide liquidity on the organized gas market and to form price signals.
The EWRC regulated price for natural gas will only apply to services of public interest, ie. of Bulgargaz gas sales to gas distribution companies and district heating companies. All other participants will buy gas at the wholesale market. In this context, the function of the public supplier is changing and it already includes three more functions – gas trader; market participant and liquidity provider, Temelkov explained.
In this context, a gas release programme is also foreseen. The public supplier is obliged to offer certain volumes of natural gas through the exchange. All transactions at freely negotiated prices, which last up to 1 year, will be executed on the organized gas market. He explained part of the volumes of the gas release programm, if not utilized, then will be offered for export. In particular, the expert stated that in order to obtain liquidity all transactions concluded between counterparties in Bulgaria are made on an organized gas market.
Concerns are what will be the prices of the public provider for selling to the end customers in 2020. It is not yet clear, Kirill Temelkov said. He questioned what would happen to the existing natural gas supply contracts concluded with the public supplier, for which there would be no fixed price. True, there is no price, but you have an obligation to buy from the public supplier and this is a little confusing, because the customers will not know the price. This will also need to be clarified, otherwise the market will not be able to react adequately.
It is also important to what extent the Gas Release Program will provide adequate quantities on the Bulgarian market, and under what conditions and prices. For this year it is clear we have contracts and quantities for release. For 2021 we will have no obligations under these contracts to end customers, on the other hand Bulgargaz will have no obligation to provide these quantities, because the gas release programme covers only 10 percent consumption and the end customers who are obliged to purchase directly from the exchange constitute more than 50%. This means that there are about 30% that are not regulated and the public supplier should provide these quantities to the market.
Another question that arises is how non-network end customers will make transaction on the gas exchange market. According to Temelkov, it is important to find the answer to the question under what conditions the natural gas will be paid by consumers who have consumed gas without a contract with the public supplier or other network user. One of the biggest issues that remains is the lack of supplier of last resort.