The article is published in the June issue of Utilities magazine.
The forecasts from the middle of last year for stabilization of the electricity and natural gas markets in the spring of 2022 did not come true. On the contrary, driven by the same factors as in 2021 and fueled by the war in Ukraine, electricity prices have reached new heights. March was the most expensive month since the start of the energy exchange, with the average price reaching 488 BGN / MWh. Medium-term forecasts are also not optimistic. Electricity futures until the end of the year and those for 2023 are traded at levels above 450 BGN / MWh. The long-term supply contracts concluded on the Bulgarian power exchange over the next 3 to 6 months are at similar levels. It seems that the high prices not only of electricity, but also of natural gas, will remain longer than initially expected. This market reality has to be considered by both traders and business consumers not only in Bulgaria but also in the countries of the European Union. On contrary in Bulgaria household consumers are protected from rising prices, as they are supplied at regulated tariffs, which are about 3 times lower than the current market prices.
New measures are expected from the government to address the market situation. Compensations for businesses consumers due to high electricity prices are likely to become permanent. The profits of state and private companies in the energy sector will contribute to financing such measures. A further change in the premium scheme for existing renewable plans is expected to ensure that they receive neither higher nor lower revenues compared to their preferential (feed-in tariff) prices.
Against this background, in the last 3 months after the changes in the organization of the balancing groups, are observed some anomalies in the balancing market. For example, lower balancing energy prices compared to spot prices in February, March and April. The balancing market and balancing prices should, in principle, have a ‘punitive’ and dissuasive effect, i.e. higher than the market ones, which encourages participants to forecast correctly and not to be in imbalance. It should happen in theory, but in practice in the last 3 months in 75% of the time the price for deficit was lower than the spot price. This means it is more profitable for traders to be out of balance and to buy electricity from the balancing market instead on the exchange. In addition to the risks imposed to the electricity system by such a price mismatch, a situation arises in which the prices of Suppliers of Last Resort (SoLR) are with a discount compared to those of regular suppliers.
Figure 1. Histogram illustrating the number of hours in which the deficit price is lower than the spot price within the last 3 months (February, March, April)
* on the abscissa are marked the price intervals showing the difference between the deficit price and the spot price. For example, the difference in the price range [-115 BGN / MWh; 0 BGN / MWh] occurs most often in 617 of the hours. The differences in 6 of the hours exceed 576 BGN / MWh, which means that in those hours the price of balancing energy is 576 BGN / MWh lower than the spot.
SoLRs, as the name suggests, are a “back-up” suppliers that must provide electricity to consumers in extreme cases. They should supply electricity to customers who have not selected another supplier or the selected supplier does not deliver for reasons beyond the customer’s control (e.g. due to the supplier declaring bankruptcy or being liquidated, license revoked or otherwise). Therefore, the price of SoLR should be the highest compared to other suppliers (traders) on the free market in order to encourage customers to quickly choose a new supplier with better conditions.
In Bulgaria, the price of electricity from SoLR is determined by a formula, with 80% being the spot price and 20% the price of balancing energy for deficite. The entire amount is charged additinal 5%, which are supposed to cover the costs of the SoLR. The formula was created with the idea that the price for deficite will always be higher than the spot price hence the price of SoLR will be higher than the market price. However, due to lower balancing energy prices, the opposite is happening. In 61% of the time the final price of SoLR is lower than the spot price. It should be noted that in contracts with traders, end customers pay a small surcharge above the spot price in order to cover the costs of traders for forecasting, balancing and more. Therefore, the final price of SoLR was even lower than the final price that traders could offer.
All of the above leads to the migration of end customers to the Suppliers of last resort, which can largely be considered as a form of regulated segment. Thus, we witness re-regulation of the market and return of business customers to its regulated segment, i.e. supply by SoLR.
In the upcoming months are expected changes in the legislation, regulations and tariff prices, which will have a direct impact on the market model. In the meantime, the existing inefficiencies have to be addressed in order for the Bulgarian market to promote fair pricing.