The article was published in the December issue of Utilities magazine.
With the approach of the first cold weeks of November, consumption (Figure 1) and electricity prices went up. Whether this will continue in the coming months of the winter period remains to be seen. The factors that contributed to lower and stable energy prices in September and October are beginning to weaken their influence on the electricity, natural gas and carbon markets. Some of these factors were: lower than usual consumption of electricity and natural gas, due to the warmer months of October and November and the correspondingly late start of the heating season in Bulgaria, good filling levels of national and European gas storage facilities, drop in the price of emission allowances to levels below €66/ton, decrease in demand for natural gas in Asian markets due to lockdowns, increased competition for LNG supplies led to the lowest price levels since June, the return of power plants from annual repairs to Europe’s electricity system and more.
Figure 1. Comparison of electricity demand between the first and last week of November 2022
Everything listed was extremely optimistic, but with the increase in consumption, the prices of energy commodities resumed the forgotten trend of growth. For the last 20 days, we have an 85% increase in spot electricity prices in Bulgaria, a 30% increase in the price of natural gas at the European benchmark hub TTF, and a 12% increase in the prices of emission allowances. This development pushed 2023 electricity futures prices upwards, with quotations for delivery in 2023 approaching the 400 €/MWh mark.
What is the expected effect of higher prices in the coming months? There will be no effect for household consumers in Bulgaria, as they are supplied at a regulated price, and the probability that the Regulator will change it from 01.01.2023 is very slim. Business consumers in Bulgaria will receive compensation for the entire year 2023 in the amount of the difference between the average monthly power exchange price and fixed amount of 200 BGN /MWh. Accordingly, it can be stated that for businesses the increase in market prices will have a minimal effect, since they benefit from financial compensations that are pretty much equivalent to a price cap of 200 BGN /MWh. At price levels similar to those in August only VAT will increase for the business consumers, as the compensations are charged without VAT and are deducted from the total value of the electricity on which VAT is due.
The provisions of Regulation (EU) 2022/1854, which proposes measures to tackle with high energy prices, are expected to be introduced in a number of EU member states, including Bulgaria. A key measure under the regulation is a price cap for the majority of electricity producers. Accordingly, upon its implementation, producers will also receive a “regulated” price. As it is obvious, high electricity prices have provoked drastic intervention in energy markets. Power producers and consumers will receive a price that we can define as regulated in one form or another. Such an intervention, especially implemented at the European scale, can distort price signals, as producers loose incentive chase higher prices than their administrative cap.
Market participants who are expected to pay the full cost of electricity remain the traders. Therefore, with increasing in prices in the coming months, liquidity problems for traders will become more acute. They will be particularly serious at extreme prices levels and in a situation of increasing interest rates. It is not out of the question that we may again see local or pan-European measures to support the liquidity needs of electricity and natural gas suppliers.
Another important topic in Bulgaria is the balancing model and the already implemented 15-minute settlement period. The first data from the 15-minute settlement for October, shows both positive and negative trends. All network operators and balancing group coordinators were able to handle and process the quadrupled amount of data. Spill and surplus price results achieved have little differences compared to hourly settlement. The transmission operator (TSO) reduced the intervals in which it balanced the system in both directions during one settlement period. This gave the TSO an opportunity to analyze the possibilities of switching to a single pricing of balancing energy. A model that functions in most developed markets and which the Bulgarian state has committed to implement as part of the reforms laid in Recovery and Resilience Plan.
The concerns are related to the results achieved by the coordinators of the balancing groups. There is an increase in the absolute amounts of surplus and shortage, varying between 10 and 20% for different coordinators. The effect is a slight increase in balancing costs. The result must be taken into account, since as prices rise, balancing costs will rise accordingly. The prevailing opinion is that before a new methodology for the single balancing price is introduced, more time is needed for market participants to adapt to the 15-minute settlement. It is realistic to expect discussions on a new balancing methodology to begin as early as this year, but for its implementation is realistic to look in the first quarter of 2023.