The article was published in the February issue of Utilities magazine.
After the relatively calm market situation at the end of December and the beginning of January, the topic of the electricity prices again creates tension. The reason is not only the newly reached price records, but also the actions of the Bulgarian Regulator, which further increase the final prices of electricity and put the market under stress.
Price expectations are already changing and according to current quotations, high prices will remain during the rest of 2022. In Bulgaria, due to high electricity prices, business is supported through compensations paid by the state. Their amount was increased, reaching 128.98 BGN / MWh in December 2021. The scheme is currently operational, but exposes traders at liquidity risks, because they are responsible for transferring the aid. A situation arises in which traders “credit” the state compensation program, charging lower bills to end customers, and actually receiving back the money from the Ministry of Energy (ME) within 15 to 20 days. With increased costs for the purchase of electricity from the power exchange, this puts companies in a liquidity crisis. The reason is that the amounts paid later by the ME are hundreds of millions of BGN per month, so traders are left without free capital to buy electricity to meet the needs of end customers. Moreover, this activity of administering the payment of the aid is carried out completely free of charge by electricity traders.
In recent weeks, electricity has been traded above 400 BGN / MWh while the aid was reducing that amount helping the Bulgarian business consumers. The lack of long-term supply contracts and the choice of the business consumers to be supplied at prices indexed to the spot market exposed the majority of consumers on the free market to the fluctuations and the volatility of the spot market.
At the same time, long-term contracts and investments in renewable energy sources for own consumption proved to be a reliable protection against high prices. Many of these long-term contracts were possible precisely because of the sales of renewable energy to end customers. The majority of the large renewable energy producers sold generation year ahead in June 2021 at prices close to the reference price of 110-120 BGN / MWh. Their energy is currently one of the few sources at affordable levels. Nevertheless, the Regulator in early December put at risk the very existence of those contracts and the supply of RES electricity to traders and end consumers. With the adopted new estimated market price, which applies only to producers of renewable energy sources, the premiums for wind and hydro power plants have been eliminated and those for photovoltaics have been significantly reduced. As a result, the financial stability of RES producers in Bulgaria and the fulfilment of long-term supply contracts with businesses and traders are threatened. 770 RES producers are affected according to data for October and November provided by the Security of the Electricity System Fund (SESF). Unfortunately, the effect of this decision gave a clear negative signal of market stability and an occasion for investors in new RES plants to reconsider their investments. Spain is a good example how to act in a similar situation. There a differentiated approach was applied and RES producers, who could prove that they have long-term contracts for sale at low prices, were exempted from paying an additional income tax. However, for other producers such a tax was applicable. A similar approach can be applied in Bulgaria as well, as in our country the information on the selling price of each RES producers is available at SESF. So it is even easier to distinguish the low-priced producers and those who sell electricity at higher spot prices.
Another serious problem that will affect all in the supply chain from producers through traders to end customers is the change in the balancing market. Now coordinators of balancing groups can no longer unite with each other. As a result, the imbalances incurred by consumers and producers will be distributed among a smaller number of participants only within one balancing group. This will lead to inefficient netting of imbalances for the majority of market participants and a corresponding increase in their overall imbalance, hence increase of the amounts paid for balancing energy. Ultimately, due to the changes, consumers on the free market will get a significant increase in the final price of electricity.
Delegating imbalances to another coordinator is an option that many suppliers take advantage of, because it reduces the costs of members of their balancing group, and also because it reduces their own administrative costs of carrying out such activities. If these balancing group merges are dismissed, suppliers will lose competitive advantage and some of their customers. Reducing competition from suppliers would lead to fewer choices for free market participants and concentration in the groups of major coordinators.
Despite the difficult price situation, changes in the market model must aim at mitigating costs and preparing it for the energy transition. The set goals and the funds provided under the Recovery and Resilience Plan focus exclusively on the installation of new RES capacities. Concerns arise that such targets cannot be met in the absence of a range of options for the sale of this electricity, affordable balancing costs, well-functioning balancing market and a stable regulatory framework. Problems with electricity prices are likely to be resolved in 2022, but at the same time it is important to prepare the market for new investment and the entry of new technologies so that we can be better protected in the future.
