Bulgaria: Great Expectations for Electricity Trading

The launch of effective electricity trading has been expected for several years. It seems the regulator might finally be ready.

New entrants to the free electricity market

The electricity market in Bulgaria has been fully liberalised, by law since 2007. But until recently electricity trading has been limited.

A new free market consumer group

In an attempt to achieve more effective liberalisation of the market (and keep regulated household prices low), in July 2012 the Parliament amended the energy law. Consumers connected to the middle-tension (средно напрежение) grid (mainly small- and medium-size companies) were excluded from the group of consumers entitled to purchase electricity at regulated prices. Instead, they were required to start purchasing their electricity on the free market, along with the big industrial companies.

A new last-instance supplier group 

The new consumer group is expected to enter the free market without much experience in planning their electricity consumption, a key prerequisite for efficient performance and effective cost saving. Therefore, within the transition period (ie, from the amendment until the date the new consumer group will be excluded from the regulated-price consumer group) the law created a safety net for them in the form of the supplier of last instance (доставчик от последна инстанция), licensed by the energy regulator. This figure, set out in the Third Energy Package, is designated to ensure that these new free market entrants will have access to the electricity supply until they choose their electricity trader.1

Incentives for entering the free electricity market

The intended price incentive 

Within a month after the suppliers of last instance are licensed, they should notify the consumers connected to their middle-tension grids about the terms and conditions of the electricity supply from them as a supplier of last instance. The consumers will then have two months to choose whether to stay with their current supplier under the notified terms and conditions for last-instance supply, or choose another supplier. If no choice is made, at the end of the two-month period, the terms of the supplier of last instance apply and the consumer must pay the electricity price, not at the regulated rates, but at the rates of the supplier of last instance. The reasoning of the model is to stimulate the expansion of the free market since that the prices of the last-instance supplier are intended to be slightly higher than the prices the consumer can find on the free market.

This idea was slightly reconsidered when, in July 2013, the energy law was amended again on the eve of the announcement of the new regulated electricity prices in the midst of social tension. After the amendment, the energy regulator could announce a decrease of the regulated electricity prices effective from August 2013 at the cost of considerable revision of the pricing mechanism. According to it, until 30 June 2015, the suppliers of last instance must purchase electricity only from the public supplier at regulated prices. The latter are to be calculated pursuant to rules approved by the energy regulator, incorporating a mark-up for the public obligations of the National Electricity Company.

The missing market alternative 

Determined to accelerate further the effective liberalisation of the electricity market, along with the energy law amendment, the energy regulator approved new electricity trading rules aiming to effectively launch an electricity stock exchange. They set out a new market structure that provides for hourly production forecasts and trade exchange forecasts in the new market management system. Even though the new rules are in place, the electricity exchange administrator is yet to be licensed before the system can be properly launched.

New investment opportunities 

Without an organised electricity exchange, the new free market consumer group increasingly chooses to enter into agreements with an electricity trader instead of staying with its current supplier under the higher rates of the last-instance supply. The main advantage of the electricity trader is that it can offer lower rates; it can also provide a package deal – electricity supply and balancing to mitigate the risks of major deviations from the consumption forecasts of the client. A company interested in providing these services in Bulgaria should be licensed as an electricity trader and a balancing group coordinator (the procedure requires about three months), and an EU-based company can apply directly without establishing a Bulgarian subsidiary.

The market development perspectives 

Since the amendments, there has been a considerable increase with more than 80% of the registered market participants, compared to the previous rates. In brief, as the middle-level tension consumer group is leaving the regulated price scope, there are sizeable opportunities for electricity traders to enter the market benefiting from the flat 10% income tax in Bulgaria.

As middle-level tension consumers are to come out of the scope of regulated prices, there are sizeable opportunities for electricity traders to enter the market and benefit from Bulgaria’s flat 10% income tax.

In July 2013 the end suppliers and the public provider were licensed to operate also as suppliers of last instance.