RES/COGEN producers forced to the free market

On 27 March 2018 the Bulgarian Parliament published a Bill for amendment and supplementation of the Energy Act (“EA”) and the Act on Energy from Renewable Sources (“AERS”), which in practice repeals the RES and highly efficient cogeneration (“CoGen”) support schemes. The most critical amendments include (i) the repeal of the currently fixed preferential prices (“FiTs”) by way of introduction of a two component payment scheme and (ii) the replacing of the mandatory obligation of “National Electricity Company” EAD (“NEK”) or the licensed End Suppliers to purchase the entire generated RES electricity under long term power-purchase agreements (“PPAs“) to the Security of the Energy System Fund (“SESF”).

Background
In the last seven years the Bulgarian energy sector has experienced serious financial imbalances, which has led to worsening of the financial status of the incumbent wholesale public provider – NEK. In 2015 the Bulgarian government has engaged a renowned international financing institution to elaborate an analysis of the electricity market to outline its deficiencies and propose stabilization and reformation measures. Despite the elapsed time and the sporadic measures undertaken, the electricity market still seems vulnerable and the full liberalization remains just a wishful thinking. The international institution’s report proposed some specific measures, namely to (i) address the energy poverty, (ii) reduce of the burden from the long term PPAs with conventional, RES and CoGen producers by way of introduction of Contracts for Differences, (iii) increase the role of IBEX as a competitive trading platform by opening of the intraday electricity market and (iv) strengthen the supervisory powers of the energy regulator the Energy and Water Regulatory Commission (“EWRC”). Although the Bulgarian authorities have publicly debated a number of options to approach the issue, no serious public discussion of the benefits and risks of any such serious reform have been made to date. Now, three members of Parliament have proposed a Bill for amendment and supplementation of the Energy Act (the “Bill”), which was announced on 27 March 2018 by the Bulgarian Parliament to be subject to further discussion in the Parliament. The Bill introduces major structural changes to the Bulgarian electricity market which are intended to take place as of 01 July 2018. The Bill also proposes changes to the AERS.

The Proposals
Among others, the Bill proposes the following changes to the Energy Act:

• Repeal of the mandatory obligation for purchase of the electricity generated by renewable sources or CoGen with installed capacity equal or above 4 MW under fixed preferential prices by way of introduction of a two component payment scheme. Namely, the RES or CoGen electricity buy- out under
  (i) Premiums – The Premiums to be set by EWRC by 30 June annually being the difference between the current fixed FiT and the forecasted market price for RES and CoGen. The premiums to be provided by SESF as compensation for the electricity generated up to the Net Specific Generated Electricity (“NSGE”) thresholds set previously by the FiT setting decisions of EWRC for the RES; and
  (ii) Forecasted Market Prices for RES (FMP) – The FMPs are reference prices to be paid under transactions concluded at the Bulgarian power exchange – IBEX from market participants depending on the offering-demand principles. FMPs to be set by EWRC annually by 30 June based on a methodology adopted by it per renewable source (wind, PV, hydro etc.) as weighted average annual price for electricity generated from solar, wind, hydro up to 10 MW biomass and other RES or the CoGen. RES producers will have the possibility to sell electricity produced by them on the IBEX via coordinators of balancing groups.
• Replacing the mandatory obligation of the incumbent public provider NEK or the End Suppliers (CEZ, EVN and Energo-Pro) for purchase of electricity under the current long term PPAs to the SESF. SESF will provide compensation with premiums under Contracts for Compensation with Premiums (“CfCPs”) for the generated electricity for the remaining term of the PPAs. The RES or CoGen producers ≥ 4MW are forced to conclude the CfCPs with SESF and the contracts for participation at the power exchange with IBEX for the quantities to be purchased with reference to the FMPs by 30 June 2018 under the threat the part of the generated electricity not to be purchased under the premiums by the SESF.
• Along with the licensed traders and the rest of the producers the RES and CoGen producers ≥ 4MW will have to contribute to the SESF for the electricity sold to end consumers. To secure the sale of electricity to end consumers RES and CoGen producers ≥ 4MW will have to provide a bank guarantee or cash deposit in favour of SESF by 30 June 2018 initially at 150% of highest monthly value product from the price towards society multiplied by the sold electricity for the preceding 12 months. Potential reduction to 100% security could be possible if precise adjustment on monthly basis of the guarantee is ensured for 12 preceding months and further down to 50% if for 24 months. SESF shall monitor the security amount on a monthly basis and shall notify the RES or CoGen producers ≥4MW which should adjust the securities within 7 days under the risk of exclusion from the market by ESO.
• EWRC shall have the following new powers:
  Determine the premiums to be paid by the SESF for the RES and CoGen producers by 30 June of the respective year ≥ 4MW;
  Determine the value of the Forecast Market Prices for groups of producers considering the primary energy source for the RES producers by 30 June of the respective year ≥ 4MW to be paid under freely negotiated prices at the IBEX;  
  Determine the value of the Forecast Market Price for the technological costs for the TSO and the EDCs by 30 June of the respective year;
  Amend the Electricity Market Rules by its own discretion/ initiative;
  Consider the applications of the SESF for compensation under premiums to RES and CoGen ≥ 4MW producers under the CfCPs;
  Adopt ordinance for determination of annual premiums for the SESF to pay to RES and CoGen ≥ 4MW producers and the Methodology for setting of Forecast Market Prices for RES and TSO and EDCs for the technological losses;
  EWRC will no longer follow the principle to balance the energy system during determining prices along the energy value chain;
  Under the REMIT (Regulation 1227/2011 on wholesale energy market integrity and transparency) EWRC will have amongst others (i) investigatory and enforcement powers in case of market manipulation and insider trading (ii) supervisory powers for abidance with Art. 4 (publication of inside information), 8 (data collection), 9 (registration) and 15 (obligation for notification in case of suspecting violation of art.3/5) of REMIT. Under its enforcement powers EWRC will be able to impose sanctions to legal entities too.
• The SESF will have the following new rights and functions:
  Apply before EWRC for recovery of costs for (i) the purchase of electricity under FiTs for RES and CoGen <4MW and (ii) the provision of premiums to RES and CoGen ≥ 4MW; EWRC to determine the volume for the compensation for the respective period;
  Collect additional money from: (i) the mandatory payment of the obligation towards society by all end users of the energy system; and (ii) 5 % from the revenues (VAT excl) RES and CoGen producers ≥ 4MW from the premiums received;
  Require securities from the traders, producers, IBEX, Supplier of Last Resort, the TSO and EDCs stakeholders for the sold electricity to end consumers. The due submission to the SESF shall be public receivables subject to forcible collection by public enforcement officer under Tax and Securities Procedural Code. The moneys in SESF shall not be subject to assignment and/or sequestration.
  SESF shall have to conclude CfCPs with RES and CoGen producers ≥ 4MW for the payment of the premiums. No premiums shall be paid if producer owes moneys to SESF and no interest is due for delayed payments. The SESF shall not be obliged to provide premiums if a RES or CoGen producer: (i) has failed to conclude contracts for (a) sale of electricity at IBEX; or (b) with a coordinator of a balancing group or (c) balancing contract; or (ii) has concluded a transaction for prices with negative values; or (iii) has not transferred the monthly guarantees (RES) or certificates (CoGen) for origin under Art 34 of AERS.
• The TSO and EDCs to purchase the electricity for technological losses from the IBEX. The Bill introduces the obligation of the TSO and Electricity Distribution Companies to purchase the electricity necessary to cover their technological losses in the transportation of the electricity through the respective networks not as currently under regulated prices, but from the IBEX at a market price considering the reference Forecasted Market Prices determined by EWRC annually by 30 June. 

The Bill also proposes the following changes to the Act for the Energy from Renewable Sources, namely repeals the obligation of NEK and the End Suppliers to purchase the electricity from RES producers with installed capacity above 4 MW.

Comments
The changes to the legislation as outlined above will be yet another, but for the time being the most adverse measure affecting the majority electricity producers and consequently the electricity value chain in Bulgaria. As already announced in the public the changes could lead to further financial difficulties following the previously introduced revenue reduction measures like the 20% fee on revenues, the preliminary access to the grid prices the balancing charges etc.
The Bill also raises concerns related to the legislative process followed by the authorities and in particular as to the transparency, predictability and the credibility of the preliminary impact assessment of the Bill. The fact that the Bill lacks serious legislative impact assessment, public consultations as required under the legislation is also a worrisome signal to the foreign investors in Bulgaria. The Bill raises questions related to its compatibility with the EU State Aid rules.

In particular, the most concerning details of the intended changes are:

• Potential future claims from RES and CoGen producers against the state due to potential unlawful State Aid implications related to SESF;
• The repeal of the obligation for mandatory off-take of electricity under FiTs under the RES and CoGen Support Schemes, thus transfer of financial/tariff and regulatory risks over to the investors;
• Nontransparent, unfair, and discriminatory approach and market model change as not all of the existing long term PPAs are affected by the Bill;
• Risk of potential future investment protection claims against Bulgaria which may lead to public tensions and increased exposure of the state.
• The lack of any transition period for the impacted stakeholders to adjust to the new regulations;
• Uncertainty as to the liquidity of the SESF to cover the premiums for all the energy produced ~ 4TWh annually and its administrative capacity to tackle its new obligations after 01.07.2018.