The business is looking for equality in the purchase of natural gas and is against cheap Azeri gas going first to heating systems

The business asked for equality in the tenders for natural gas supplies and spoke against the idea of ​​the cheapest blue fuel being offered first to the heating plants. This became clear from a letter sent to the government and EWRC by the Association of Bulgarian Employers' Organizations.

"With the foreseen amendments to Ordinance No. 2 on the regulation of natural gas prices, it is envisaged that the gas purchased by Bulgargaz EAD at the lowest price will be reserved for consumers at regulated prices. This is a direct request for cross-subsidization on the market of natural gas. Such actions will unreasonably increase the price for the industry.

We are categorically opposed to such a policy, especially in times of energy crisis and unsecured supplies!",  argues the business.

According to the business, "the ideas expressed by you contradict market logic and the organization of the natural gas market in our country for the following reasons:

1. Deliveries under the long-term contract between Bulgargaz EAD and AGSC.

Deliveries under the long-term contract between Bulgargaz EAD and AGSC are carried out based on the annual quantities requested by all users, including industry. This was also true for the quantities claimed by Gazprom Export LLC, and it is also true for the quantities purchased by Bulgargaz EAD from alternative suppliers, including those of liquefied natural gas (LNG).

The price formula by which Bulgargaz EAD pays gas to AGSC is valid for the entire quantity delivered under the contract, not only for the quantities of consumers with regulated prices. This is also the reason why Bulgargaz EAD includes these quantities in their entirety when forming the price it proposes for approval by EWRC. We would also like to remind you that this is also the reason why the price set in the gas supply contracts at "freely negotiated prices" between Bulgargaz EAD and the industrial enterprises is the price that the public supplier offers for approval. The terms of the contracts are such that the delivery price for the industry depends on the process of monthly approval of the regulated prices.

In view of this, separate pricing for end customers, depending on whether they are on regulated or freely negotiated prices, for the same gas under the current conditions, is unacceptable, as it creates privileged and non-privileged consumers. This directly contradicts market logic and EU competition law.

After the IGB is put into commercial operation, gas from Azerbaijan will start entering the country through the originally agreed entry point. This will lead to a noticeable reduction in the price of this gas. Until now, only 1/3 of the AGSC contracted quantities were priced according to the original price formula, which contributed to the increase in prices. Until now, industry has been paying for the expensive gas, and when a positive price effect is achieved, it will be redistributed only to regulated businesses, and business will pay even more expensive gas.

The industry does not want special treatment. The industry wants fair treatment," commented the AOBR.

From there, they recall that the industry is a regular payer of its supplier. Against this background, the largest user of natural gas at regulated prices is accumulating huge debts to Bulgargaz EAD (currently over BGN 1 billion), which in the future may threaten the financial stability of Bulgargaz EAD and BEH EAD, as well as putting at risk the supply of gas under long-term contracts for the country in the event of an inability to pay them.

The second problem is cross-subsidization.

"We have repeatedly expressed the opinion that the aspiration to provide affordable energy (electricity, heat and natural gas) for households is understandable, but it is high time that the social policy of the state stops being implemented through the energy system. Dealing with energy poverty, however, goes through targeted programs for social assistance to the needy and the implementation of large-scale measures to increase the disposable income of the population. This responsibility and function of the state should not be transferred to market participants", according to the AOBR.

For many years, the Bulgarian industry subsidized the prices of electricity and heat for households through a "duty to society" price on the electricity market. Industry is now expected to take on this role in the natural gas market as well, paying higher prices at the expense of being excluded from access to competitively priced sources of natural gas. This comes against the background of several months of difficult situation for consumers on the electricity market, depleted reserves and high uncertainty for the base industry, underpinned by extreme price levels and natural gas supply risks.

Long-term supply contracts are negotiated at the state level, and their benefits should be distributed evenly among all market participants, rather than creating privileged groups of users.

"We would like to remind you that even now Bulgargaz EAD has the possibility to sell at a price below the regulated one, as long as this does not lead to cross-subsidization. This is regulated in Article 6 of Ordinance No. 2: "Energy enterprises may apply -lower than the prices approved by the commission, provided that this does not lead to cross-subsidization between individual activities, as well as between customer groups."

Duty to society price

In addition to the price of natural gas, a surcharge for obligations to society is also paid, the amount of which is also determined by EWRC. These obligations stem mainly from the presence of customers with uneven annual consumption, which are mostly heating companies. However, according to Ordinance No. 2, these costs are paid jointly by all market participants, including the industry, which has uniform consumption, the business explains.

Natural gas market model

According to AOBR, if the intentions to "separate" the functions of "Bulgargaz" EAD (public supply and "free" market) are now realized, this will be another change in the gas market, carried out in the middle of active long-term contracts and made without prior discussion with interested parties.

Moreover, it will lead to a clear unequal treatment of economic operators from the same industries, which is market discrimination and is a clear violation of European competition law. This is so because some industrial enterprises are supplied by end suppliers, and their competitors from the same industry are supplied by Bulgargaz EAD. Thus, part of the economic operators will continue to benefit from the regulated prices.

Employers strongly oppose changing the market model when the EC considers imposing a price cap. "At a time of price instability and a clear risk to the security of supplies, such actions would lead to the "dumping" of the Bulgarian industry on the spot market, which will have extremely negative consequences for the entire society. In practice, in order to support a certain category of consumers, the functioning of a significant part of the Bulgarian economy is threatened.

Regarding the heating companies, without aiming to oppose the categories of users, we would like to remind that premiums are also paid for the electricity produced by them", the business explains.

"Furthermore, we did not hear any proposed measures to limit the consumption of natural gas by heating enterprises, and all such requests were directed at the industry. Thus, the largest gas consumer in the country remains out of these processes, which affect all consumers of gas in the European Union.

With such proposed amendments, defects will be created in the country's gas market, similar to the electricity market, where, in order to suppress household prices, electricity from the Kozloduy NPP is directed to the regulated market, reducing the supply on the free market and replacing that energy with much more expensive sources. The same situation will be replicated in the natural gas market.

As a result, all industrial enterprises connected to the gas transmission network will be directly or indirectly taken out of the spot market (they will be forced to buy spot from the exchanges or through spot indexed contracts from traders). This will be detrimental to manufacturing enterprises, which will ultimately not be able to pay their bills," they added.

According to AOBR, any prerequisite for an additional increase in the prices of energy carriers for the basic industry at the expense of "cheap heating" will have a general negative effect on the entire economy of the country. Along with electricity, natural gas is a major pricing factor in ferrous and non-ferrous metallurgy, nitrogen fertilizer and chemical industries, cement production and glass production. These industries have a significant contribution to the trade balance and the formation of the country's GDP. The processing industry is also a major employer in the country.

Due to the nature of the products produced by the base industry, the increase in their production costs leads to a number of negative effects:

1. Inflation is generated, caused by the increase in the price of construction and packaging materials, metals, fertilizers (which also affect food prices), machines, facilities and equipment;

2. Brings enterprises into a mode of cost minimization, which is expressed in the termination of investments, reduction of production, reduction of costs, inevitably leading to job cuts;

3. Loss of competitiveness vis-à-vis direct competitors in the EU and in third countries with lower energy costs. In this case, the increase in energy prices, the increase in output prices when possible and the reduction of production capacities lead to a loss of share in foreign markets. For some industries, these effects are reinforced because their products are sold at world exchange prices and the increased costs are not transferable to the final price. This is especially true for base metals and fertilizers. Thus, there is a direct negative impact on the country's exports and its balance of payments. Bulgaria is an open economy in which many of the productions are export-oriented and competitiveness is essential for maintaining economic growth;

4. The increase in production costs leads to a deterioration of the investment environment, as it stops capital investments in existing and new productions. In cases where an enterprise is part of an international corporation or group, a decision may be reached to close and/or relocate the relevant unprofitable production asset outside the country. In this way, the country also suffers from loss of production potential.

5. The basic industry is fundamental for the provision of the materials necessary for the implementation of the green deal and the low-carbon transition of energy and the economy. Energy-intensive industries are also an important part of the circular economy – metallurgy and glass industry, for example, provide a huge opportunity for the complete recycling of metals and glass, fertilizer plants utilize sulfuric acid obtained in metallurgy as a result of gas cleaning, etc. The non-competitiveness of such productions in our country may lead to their displacement and implementation of their activities in places with lower environmental standards. This phenomenon is known as "carbon leakage".

Therefore, as industrialists, we insist on continuing to purchase our natural gas at affordable prices in order to preserve the competitiveness, jobs and export potential of the national economy. Also, we invite you to dialogue, as we have had so far at a good level, encouraging you to discuss any intentions to change the market model with stakeholders.

Otherwise, it will inevitably lead to mass protests in all legal forms, conclude their letter from the business.