After the ombudsman and EWRC criticized the proposed changes to the Energy Act

After the impressive criticisms made by the Ombudsman of Bulgaria, Diana Kovacheva, on the project with the proposals to amend the Law on Energy and the Commission for Energy and Water Regulation expresses an opinion containing significant criticisms. Given the public interest, we offer the EWRC Opinion without editorial intervention.

In connection with the draft Law on Amendments and Supplements to the Energy Law (LAS to EL), the Draft), published on 27.07.2023 on the Portal for Public Consultations, prepared by the Ministry of Energy, the Commission for Energy and Water Regulation (EWRC, the Commission) sent a letter to the Minister of Energy in which he expressed his opinion on the project proposed for discussion. The opinion was adopted today, 25/08/2023, at a meeting of the energy regulator, the press center of the regulator announced.

After analyzing the proposed draft of the LAS to EL and the reasons for it, the Commission makes some basic findings and conclusions:

The bill envisages full liberalization of the wholesale electricity market by the end of 2023, while maintaining household consumers in a regulated market until 2026. It is proposed to regulate a transitional market model that will operate until the introduction of full liberalization of the electricity market wholesale and retail. In this regard, the EWRC expresses a general disagreement with the proposed market model and with the specific provisions of the EL Project of the LAS.

According to the regulator, the determination of availability for electricity production of producers under Art. 21, para. 1, item 21 of EL and the approval of their prices is the main and most important regulatory tool for maintaining predictable and stable electricity prices for final household customers. Its removal should be carried out gradually, in the form of a smooth transition period of at least 2-3 years, and not all of a sudden, as envisaged in the draft of the LAS to EL. This is necessary due to the fact that there are still significant differences in the price levels of the regulated and free market of retail electricity, which may even widen in view of the complete unpredictability of key factors - the geopolitical situation, the demand for energy worldwide scale, actions of major central banks, etc.

According to the Commission, it is not possible to completely overcome these differences either by imputing additional obligations of the Electricity System Security Fund (ESSF, the Fund) or by temporarily preserving the regulated retail market in a modified version, as proposed in the draft of WALL OF EL. Instead of a balanced change in the regulated prices until they are equalized with the prices on the free market, the proposed model, in the current market situation, will lead to a sharp jump in prices for final household customers as early as 01.01.2024 or postponed to 01.01.2026 at the latest., if a mechanism for providing additional financial resources is not foreseen in the FSES, it is stated in the EWRC Opinion.

The Commission considers that the abolition of the regulated wholesale market, starting from 01.01.2024, in the middle of the current regulatory period 01.07.2023 - 30.06.2024, will create insurmountable difficulties especially for final suppliers to provide the necessary their quantities of electrical energy to cover the consumption of final household customers. In this regard, it is unrealistic until 01.01.2024, and in the future, for these suppliers to be able to comply with the requirement of Art. 97, para. 4 of the project of the LAS to EL to conclude agreements for the purchase of electricity from low-emission sources for 60% of their required amounts of electricity. Moreover, these transactions, according to Art. 103, para. 2, item 8 of the draft of the ZID of ZE, should be concluded on a special segment of the platform for bilateral contracts on an organized exchange market of electric energy, such as not only in a reasonable period before 01.01.2024, but also very likely after that date cannot be created.

The Commission's opinion states that there is a risk that the changes will create insurmountable obstacles and the impossibility of EWRC to approve prices of electricity suppliers, starting from 01.01.2024. In the event that the concept of the proposed transitional market is preserved in the draft of the EL model, which will operate until the introduction of full liberalization of the wholesale and retail market, and the principled disagreement expressed by EWRC as a whole is not taken into account, it is expedient to provide for a longer term for the abolition of the regulated wholesale market. This term must be taken into account with the end of the price period that started - 30.06.2024, respectively the earliest date for this to be 01.07.2024.

EWRC also strongly disagrees with the proposed new texts in the project and in particular with the lack of EWRC's powers to control the costs of suppliers, including operating costs, balancing costs, bad debt costs, potential losses from resale of purchased electricity in short-term markets, etc. Based on the experience with the transition of non-household final customers from a regulated to a free market, the regulator considers it unrealistic to expect final suppliers to keep their costs within reasonable limits due to the risk of losing customers as a result of accepting more attractive offers from competitors (electricity traders). In this direction, the project of the LAS to EL creates prerequisites for unconditioned behavior and commercial practices of the final suppliers, resp. excessive profits and economically unreasonable electricity prices for final household customers and/or costs for the Fund.

It is objectively impossible for the Commission to approve regulated prices for electricity traders on a cost basis, the regulator's Opinion states. Unlike final suppliers, traders resell electricity to a wide range of customers (wholesale and retail), with residential final customers occupying a negligible part of their portfolio. In this sense, there is no way to calculate a specific cost of their costs specifically for household customers. The reasons for creating the impossibility of electricity traders to enter into contracts with final household customers at freely negotiated prices, as is possible in the current legislation, also remain unclear.

In conclusion, the regulator considers that in order to avoid the mentioned potential risks and adverse consequences for all participants in the electricity market, it is necessary to provide additional approximately BGN 1.4 billion in the FSEU on an annual basis, and in its Opinion the Commission proposes possible decisions in this direction. At current market prices, they would compensate for the difference between the exchange price of electricity, corresponding to the profile of customers on the regulated market, and the established one of the public supplier for the regulatory period 07/01/2023 - 06/30/2024. In the draft of the LAS EL does not provide a mechanism for the procurement of these funds.

The Opinion draws attention to the fact that with the deletion of the words "public supplier" proposed in the project, the authority of EWRC to publish recommendations not only in relation to the public supplier of electricity, but also in relation to the public supplier of natural gas - "Bulgargas EAD. With the adoption of the proposed revision in the Natural Gas sector, the Commission will publish price recommendations for end suppliers, but not for the public supplier of natural gas. Objections have also been made in connection with the Commission's intended obligation to approve the instructions to the Rules for the operation of an organized stock market, which will create an unnecessary administrative burden and, in practice, will deprive the stock exchange operator of the opportunity to react in time in the event of an urgent need to amend the instructions. It is also necessary to clarify specific texts in the draft law, with which to preserve the obligations of energy companies in relation to vulnerable customers in the energy sector, including in the "Natural gas" sector. With the proposal made in the project of the LAS to EL, the status of the only vulnerable customer of electric energy is regulated, are the findings of EWRC in the adopted Opinion.