The energy conundrum in Bulgaria and Greece

Protests over electricity prices in Bulgaria. [Economic.bg]

Bulgaria and Greece are hard nuts to crack when it comes to implementing EU energy legislation and integrating with the wider European energy market. These two countries illustrate the difficulties of building an Energy Union.

Background

Bulgaria and Greece have distinctive political backgrounds, the first having been a member of the former COMECON Communist economic bloc, while the latter was an EU member without a territorial link to the rest of the union.

But they share Byzantine practices that have helped keep monopolies alive, and resist EU energy liberalisation rules.

Both countries are also in a difficult economic situation, having to deal with the issue of energy poverty, as large parts of their population lack the financial means to properly heat their homes in winter.

An important difference appears to be that Bulgaria is increasingly willing to play by EU rules, while the Syriza-led government in Greece is unpredictable.

Regarding gas, the European Commission has highlighted the fact, (and this has been proven by the 2006 and the 2009 gas crises), that Greece and Bulgaria are supplied mainly by Russia, and that in instances of interruption, they are the first ones to be impacted. So there is a crucial need for diversification in the region, and the lack of North-South connections is a challenge.

It is important to highlight the fact that the existing main transport line that transports gas from Russia through Ukraine, Moldova and Romania to Bulgaria, Greece and Turkey, is not operated in line with EU legislation (no third party access, no unbundling, no reverse flows).

Russia has also rerouted this politically-motivated pipeline from Bulgaria to Turkey and Greece. The South Stream project has been abandoned, and is being replaced by Turkish Stream followed by Tesla, a pipeline across Russia-friendly countries such as Greece, Macedonia, Serbia and Hungary.

The region is moderately interconnected as a historical legacy. Electricity supply companies in the region often act as monopolies, and the regulators often fail to play an independent role. In Greece, the Public Power Corporation, a state company, distributes close to 100% of the electricity of the country. In Bulgaria, three utilities (CEZ, E.on and Energo Pro) have divided the country and each act as a monopoly in their respective territories.

In both countries, energy regulators have served governments and vested interests, rather than consumers.

In view of the “particular vulnerability” of the Central and Southeastern parts of Europe, the Commission envisions new cooperation formats to help solve the many problems the region has.

Issues

The case of Bulgaria

Last January, Bulgarian Prime Minister Boyko Borissov paid a visit to the European Commission to sound the alarm over his country's energy resources, following the freezing of the South Stream gas pipeline project, which Russia cancelled and replaced with an alternative project called Turkish Stream, which bypasses Bulgaria.

>> Read: Russia says South Stream project is over

>> Read: Borissov warns of Bulgarian energy ‘catastrophe’

In particular, Borissov warned that if Russia drags its feet over the rehabilitation of Bulgaria’s two nuclear reactors, this would be a “catastrophe” for the country.

Nuclear: uncertain future

Bulgaria depends on Russia for 89% of its petrol, 100% of its natural gas, and all of the nuclear fuel needed for its Kozloduy nuclear power station, which has two functioning reactors. Four other reactors have been decommissioned upon EU insistence, as part of Bulgaria’s EU accession deal.

Bulgaria turned to Westinghouse, offering it a 49% stake in a new nuclear reactor (unit 7) the US multinational would build on the site of the Kozlodui nuclear power plant.

>> Read: Bulgaria offers Westinghouse stake in new nuclear unit

However, according to latest information, Westinghouse is not interested in being an investor and the country has no financial resources to build unit 7 on its own.

Vulnerability to a new gas crisis persists

A recent study has found that following the 2009 Ukrainian gas crisis, Europe is better prepared to deal with a such disruption than before. Only Bulgaria would be incapable of substituting imports during a short supply interruption.

>> Read: Study: Only Bulgaria would be hurt by a new Ukraine gas crisis

This dramatic meeting prompted Commission Vice-President responsible for Energy Union, Maroš Šef?ovi?, to initiate a new effort to tackle the energy conundrum of the region, in which the cases of Greece and Bulgaria represent the biggest challenge.

A first meeting with the energy ministers of nine countries was held in Sofia on 9 February. A second meeting is expected to take place in Croatia in June. The countries represented were Greece and Bulgaria, as well as Romania, Austria, Croatia, Hungary, Italy, Slovenia and Slovakia.

As a first decision, the high level group said that its objective would be to make sure that each member state of the region should have access to at least three different sources of gas.

>> Read: Šef?ovi? sees three sources of gas for Central Europe

The Commission also said it will start, together with the respective member states, “a very thorough discussion how to re-create the energy landscape in South Eastern Europe”.

Easier said than done. Bulgaria is likely to have a new source of gas not before 2021, when the Southern Gas Corridor would come upstream, bringing gas from the Shah Deniz II gas field in the territorial waters of Azerbaijan in the Caspian Sea. Bulgaria has already commissioned 1 bcm/y of Azeri gas. Its yearly consumption is under 3 bcm.

Catch 22

But more importantly, Bulgaria is bound by a long-term contract with Gazprom until 2030, which contains a take-or-pay clause and doesn’t allow Sofia to sell Russian gas to any foreign market.

“The existing gas contracts are designed in a way to encapsulate Bulgaria,” a Commission expert who asked not to be named told EURACTIV. He also used the ‘Catch 22’ phrase to describe the situation.

Bulgarian authorities typically act in the interest of Gazprom, which has led the Commission to charge the state-owned Bulgarian Energy Holding with breaching EU antitrust rules by hindering competitors' access to the country's gas network.

Virtual reverse flows are still not possible today in Bulgaria, in spite of the Third Energy Package that should make them possible as a rule.

>> Read: Commission charges Bulgarian Energy Holding with gas market abuse

The Commission also reproaches Bulgaria for being carried away with gigantic projects which fail, like Nabucco or South Stream, instead of building less spectacular projects, such as interconnectors, with its neighbours.

>> Read: Bulgaria lacks political will to build interconnectors, says Commission

From an economic perspective, building missing links is much more interesting than giant projects.

The IGB (the Greece-Bulgaria interconnector, also known also as Stara Zagora-Komotini pipeline) has been on the table for at least 10 years. In 2008, €45 million was earmarked for the project. At that time, it was seen in the context of the Southern Gas Corridor and the ITGI project (the latter now defunct, replaced by TANAP across Turkey and TAP across Greece and Albania, to Italy).

Reform to begin with the regulator

The new Bulgarian government has received some praise from independent experts for making efforts to change the status quo in the energy field.

>> Read: Analyst: Politics have marred Bulgaria’s energy sector

A new head of the country’s energy regulator was approved by the parliament. Ivan Ivanov, head of the new Commission for Energy and Water Regulation (CEWR), said his priorities as the overcoming of the huge deficits of the National Electricity Company NEC by the end of the year, putting in place an energy exchange trade, to be operational by the beginning of 2016, and keeping under the control of CEWR network services where utilities have a dominant position.

Electricity: monopolies and distorted price elements

NEC's deficit is currently of BGN 3.3 billion (€1.68 billion). The Bulgarian energy sector has a bizarre structure, with Bulgarian Energy Holding (BEH), a state holding firm, being the owner of NEC.

The deficit is largely due to the long term purchase contracts between NEK and the private coal-fired producers operating the coal stations Maritsa East 1 and Maritsa East 3. The two power stations were awarded with special high prices for their electricity. In return, their owners, American companies AES and ContourGlobal, have upgraded the plants and made them more efficient and compliant with environmental standards.

Another issue is that solar and wind power plants have benefited from preferential prices for many years. Last February, the Bulgarian parliament scrapped preferential prices for new, renewable energy installations, but the existing ones still benefit from the scheme.

>> Read: Bulgaria scraps incentives for new renewable energy installations

Many Bulgarians assume that the preferential prices benefit projects of those close to the political elite. Reportedly, NEC is procuring electricity from power plants at prices ranging from €21/MWh to more than €350/MWh, privileging the expensive sources, while the cheap capacities often stay idle.

Bulgarians also complain about the monopoly of the electric utilities. Indeed, the country is divided into three regions, with monopoly over distribution networks respectively in the West by the Czech firm ?EZ, in the northeast by the Czech Energo-Pro, and in the south by the Austrian EVN [see map].

According to Ivanov, next year, competition could become possible for energy supply, with the liberalisation of the market allowing retaining electricity prices at their current prices, or at least the price increase to be minimal.

A previous government asked the European Commission in 2013 to conduct a study, with recommendations on how to refurbish the country’s energy sector. This happened in the aftermath of massive street rallies that ousted the previous cabinet led by Borissov, over what Bulgardians believed to be hiked electricity bills.

>> Read: Bulgarian prime minister quits following mass protests over electricity bills

The Commission soon produced its report, but little has been implemented since.

The report speaks of "complex and non-transparent structures”, of “distrust among system users”, of “concerns of mismanagement, abuses and widespread allegations of corruption".

To improve the system, the Commission recommended measures to facilitate exports, market liberalisation, more transparency, and the possible decommissioning of inefficient plants, as well as the independence of the price regulatory commission.

It also advised Bulgarian authorities to seek ways to make production more efficient, improve building insulation, and develop well-targeted, adequate and effective support for vulnerable customers.

The case of Greece

Like Bulgaria, Greece has socially vulnerable population from which the leftist government of Prime Minister Alexis Tsipras is buying political support, by requesting the country’s electricity company to foot the bill for restoring electricity service to the poorest of households that had been disconnected, offering them 300 kilowatt hours per month.

Keeping the monopolies afloat

The country’s electricity company Public Power Corporation S.A. (PPC), in which the state holds 51% of the shares, enjoys the status of a monopoly on the Greek electricity market.

Greece is a net power importer and imported 3.3% of its electricity need from Turkey and 3.1% from the Former Yugoslav Republic of Macedonia (FYROM). The country is connected to all of its neighbours, including Italy (with a high voltage sub-sea DC link).

PPC was included in the privatisation program agreed to by the previous coalition government and the Troika (IMF, European Commission, ECB), but the Syriza-led government has ruled out any privatisation schemes for the country’s energy sector.

>>Read: Athens opposes EU energy strategy, blocks privatisations

The Syriza government largely counts on keeping control of PPC and making the country a gas hub, with a drastic reduction in energy prices, thanks to a planned pipeline carrying Russian gas.

>>Read: Tsipras: ‘Turkish Stream’ will have another name on Greek territory

The Commission insists PPC should negotiate its tariffs and not impose them unilaterally.

PPC has a competitive advantage, as it enjoys preferential access and has special mining rights to lignite (98% of the total active reserves owned by the state), a strategic natural resource in Greece used for electricity generation. Greece is the second largest lignite producer in Europe and fifth in the world. It also exploits all major hydro plants in Greece.

Having a total monopoly in generation, transmission and distribution, the tariffs are being unilaterally formulated by PPC for all kinds of customers, including the cash-strapped Greek industrial sector and energy-intensive companies, which have no alternatives for electricity supply.

Anti-industry policies

In the 1960s, aluminium producing company Aluminium SA, which consumes 5% of Greece’s total electricity, and 40% of all high-voltage consumption of the country, signed an agreement with PPC, offering the company a globally competitive rate for electricity supply.

The agreement was due to expire in 2006, unless it was to be extended. No agreement was reached, and both sides jointly decided to accept arbitration under the auspices of the Greek Regulatory Authority for Energy (RAE). This took place in accordance with the basic principles on power supply tariffs approved by the European Commission, taking into account the underlying cost of PPC, and the consumption profile of Aluminium SA. A tribunal was composed of renowned experts in the energy sector and was supported by acknowledged international consultancy firms such as The Brattle Group, and PWC.

But the arbitration decision wasn’t to the liking of PPC, who filed a complaint with the European Commission, claiming that it was forced to provide electricity to Aluminium SA at below-cost levels, as state aid, offering it unfair advantage over other EU producers.

In two letters in May and June 2014, the Commission rejected the complaint of PPC, considering that RAE’s pricing does not confer any unfair advantage and does not constitute state aid toward for Aluminium SA.

PPC did not accept the decision, and appealed to the EU General Court against the Commission's decision to close the case.

On 25 March, in a decision signed by the Competition Commissioner Margrethe Vestager, the College of the European Commission brought definitive closure to PPC’s complaints.

In its decision, the Commission rejected the allegations of state aid, noting that the arbitration was fully in line with market “best practice".

It also stressed that PPC’s monopoly makes heavy industry totally dependent on it for electricity, as it has no other options to turn to, and urged PPC to proceed to negotiations with the energy-intensive companies regarding the pricing based on the “unique consumption characteristics of the customer and the Greek electricity market and the cost structure of the supplier”.

As Greek heavy industry claims, real negotiations on electricity tariffs actually have never taken place.

Abandoning privatisations

The previous coalition government had aligned with Commission’s decision to review all energy-related intergovernmental agreements, in order to verify their compatibility with EU law.

In the meantime, Greek authorities have announced that the privatization process of the Greek energy market, a commitment also made by the previous government towards international lenders, and a crucial term of the bailout, will stop.

The previous coalition, center-right New Democracy and the Socialist Pasok, had committed themselves to privatising the energy sector. However, the Syriza-led government will keep it under state control.

Natural gas importer and distributor (DEPA), and electricity company Public Power Corporation S.A. (PPC) are both controlled by the Greek government.

Proposals for the privatisation of DEPA and PPC have been “abandoned”, according to Lafazanis.

DEPA had also been a political “headache” for the previous government, which was willing to privatise it.

But ahead of the tender, only Russia’s Gazprom expressed interest before backing down, reportedly after being warned that the deal would be blocked by the Commission.

Regarding Greece's gas transmission operator (DESFA), a 66% stake was acquired by Azerbaijan's state-owned oil and gas producer SOCAR, with the remaining 34% remaining in the hands of the Greek government.

DESFA’s privatisation helped the Trans-Adriatic Pipeline (TAP), which is part of the Southern Gas Corridor, to win its bid for Azeri gas over its competitor, Nabucco.

But the deal is currently being scrutinized by the European Commission to see if it is compatible with EU law, and Azerbaijan has expressed its concern over the delay.

>> Read: Aliyev: Azerbaijan concerned by Commission’s DESFA investigation

Azeri SOCAR has already granted an advance payment guarantee that expires in June 2015. According to the terms of the tender in 2013, a “safe exit” from the deal is only possible for SOCAR after June 2015, on the condition that the sale is not completed.

Athens is waiting for the Commission’s investigation to make its final decision on DESFA’s privatisation.

The Greek government has expressed its support for the TAP project, but finds it “fair and reasonable" to seek offsets from its passage from Greece.

Greece imports 65% of its annual gas needs from Russia, and despite a deal for a gas price reduction by 15% last year between DEPA and Gazprom, debt-ridden Greeks keep on paying the highest bill in Europe.

According to analysts, the monopoly regime of DEPA, controlling 90% of the wholesale and 51% of the retail market, has helped it dominate the market and make excessive profits.

There is an LNG terminal in Greece (the Revithoussa LNG terminal , located on the islet of Revithoussa, in the Gulf of Megara, west of Athens). The Commission finds it interesting to ship gas from there from Bulgaria. This is why the project has been included in the Ten-E list and in the Commission’s security strategy for the region.

Although the nominal capacity of the Revythousa LNG terminal is 5.3 Bcm/y, it remains largely under-utilised.

A turn to Moscow?

The pro-Russia stance of the Syriza government doesn’t come as a surprise. The first clash of the Greek coalition government with the EU was over Russia, opposing tougher sanctions against Moscow for its role in the Ukraine crisis.

>> Read: Tsipras has first clash with EU – over Russia

But Syriza’s intentions were made pretty clear before the national elections in Greece. Syriza MEPs had initially opposed the signing of the EU-Ukraine Association Agreement, which irked Moscow, and abstained from backing a similar deal between the EU and Moldova.

Now the Greek government puts its hopes in the new project to bring Russian gas to Europe– the Turkish Stream project.

Bypassing Kyiv, and punishing Sofia for having obstructed the construction of scrapped South Stream, the new Turkish Stream pipeline will travel across the Black Sea to the Turkish city of Ipsila, close to the Greek-Turkish border. Its aim is to deliver 47 bcm/y of gas to Central Europe and the Balkans.

From the Turkish Greek border, the gas will run through a pipeline tentatively called Tesla, across Greece, Macedonia, Serbia and Hungary, to the Baumbarten gas hub in Austria.

>>Read: Greece, Macedonia, Serbia and Hungary discuss ‘Turkish Stream’

Greece is a strong supporter of Turkish Stream, but it dislikes the pipeline's name.

>> Read: Tsipras: ‘Turkish Stream’ will have another name on Greek territory

The Commission takes the view that Turkish Stream is not viable. Experts say that materialising huge projects is extremely difficult, and even more difficult for a region like South East Europe.

>> Read: Šef?ovi?: Turkish Stream ‘will not work’

As Greece is cashless, Russia has offered to pay for Athens’ share in building the future pipeline, with the understanding that the amount will be an advance on the profits to be made by the Greeks from transit fees.

>> Read: Speculation rife over Russia's Turkish Stream loan to Greece

Cashless Bulgaria was previously been made a similar offer over the now defunct South Stream project.

Romania – a good example?

In the past, Romania suffered from similar problems in the energy sector as its neighbour Bulgaria. However, there are substantial differences. One is that Romania has its own gas production, it is better connected to its Central European neigbours and is less vulnerable to disruptions of gas supplies from Russia.

But perhaps more importantly, the Romanian energy sector has undergone important changes in recent years. Through consistent judicial and legislative efforts, both the fight against corruption and the legal framework regulating the sector have greatly improved.

>> Read: Ukraine crisis, anti-corruption drive, boost Romanian energy reform

Positions

Former US Ambassador Matthew Bryza, now Director of the International Centre for Defence Studies, warned Greece against turning its domestic gas market back to a monopoly regime at the expense of Greek consumers.

"I heard the Minister of Energy emphasise the need for a multidirectional energy policy and the major powers not to exploit small ones. We have no objection. If these are the goals of Greece, the worst thing to do is to step back in(to) the Southern Gas Corridor and return to the monopoly that led Greece to pay for natural gas more expensive than anywhere else in Europe.”

Indeed, according to Eurostat, Greek consumers pay 35% more for natural gas than in more Western EU countries.

Greek Energy Minister Panagiotis Lafazanis, who elongs to the leftist wing of the Syriza party, said last March that Athens is not willing to follow EU’s energy strategy as it currently stands.

“We generally don’t question the declared objectives of Energy Union, but we do doubt whether the means being proposed can succeed or, on the contrary, will end up reinforcing the inequalities and painful economic and social complications currently prevailing in the eurozone and the EU,” Lafazanis said.

“Greece will not become a dependent pawn of unilateral energy choices or axes, in the name of the alleged diversity of EU’s energy supplies,” Lafazanis also stated.

The minister also hinted that Athens has its eyes open for cooperation with other non-EU countries.

After he clarified that Greece was not an energy “satellite” of any big power, he said that it was pursuing “multidimensional energy relations with all the countries of our region and in Europe”, specifying the “wider geographical definition of the latter”.

Slavcho Neykov, an energy policy expert and a former Director of the Energy Community Secretariat, told EURACTIV that the Bulgarian energy sector suffers from two basic problems.

The first one is linked to the lack of updated strategic energy priorities. The present government has adopted an excellent programme, linked to the energy sector, he said, adding:

“However, it is not only the government in charge – the parliament and the energy regulatory authority also have to contribute substantially. Normally, preparation of new energy strategy takes time. In the Bulgarian case, it will be much easier that the competent institutions look for a consensus on several key priorities. In relation this, I will mention a few factors – the process of liberalization of the energy market, the development of the nuclear sector, the steps towards improving the energy efficiency and the update of the regulatory framework are key.

“The second basic problem is linked to the social dimension of the energy sector developments. In recent years, the politicians talk about market principles of developing the energy sector, but de facto they still do not separate the from social issue. Sadly, energy poverty is a huge national problem with variety of dimensions, but it should be treated separately from the energy sector development.

“The optimistic part of the current energy equation is that this government has changed completely its approach to the sector – there is much more transparency, much more and much better communication with the private business and much stronger readiness for reforms. Besides, it put Bulgaria back on the European energy map with a proactive position towards energy developments of regional and European value. The Regulator has also undergone substantial changes in the last month – for the first time since its existence the commissioners have been appointed by parliament, thus increasing its independence. The parliament, however, needs to undergo substantial changes – first of all to be more precise in following EU requirements when adopting laws and secondly – to stay away from politically motivated interventions in the work of the Regulator. Unfortunately, so far there have been discrepancies in its work in both directions.”

Further Reading

European Commission

Other EU institutions

NGOs and think-tanks

Other Documents

Press articles

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