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Bulgaria - Energy Market

SUMMARY

Bulgaria's economy is currently in transition moving from central planning to a market driven economy and is experiencing difficulties due to the disintegration of its traditional economic links, lack of investments and the sharp rise in the prices of energy.

At present, the energy sector is characterised by:

• Problematic, highly inefficient power supply units,
• Inefficient and ineffective system of subsidies for heating and electricity,
• All power generation assets are outdated and they consist of imported equipment,
• Intensive use of indigenous coal in thermal power plants,
• High energy consumption level per capita,
• Recent decommissioning of the Kozloduy NPP Unit 1 and 2,
• Bulgaria is the main exporter of electricity in the region (46%), followed by Romania (28%) and Serbia (22%),
• Balanced fuel mix, and excessive over-capacity, even with nearly 2.6MW of installed capacity inoperable.

The energy sector in Bulgaria is supervised currently by the Ministry of Energy and Energy Resources.

Bulgaria initiated the restructuring of its power sector in 2000. It was reorganised into seven independent power generators (six thermal power plants and Kozloduy NPP), seven distribution companies, and a transformed National Electricity Company (NEK). NEK retains some hydropower stations, and is the primary grid operator and only supplier of power to distributions companies. NEK is responsible for electricity transmission, and being the system and market operator, it’s monopoly as a buyer and seller will end in 2007. Starting in July 2003, the domestic power market will be partially opened to competition, that is, 10 % of total demand.

Decommissioning of old capacities and renovation will continue to fall behind the modernisation requirements and will be based on specific regional allocation of fuel and energy resources. In the long-term the share of nuclear power generation will decrease, while fossil thermal generation's share will increase significantly and hydroelectric generation will face a somewhat higher increase.

Bulgargaz, the National Gas Company, is responsible for developing the national strategy within the natural gas field and has as a major scope of activity in production, storage, transmission, dispatching, import, international transit and distribution of natural gas.

The whole economic and technical operation and development of the electricity sector is regulated, ruled, supervised and monitored by the State Energy Regulatory Commission (SERC), set up by an Ordinance in October 1999 as a public institution, independent and autonomous.

The electricity sector in Bulgaria is under a process of transition from a monopolist structure to a competitive energy market in order to ensure safety in electricity supply, quality of electricity supply, efficient use of fuel, direct market relations between producers, energy/services suppliers and customers.

The energy strategy envisages financial restructuring of the state-owned energy companies and their speedier privatisation. (There are a total of 104 state-owned energy enterprises, of which 77 will be privatised).

Bulgaria’s electricity market will be introduced gradually by granting electricity generators free access to the transmission and distribution network (so called third party access) and to contract freely with eligible end-users. The first stage of restructuring is to introduce competition among generation companies (suppliers) and give eligible consumers the rights to choose their supplier. In the next stage, a spot market will be set up as well.

The Introducing an open electricity market in Bulgaria will have the following objectives:

• Cost reduction and limited future price increases,
• High reliability and quality of electricity supply, and
• Transparent and fair allocation of market benefits.

Bulgarian demand for equipment and services that are related to the energy sector is expected to witness a significant increase over the next years. Some of these increases will be linked to the above-mentioned restructuring/privatisation programs.

Bulgarian’s power sector cannot be planned in isolation anymore, but rather from a regional perspective taking into account developments in neighboring electricity systems.

MARKET HIGHLIGHTS & BEST PROSPECTS

Market Profile

Bulgaria's energy sector is dominated by nuclear power and imported fossil fuels. The energy balance for the country shows that more than 70 % of the energy consumption is based upon imported fuels. The rest of fuel consumption is mainly coming from low-grade coals and limited hydropower generation. Due to the geographic location and the geologic conditions, Bulgaria has a number of potential sources for renewable energy, i.e. solar, hydro, biomass, geothermal and wind energy.

Low-grade coal deposits account for most of Bulgaria's currently exploited energy supplies. Large-scale hydropower accounts for nearly 7-8 % of all electricity generation. Bulgaria's nuclear plant accounts for between 40-45% of all electricity supplies, depending upon the availability of hydropower and on demand.

The Balance of Energy Resources in Bulgaria

KTOE - (thousand tons of oil equivalent)

Despite its sizeable fossil fuel reserves, Bulgaria has become a net-importer of crude oil and gas due to obsolete equipment and a slow-down of investment in exploration and production of coal.

Oil and gas exploration opportunities in Bulgaria are widespread since most of the present production is shallow and deeper horizons are under-explored even in the old producing areas. Modern technologies for exploration and field development are expected to make the Black Sea area an attractive exploration target. The Bulgarian Ministry of Energy already granted the first gas deposit 25-year concession to Petreco Bulgaria and Petreco S.A.R.L. Petreco agreed to invest some USD 50 million in development the Galata gas site. The Galata deposits are estimated at 1.44 bcm, will provide some 0.4 bcm annually, or 13% of the annual domestic consumption.

In 2002, NEK EAD exported on commercial terms 6168 GWh electricity which is 17.57% of the total annual sale. The other sales are as respectively: to power distribution companies – 23677 GWH (67.43%) and to HV customers – 5269 GWh (15 %). For 2003 experts foresee that total NEK’s exports will stand at around 5 million GWh. The primary cause of the decreased electricity export is the decommissioning of the two 440 MW units of the Kozloduy Nuclear plant. In 2003 the electricity exports to Turkey comprise 30 % of the total exports, to Greece – 42.1 %, Serbia –16.1%, Macedonia –4.51% and Romania respectively 1.3 %.

The whole economic and technical operation and development of the electricity sector is regulated, ruled, supervised and monitored by the State Energy Regulatory Commission (SERC), set up by an Ordinance, in October 1998, as a public institution, independent and autonomous.

Electrical Power Generation and Transmission Equipment (ELP):

The available capacity purchased by NEK in 2002 from independent producers amounted to 31222 GWh out of which: NPP Kozloduy – 18800 GWh, condensed type power plants -9583 GWh, DH plants – 1538 GWh and HPP –280 GWh.

NEK annual sales for 2002 were 35 114 GWh and grouped as categories as follows: electric distribution companies – 23777 GWh (67.43%); HV customers - 5269 GWh (15%); trade export –6168 GWh (17.57%).

In 2002 the National Electric Company concluded power sales with 99 high voltage customers and 8 power distribution companies. Based on the annual consumption of electricity, the following customers can be defined:

• 12 Customers with annual consumption of which over 100 GWh – 77.40%
• 6 Customers with annual consumption over 50 GWh – 7.65 %
• 25 Customers with annual consumption over 10 GWh – 11.88 %
• 56 Customers with annual consumption less than 10 GWh – 3.07 %

In 2002 the total output of hydro power plants run by NEK amounted to 2 377 GWh, power consumption in the pumping mode to 824 GWh. In the beginning of 2002, NEK EAD was the owner of 64 hydro power plants with 2 729 MW total installed capacity. During the period 2002 –2003 twenty- one hydro power plants were privatised. The fourteen largest of these hydro power plants operate within four cascades - Belmeken-Sestrimo-Chaira, Batak, Vacha and Arda, all used to generate electricity, cover peak loads and regulate the parameters of the electric power system.

The ministry of energy recognises the national priority of preserving and increasing the market presence on Bulgaria in the regional electricity market as well as the general trend of emerging European market -moving from opening of individual markets towards trading between and among open markets.

Bulgaria’s electric power transmission network consists of transmission lines of 750 kilovolt (kV), 400 kV and 110 kV, step-down substations, medium and low voltage distribution networks that supply the industrial, public and residential customers; transformer stations, and nodal substations, and installed medium voltage transformer capacity. The system of 400, 220 and 110 kV lines, which have a total length of about 12,269 kilometers, operates in a ring mode. The inter-system transmission line of 750 kV from Varna to Isakcha to Yujnoukrainskaya nuclear power plant and the inter-system transmission line of 400 kV from Dobrudja to Vulkanesht are presently in a reserve status.

In May 2001, Bulgaria moved to increase the linkage of its electric system to Turkey's by starting the construction of a second 400 kV cable to Turkey. It is estimated that the 42-mile link will cost $35 million. The GOB does not envisage privatisation of the power transmission network, as it is considered a matter of national security.

Bulgaria’s nuclear power plant is based on Russian technology. The national power plant "Kozloduy “ is in charge with nuclear electricity generation. Nuclear electricity generation will remain state owned. For the past decade, Kozloduy NPP has been providing 44-46% of the total average annual generation of electricity in of Bulgaria.

The Bulgarian energy covers about 45% of the constant deficit in the overall energy balance of the Balkan region, which is assessed as a significant contribution to the economic stabilisation of the region.

Nuclear power has a major contribution in satisfying the needs for electricity of the economy and population on the national and regional level. It guarantees a minimum risk in terms of the supply of energy sources and maximum economic effect in the long run. Its reliability is very high and is not affected by meteorological conditions.

Implementation of the planned arrangements for safety upgrading within the declared timeframe, the achievements made in bringing the operational safety of the existing nuclear facilities into compliance with the internationally accepted standards, assessment of the safety level by the regulatory body of Bulgaria and international verification on the part of the IAEA with regard to the meeting of the recommendations made for the solution to the safety problems encountered in 1991-1992 provide grounds for the conclusion that VVER-440/V-230 units are subject to modernisation at an acceptable cost.

Oil & Gas Industry and Equipment Market

Production of natural gas in Bulgaria is negligible (less than 1 percent of total consumption, although due to rise to 7 percent when Galata offshore field comes on stream late 2003). Natural gas accounts for less than 20 percent of energy consumption.

Bulgaria presently has virtually no proven reserves of oil. There have been considerable efforts over the years to explore for oil and gas, but Bulgaria still lacks modern exploration and production technologies, especially equipment for seismic testing and offshore drilling. To encourage exploration, the government has signed agreements for large tracts both in and around the Black Sea. Texaco, British Gas, Enterprise Oil, OMV, Vintage Oil and Maxus Energy received exploration and production licenses.

Over the past decade, average oil production in Bulgaria has been 1,000 barrels per day (b/d). Crude oil imports have been more than 90,000 b/d while imports of refined petroleum products are more than 13,000 b/d. Lukoil Neftochim, Bulgaria's main refinery, operates a refinery near Bourgas that produces 134,000 b/d. It accounts for 85% for the refined products in Bulgaria.

Bulgargaz is the National Gas Company, having the responsibility of performing the national strategy within the natural gas field and is also responsible for the storage, transmission, dispatching, import, international transit and distribution of natural gas. In March 1998 the Bulgarian government signed an exclusive 12-year supply deal with Gazprom for Bulgargaz. Since the low-pressure distribution network is underdeveloped, large industrial consumers dominate demand. Domestic consumption of natural gas significantly declined over the past several years dropping to 3.1 bcm in 2001. This is due in large part to the reform and restructuring processes.

The underground gas storage capacity will continuously increase and after 2000 the gas quantities extracted from deposits during winter will represent about 10% of the consumption.

The Galata deposits on the northern Black Sea coast are the only known gas reserves in Bulgaria. They are estimated at 1,44 bcm and provide 0,4 bcm annually, or 13 % of the annual domestic consumption. The utilisation of natural gas has been traditionally very low in Bulgaria and low-pressure supplies and household gas consumption facilities are practically non-existent. Only 28 companies represent 78 % of the gas consumption in Bulgaria.

There are currently two pipeline projects being debated in Bulgaria. Both projects are intended to serve as by-pass conduits to carry Caspian oil to the Mediterranean without having to transit the Bosporus. Both projects will originate at Burgas, but one will transverse the Balkan peninsula across Bulgaria, Macedonia, and Albania to the Adriatic port of Vlore. The other project will go southward to the Greek port of Alexandropolis. Bulgaria and Greece signed an agreement for this project in January 2003. Russia would be the third partner in the project, but they have not yet signed the agreement.

The market for oil and gas equipment, tools and services is entirely supplied by foreign firms. In this environment, the total value of required trunk pipeline material and equipment, compressor stations, telecommunications equipment and technology, computer and communications hardware installations and related to them services will be significant.

The medium-term government priorities in the gas sector should be focused on:

• Expanding the facilities for transit transmission to Bulgaria’s neighbouring countries,
• Development of the emerging market for low-pressure natural gas as a way of mitigating the impact of coal heating,
• Prospecting and developing the local hydrocarbon reserves.

Refineries

Neftochim is the refining company which operates the large 134,000 b/d oil refinery near Burgas and has 85% of the market for refined products in Bulgaria. Since October 1999, neftochim refinery at Burgas has been 58% owned by the Russian giant Lukoil, which paid $101 million for its share. As part of the deal , Lukoil committed to invest an additional $408.3 million by 2005 to upgrade the refinery and meet environmental standards. A parallel investment in petrol station chain worth around $18-20 billion has been launched in 2000.

In 1993 Bobokov brothers established in Russe a plant for production of motor and industrial oils and named it Prista Oil. Prista Oil is the main Bulgarian lubricant producer. In 2000 Texaco acquired 25 % equity stake in Prista Oil. The new products of the Bulgarian refinery, developed together with Texaco, were extremely well accepted in the domestic market. The company focused its export policy on some countries in Southeastern Europe - Turkey, Greece, Hungary and continued trading its lubricants on the traditional markets: Armenia, Israel, Bosnia and Herzegovina. In 1998 the company was ISO9001-quality accredited and its chemical laboratory was EN 45001-quality certified.

Coal

Twenty –two enterprises currently exist in the coal sector. Thirteen operate in coal production, reprocessing and sale; six are in the process of liquidation; and three are in bankruptcy. The thirteen coal producers utilise twenty-on coal mines, with three on the ground and the rest underground. Maritsa East coal mines exploit the East Maritsa coal basin, which is the largest lignite coal deposit in Bulgaria. The coal is used for electricity generation and for production of briquettes in the TPPs and a briquette factory next to the mines. These mines produce over 80 percent of the coal produced in Bulgaria, which in turn, is used to generate almost 40 percent of the country’s power.

Renewable Energy Sources (RES)

The key to successful development of renewable energies in Bulgaria requires a combination of political commitment and decision making as well as support mechanisms including well-defined government targets, technological advances and public acceptance. The total rural population, together with the urban population living in medium-sized towns will be considered as the primary market segment for RES applications.

The renewable energy sources (RES) theoretical potential in Bulgaria is considerable. According to the PHARE Project Report data, the RES potential is evaluated to 14387 J/year for geothermal energy; 77156,7 J/year for solid agricultural waste; 478,4 J/year – biomass from paper waste; 9605,2 J/year –biomass from wood for heating; 79,8 J/year –biomass from natural fibers; 11381,83 J/year –liquid agricultural waste; 25766 GWh/year – big and small HPS; 1450-1500 kWh/m year – solar radiation. The geothermal and wind energy sector’s potential is considered the highest, while larger-scale utilisation of solar and biomass energy may also be attractive as soon as the government develops its subsidy program and conventional energy prices continue to increase. There are no wind farms in Bulgaria, although recent wind analysis shows that wind speeds at certain locations along the Black Sea would justify the use of wind turbines.

The national program on RES in Bulgaria for 2002-2010 includes best prospects for the following renewable energy equipment.

In the current phase of Bulgaria’s economic development, renewable energy cannot replace conventional energy resources. It can only play a supplemental role as an additional energy resource in rural areas. The total market size for renewable energy equipment for 2002 was USD1.4 million where imports from EU have not been executed.

Further development of the renewable energy market in the short term will depend on the liberalisation of the power price system and government incentive programs. The most promising application and priority under the current situation is the refurbishment of a number of small hydropower (SHP) by investing up to about 600 USD/kW installed for plants now being out of operation and lower budget for plants operating significantly under the design output.

With regard to the wind energy there are two main fields of applications:

• Grid connected applications on a strictly commercial point of view. The future of these applications depends on the changes of the Romanian cost structure for conventional power generation and/or provision of subsidies.
• Supply of isolated remote area. If there is a political commitment to supply these isolated settlements (i.e. public funding) small wind turbines are an economically attractive alternative in connection with small diesel generators and PV system, where wind resources are sufficient.

The applications for biomass can be grouped into the following main market segments:

• A) substitution of part of the fossil fuels in existing district heating schemes (wood chips),
• B) enhanced uses of biomass as industrial fuels (wood chips and logs as industrial fuel for steam or hot water boilers) instead of oil,
• C) improved uses of biomass for new district heating schemes for small towns and villages near the resources, in the countryside, where the population has no access to central co-generation or gas supply, D) uses of straw and other agricultural by-products in appropriate biomass boilers for heat supply of farms and small villages (in the medium term).

The applications for geothermal energy can be grouped into three main market segments:

• market for district heating for urban areas and possibly for villages.
• market for thermal applications within the primary, secondary and tertiary sectors
• market for power generation connected to the grid in case of high enthalpy sources. According to the discussion on economic potentials, the top priority is the use of geothermal sources for thermal applications:
• • mainly in existing district heating supply system in the cities nearby the geothermal fields and in new DH schemes for smaller towns and large villages,
  • thermal applications for industrial or agricultural uses.

Best Sales Prospects

Best prospect areas are related t Co-generation equipment, Revamping of coal based power plants, Revamping of Russian built 200 Mw boilers/turbines/, Commissioning of un-finished hydro power plants, Instrumentation, control devices, SCADA systems, software, Services (such as ESCOs), Equipment for electricity distribution, Modernisation of refineries, crude and gas pipelines as well as distribution of oil products and gas.

Energy products made by enterprises subordinated to the Ministry of Energy and Energy Resources account for a small proportion of them. This goes to show that Bulgaria is extremely energy dependent and has an extremely high-energy intensity, exceeding that of all countries of Central and Eastern Europe and all EU applicant countries,

The perception of the quality of EU products in general in Bulgaria is excellent, as is the Europeans' reputation for being the best partners.

European companies could take advantage of the Bulgarian determination to rehabilitate the energy sector by selling licenses, know-how and special equipment to existing power equipment manufacturing facilities. EU firms could also take advantage of Bulgaria's low wages and skilled labor force by forming joint ventures or signing other types of agreements with these plants to produce higher quality/lower priced equipment to be sold to local power facilities or third countries.

Well-qualified expertise and capability exists in Bulgaria for export of consulting and engineering services for all types of projects in the energy sector. A significant number of turnkey projects have been performed by Energoproekt PLC, Glavbulgarstroy (GBS Impex), Gassstorymontaj, Chimcomplect in other countries. We are encouraging European engineering firms to form associations with these firms for work on joint third-country projects.

COMPETITIVE ANALYSIS

Domestic Production

Energy products, spare parts and equipment made by local private companies and enterprises subordinated to the Ministry of Energy and Energy Resources account for a very small proportion of resources. This goes to show that Bulgaria is extremely dependent on imported power equipment, devices and machinery and has an extremely high-energy intensity, exceeding that of all countries of Central and Eastern Europe and all EU applicant countries,

Much of the equipment for the local power industry is manufactured in Russia. Indeed, Bulgaria does not have its own domestic power generation equipment industry. This is direct result of Soviet industrial policy to export such equipment to the ex-socialists east European countries.

Potential direct EU exports of power equipment to Bulgaria will have to be viewed with the impact of high freight costs and competition with Russian industry that can still offer comparatively lower prices for equipment that is technically competitive.

Another category of equipment manufactured locally is not up to international standards. These items will have to be imported anyway. Competition could come only from other western companies. The list of this equipment and materials is as follows:

Nuclear equipment; power plant control systems and instrumentation; installations for solid, liquid and gas fuel handling or parts of such installations (such as special pumps, special compressors and high pressure fittings); high and medium voltage breakers; special high voltage transformers and insulated cells as well as parts thereof; conductors and electric insulators; ionic masses; special high alloy steel plates and bars; ferro-alloys and other special materials.

3rd Country Imports

Much of the equipment and technologies now in place in the Bulgarian factories is European origin, purchased in sixties and seventies. The Bulgarian import market for equipment related to the energy sector is dominated by German, French, Italian companies.

U.S. Market Position

The following U.S. companies are present on the Bulgarian power market: AES, Entergy, Emerson Process Management, Black and Veatch, Westinghouse, General Electric, Halliburton Energy Services, Harza Engineering, Honeywell, Horizon Energy Development, Parsons, Raytheon Engineers.

END-USER ANALYSIS

The electricity sector in Bulgaria is under a process of transition from a monopolist structure to a competitive energy market in order to ensure safety in electricity supply, quality of electricity supply, efficient use of fuel, direct market relations between producers, energy/services suppliers and customers.

Investments and projects

In 2002 and 2003, NEK invested in projects and sites of significant importance in order to ensure reliable and quality supply of electricity and reduction in power transmission and transformation losses. The investments made were mainly for rehabilitation and modernisation of power transmission and hydropower facilities needed for the interconnection of the Bulgarian power system to UCTE. The investment policy of the National Electric Company renders priority to the construction of new interconnection lines in order to increase the export and transmission capabilities. NEK investments for 2002 totaled to USD 60 million. The investments of the National Electric Company were applied in the following areas:

• Development of the EPS Interconnection Lines - In 2002, the construction of the second 400 kV interconnection line Bulgaria-Turkey was completed. In 2004, this line and the 400 kV switchyard at TPP Maritsa East 3 will be put into commercial operation.
• 400 kV Interconnection Line between s/s Chervena Mogila and s/s Dubrovo /Republic of Macedonia/ -. This project is financed by the electricity company of Macedonia (ESM) using a loan from the European Bank for Reconstruction and Development (EBRD). The Construction works are planned to start in the beginning of 2004.
• 400 kV Interconnection Line between Bulgaria and Greece- NEK EAD made a feasibility study for the project. There is a draft Environmental Impact Assessment Report. The electricity company of Greece (PPC) will apply to international financing institutions for financing the construction of the line.
• Refurbishment and Upgrading of the Power Transmission System -During the year, power lines and substations within the HV (110, 220 and 400 kV) transmission network were refurbished and built.
• Project for Improvement of the Joint Operation of the Bulgarian and Romanian Energy Systems -This project is financed under the EU Phare Program. It consists of procurement and installation of a fiber optical cable and optical telecommunication equipment to improve the communication link between the EPS of both countries.
• Development and Upgrading of the Electric Power System Dispatching -Activities related to the telecommunication system, telemetering equipment, PLC channels, etc. were undertaken to improve the performance of NDC and RDC (regional dispatch centers) in controlling the electric power system.
• Project for Rehabilitation and Modernisation of the Power Transmission System - Energy 2.The project started in 2002. It is co-financed with sovereign guaranteed loans extended by EBRD and the European Investment Bank (EIB) and equity funds of NEK EAD. The total project cost is 153 million Euro, of which 101 million Euro are borrowed funds. The investments under this project will be used for large-scale modernisation of the power transmission system and system dispatching. ESBI (Ireland) is the consultant for this project.
• NPP Belene: During 2003 conservation of machines and equipment, civil structures and site maintenance were undertaken on the site. Following a Decision ? 853 dated 20 December 2002 issued by the Council of Ministers of the Republic of Bulgaria, the Minister of Energy and Energy Resources was entrusted with organising the elaboration of evaluations on nuclear safety, radioactive protection, environmental impact, physical protection, radioactive waste, spent nuclear fuel and their management, as well as the social and economic importance of the NPP Belene construction. NEK EAD is in the process of issuing terms of reference for a feasibility study on the construction of an NPP with the aim to establish solutions possible for completion of the NPP construction at the Belene site.
• Rehabilitation and Reconstruction of Hydro Power Plants
  • A) Vacha Cascade: The project for rehabilitation of HPP Devin and HPP Teshel is financed with funds of the company and credit facilities guaranteed by the Government of Austria. The contractor for this project is VA TECH, Austria. The project for rehabilitation of PSHPP Orphey and HPP Krichim is financed with bank loans extended by Societe Generale (France) and SG Expressbank (Bulgaria) and these credits are secured by the Austrian Control Bank. The contractor for the project is a consortium of ALSTOM Power and VOITH Siemens Hydro.
  • B) Gorna Arda Cascade: Part of the site preparatory construction and erection works was completed.
  • C) Hydro Power Project Yadenitsa : Site preparatory construction works were completed financed with Company own funds. Capital construction works is expected to be financed with internally generated and borrowed capital.
  • D) Hydro Power Project Tsankov Kamak: This is a bilateral hydropower projects for the construction of a new HPP and dam – 80MWt/185 MWth per year and its implementation will be. Partners of NEK as EPC contractor are Va Tech (Austria) and other Austrian companies. The investment is estimated to €170 million and the financing is ensured from local banks as well as an Austrian export credit.
  • E) Hydro Power Plant Alek The project for rehabilitation of HPP Aleko is financed by the company and with the support of the Swiss Government. It is expected to have this project completed by the end of 2003.

Bulgaria supports the development of significant energy projects under the EU and USA initiatives and related to the regional energy market:

• Construction and expansion of the electricity and gas interconnections in the SEE region, which is of extreme importance with regard to gas sources and electricity supply diversification
• Nabucco
• Construction of oil pipelines Bourgas –Alexandropoulis and Bourgas – through FYROM - Vlore

In 2003, the National Energy Strategy was endorsed by the Council of Ministers having the following main priorities:

• Security of supply
• Competition in the energy sector
• Environmental protection
• Privatisation and liberalisation
• Establishment of a competitive energy market

The Bulgarian energy is to be regarded as a part of the rapidly integrating market and as a close system. Compatibility is to be regarded as a major mark in the energy policy and the regulatory body is to take its dominant place among the energy institutions through active measures in formulating market and administrative rules. The main principle of the strategy is Bulgaria to preserve its potential for exports of energy products through utilisation and improved efficiency of the energy facilities. The strategy objectives are to curtail the role of the State as an administrator and to create transparent conditions for business in the energy sector, as well as to protect the public interest.

Summary of the Bulgarian Energy Law

The Energy Law, adopted by the Bulgarian Parliament on November 26, 2003, is landmark legislation for Bulgaria:

• Good law by international standards, compared to the energy laws of Spain, Latvia, or Romania, and a very good one by regional/reforming countries standards, compared to Hungary, Croatia or Albania
• Builds upon and implements the 2002 Energy Strategy of the Government of Bulgaria
• Harmonizes Bulgarian law with the EU Directives on electricity and natural gas
• Establishes a modern legal framework for the energy sector
• Reduces government interference in the regulatory process
• Independent and transparent regulation via greater authority and autonomy of SERC:
• SERC has the authority to adopt key implementing regulations. By law, SERC has greater authority than the regulators in Croatia, Hungary or Greece;
• SERC is financially independent: primary funding from fees, not from the budget; On par with the funding mechanism of the regulators in Croatia, Greece, Romania, Turkey and Albania;
• SERC has full authority to set tariffs and issue, amend and revoke licenses. By law, SERC has greater authority than the regulators in Croatia or Hungary;
• SERC monitors utility performance and adherence to set customer service standards; On par with the responsibilities of the regulators in Romania, Turkey Greece and Albania;
• SERC decisions can be appealed only to the courts (no administrative review). This is a key requirement of regulatory independence and SERC conforms to international practice.
• Creates a more investment-friendly environment via more transparent regulatory process
• Public participation in the regulatory process: public access to SERC decisions, public records of submissions and public hearings.
• Requires unbundling of energy sector activities necessary for market competition:
• Legal, organisational and financial separation of production, transmission and distribution and retail sales.
• Opens the electricity market for regional trade:
• Based on reciprocal treatment of eligible consumers in other country;
• Full market opening when Bulgaria joins the EU in 2007.

The main objectives of the governmental energy policy comprise:

• ensuring the primary energy supply by diversification of sources and creation of the necessary infrastructure for transiting the Caspian Oil towards the Central Europe
• elimination of subsidies for mining activities and closing of inefficient mines
• modernisation of power and heat generation, transport and distribution installations, in accordance with the "Least cost development study"
• stimulation of occurrence of private players on the electricity and heat market
• elimination of cross-subsidies for heat and electricity
• preparation of the EU accession, by adopting the "acquis communautaire"
• participation to East-West energy exchanges (interconnection of the Bulgarian power system to the UCPTE)

Privatisation strategy in the energy sector will be oriented towards coordination of the reforms and the privatisation processes, which calls for the following sequence:

a) Privatisation environment
For a successful privatisation, it is necessary to create an appropriate regulatory environment and to prepare energy companies for privatisation. To this end, rules and ordinances pertinent to the regulation of prices will be drafted and approved along with indicative schedules for the opening of the internal and external market and for normalisation of electricity prices for the household sector.

b) Privatisation of electricity distribution companies
To reduce the risk for the energy industry, the privatisation in the electricity sector will start from the privatisation of distribution companies in 2002-2003. The successful privatisation of distributing commercial structures, where direct linkage between suppliers and customers takes place, will bring down the non-payment risks for the electricity suppliers, respectively for the suppliers of fuel. Thus a more favorable environment will be created and the required risk premiums will be brought down throughout the entire supply chain in the process of subsequent privatisation.
In parallel to that, a better, non-politicised type of management will be attained, as well as more efficient operation of enterprises, improved quality of service and rapid building of corporate culture.

c) Privatisation of power plants
Privatisation of power plants will start from the key power and thermal power plants and will involve strategic investors. In 2003-2004 sub-peak power plants in Bobov Dol, Rousse and Varna will be privatised. Once clear regulatory and market rules are put in place, no obstacles will exist to an open and fair process of selling of all plants without exception.

d) Transmission company
Due to the fact that the transmission company (the National Electricity Transmission Company) acts as an operator of the transmission company, power plants operator, wholesale trader and system operator, the restructuring of the company is high on the agenda, because this will result in its facilitated regulation and in the prevention of possible discrimination with regard to the free access.

On 19th February 2003 a contract for Mutual Operation of High Voltage Transmission Line 400 kV Dobrudja (Republic of Bulgaria) – Vulcanesti (Republic of Moldova) and of High Voltage Transmission Line 750 kV Varna (Republic of Bulgaria) – Isaccea (Romania) was signed in Bucharest between the power transmission companies of Bulgaria and Romania.

The contract was signed by Mr.Vasil Anastasov - Executive Director of NEK EAD and Mr. Jean Constantinescu – General Director of Transelectrica.

MARKET ACCESS

A long-term strategy with a qualified Bulgarian partner is recommended, as are experienced country managers with Central European or other developing country experience. Also recommended is that contacts be made with industry and Government. EU participation in Bulgarian trade shows, presence in demonstration projects is highly recommended. Other important strategies could be buying a local firm and using its projects as a base, committing to after-sales service.

Agents and distributors can contribute importantly to an EU company’s success on the Bulgarian market. However, as a general rule, finding a partner in Bulgaria’s complex economic situation requires EU companies to invest sufficient time on their own to satisfy themselves that the selected partners are fully capable and reliable. Fortunately, well-qualified candidates exist in Bulgaria. Bulgarian specialists are educated, have a good understanding of technical matters, and, with a minimal training, can rapidly master new marketing techniques.