Bulgaria retroactive gas price change could wipe out market, traders

Aura Sabadus Luka Dimitrov

30-Mar-2020

BUCHAREST (ICIS)–Bulgarian state institutions have come under severe criticism amid concerns that Gazprom-triggered moves to change the regulated gas price retroactively would wipe out the country’s budding gas market and trigger a chain of bankruptcies and lawsuits.

The Bulgarian parliament is poised to adopt a series of amendments to the energy law this week to allow regulator EWRC to change the regulated gas price to end consumers back to 5 August 2019.

The retroactive change would reflect a gas price discount given by Russia’s Gazprom to the state incumbent Bulgargaz backdated to the start of negotiations last summer, traders said.

As Gazprom gave a 40% discount on this year’s price starting from April 2020 and has reimbursed an estimated €77m to Bulgargaz retroactively to 5 August, the regulator has proposed to change the regulated price not only going forward from 1 April, but also backwards so that Bulgargaz may, in turn, reimburse money to end consumers.

The proposed amendments were then drafted by the ministry of energy and sent to the parliament’s energy commission.

The proposals sparked anger among market participants, who say state institutions have acted in sheer disregard of the entire sector.

NO CONSULTATION

Traders told ICIS that the Bulgarian government may have received a note from the directorate general (DG) for energy at the European Commission, warning them against the retroactive tariff change.

However, when the draft amendments were sent to parliament at the end of last week, they did not reflect the commission’s position related to this subject, they said.

Neither DG Energy, nor the Bulgarian government commented by publication time.

Traders also said that although there is concerted opposition against the proposed measure from the private sector, views from market participants have been ignored.

They point out that when the draft amendments were received, parliament launched the public consultation on Friday evening, giving companies only until 30 March 10am Sofia time to comment officially.

“They gave us two days to comment, one of them was Saturday, the other one Sunday,” a trader said.

In a letter sent to the parliament’s energy commission by BULGAS, the Bulgarian gas association, and seen by ICIS, traders warn that if adopted, the measures would wipe out competition, trigger a chain of bankruptcies and court cases and set a dangerous precedent for the region.

“[If enacted it will trigger] irreparable harm to all free market participants,” the letter said.

HITTING HARD

Firstly, a change in the regulated gas tariff would also have to be reflected in the balancing market, where, through law, the daily balancing price is indexed to the former.

This means that if the balancing price is adjusted lower back to 5 August 2019, many companies would suddenly find themselves in negative positions and would have to reimburse some €5m to the transmission system operator, Bulgartransgaz.

Bulgartransgaz did not comment by publication time.

Secondly, they note that many private suppliers bought natural gas from other sources, including LNG imported via Greece last year.

Since Bulgaria does not have a free market, the regulated gas tariff at which Bulgargaz sells to end consumers acts as an unofficial index. This means that in order to capture end consumers, private companies would need to sell at a discount to that tariff.

If parliament amends the law and the regulator adjusts the regulated tariff retroactively to 5 August 2019, this tariff would fall below the price at which private companies had been selling.

Suppliers fear that their own end consumers might ask for a similar retroactive adjustment, but they could not offer it since they did not purchase the gas from Gazprom.

Thirdly, gas distribution companies as well as district heaters would also be affected because since last year they had been purchasing not just Russian-sourced gas from Bulgargaz but also from alternative sources.

If the regulated tariff is decreased to reflect the latest changes in the Gazprom price, they would have to pay for the gas that had been bought from alternative sources from their own pocket.

This is because the gas bought from alternative sources last year would suddenly become more expensive than the Russian price which is now adjusted lower.

“There was no mention of a retroactive payment [at the time when companies bought from alternative sources],” the BULGAS letter said.

The association further noted that the proposed changes were a flagrant breach of EU competition, and, if enacted, would wipe out the budding market, consolidating instead the positions of Bulgargaz and Gazprom.

Bulgargaz, EWRC and the Bulgarian parliament did not comment by publication time.

POWER PRICES IMPACT

So far, the regulator has proposed to adjust the tariff lower for natural gas, water and heating, but it is unclear whether the measure would also extend to electricity.

Traders say electricity prices are already very low on the combined impact of plummeting demand linked to the emergency measures to contain the coronavirus and a large cash injection to save a state-owned coal-fired power plant.

A surge in hydro generation during the spring months would further depress power prices, traders said.

“I can’t say how much [lower prices will go] because we are entering a period of spring where hydro power plants will start producing one of the cheapest energy in large quantities,” added one of them. “Right now it’s pretty hard to make good predictions.”


Additional reporting by Luka Dimitrov

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