Renegotiation unlikely despite Bulgarian regulator ‘demands’

04 June 2014 08:00 Source:ICIS

The renegotiation of long-term supply contracts between Bulgarian state-owned utility NEK and two private coal-fired power producers would be a step towards further market liberalisation in Bulgaria, according to traders.

But market sources doubt NEK would succeed in getting more favourable contract terms.

Last Thursday Bulgaria’s energy regulator SEWRC published a statement in which it “demands” that NEK starts negotiations with the 670MW AES Maritsa East 1 and 908MW ContourGlobal Maritsa East 3 coal-fired power plants to change the conditions of long-term contracts signed back in 2001 which oblige the utility to buy all the electricity produced by the two plants at a fixed price.

This was to ensure a return of investment for American companies AES and ContourGlobal which have since upgraded the plants and made them more efficient and compliant with environmental standards.

In the statement, SEWRC demands the purchase price for the power produced by AES Maritsa East 1 be reduced by 30% and that one of the facility’s units starts selling directly to the free market.

Similarly, ContourGlobal Maritsa East 3 should reduce its price by 20% and two of its blocks should sell to the market, according to SEWRC’s statement.

“These long-term contracts for purchase of electricity are not in line with the new European requirements for competitive market conditions,” the statement said.

“They don’t comply with the standard electricity purchase contracts signed on the European markets and put ContourGlobal Maritsa East 3 and AES Maritsa East 1 in a more favourable economical position compared with other electricity producers as well as potential new market participants.”

Furthermore, lower electricity demand on the internal regulated market because of medium voltage customers moving to the free market means that NEK has to buy a lot more energy than it actually needs to supply the internal market.

Producer’s position

According to ContourGlobal Maritsa East 3, SEWRC should not influence such contracts.

“The regulator is not counterparty to our contract. It does not have the right to impose conditions,” a spokesman for the plant operator said on Tuesday. “We expect that the government will honour its obligations in regards to our contract,” he added.

Traders said on Tuesday that while a change to the contracts would be beneficial to the free market it was unlikely that the negotiations will be successful.

“How could one oblige NEK, AES and ContourGlobal to negotiate a price decrease?” one Bulgarian trader asked.

Another added that in cases where big investments are made, the investor expects a return within a certain number of years, therefore it was doubtful that the terms of the contracts would be changed.

However, a third said there was a chance for the contracts to be renegotiated considering that steps needed to be taken to improve NEK’s bad financial shape.

AES was not available for comment at the time of writing.

Renewable law changes

In the same statement SEWRC also proposed a change in the Bulgarian renewable law which would give the regulator the right to decide how much electricity produced from renewable sources would be bought by NEK at preferential prices, taking into account the expected demand in the country.

The regulator is proposing that NEK would buy only 50% of the electricity produced by wind and solar facilities at preferential prices for the next regulatory period starting 1 July.

Wind and solar lobby groups insisted such measures would be disastrous for the Bulgarian renewable energy sector. Irina Peltegova

By Irina Peltegova