ELECTRICITY MARKET IN BULGARIA an attempt for realistic point of view

Lubos Pavlas Regional manager of CEZ for Bulgaria

Sofia, 27.02.2008

OUTLINE OF PRESENTATION 1. CEZ POSITION ON BG ENERGY SECTOR 2. BULGARIAN ENERGY MARKET MODEL  Market model   Regulatory framework Market development 3. REGIONAL ENERGY MARKET  Cross-border capacity market, regional prices, energy flows 4. CHALLENGES TOWARDS BULGARIAN ENERGY SECTOR 2

CEZ GROUP OPERATING IN BULGARIA 42% SHARE IN DISTRIBUTION & SUPPLY AND 11% SHARE FROM GENERATING CAPACITY PRODUCTION DISTRIBUTION

TPP Varna

(100% owned by CEZ a.s.) -

production license CEZ Distribution Bulgaria

BG State) – (67% CEZ a.s., 33%

distribution license

SUPPLY (REGULATED)

CEZ Electro Bulgaria

(67% CEZ a.s., 33% BG State) -

public supplier license

WHOLESALE

CEZ Trade Bulgaria

(100% CEZ a.s.) -

trading license

CORPORATE GOVERNANCE

CEZ Bulgaria

– 100% CEZ a.s.

3

ELECRICITY MARKET MODEL - SEGMENTS Export?

15% Producers 85% regulated Quotas & PPA Free

Not clear Traders Consumers HV Consumers HV

Free

Consumers HV/MV

Bilateral contracts Scheduling Balancing According to Market Rules

Not clear Unprotected Consumers NEK Public Provider & Trader

R.Tariffs

E.ON EVN CEZ

R.Tariffs

Consumers MV, LV, households 4

OPEN ELECTRICITY MARKET IN 2007

REGISTERED MARKET PARTICIPANTS 65 Eligible Customers, 7 Producers, 26 Traders TOTAL VOLUME ON THE BG OPEN MARKET FOR 2007 IS 4.3 TWh



11-12% from production 35 TWh (net)



15-16% from the end user market in BG 27 TWh (net)



3.0 TWh traded by traders, or app. 8% from production Generation 2007 35 TWh (net)

Open Market 4.3

11%

15% market End user market 2007 27.0 Twh (net)

Open market 4.3 Twh 16% Production 35 89% Production Open Market

85% Tariffs

Regulated 22.7 TWh 84% Open market Regulated 5

REGULATORY FRAMEWORK

THERE ARE STILL SOME GAPS IN THE LEGISLATION CONCERNING THE OPEN MARKET



Energy Law 2003 and amendments from Sept. 2006:

 Dominant role of PUBLIC PROVIDER (NEK) as a hidden “SINGLE BAYER”  Eligibility is a matter of choice  Unclear difference between protected consumers and eligible customers, no clear function of public supplier / end supplier, purchase from the producers side still under regulations.



Market rules

– not changed significantly since 2004, at the moment there is a proposal for changes in the Market Rules, however the changes are concerned to keep the regulated market which is full contradiction to market opening approach.



Grid Code

– contradiction between central dispatch and liberalized market. 

Quota mechanism

Provider

-

generators are obliged to sell most of their production to the Public 6

CROSS-BORDER CAPACITY MARKET  

FIRST CROSS-BORDER TENDER ORGANIZED BY ESO IN OCTOBER 2007 LIMITED NUMBER OF PARTICIPANTS DUE TO TWO MAIN REASONS: a) Lack of power on the BG market (due to high regulated quotas) b) Power companies can NOT export it due to the Criteria in art. 3 according to which traders can NOT export more than 25% of their sales portfolio on the open market.

This eliminates all new market participants and puts a “Chinese wall” for the current ones.

Conclusion



VICIOUS CIRCLE

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REGIONAL ENERGY MARKET – PRICES EUR/MWh 39 60 80

HU

36 50 55 2006 2007 2008 40

SR

55 60

RO

2006 2007 2008 2006 2007 2008

GR

25 28 32

BG

2006 2007 2008 50 60 80 2006 2007 2008 Prices in Bulgaria remain the lowest in the region 32-35 euro Consequently, Energy flows are towards West and South 8

VISION FOR ELECTRICITY MARKET PROGRESS

1. PRODUSERS / WHOLESALE

 Allow power plants to sell at freely negotiated prices to cover costs and to increase availability of power on the open market;  Suspension of the “quota mechanism”;  Development of market for

“System services”

(primary, secondary regulation, etc.)

2. MARKET MODEL -> CREATE SHORT-TERM MARKET

 Switch from week ahead to day ahead – key factor for optimization and lower risk  Create Power exchange or OTC to show market reference price  Introduce Balancing groups - optimize costs and implement standard products.

3. CROSS-BORDER CAPACITY MARKET

 Equal access for all market participants to the cross-border capacity

4. TRANSPARENCY AND ACCESS TO INFORMATION

 Equal access for all market participants to the information for production, end users demand, cross-border trade, ect.

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CHALLENGES TOWARDS BULGARIAN ENERGY SECTOR

1. PRACTICAL IMPLEMENTATION OF EU DIRECTIVE 87/2003

 National Allocation Plan /NAP/ 2007 and NAP 2008-2012 have been significantly reduced by European commission  NATIONAL REGISTER FOR TRADING WITH ALLOWANCES NOT OPERATING YET  FUTURES PRICE FOR CO 2 ALLOWANCES FOR 2008 RICH 23 €/ton

2. INCENTIVES MODEL FOR RENEWABLES

 The present incentives model is unfair to regional “end suppliers” and customers  The high priority for connection of renewable power plants leading to conflicts within DISCOs and TSO

3. GAP BETWEEN BULGARIAN AND REGIONAL ELECTRICITY PRICES

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