Economic Policy Review ISSN 1313 - 0544

Energy Liberalization?

Author: Adriana Mladenova / 27.06.2007
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1st of July 2007 is an emblematic date for the European Union, in particular for Bulgaria, because this is the official date of liberalization of the energy market in the EU.  This means that the private consumers, not only industrial ones, will have the possibility to buy electric power and heat supply from foreign suppliers and to negotiate the conditions of their contracts.

In spite of possibilities, which are available from 1st of July, probably the date by itself will not factually change the situation in the market, which was dominated by the monopoly and lack of choice for many years up to now. Private consumers will be much more interested in the decision from the state regulator for the rising prices of electricity, than the official start of liberalization of market. Models and adjustments of thinking, which are deep-seated in people's minds, can be hardly modified and it will take a long time. It is hard to believe that there can exist harsh competition on the electricity market for private use and the suppliers have to fight to gain customers, as on the market for GSM services for example. Therefore we could not expect that something revolutionary happened at the market of electricity, but every step in the direction of bigger liberalization of the market is positive.

Is this liberalization?

According to strategies of European Commission liberalization does not mean privatisation and the presence of private companies in the market is not a compulsory condition of market "liberalization". It is sufficient to separate production activities, transportation, distribution and trade with electricity and ‘preconditions' for free competition to be established between the different parts of the chain. Efficient competition could exist only in the private sector where the right stimulus can be created.

According to officials pronouncements made by the politicians in Bulgaria, restructuring of the state mastodons NEK and Bulgargaz is already a fact, but the actual situation of these companies has not changed. They continued to be monopolists. That means we could not witness real movement on the market in the direction of bigger competition and liberalization until state companies have enough protection and privileges from the state and there exist barriers (formal and informal) for entry of new competitors.

There are already ten licensed energy suppliers, but the energy market has just started to develop, particularly the private consumption sector. There is still lack of transparency related with the design of the new rules of the energy market. The imposed regulations also enervate strong desires for liberalized energy market.

Because of the shut down of III and IV block of NPP Kozloduy and reduced production of electricity in the country, the already ex-minister of the economy and energy issued a decree to stop exporting energy, while the internal needs of electricity are satisfied. All these factors are obstacles for market liberalization.

The price of electricity in Bulgaria is still the lowest in EU. Until the end of 2006, the country was one of the members of EU, which was a net exporter of electric energy. NPP used to cover 40% of the electricity deficit in the Balkan region, and the revenues from the export covered the lower performance of NEKoin the internal market. However, from the beginning of 2007 NEK has accumulated debt in the amount of 107 millions leva to NPP and Maritsa east 3 TPP. There are two ways- either increase the price of the energy at which NEK sells to electricity distributors, or the state has to pay off the debt of NEK, which would mean an indirect increase of the prices, because taxpayers will be the ones to finance the deficit.

The benefit of liberal market   

The benefits of liberalization, if it could be done in practice, are interdependent with the presence of competition and are the following:

  • Possibility of choice and negotiation
  • Better quality of services
  • Modernisation of infrastructure and less losses of energy during transportation
  • Pressure for reduction in the profit margin of energy companies and lower prices of electricity and heat supply in long term.
  • Market approach in price formation, which means less distortion of the market reality
  • Clearer and more transparent rules, less political dependence and lobby interests.

Researches of the energy market in the EU show that the most profitable companies are those which operate in the countries of Central and Eastern Europe, which are least liberalized. The average profit margin of these companies is over 15% in contrast with the profit margin in Great Britain which is almost 10%. Electricity market in GB is one of the most liberalized in the EU and is characterized with the presence of competition and relatively low entry barriers. In 1990 the government of Margaret Thatcher take the first steps in the privatisation process of energy companies and the abolition of the model of a state monopolist for the distribution of electricity and heat supply for the end consumers. The data shows that the fundamental factor, which determinates how profitable the energy companies are, is not their market share, but their business environment and the presence of free market forces, which guide entrepreneurs in their decision-making.

Undoubtedly Bulgaria has a long way to go in the direction of the energy market liberalization. Therefore, the EU policy is not enough, the presence of political will and desire on behalf of the government are necessary.