Liberalization is a Winning Strategy for the Energy Sector in Bulgaria

At the end of March the executive director of National Electricity Company (NEK) threatened the general public with a drastic increase in the prices of electricity as a result of the forthcoming liberalization of the energy market in Bulgaria, and consequently closing down third and fourth block of NPP Kozloduy. Creation of a competitive liberalized market is laid down in the EU Energy Directives according to which a common European market is expected to begin its operation in 2007. The government monopoly in transition, purchase and exporting of electricity is set to disappear then. For the purpose, until the end of 2006 NEK has to be restructured into two companies – one for transit and one functioning as a system administrator in the electricity sector.

Although the price of electricity has been rising in the country for the last years, the prices of electricity in Bulgaria remain among the lowest in Europe – for households as well as for the industry. Following the pessimistic prophecy of the executive director of NEK, the price of the electricity in the country will inevitably rise to reach the levels of the European market. And as such, the burden of the rise in the prices will be borne mostly by the household consumers according to him.

Imposing the idea on the public opinion that the supply of electricity is a social priority of the state makes people turn against private companies that are ruled by market signals. These firms are ready to invest, to modernize the equipment and optimize the expenses, and of course – to make profits. The argument that is often laid down is that the market mechanism will change the current status, which for the moment is actually of benefit for consumers. According to statements by managers of NEK, at the moment the company sells electricity in Bulgaria at rather low prices, which in some cases even do not cover the costs of production and the company cross-subsidizes the losses in the internal market through its net income from the export of electricity abroad.

At the same time, the chairman of the State Energy and Water Regulatory Commission (SEWRC) said in the press that despite the enhanced price of coal, the price of electricity for households would not rise for the moment. We can conclude that the change in costs of production are mandated by structural changes and increases in the prices of factors of production but keeping the prices at these levels by the state-owned company cannot be guaranteed for long. When a market is liberalized and competitive, only then are prices perceived as truly objective and as such, there is no need for the decisions of the Regulatory Commission to be constantly justified, especially in the minds of people. The signals that we get from NEK are that the company is not ruled by market principles only. When the third and fourth blocks of NPP Kozloduy close down and the export levels of electricity decrease (at least in the short run), how is the loss from the internal market going to be covered? From the other side, the lack of a market approach in pricing is a problem as it leads to discrepancies and distorts the market reality.

From 2004 onward, the so-called privileged consumers have the right to buy electricity directly from the producers and to negotiate individually the terms and prices of the contracts. After almost a year, all enterprises and households will be able to take part in the free market and buy electricity from different suppliers and traders. That is going to happen in the common European energy market.

So, should we worry about this?

The irrefutable consequences of competition in every sector in the economy are the following:

• Optimization of costs of goods and services sold
• Broadening the set of choices for the consumers
• Tendency of falling prices
• Improvements in quality of services
• Investments in capital and technology

Part of the fears come from the fact that the energy companies tend to consolidate which in turn harms competition. Consolidation of enterprises, however, when not mandated by a government regulation or protectionism, aims at economies of scale or greater efficiency in utilization of resources and lessening of transaction costs. It is, however, important to have a free access to the market and a uniform treatment of all parties in order the benefits of the competition to be fully realized.

Bulgaria is characterized by a high level of energy consumption per unit of economic activity. Studies show that an increase in the overall output by 1% leads to an increase in the consumption of energy by more than 1%. The free market price regulates exactly these processes: it is a natural regulatory behavior of the energy dependency of the economy. If there are not enough inputs for production of electricity or the production is not competitive or efficient enough, the prices of electricity will go up which will, as a result, lead to a decrease in consumption, greater usage of alternative energy resources, more capital investments that optimize and decrease the costs of production. Bulgaria has traditionally developed its electricity infrastructure. At the same time, gasification, co-generation and heat-production cause fewer losses of primary energy resources. The lack of usage of these alternatives to electricity is one of the reasons for the high energy dependency of the economy.

The steps towards abolishing of the “one seller” model will lead to a real market. Liberalization of the market and abolishing the monopoly of NEK in export and import, delivery and transit of electricity will have various effects. The usage of alternative renewable sources and investments in energy efficiency will become a real alternative for consumers that are going to be more greatly involved in that process. Artificial preservation of prices below the market ones is not a far-sighted strategy as it distorts consumer behavior. At the same time, with a liberalized market, strategies and coordination among authorities and government bodies are not needed. However, this is not the case with a government monopoly in the energy sector. That is important for the Bulgarian market as at the moment such coordination is missing.

If we have a look at the liberalization of the market in Europe, we can conclude that it is good for the sector as a whole. During the last ten years the prices of electricity on European markets has gone down by 15% in real terms. The size of the change, of course, differs in the countries as it depends on the particular level of liberalization. The decrease in the prices for industry is greater than the decrease for households.

Last month, the European Commission declared that it is ready to implement a common energy policy. However, opposition of France and Spain to strategic deals with big utility companies is a clear indication of the desire of the European powers to keep the leading energy companies under their control. Still, the energy market is dominated by interests and politics rather than by market principles. That is fully true for Bulgaria, as well. But the benefits of liberalization should not be doubted because the only interests that truly dictate the market are the ones of consumers and producers.