Economic Policy Review ISSN 1313 - 0544

Why are we paying high prices for energy?

Author: Velin Peev / 29.06.2009
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In the last several months the inflation, measured on a yearly basis, in Bulgaria is falling. The monthly report of the National Statistics Institute (NSI) shows, that April is not exception as well. Usually, when Bulgarian and European economic growth is slowing down, demand is diminishing and thus, the prices. The same applies for the world economy and the prices of goods, whose prices are determined by the global demand - as are energy raw materials. We witnessed how in less than a year the prices of oil and natural gas fell by 70%. That was immediately reflected down in the market chain - retailing of fuels, transportation, etc.

In our country, however, the market chain, from whose healthy functioning depends the effective self-regulation of the market, is interrupted by a state regulatory body - the State Commission for Energy and Water (SCEW).

Initially it delayed for several months the transfer of reduced wholsale energy resources prices toward the consumers. This week finally the Commission announced that there would be a reduction - natural gas would become cheaper by 30%. The reduction of the price by itself is good news, but the question remains why it does not reflect the entire 70% reduction of the raw material prices?

The more unpleasant surprise coming from SCEW however is different: despite the above mentioned natural macroeconomic processes, the Commission is planning not to reduce, but to increase the price of electric energy by 4-5% from the 1st of July. It is justifying this increase with the higher prices of electric energy produced from renewable energy sources - wind, solar and water, an imposition written in the energy strategy of Bulgaria until 2020.

The energy produced from renewable energy sources is connected to one significant problem. If you ask the people whether they approve it, probably most would give a positive answer. When however, the moment to pay its higher price (due to the expensive production) comes, it does not look as an attractive "alternative" any more. But is this energy an alternative, and who is selecting it?

In Belgium, i.e. a country with three times higher purchasing power than Bulgaria[1], where the households have the right to choose whether to use "green" energy or energy from conventional sources, less than 3% select the "green"[2]. In Bulgaria the poorer consumers are left without choice.

The Belgian experience shows, that it is morally wrong to impose by force certain product without the right of an alternative, even more, when it is so expensive compared to the standard of living of the consumers.

On the other hand such policy is economically harmful, because the electric energy is a main cost in production and when this cost is increased, the national production becomes uncompetitive on the world markets, leading to bankruptcies and increases in the number of unemployed.

Due to this compulsion, Bulgarian businesses and consumers alike are loosing one of the opportunities created by the global crisis - the opportunity to rationalize the costs and to discover new ways to utilize the resources and reserves.   Referring to the Energy strategy in this situation is not simply inappropriate it is an excuse for a dictate. It is possible, however, that the actual reason for such regulation is the desire to finance energy projects, that do not use the so-called renewable sources.

One of its consequences would be the search for a reason for future administration of the energy prices and finding excuses for other economically ineffective projects. For example, it seems almost certain that the artificially increased prices of electric energy by the administration, would mislead the society about the effectiveness of the disputable project for NEPS "Belene". Preliminary calculations for the future electric energy produced by "Belene" show that its price will be higher than the competitive alternatives (including import). That is why each increase of the prices, manipulated by the State Agency, might create the wrong impression that the nuclear power electric station is economically advantageous.

[1] Data of Eurostat

[2] Data of Electrabel, supplier of electric energy in Belgium