Meeting the Energy Challenge

Economic News

22 Jul 2010
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An exclusive OBG interview with Milko Kovachev, Minister of Energy and Energy Resources, on building, modernising and closing nuclear power plants - alongside energy sector liberalisation and plans for renewable resources.

OBG: The Belene nuclear power plant project has been much in the news recently. Could you clarify where things stand on the project, how it is going to be financed and whether it makes economic sense?

KOVACHEV: Certainly this is a project which has received a lot of public interest. We have been working on this project for over two years now. Many steps have already been taken to get us where we are today, including a market survey of all world-class vendors on their readiness to supply the equipment for the new units to be built in Bulgaria.

Based on this study, we were able to identify three specific interested parties, who could become potential participants and suppliers in this project. I can identify one of them as the team which is working on the modernisation of Kozloduy [nuclear power station] units V and VI, which consists of Framatome, Siemens, Atomstroiproekt and Westinghouse - which together or separately answered our questionnaire. We have another identifiable group - the Czech vendors and suppliers of equipment, above all Skoda, which indeed was the manufacturer of the equipment supplied to the Belene site at the time when the project was frozen in the early 1990s. The first two groups are offering pressurised water technology. In contrast, the third group we have identified is offering a heavy water technology - this is the AECL group of Canada.

The question of how the project will be financed is indeed preoccupying us at the moment. First, we would like to have a commercial project, which would not create any obstacles to liberalisation of the energy market. That means that we have to structure financing in a way which does not include any full sovereign guarantee. Another precondition for a successful financing arrangement is that we cannot include any provisions for a long-term power purchasing agreement. We are therefore looking to create a structure that would be creditworthy for such a type of mixed financing. We will also be looking for the participation in this project of state owned entities - corporations in which the state share is above 50%. The maximum state guarantee which could be offered for this project is not higher than 80%.

The government took a principled decision to go ahead with this project in June, based on initial findings and preconditions. However, the final decision will be based on a competitive tendering process and financial structure. Our main decision criterion is, first, safety, because it is a nuclear plant. Second, but equally important, is going to be the price of generating the electricity. In addition, the Ministry of the Environment will have to evaluate and approve our proposed environmental impact study.

Finally, we are aiming to create extra capacity of up to 2000 MW and our cost estimate is around 2bn euros - in addition to work already done before the project was frozen - even though the actual figure will be decided through a competitive tender.

OBG: The existing nuclear power station in Kozloduy has also been a lot in the news in the last year or two. Is it now certain that units III and IV will be closed by the end of 2006 and, if so, is this going to create problems for the country's energy balance?

KOVACHEV: As you know, Bulgaria had committed itself to close units I and II by the end of 2002 and we have done so. Both units are being decommissioned. Subsequent negotiations with the European Commission have led to a joint position that units III and IV have to be closed by the end of 2006. Certainly, being minister of energy, I have to say it does not seem that there are economic or technical reasons for this decision. However, our future in the joint European family is very important for Bulgaria and we are therefore ready to make this sacrifice. Which is why I say this: Yes, we will keep our commitment. Whether it is going to create problems for covering the energy balance in the country - I will not say that this will be critical for our domestic supply. As far as regional stability is concerned, the role of Bulgaria as an important supplier in stabilising the supply of other countries will certainly be affected.

Bulgaria's recent sale of power distribution companies has been deemed a great success, a lot better than most observers expected. How pleased are you with the quality of investor and the price achieved and how will the deals impact on the efficiency of the Bulgarian energy system from a consumers' point of view?

KOVACHEV: This privatisation of power distribution companies was indeed a major success - one that cannot just be measured by price and quality of investors. It has generally improved the perception of Bulgaria as a country, which is on the right path of reform. From a purely technical point of view, we are happy with the price. Indeed, many were surprised by the price we got - perhaps because they did not quite appreciate the depth of reforms within the energy sector. The results achieved will also help with our next phase of deepening the reforms, by improving managerial efficiency within the privatised companies. End consumers can therefore expect a better quality of services, based on improved efficiency within the companies. Moreover, our success in selling the power distributors has sparked a growing interest in the upcoming privatisation of power generating companies and district heating companies.

OBG: What impact will the privatisation of distribution companies have on the price paid by consumers?

KOVACHEV: It is difficult to say with certainty because there are two different tendencies at work. On the one side, investors will look for a sufficient rate of return on their investment. On the other hand, the regulatory framework will push the owners to operate in a more efficient way, which is why I do not expect a sharp increase in prices. I expect active trading and differentiated tariff policies, efficiency gains which will be transferred to consumers. In other words, I expect normal market behaviour from the new entrants.

OBG: We have recently seen the signing of the first bilateral contract between a power generator and an end-user (Kozlodui and Umicore). How many others do you expect in the near future and what is the schedule for market opening?

KOVACHEV: If we look purely from a legal point of view, the market was opened a year ago. Yet, opening the market is a right not an obligation. Today, we have all the regulations in place and we have the first deal, which was signed recently. We expect further deals to be signed by the end of this year. According to regulations, any consumer using more than 40 GWh per year has a right to sign a direct contract with a generator. This is a right, not an obligation, which will act as an incentive for both sides to reach an agreement.

OBG: Are transmission tariffs a problem at the moment in this connection?

KOVACHEV: Some of the consumers and generators have expressed their view that this might be an issue today or in the future. There is, however, a need for an understanding of the substance of this tariff. First, this is the income of the system operator, which has the obligation to maintain and develop the transmission system and to give equal treatment and access to all the participants in the market. The National Electricity Company (NEC), which at the moment has both the responsibility for transmission system operations and wholesale trading, is planning to separate these two roles. This will influence the practice of the regulator and the behaviour of the transmission system operator towards tariff setting.

However, everyone has to recognise that, in order to maintain its reliability and function, the system operator has to have an income. This is still subject to optimisation and certainly I think market forces will help to determine a reasonable outcome.

OBG: Bulgaria has been a very big exporter of electricity recently. How do you think export is likely to develop in the next few years and how competitive is Bulgarian electricity in the long term?

KOVACHEV: Bulgaria is covering between 60% and 80% of the electricity deficit in the region, which means we are competitive on the regional energy market. If earlier many people thought this was due to our contract with Turkey - which ceased to import our electricity last year - today NEC has contracts with almost all the countries in the region. They are acting purely on a commercial basis, which reassures me of our competitiveness. As far as future development is concerned, we are certainly backing the establishment of a regional market, which should favour all the countries in the region, and which could save on having to make significant investments. As to whether Bulgarian electricity will remain competitive, I think the answer is yes. I base this conclusion on the marginal costs of producing energy at present. I think there will be a level playing field for all the countries in the region and that marginal costs will move in parallel.

OBG: Renewable energy is generally recognised as an important plank of the government's energy policy. What is the potential for renewable sources of energy in Bulgaria and what are the most promising lines? What are the obligations and targets you have adopted and what are the incentives and policy instruments which will be used?

KOVACHEV: As part of the legal and regulatory reform, the energy law now - for the first time - includes a chapter on renewable sources of energy, which gives serious incentives such as preferential prices for energy produced from such sources. The law says that in future we will move to market-based incentives, such as "green certificate" trading - the regulation has already been prepared for that. It seems that the environment is adequate, because we have seen booming investment in small hydro power plants. Last year, 27 small hydro power plants were connected to the grid, which represented approximately 35m euros worth of investment. These are newly built power plants below 5 MW installed capacity. Now we have growing interest in wind energy, which was adequately assessed by investors. We are still trying to work out the exact targets. It is a question of balancing different benefits and issues to be solved with renewables. We do consider that hydro, wind and geothermal energy are areas of further development and interest for investors. Today we have 8-9% of electricity generated by renewables - mainly by hydro plants. Based on expert analysis, we can expect this figure to go up. I can't say exactly what it will be, but I think the EU target of 25% by 2010 is feasible for Bulgaria.

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