Compensation with premiums of renewable energy sources power producers

Author: Aleksandar Aleksandrov

August/September 2018,

Substantial amendments of the Bulgarian Energy Act (EA) were adopted and published on 8th of May 2018, which concern power producers from renewable energy sources (RES). The feed-in-tariff (FIT) mechanism, as an incentive of the RES power generation, was replaced with the feed-in-premium (FIP) mechanism.

This new mechanism provides for the inclusion of a new participant in these relations – the Electricity System Security Fund (ESSF). The fund pays the premiums to the RES power producers. The public supplier and the end suppliers shall not be purchasers under the contracts for mandatory power purchase under preferential prices, effective as of 1st of January 2019 at the latest.

How does the mechanism for premium compensation function?

This mechanism provides that all the power generated from RES is going to be sold to an organized market platform, such as the Independent Bulgarian Energy Exchange[1] (IBEX). For a certain amount of that quantity (the so called “net specific power generation”) the power producer receives a premium to the amount and under conditions, which shall be further clarified below. Effective as of entry in force of the feed-in-premium contracts between the power producer and the Fund, all power purchase contracts under preferential prices between the same power producer and the public supplier, respectively the end supplier, are going to be suspended.

The following conditions must be completed by the RES power producer to receive a feed-in-premium:

  • it has concluded transaction/s for sale of its power under freely negotiated prices to an organized market (IBEX) or to a balancing market through a coordinator of balancing group[2];
  • it has concluded feed-in-premium agreement with the Fund (such agreement has to be concluded on 31st of October 2018 at the latest and enters in force not later than 1st of January 2019);
  • it has submitted an application (in specific form) to the Fund for receiving a premium;
  • it has transferred in favour of the Fund the respective guarantees of origin for the amount of electricity produced by its installation;
  • it has no outstanding liabilities, due and payable towards the Fund as of the date of payment of the premium;
  • it has produced a document justifying the expenditure, pursuant to the requirements of the applicable legislation.

To which RES power producers the feed-in-premium mechanism shall apply?

The feed-in-premium mechanism shall apply to all RES power producers with total installed capacity of 4 MW and exceeding 4 MW, for which preferential prices are defined by the energy regulator (the Energy and Water Regulatory Commission of Bulgaria, EWRC) and which have entered into contracts for mandatory power purchase under preferential prices with the public supplier, respectively with the end suppliers (depending on the voltage of the grid, to which these power installations are connected).

How is the feed-in-premium for RES power producers defined?

The feed-in-premium is set by the EWRC in BGN per MWh. It is calculated as a difference between the preferential price set for the respective power generation installation and the forecast price of the RES electricity set for the respective year, depending on the primary energy source.

Definition of the forecast market price of the electricity

The forecast market price is defined in accordance with a methodology, regulated in Section IIIa from Ordinance 1 from 14th March 2017 for the regulation of the prices of the electricity. The methodology above contains all general instructions which provide wide discretion to EWRC when defining the forecast market price. Thus, for example, the forecast market price is defined only based on analysis of the forward contracts for the respective period of the national and local energy exchanges. There are no additional instructions as to how exactly the analysis is to be performed.

Besides the lack of precise instructions, the Commission itself emphasizes in its motives with which it accepts the forecast market price that there is no sufficient information for the execution of an objective analysis. According to the Commission this is due to the circumstance that most of the contracts for power supply are signed for a period of 1 calendar year, in view of which there is no sufficient data for defining the forecast market price for the period 1st of July 2018 – 30th June 2019.

A substantial factor which influences the price levels of the electricity is also the climatic conditions. The unclearness regarding this factor is also brought forward by the Commission in its motives for the definition of the forecast market price and derives from the lack of information about the climatic conditions during winter 2018-2019 at the moment when that price is defined. In this regard the Commission points out that when preparing the forecast for the following pricing period it should approach more conservatively by using the below levels of the future contracts.

With Decision Ц-9 from 1st of July 2018 EWRC for the first time defines a forecast annual average market price of the electricity. It is for a base load and is of the amount of 70,00 BGN (approx. EUR 35,79) per MWh. The Commission defines also group coefficients for the electricity, produced by solar radiation, wind power, hydropower plants with installed capacity not exceeding 10 MW and biomass. After multiplying the forecast annual average market price with the respective group coefficient, the following forecast market prices are resulted depending on the primary energy source for the period 1st July 2018 – 30th June 2019.:

  • For electricity, produced from solar radiation – 78,98 BGN (approx. EUR 40,38) per MWh;
  • For electricity, produced from wind power – 67,06 BGN (approx. EUR 34,29) per MWh;
  • For electricity, produced from hydropower plants with installed power not exceeding 10 MW – 68,98 BGN (approx. EUR 35,27) per MWh;
  • For electric energy, produced by biomass – 69,87 BGN (approx. EUR 35,72) per MWh.

Comments by the author

Certainly, the main question, which excites the producers, is whether the premium will cover the existing amount of the preferential price. This can be assessed after comparing the forecast market price and the price, received from the respective producer for its electricity generation on the organized energy exchange (IBEX) for the respective month of the year. If the forecast market price is higher than the price formed on the energy exchange, the producer shall make a negative financial result and conversely – if the forecast market price is lower than the price formed on the energy exchange, the producer shall make a positive financial result.

The proportion between the actual annual weighted average market price and the forecast market price for the period 1st July 2018 – 30th June 2019 can be a subject only to speculations. The following circumstances however could be taken into account for the forecast of that proportion:

  • The weighted average price of the electricity sold to IBEX for the previous 12-month period (July 2017 – June 2018) is 75,52 BGN (approx. EUR 38,61) per MWh;
  • The volume of the traded quantities on IBEX is expected to be increased (considering the latest Energy Act amendments, which impose to all producers with installations of 4 MW and exceeding 4 MW to sell its electricity generation to an organized energy exchange[3]);
  • Winter 2018-2019 is approaching, during which the electricity consumption will increase compared to summer and autumn (of 2018) levels.

It can be seen that the weighted average price for the past 12-month period before the one for which the forecast market price will be applied, is lower than the price, forecasted by EWRC. If this trend remains, the power producers probably will make negative financial results. It is also unclear how the increased supply of electricity will influence the market. If the level of market demand remains unchanged and the supply increases, according to the economic doctrine the prices should continue to decrease. It stays unclear how the demand will be developed under these market conditions and of course under unclear climatic conditions. Only time will confirm or reject any forecast in relation to the price of the electricity on IBEX.

Regarding the nature and the comparison of FIP with other mechanisms for incentivizing the production of RES electricity, a research by Franhofer ISI[4] (EWRC also bases its motives for the issuance of Decision C-9 from 01.07.2018 on this survey) points out that FIP is more market orientated compared to the FIT mechanism. The same research presents the advantages of FIP and FIT compared to other mechanisms for incentivizing the power production from RES (like the auctions and the quata mechanisms): low investment risk; high diversity of technologies for power production from RES; low unexpected expenses when applying developed technologies; wide range of investors. Their disadvantages are also shown in the survey: low degree of compatibility with the free market of electricity and limited possibilities for set up of market prices.

It is undisputed however, that the direction for development of free market of electricity with the participation of RES power producers is from FIT to FIP and hence transition to auction and quata mechanisms. In this regard the replacement of FIT with FIP should be evaluated as a positive step forward in the direction of full liberalization of the market for electricity.

Additional proof for that is also the application of FIP for incentivizing the power production from RES in the Netherlands, Finland and Estonia[5] which undoubtedly are states with a developed electricity market. Combined with other mechanisms FIP applies also in Croatia, the Czech Republic, Denmark, France, Germany, Luxembourg and the United Kingdom.

[1] This is the only licensed organized market platform in Bulgaria.

[2] The balancing group coordinator is obliged to sell all the power purchased under these conditions through a separate registration in IBEX.

[3] See Art. 100, para. 4 of the Energy Act, State Gazette, issue 38/ 08.05.2018, effective as of 1st July 2018.

[4] EU Renewable energy support schemes – Status quo and need for reform, 12.04.2013, Brussels

[5] Source – CEER Status Review of Renewable Support Schemes in Europe, 11.04.2017, C16-SDE-56-03.