EUR 1.5 billion bonus: Bulgarian businesses benefited from the energy crisis

1000 euros per megawatt hour. In the summer of 2022, electricity prices in some European countries reached this astronomical number during a year that will be remembered as a shock for the energy industry. It was a year heavily marked by Russia's war in Ukraine, which led to a rampant increase in gas and electricity prices on the continent. The accumulation of factors such as the Covid crisis and the war shook the markets and Europe got trapped into an energy crisis.

Skyrocketing electricity and gas bills for households and businesses, business closures and uncertainty over winter supply have prompted governments across the bloc to take extraordinary measures to protect consumers. Bulgaria was one of the first countries in the EU to approve aid for its private sector at the beginning of the pandemic, and then these subsidies kept flowing because of the war.

If we now see a completely different situation on the energy market in Europe and record low, even negative electricity prices, this does not mean that the crisis has not left its mark.

The Faculty of Economics at Sofia University, through its research unit, Net-Zero Lab, published a regulatory assessment report of the measures taken by Bulgaria in response to the energy crisis in the period 2021-2023. It was presented at a special event by one of its authors Kaloyan Staykov, Chief Economist at the Energy Management Institute (EMI).

Generous subsidies…

While the rest of the European countries acted cautiously and with a focused approach as to where they directed their emergency measures due to the crisis with electricity prices, Bulgaria began to hand out energy subsidies quickly and in spades.

The first aid came after a government decision of 26 October 2021, which had retroactive effect - from 1 October - and was in force until 30 November 2021. The subsidy was in the form of a fixed payment of 56.24 euros/MWh. All non-residential consumers, approximately 633,000 businesses that buy their electricity from the open market, were eligible for it. The projected budget of the program was 230 million euros and was financed through the early payment of the dividend from the state-owned Kozloduy NPP.

In just three months, in the fall of 2021, Bulgarian businesses thus received as much subsidies as for the whole of 2023. In response to the energy crisis, their total value from October 2021 to December 2023 amounts to 3.38 billion euros, which clearly shows the uneven distribution. By comparison, the total financial support for 2023 provided in the form of price caps is slightly higher than the amount paid in the last quarter of 2021. In that quarter, support was provided as a flat payment covering 75% of the difference between the average monthly prices of the Day Ahead market (DAM) and the price in July 2021.

Just for the period October 2022 - December 2023, Bulgarian businesses received aid in the amount of over 3 billion euros. A large part of these funds came from the companies of the Bulgarian Energy Holding (BEH) group, initially as dividends, then earmarked contributions, and after a ceiling on the revenues of state-owned companies was introduced about 1/5 of the funds came from the Power System Security Fund (FSES). This is also part of the reason for the subsequent deficit in the FSES, due to which the liberalization of the market has been postponed.

With the monthly changes to the mechanism itself and the subsidy discussions, the Bulgarian government left a feeling in the public that these were only a temporary fix, yet there were no such indications in 2021 nor in 2022, and it became clear that the situation would last longer, commented Kaloyan Staykov.

With these fluctuating decisions, in fact, the government created additional uncertainty both in the markets and among the market participants themselves," commented Staykov.

But the big problem is not ​​business subsidies as such, but rather the way they are applied in Bulgaria.

...but no focus

In other European countries, financial aid is logically directed first at vulnerable sectors, such as schools, kindergartens, and micro-enterprises, and only then the energy-intensive industry is included. The aid for the latter, however, does not cover the full amount of their electricity costs.

In Bulgaria, it happened the other way around - the aid had a maximum scope, that is, it was distributed to absolutely all commercial actors, initially, there was an exception for companies with regulated prices (heating systems, public utility companies, distribution and network companies), but later these were also included. And in addition to being available to everyone, the subsidies were rather generous, too.

The aid has been spread among absolutely all market participants, without any assessment of need, size and without focused approach," comments Kaloyan Staykov.

According to the expert, if initially some logic could be found in these actions, since it was necessary to act quickly, later on, subsequent adjustments could have been made to the subsidy criteria.

Another problematic point in the payment of subsidies for Bulgarian businesses is that they were introduced without any pre-set goals, such as a reduction in consumption or a commitment to energy savings.

When prices in the markets increase, the logic is that consumption should also decrease in some way. And if in 2022 in the EU on average it decreased by 5%, for Bulgaria that percentage is only 1, which can be explained precisely by the lack of requirements to be followed by the enterprises receiving the aid.

A bonus of 1.5 billion euros

From the report data, it is evident that aid to companies was given in conditions of increasing economic activity and decreasing losses. And if the idea was to help the firms avoid bankruptcy, then the results diverge from this goal.

According to data from the country’s National Statistical Institute (NSI), the corporate profits of Bulgarian companies increased by 38.3% in 2021, and by 35% in 2022. The number of companies declaring accounting losses, as well as their size during this period, decreased significantly.

In conditions of economic recovery from the pandemic and growing producer prices, we see that these subsidies in most cases actually became something akin to a bonus for these companies", says Staykov.

He gives Lukoil as an example, (a Russian energy corporation operating a refinery in Bulgaria), which also received aid, which in the situation at the time had no economic logic.

Former MP Vladislav Panev (Democratic Bulgaria) also spoke about the fact that the compensation scheme was not effective enough.

The biggest subsidies were actually received by those who needed them the least," added Panev.

He explained that he was the only MP who, at the end of 2022, proposed that the subsidies be linked to energy efficiency, as well as to investments in own renewable capacities. Although the proposal was accepted by the PP, DB and GERB political parties and was expected to be adopted, this did not happen due to "lobbying pressure" from large companies that would stand to lose the compensation because of these criteria, claims Panev.

That is why the proposal was revised and it was accepted that all non-household consumers will receive compensation when the price of electricity on the free market exceeds EUR 100/MWh. These would apply to everyone, regardless of whether the recipients are winners or losers from the market situation, whether the companies are small or large, and whether or not they invest in energy efficiency and renewable sources or not.

According to Panev, these EUR 3 billion subsidies have flowed out of the Bulgarian energy industry at a time when there was a lot of talk about the need for large investments.

With a more flexible and market-oriented compensation scheme, these 3 billion euros could have been halved," said Panev.

He added that if the resulting 1.5 billion euro were now available, "we would not have to think about where to find money for FSES, for energy efficiency or for investments in updating the electric grid".

In his words, the behavior of politicians in the energy sector in recent years can be described as populism and short-term decisions, and not motivated by the way their decisions would affect the Bulgarian economy in the next 5-10 years.

The fact that we have short and unstable parliaments in Bulgaria conditions the rise of populism, and since everyone is fighting for the voters’ attention every six months, it becomes only natural to rely on populist rhetoric," concluded the former MP.

Still, there is a positive effect

However, the opinion of the base energy industry regarding the compensations is different – ​​their claim is that the subsidies are having a positive effect

Large industry is the only sector in Bulgaria that improves its energy efficiency systematically, and this is not because it was imposed by the government, but because we are competing in international competitive markets", explained Ivaylo Naydenov, executive director of the Bulgarian Federation of Industrial Energy Consumers (BFIEC).

He gave as an example non-ferrous metallurgy in Bulgaria, which works with 1/3 local concentrates, in which the metal content is many times lower than those mined in South America or Turkey, that is, the manufacturers here need much more energy to extract the metal and if they are not efficient, it becomes difficult to compete globally.

The main contribution of this compensatory mechanism is that it actually gave some predictability of price to consumers and some possibility of budgeting. In fact, from the point of view of large industry, it was able to preserve the industrial potential and had some protective effect, which is definitely different for each manufacturer," Naydenov believes.

Compensation for energy-intensive industries also had the additional effect of indirectly mitigating the consequences of increased natural gas prices, since the energy/cost ratio was still manageable.

In fact, gas consumption has dropped quite a bit, and this is because of the high prices, Naydenov explained. Many businesses have found alternative approaches, such as LPG. Still, for many businesses that are bigger consumers of natural gas than electricity, the offsets still helped ease the overall bill.

There were entire industries that would’ve shut down without compensation".

From the point of view of BFIEC, the subsidy program was the reason to preserve the competitiveness of Bulgarian manufacturing and the industrial capacity of the country’s heavy industry.

BFIEC, for its part, has also proposed several approaches to differentiate the compensations, including according to energy efficiency and availability of renewables for own consumption, yet these have not been accepted.

According to Naydenov, if the aid was tied to a weighted average price and ceilings, instead of an arithmetic average, there would certainly be a greater incentive to manage consumption in large enterprises, but not in small ones.

The lessons

One of the lessons that Europe has learned from the energy crisis is that the correlation between natural gas and the electricity market is too strong, meaning the strong rise in energy prices follows the steep increase in the price of natural gas. That’s an effect that should be mitigated, according to the policy director of Eurelectric, Cillian O`Donoghue, who joined our discussion online.

In 2022, when the price of gas skyrocketed, the electricity market also increased. The correlation is too strong," he said.

The second main lesson, according to him, which is of great importance, is the absence of interruptions in the internal market.

The third conclusion is that we are too dependent on fossil fuel prices. I think this is quite clear and a more serious inclusion of renewable energy sources will help quite a lot".

According to him, the "cure" is to give more choice to consumers - to encourage more long-term products, because too many of them are in the spot market. In Bulgaria, short-term contracts on that market accounted for 80% even before the crisis began. According to the Eurelectric expert, better financial rules are also needed, as we had problems with high requirements for guarantees – due to high electricity prices, large guarantees are needed, which reduces the liquidity of the system.

We need to invest heavily in the grid. We need a more flexible electricity system as this flexibility will be vital," he emphasized.

According to Kostantsa Rangelova, from the Ember think tank, we should already be looking for the answer to the crises in renewable capacities.

In terms of long-term measures, the reform of the electricity market and its design in Europe, there are indeed some good changes that have been implemented with the latest reform that was adopted very recently. Many of the measures that have been introduced have been aimed at this is to help a greater penetration of renewable energy sources into the grid, to make it more flexible to deal with problems such as rising prices, for example, that of gas."

Perhaps the most important of the changes is the new methodology for assessing system flexibility. This methodology is to be developed and then implemented by EU Member States, which will need to assess the flexibility capacity they have in a way that is not related to fossil fuels.

Translated by Tzvetozar Vincent Iolov