The real problem with electricity prices – populism

Have we forgotten the reason for the start of the protests, which led to a political crisis and the fall of the government? Do you even remember that the price of electricity was based on the demands of the first people on the streets. Where is the problem, actually?

“As Bulgarian citizens: we demand immediate measures to alleviate the financial burden imposed by monopolies on the citizens of the Republic of Bulgaria.” This is a sample of the protesters’ demands published on the presidency’s website. Others were more direct: “We want a 50% reduction in electricity bills” or “Cases against irregular payers of CEZ to be immediately terminated.” While the protesters piled up accusations and raised demands, each more extreme, few of them actually thought about what the objective situation in the energy sector in Bulgaria is, let alone how we can improve things.

The protests achieved their goal, bringing down the government on February 20. Angel Semerdzhiev's "bad" SEWRC was dissolved, and the newly elected board of the regulator lowered prices by 7% from March 5. A procedure for revoking CEZ's license was also launched, and politicians took turns explaining what fraudsters the monopolies are and how the state should intervene. However, let's look at the facts.

First, the Bulgarian state is already seriously interfering in the electricity market in the country. The State Electricity Regulatory Commission regulates electricity prices to the lowest levels in the entire European Union, or the already protracted 8.5 euro cents per kWh. For comparison, the price in the Czech Republic is 15 euro cents, 15.8 in Hungary, and 10.5 in Romania.[1] The regulator nevertheless decreed an increase of 14% in July 2012, when, strangely enough, there were no protests in parliament. In addition, the state, through the vertically integrated company BEH, produces more than 50% of the energy produced. The state-owned NEK, in turn, resells the generated electricity to the ERPs at huge losses related to investment costs for maintaining the system and building new capacities, higher purchase prices from enterprises, and inadequate returns at artificially low final prices.

The state is also actively intervening in the electricity market by providing generous, fixed prices for purchasing electricity from renewable sources, as well as from highly efficient cogeneration plants that produce both heat and electricity. The energy mix also includes some of the most expensive thermal power plants, including the American Maritsa Iztok-3 and AES Galabovo, which have long-term contracts for fixed amounts of energy. The state also adds a special fee for “non-renewable costs”, which is actually used to secure the fixed costs of the American plants. A cursory glance at your electricity bill will show that the price for access and transmission through the low-voltage distribution network, which is charged by the EPCs, is about 27% of the amount due. In the meantime, however, CEZ alone, for example, has invested about 430 million euros in infrastructure investments, thereby reducing electricity losses on the network to below 10%.

The second argument that the protesters use to defend their demands is that despite the low price of electricity, it is still disproportionately high compared to the incomes of Bulgarians. Eurostat statistics, however, show that in fact the bills for electricity, water, heating and fuel as a percentage of citizens' income is one of the lowest in the EU. On average, a Bulgarian spends 16.9% of his income on bills, while in the Czech Republic and Germany it is 27.4% and 24.9%, respectively. Statistics from the National Statistical Institute even show that in the fourth quarter the share decreased to 13.9%.[2] Of course, the arithmetic average values hide the greater burden for pensioners and people with financial difficulties in the country, but the share still does not exceed 30%. The truth is that in the last few years people have massively switched to heating with electricity, which is very inefficient. After the shock increase in July, people only felt the increase in their bills in the winter, when they started heating with electricity. Combined with the holidays, cold weather and the longer reporting period in December/January, bills swelled.

Although Bulgarians consume almost the same amount of electricity per capita as other EU members, energy efficiency is the worst in the entire union. The average Bulgarian uses 220-230 kWh/ ^m2, while in cold Norway it is 160 kWh/ ^m2, and in Germany around 50 kWh/ ^m2.[3] The main reason for the low energy efficiency is the artificially low electricity prices, which force businesses and households to waste energy. Poor infrastructure and dilapidated apartment blocks are also a problem. Energy theft, which is common, especially in the country's smaller cities, also contributes to the losses.

What can be done?

The reduction in bills from March 5 will only deepen the problems. The reduction in recognized technological losses will directly limit the profits of the EDPs, which in turn will invest less in the distribution network, which, like a vicious circle, will again lead to greater losses in the supply of electricity. It is also unclear whether prices will not rise again from July, so that the debt holes of BEH, which borrowed half a billion leva last week to cover its obligations under Belene, can be somehow filled. However, what direct steps can be taken to improve the situation in our energy sector?

1. The SEWRC must become a transparent and completely independent regulator, so that it is not influenced by populist rhetoric from any government.
2. The price for household and industrial consumers should be liberalized to reflect real production costs. This will also provide the necessary market incentives to encourage investments in the distribution network.
3. To eliminate long-term fixed contracts, which will improve market liquidity and create conditions for spot electricity price formation in Bulgaria.
4. Subsidies for renewable sources, highly efficient thermal power plants and American plants should be gradually eliminated by imposing fixed prices above market prices, without jeopardizing the country's energy security.
5. Energy efficiency must become a priority in our energy strategy, with European funds being used more specifically for projects to improve the infrastructure in residential buildings (introducing international energy efficiency standards, supporting the introduction of thermal insulation boards and promoting the use of low-emitting diode (LED) lighting)[4].

Energy efficiency is perhaps the most long-term solution to the problems of high electricity bills. It can be promoted either, as we have indicated above, by directly improving infrastructure, or through market mechanisms. Price liberalization will reduce unnecessary electricity consumption and will force enterprises to modernize production in order to save on energy costs. The latter will also have an effect on the overall increase in economic productivity.

Of course, the price increase should start gradually, taking into account the general inflationary trends in the economy. In addition, the severe effects on the purchasing power of Bulgarians can be mitigated by temporary electricity surcharges for pensioners and the poorest in the country. These transfers are far more effective than artificially holding down prices, which leads to market distortions, such as a decrease in investment, reduced liquidity and a loss of incentives to improve quality.

But none of the measures proposed above is more important than adhering to one simple rule – economic problems are not solved with the magic wand of populism. There is no way to avoid the laws of the market. Market regulation always changes the incentives of producers and consumers, eliminating the rational desire of all participants to maximize their personal benefits. Thus, energy companies have no incentive to provide good quality of their services, and ordinary citizens and industrial enterprises have no reason to save. The result, sooner or later, is well known – a power regime and covering losses with higher taxes.

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