The liberalisation of the electricity market in Bulgaria and the fight against energy poverty are two urgent and closely linked tasks. The main political obstacle to the removal of regulated energy prices is the high share of vulnerable households in Bulgaria. Liberalisation would make the market more transparent and create incentives for investment in energy efficiency and renewables. The fight against energy poverty, on the other hand, also goes through the decentralisation of energy production, based on the active involvement of citizens in the energy transition process.

After a three-year delay, Bulgaria is in the process of transposing the main European directives and regulations for market liberalisation and promotion of the renewable energy sector. On 27 July 2023, the Ministry of Energy proposed for public consultation a draft law on amendments to the Energy Act. However, the proposed revisions are an attempt to maintain the existing governance model in another form. The regulated market would continue to exist and therefore artificially low electricity prices, which would create conditions for speculation in trade and distort incentives to reduce consumption.

Essentially, the proposed mechanism is based on financial guarantee contracts concluded between the Electricity System Security Fund (ESSF) and electricity traders. There are no safeguards against abusive practices whereby electricity traders can purchase electricity from the wholesale market (including from associated generation facilities) at prices much higher than the market average and sell it to households at regulated prices, with the difference being fully covered by the ESSF.

At the same time, there is an obligation for electricity traders to purchase 60% of their requirements from low-emission sources (i.e., renewable energy, hydroelectric or nuclear) , which implies that the remaining 40% will most likely be provided by coal and natural gas-fired thermal plants. This only continues the already existing pattern of subsidies to coal plants through the regulated market, with the generation mix being set directly in the Energy Act instead of the Energy and Water Regulatory Commission (EWRC) determining the availability of the different capacities on the regulated market. There is also no clear procedure for setting the price on the regulated market by the EWRC, relying on the energy regulator having to calculate the average cost of electricity purchased by traders on a monthly basis, entirely on the basis of financial records of payments made.

The full liberalisation of the electricity market needs to take place in phases by 2026 and the focus should be on creating compensation mechanisms for consumers rather than traders. The EUSF should be used as a key instrument to fight energy poverty, by providing direct subsidies to vulnerable households and investing in measures to promote and support energy efficiency improvements and the use of renewable energy for self-consumption. This will reduce the share of the energy poor each year, with a target of reaching the EU-27 average by 2030.

The reduction of the share of vulnerable households will go hand in hand with the reduction of revenues in the EUSF due to the phased reduction of the amount of carbon emissions that Bulgaria sells on the European exchanges. It was the European Commission that, in the context of the 2022 energy crisis, issued an opinion that half of the funds collected from the sale of allowances should be allocated to fighting energy poverty and the other half to implementing the energy transition.

It is more sensible to introduce a tiered pricing, with the most vulnerable paying a "social tariff" at levels close to those currently in place, with the EWRC setting a generation mix to provide the necessary quantities at this marginal price, as under the current regime. The remaining domestic consumers should pay the liberalised market price, and depending on their income and level of monthly consumption, they receive a different amount of compensation from the EWF. Households with lower income and lower consumption will receive more financial support. This will incentivise households to reduce their consumption and those with higher incomes will not be encouraged with perverse incentives for wasteful electricity consumption.

The design of the new pricing mechanism on the regulated market and its implementation should be developed in close cooperation with the EWRC as the main competent authority, as well as after a detailed review of best practices from other EU countries and an assessment of their adequacy and applicability in the context of the Bulgarian electricity market. For the successful liberalisation of the electricity market in Bulgaria and the achievement of all potential benefits for consumers, the following steps should be taken into account:

• A smooth process: household consumers should be phased out of the liberalised market, with vulnerable households remaining on regulated prices for the longest time. Removing artificially low energy prices is the key to stimulating investment in energy efficiency and renewables.
• No subsidies for coal-fired power plants: As long as there is a regulated market, the EWRC should set availability solely on the basis of lowest cost, ending the practice of buying electricity under long-term contracts from a public supplier. "Kozloduy NPP can fully replace coal-fired electricity without creating a shortage on the free market. This will be another step towards removing the vicious dependencies in the energy sector in Bulgaria, which hinder the transition to carbon neutrality and artificially sustain the operation of coal-fired power plants through the revenues from the sale of carbon allowances.
• Transparency and competition: creating a transparent market that encourages competition between energy suppliers will lead to better conditions for consumers. An independent platform is needed to allow households to easily compare the available offers and choose the most advantageous one. In the early stage of liberalisation, the EWRC could propose a set of model offers for consumers to serve as a benchmark for traders.
• Social support: the CEF should be used as an instrument to provide direct compensation to vulnerable households and to invest in measures that promote and support the improvement of energy efficiency and the use of renewable energy for self-consumption.

The liberalisation of the electricity market needs to be implemented in unison with the rethinking of Bulgaria's long-term energy and climate policies so that they support the overall green transformation of the economy.

CSD analysed the draft amendment in an Opinion published on the website of the National Assembly on 26 August 2023. Full text of the Opinion (Adobe PDF, only in Bulgarian).