Draft law to be ‘catastrophic’ for Bulgarian power market

A new draft law imposing a 5% margin ceiling for wholesale transactions could have a ‘catastrophic’ impact on the Bulgarian power market, potentially ceasing trading activity, pushing local traders into insolvency, and drying out liquidity, industry groups and traders warned, writes Luka Dimitrov, Senior Energy Market Reporter at ICIS.

In open letters on 18 October, lobby trading groups the Free Energy Market Association (ASEP) and Association of Electricity Traders in Bulgaria (ATEB) urged the Bulgarian government to after the proposals urgently. They said that the new proposal “moves Bulgaria away from market principles, distorts prices and are a step back from the free electricity market that has been built for many years.

Measures

On 13 October, the Bulgarian interim government and its energy council proposed a draft law to implement the EU’s 6 October Council Regulation 2022/1854 on emergency intervention to tackle high energy prices. The new draft law proposes several measures including.

• A margin ceiling of 5 % for wholesale transactions and 15%  for transactions with and customers.
• Taxation of energy producers’ excess profits
• Mandatory market revenue cap for energy producers
• Reduction of gross electricity consumption
• New compensation mechanism for customers buying power from the wholesale market
• Introduction of two tariffs for the electricity price for domestic consumers (a lower price for certain consumption and a higher price for higher consumption).

ATEB argued “margin limitation leads to de facto taxation of income, which especially for traders who are often not Bulgarian citizens, would constitute prohibited taxation of corporate income of foreign enterprises.”

‘Catastrophic’ impact

Responding to the ordinance, traders said the proposed measures would have a “catastrophic” impact on the local power market, pushing traders into insolvency, drying up liquidity, as well as market distortion.

“The bill does not look good not only for traders, but also for the market as a whole. As far as I know in the coming days we can expect a revised (hopefully for the better) version of the text. We are all watching the developments as such a change will bring a lot of changes and chaos to the day-to-day working of the market,” a local trader told ICIS.

“Things are very serious for traders as it will really kill trading interest and everyone down the chain will suffer,” added a second participant.

Other traders said the new measures could potentially threaten the functioning of the local power market, drying up liquidity and potentially ceasing all trading.

“Major foreign trading firms could pull out from Bulgarian market if margin ceiling is introduced, ” a third source warned.

ATEB and ASEP said the new measures will lead to:

• A lack od interest in trading long-term futures on the IBEX power exchange
• The withdrawal of market participants and reduced competition
• A significant decrease in exports, which would worsen the energy situation in the region and contribute to an increase in market prices due to reduced supply(Bulgaria remains a net power exporter)
• Reduced exports would force the shut down od production capacities, increase risk to the system and reduce producers’ revenues

Traders said similar measures were introduced in Romania in September leading to a lack of trading activity in the Romanian energy market, a drop in the price of cross-border capacities and weak interest in cross-border transactions.

On 20 October, power participants are meeting the government to discuss the proposed changes.

The draft bill will then be uploaded for public discussion. The plan is to be adopted by the council of ministers and submitted to the parliament by the end of October.