Bulgaria is imposing swingeing retroactive cuts to the price the government pays renewable energy producers in a move that has angered the industry and could disconcert other investors. Others argue that the reductions are a reflection of economic reality.
From September 18, energy regulator DKVER will impose cuts of between 10% and 39% on network access fees for all existing renewable projects. Network fees are tariffs paid to the power plant owner by the network operator - also known as a distribution company or disco - for electricity produced.
Following a meeting on September 14, DKVER (also known by its English abbreviation, SEWRC) announced it was cutting tariffs on all wind projects by 10%, and those on solar projects launched before this year by 20%. The biggest cuts are for solar projects launched in the first half of 2012, which will lose 39% of their income.
Renewable energy has become a huge growth sector in Bulgaria in recent years, partly due to the favourable terms offered to investors in the sector. Some of the institutional investors who put money into Bulgaria's then-burgeoning real estate sector in the mid-2000s switched to renewables as the country pushed towards its target of generating 16% of its energy from green sources by 2020. Now, the proportion is around 12% -not bad by European standards.
However, a distinct cooling of government opinion towards the sector has been apparent for some time now, given its cost to the budget and use of agricultural land. A law passed in April 2011 established that producer prices for wind projects would only be set after they were completed, obviously making projecting profitability difficult.
Some investors shifted to solar projects instead, and the segment began to attract attention from further afield. In July, Saudi Arabia's ACWA power announced that it was taking a 42% stake in a €155m, 60-megawatt (MW) plant in central Bulgaria.
Now, however, the outlook for Bulgaria's entire renewables industry looks shakier. According to the Bulgarian Wind Energy Association (BGWEA), DKVER's fee changes are "illegal" as they contradict the country's renewable energy law, which guaranteed investors fixed prices for 12 to 20 years. According to BGWEA executive director Sebastian Noethlichs, the changes to network fees are effectively retroactive cuts in feed-in tariffs - long-term prices that the state pledges to investors in renewables projects.
In a very strongly-worded statement, BGWEA warned that the changes imperilled not only the renewable sector, but the broader economy, given the scale of renewable energy investments in the country. "Several billion leva worth of domestic and foreign investment along with hundreds of newly created jobs have been destroyed overnight," the statement, issued on Monday, said. "The ultimate consequence will be that the Bulgarian banking system, which has so far been stable and insulated from the financial crisis all around the region, will end up with a massive amount of bad loans on its books."
Noethlichs warns that the message to any investor in any sector in Bulgaria is clear: what the law promises you today, can be retroactively revoked tomorrow. "Investing in Bulgaria no longer means investing in a stable, reliable European market, but in a wild, chaotic market where every investor is at the mercy of an untransparent, secretive government."
DKVER has said that the cuts are necessary to account for the cost to the discos of purchasing an increasing amount of renewable power. The regulator states that capital expenditures for renewables companies have fallen considerably since network fees were set, making their projects considerably more profitable; it asserts that generators' return on investment will still exceed 7%.
Like last April's changes to wind farm legislation, the tariff reductions are also likely to reflect a waning enthusiasm from the Bulgarian government and among consumers to foot the bill for more costly renewable energy at a time of fiscal austerity and straightened circumstances for households.
But Noethlichs says that the changes are a partly political move following the unpopular decision to increase power prices by 13% this summer, and are a maladroit attempt to tackle the serious funding issues faced by NEK, the state-owned national electricity company. "The government has a problem," he tells bne. "NEK constantly runs at a deficit because it buys electricity at market prices and then sells to the general population well below those prices. Power prices in Bulgaria need to go up. That's a fact. But power prices going up are political poison, that's also a fact. So the government had to find a scapegoat to blame for the price increases. Now it appears that they actually believe that by lashing out at renewables alone they can solve the problems of NEK, which is very misguided indeed."
Ruslan Stefanov, director of the economic programme at the Centre for the Study of Democracy, a Sofia think-tank, agrees with Noethlichs that the abruptness of the fee changes, and their retroactive nature, bodes poorly for investor confidence in Bulgaria - but argues that the renewable sector has been in need of a haircut for some time. "I have to say there is some rationale to lower feed-in tariffs on two grounds," he tells bne. "Firstly, they have been misaligned with improvements in technology and with falling costs, which has resulted in huge profit margins. Secondly, their level is unsustainable for the average income level of Bulgarian households. However, changing them retroactively is a very bad signal for investors, not only in this sector but in others too. The need to trim tariffs was already obvious in 2008-2009, when the housing boom collapsed and money from there went into renewables. The government should have acted then. All in all, the changes are reasonable, but were done in a very, very cumbersome way."