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Vladimir Penkov for passive-PLUS.com: “State Creates Negative Attitude to Producers of Green Energy”, April 2014

Vladimir Penkov is founder and managing partner in the Penkov, Markov and Partners law firm and arbiter in the arbitration court of the Bulgarian Chamber of Commerce and Industry since 1999. He has also served as member of the Board of Directors and executive director of Zagorka AD, as well as member and chairman of the Supervisory Board of BTC AD. Vladimir Penkov is also member of the Managing Board of the Bulgarian Chamber of Commerce and Industry and its deputy chairman (1999-2006). He has actively participated in the drafting of a number of Bulgarian laws concerning commercial operation and investment in the country, including the Commerce Act, the Commercial Register Act and the Energy from Renewable Energy Sources Act.

Interviewed by: Elena Yolovska

 

Mr Penkov, the most recent EU requirements set the target share of electricity from renewable energy sources (RES) at 25% by 2030. What share do we have at the moment?

An official report by the Economy and Energy Ministry says that Bulgaria has achieved a RES share of 16.4% which is 0.4% more than the 2020 target. No figures are available for 2013 and 2014. But the reality is that no new production capacities are being connected because of the policy of the State.

The relevant associations say that the figures are wrong and that we have only reached 12-13%.

We must note that this was the minimum required by the EU and the government is wrong to say that 16% is too much. The EU recommendations were for over 20 % but that remains just a wish.

Now the European Commission has decided that the 2030 target should be 25%. It means that Bulgaria has a lot more to do to achieve this.

 

Do you think that potential investors could be interested, considering Parliament’s vote last year to reduce the purchase price of RES electricity and the frequent changes in the legislation?

Obviously not. An atmosphere has been created in which RES producers are made to look guilty for having these preferential prices. A negative attitude has been created in the whole society and especially among consumers that green energy is to blame for the high prices of electricity.

The result is that investors have started to avoid this sector and existing power generating facilities go for sale. Small and mid-sized companies are finding it particularly hard to manage – and these companies make up three-quarters or more of the sector.

The present government set in place a 20% fee on the revenue. Not on the gain, but on the revenue! If we add the other fee of some 10% of the revenue in the latest revision of the law, we get over 30% that all producers of electricity from solar and wind energy have to pay from their income. This is an unbearably large share of the profit.

It is an additional payment and what’s more, it is unlawful. The retroactive effect of the decision by the State Energy and Water Regulatory Commission (SEWRC) is absolutely prohibited by the Constitution.

It has forced producers to start renegotiating their lending agreements with banks which means for banks to bring down interest rates and extend by 4-5 years the maturity of the loans. This creates insecurity among investors, and weakens their interest and motivation: when a lending agreement is extended to 15 years from 9 years, as in this case, it is obvious that the production facilities cannot go without repair and new investment for 15 years. This is especially valid for photovoltaic plants.

The very introduction of these charges solely for producers of solar and wind energy is discriminatory. It does not create a good atmosphere and investment climate and inhibits the development of the sector.

 

What has been the reaction of the RES companies?

It takes stability and a predictable legislative base for this sector to develop. This is what everybody wants: Both the Bulgarian and the foreign investors. And most of all, it takes dialogue and joint discussion and solution of the problems.

Right now there is no transparency. Things happen backstage. There are no joint discussions. The capacity of the associations, the producers and the experts in this area are not used.

Let me remind you that last year a programme was prepared about how this sector should develop and the participants came to a consensus on over 80% of all issues. For the first time, all producers and electricity distribution companies (EDCs) participated – and nobody from the government and the SEWRC showed any interest. They act like a stepmother to a sector of the economy which generates 10% of the budget and employs more than 10,000.

 

Do you see any good move that companies which own such RES projects can make?

If we are talking about a move by an individual company to ensure its survival, yes, there is: sell or fight. They will fight because with these conditions right now, there is nobody to buy them or selling will be very difficult.

The right move is for the NGOs and all stakeholders, experts and democratically-minded people in this country, as well as some independent institutions, to unite, to hold a round table, address the questions and try to find the solutions jointly. Solutions exist.

Our law firm participated in the formulation of a package of measures connected with the liberalization, the energy exchange, transparent pricing, the creation of a powerful social package for low-income consumers and elimination of corrupt schemes for redistribution of incomes.

The going public sentiments and attitude of the government – that the RES producers, and the EDCs as well, are to blame for the imbalances in the National Electricity Company (NEK) or the high price of electricity – substitutes the real issue, results in aggravation of the crisis and a collapse of the system, and speaks of the dependence of what is supposed to be an independent regulator.

 

The SEWRC is not independent?

No, it is not. This regulator needs re-installing to become really independent, which means that its members should not be appointed and fired by the government. Members should be nominated by NGOs, experts or maybe MPs but only in their capacity as experts.

This is not what we have. The latest revisions in the law even made the regulator’s acts enforceable before they are contested in court. They [the regulator] became a lot like the tax people: a state within the state. They can impose a fine, irresponsibly, and then when one appeals the fine and three years pass, one can get his money back without interest.

Such a decision shows that this is not an independent body, that it acts under huge administrative pressure, that the law is not the only thing it obeys, that rule of law and constitutional order does not exist as far as it is concerned and that it makes its decisions based on some ad hoc considerations, probably under somebody’s pressure and instructions.

This is a very bad signal for investors and it shows that the investment climate as a whole is seriously worsened because the same thing can happen in other sectors of the economy.

 

The Bulgarian Photovoltaic Association speaks of regulatory aggression towards the producers of electricity from solar energy and says that the high price of green energy is a myth. What do you think of that?

RES producers are a very small factor in the overall price of electricity and the preferential price of green energy does not impact pricing as much as the SEWRC allege, as well as some not quite knowledgeable ministers.

 

Do we have any legislation to encourage the use of RES electricity in households like most European countries do?

All European countries have nominal incentives or preferences for small generating facilities of up to 30kW but here, too, like in many other areas, requirements are fulfilled superficially.

Indeed, we do have lots of incentives, first of all in respect of the building papers where only a final contract is signed and there is no tentative agreement. No investment project needs to be prepared and approved and an opinion by a designer-engineer is sufficient. Second, there are preferential rates. Third, some charges are not applicable, including the guarantee charge of BGN 5,000 per 1MW – but we are talking only of 30 KW after all – and the BGN 25,000/MW advance payment on the connection charge. Fourth, the time limit for the connection opinion is 30 days. These are all preferences and they end here.

Why then the system cannot function? Because it remains clumsy and bureaucratic. The few things that remain to be done after all the preferences get done in a slow, incompetent and hostile way. Second, the EDCs did not have general terms for fast connection and it was not clear how this connection would occur. Only recently did they start paying attention to these questions.

No preferential low-interest loans are available, no grace period for the interest, nothing like this.

And third, there is no government policy to give this sector a positive outlook. Look at Germany where preferential loans are available and the government makes an effort to convince people that it is good for the country.

The members of a civil society want to be useful for their society. In Bulgaria, everybody look after his own interest and profit only.

The government must fight and try to convince people that they  should be doing something good [for society].

Well, how can we achieve this when our government tells people that green energy is bad and that the producers of green energy are doing bad things! This goes against the common policy in Europe and the world.

We have seen all kinds of protests in Bulgaria but nobody says a word about this [policy on green energy] even though it [the RES sector] generates 10% of the national budget and creates job opportunities for tens of thousands of jobless people. A whole sector connected with the future and energy efficiency, is being destroyed and the news media remain silent. It turns out that no opposition exists either: everybody agrees that green energy is bad.

 

You have touched upon this but let me ask you again: what is the procedure for one who wants to have a RES project on his property to produce electricity for his household? And if one  produces more electricity than they use, what are the options for its sale?

If, despite everything, one has the courage to do this, they have to write a simple application to the competent EDC and should expect a connection opinion within 30 days. After that they should prepare the construction papers, get a permit and sign a direct contract – no tentative agreement with all kinds of requirements for the project. It is not at all a complex procedure – only if all this functioned well. Everything should have been happening very quickly – if only it wasn’t for this bureaucracy.

The result is that due to the government policy there are only some ten such projects.

By contrast, in Germany, for example, people are first being told that it is very good to invest in RES projects – because after all this takes efforts, inconveniences and resources, and then they are offered financial preferences and preferential prices and, third, they are told how the investment will pay back and what a good thing they are doing for the future generations. The result has been that while the initial short-term target was to have 10,000 such installations on buildings, they now have over 1 million.

This is what I call government policy. In Bulgaria, we don’t even have ten or twenty such installations.

 

So, you are saying that the existence of both private and public interest should make the government encourage the construction of RES projects?

There is a negative attitude in the whole society, which has been instilled by the government, by the incessant unfair talk about how bad green energy is, instead of speaking about its role – because we are talking about billions in investments and only a small share of these belong to the large companies. Over three-quarters are small and mid-sized companies. These are successful business people who have invested everything they own, have taken out loans at extremely unfavorable conditions - because the investment credits in Bulgaria are not what they are in Germany and Austria – with interest rates of 8-9% and another 20% of their income being taken away by the government. The previous government wanted 40% but even this 20% is slowly killing the business.

And the banks, too - it is very difficult to get favourable business credits anyway – are hard to work with considering the situation.

 

If a household produces more electricity than it needs, are there any mechanisms to sell it?

Yes, there are but as there have been very few such projects, I am not sure how well it functions with the bureaucratic rules that have been set in place. The information I have is that it operates with lots of difficulty.

 

From a legal viewpoint, what steps need to be taken now and in the future towards complying with the European directives on RES and the fair relations between the government, businesses and consumers in Bulgaria?

The first thing to do is finally start the energy exchange to make sure prices are regulated in a democratic way, through competition. There is quite a large consensus about this exchange among all market players: producers, EDCs and consumers, as well as the NGOs. It seems that only the regulator keeps away from it and refuses to state its opinion – and there can be no reasonable opinion “against”.

Only this energy exchange can create a market mechanism for pricing.

Second, we need to have a really independent regulator. The members of the regulator should not be appointed by the government: it should have members nominated by the NGOs, by experts. Some may be appointed and elected by Parliament but not on a party-quota basis.

Such a regulator must be independent when it makes its decisions – nothing like the present situation where the regulator follows the instructions of the Economy and Energy Minister - to act by observing the law and following the economic mechanisms and the opinion of experts. Such a regulator would be interested, when an issue arises – I intentionally avoid the word “problem” – to bring together all market players and find a working solution. There is no problem without a solution as long as those who now take advantage of the backward system we have in the energy sector, agree to stop grabbing from it.

Third, we need to have a transparent pricing mechanism reflecting all elements in the right proportion, to make sure consumers and everybody else know what, after all, they pay for and what weight all factors have.

Now, the weight of one part – the EDCs, green energy, etc. – is less than 10% and the big costs are in the remaining 92% which are purely state-owned. Nobody says anything about these and it is where the reserves are.

It is true that the price of electricity will probably go up but it is possible for the price for consumers to come down, if they stop taking uncontrollably money to put it who-knows-where. If this 92% weight on the price by the State or the state-owned NEK and other companies is optimized, the price for end-users could eventually come down. I say maybe. I am not saying that this is sure to happen but it [the price] is very much likely not to increase.

Green energy must not be destroyed. Just the opposite.

Oddly, at a time when we get a lot of sunny days – which was the case the week before last week – photovoltaic plants are set a 60% cap on their capacity. It was 24C outside and the coal-fuelled plants were running at full capacity.

This is bad government policy.

 

What sense does it make?

The logic is the same and has to do with the 92% of “other factors” that influence pricing. Nobody speaks about them – the spinning reserve, the coal-fuelled plants which produce the most expensive electricity. Nobody mentions these.

If we have transparency, the efficiency will rise, tensions will subside and there will be none of these negative attitudes. Investors will be back, will feel confidence and be able to work. Banks will work better with businesses in this area.

And one more thing: a powerful social package needs to be made available for people who have low incomes. The price cannot be kept lower than is economically justifiable because of them but the government can provide support for such people, and so can the players on the market and the energy exchange. Such a social package would be just - this is social solidarity. When the package is fair and reasonable, nobody would object.

It is also important that enough resources be set aside for development of green energy and increasing energy efficiency.

These are all measures where the government should focus its efforts. Not just the government - the whole society should.

Right now, together with this negative public attitude to RES projects, there is an equally negative attitude to the EDCs – because they are said to owe BGN 20 million to NEK. Well, they do, but then NEK owes them BGN 480 million and there is no legal reason to prevent them from making these deductions.

These are purely commercial relations and the measure the SEWRC set in place is absolutely unlawful: telling the companies to pay this money today or tomorrow or else face a de-licensing procedure.

Maybe in the end they will not get to licence withdrawal but they will appoint a civil servant to work in each of these companies. The ownership will remain unchanged – the companies are not being nationalized or bought because the government will have to pay several billion for this because of all the investment that has been made.

I hope that we will not go as far as they have in some countries which don’t have democracy and which are not EU members. But this is a problem we facing at the moment: when you have a commercial dispute, the regulator cannot step in under somebody’s dictates and interfere in this independent commercial dispute in violation of the legislation, ignoring the Commerce Act and the Obligations and Contracts Act, and failing to provide an opportunity for the two companies – one of them private and the other state-owned – to resolve the dispute in court with the help of the independent judiciary.

This is interference by a regulator who listens to the Economy Minister and some other prompters.

The regulator cannot take such decisions for licence withdrawal: this is a most adverse signal for investors, a bad sign for the investment climate and the predictability and stability of the legislation.