Over a decade ago the European Commission commented on the “high energy intensity, low energy efficiency, and deficient environmental infrastructure hamper business activity and competitiveness” that exists in Bulgaria – writes Dick Roche, former Irish Minister for European Affairs and former Minister for the Environment.
Since that report issued little has changed. Seventeen years after entering the EU Bulgaria uses four times more energy per unit of GDP than the EU average. While other member states that joined the EU since 2004 have significantly cut their energy intensity Bulgaria has made little progress. It is out of step with EU partners. The question arises why does Bulgaria wilfully ignore EU energy policy?
The Spirit of Solidarity
AdvertisementThe Russian invasion of Ukraine in 2022 presented major challenges for the European Union.
In the energy sector where it had been obvious for some time that the EU was overly dependent on imports of Russian fossil fuels, the challenges were particularly acute.
In the run-up to the invasion, Russian gas exports dropped by 80 billion cubic metres. While the EU was already committed to phasing out imports of Russian fossil fuel “as soon as possible” the drop in Russian gas supplies and the outbreak of war posed the prospect of a very real crisis. There were dismal predictions that Europe could become a wasteland of dark iced-over cities with businesses and households facing huge energy bills and with energy-intensive industries facing closure. This was a time for EU solidarity and rapid action.
The EU, to its credit, was quick to react to the crisis. On 29 June 2022 Regulation EU 2022/1032 was adopted by the EU’s co-legislators.
The legislative changes were enacted in record time because of what Commissioner Kardi Simson identified as a “spirit of solidarity” amongst the key EU players.
The June 2022 Gas Storage Regulation and the Implementing Regulation adopted the following November, set ambitious gas storage targets for member states. EU countries were required to attempt to fill 85% of total EU underground gas storage capacity in 2022 and to fill 90% of Europe’s gas storage capacity by 1 November 2023.
Those targets were not only met but they were surpassed. By November 2022, an EU-wide average storage level of 94.9% was achieved. By the end of the 2022 heating season, the average storage level remained high at 83.4 per cent of capacity. By November 2023, the EU gas storage level stood at 99% of capacity.
The arrangements introduced in that Regulation played a central part in avoiding the EU energy crisis that many had predicted.
Solidarity Less Evident in One Area
That spirit of solidarity was, however, less evident in one area. The part played by private operators in protecting Europe’s gas industry has been under-recognised. Nowhere is this more evident than in the case of Bulgaria.
Achieving the ambitious EU storage targets set in 2022 required extraordinary cooperation between member states: it also required close cooperation between governments and private sector players.
As the EU Regulations were being prepared gas prices were rocketing. Those drafting the legislation recognised that the cost of buying gas to put into storage could pose severe financial challenges for the gas industry and in particular for private operators.
To address the financial risks Article 6b(1) of the Regulation adopted in June 2022 obliges member states to “ take all necessary measures, including providing for financial incentives or compensation to market participants” involved in meeting the ‘filling targets’ set in the Regulation.
The compensation mechanism set out in the Regulation was intended to protect all gas suppliers who ‘ stepped up to the plate’ and played their part in the EU’s efforts to come through the winters of 2022 and 2023. That is not how the mechanism was applied in Bulgaria.
Always the Outrider
In the run-up to an EU Energy Council in March 2023, the Commission issued its report on the operation of the gas storage arrangements.
The report gave a positive overview of measures taken by member states to fulfil gas storage obligations. It was, however, silent on the compensatory mechanisms put in place in member states. In contrast, Bulgarian political figures were not silent on the issue.
In the days before the Council meeting, the then Bulgarian Minister for Energy, Rosen Histov announced that he was in discussion with stakeholders on the question of a compensatory mechanism which, he suggested, would cover the cost of the very expensive gas being pumped into Bulgaria’s underground storage facilities. The Minister who did not elaborate on the stakeholders with whom he was in contact, said that it was his intention to raise the cost of gas storage with fellow ministers in Brussels.
Bulgaria’s President Ruman Radev also spoke on the issue. He suggested that the EU should step in to support member states’ efforts to find a way to compensate for the drop in value of gas put into storage. The President’s idea that Brussels should ‘pick up the tab’ came to nothing.
Instead of introducing a compensatory mechanism that aligns with the requirements that the EU put in place in June 2023, Bulgaria introduced a low-interest loan scheme that provided Bulgargaz with € 400 million, funds that few expect will ever be repaid. Private operators who applied to avail of the scheme got nowhere; they have been ‘left out in the cold’, forced to shoulder the huge burden of financing the gas that was purchased when natural gas prices were at an all-time high from their own resources.
The arrangement again illustrates a Bulgarian propensity to use every opportunity to advantage a state-owned enterprise, with a less than sterling record, to the disadvantage of private operators, the very antithesis of EU policy.
Time for Action by the EU
The EU Commission has been remarkably, many would say, excessively tolerant of the special position that state-owned Bulgargaz, part of the Bulgarian Energy Holding (BEH) group enjoys in Bulgaria’s energy sector.
As mentioned earlier, the Commission, in 2013 noted Bulgaria’s high energy intensity, low energy efficiency, and deficient environmental infrastructure which it saw as hampering “business activity and competitiveness”. Those negative positions arose and continue to exist in no small part from the coercive control that the state-owned Bulgargaz has been allowed to exercise in the energy sector.
In 2018 the Commission after a years-long examination fined the company €77 million for blocking competitor access to key infrastructure and breaching EU antitrust rules. The Commission’s action was the subject of striking political push-back in Bulgaria. At one point all 176 MPs present in the Bulgarian Parliament voted in favour of a motion to reject the Commission’s position.
Following the imposition of that fine, the Bulgarian government took what some saw as a sign that things were changing. It introduced a programme under which significant amounts of gas were to be made available to third parties. This was regarded as a step in the right direction that would promote the liberalisation of the Bulgarian gas market. That hope was short-lived: the programme was dropped without explanation a month before it was due to come into operation.
In January 2023 another demonstration of the extraordinary position enjoyed by the Bulgargaz group in Bulgaria was demonstrated by the announcement that the company, without any notification to the EU had signed a hugely controversial agreement with its Turkish counterpart BOTAS.
That agreement provides a ‘back door’ for rebranded Russian gas to enter the EU, runs counter to EU aspirations to wean Europe off Russian fossil fuels, undermines EU ‘energy sovereignty’ and gives Turkish political leadership a significant lever for use in future dealings with the EU.
The agreement delivers striking competitive advantages to both of its signatories and strengthens the stranglehold that Bulgargaz enjoys over competition in Bulgaria.
While lauded by the Bulgarian government at the time of its signing the BOTAS-Bulgargaz agreement has been heavily criticised by the Bulgarian government which took office in June last. The Government is reviewing the agreement as part of an examination of policies adopted by its predecessor.
The agreement has also sounded alarm bells with the EU Commission. Last October the Commission announced a probe into the agreement and requested Bulgargaz to supply it with a comprehensive list of documents relating to it. That announcement allied to the announcement made on 7th February that the Commission considered that Bulgaria had failed to fulfil its obligations under the Security of Gas Supply Regulation may be a sign that tolerance of the extent to which Bulgaria’s energy policy, in particular in relation to gas, is running out. Time will tell.
To return to the question posed at the outset – why does Bulgaria wilfully ignore EU energy policy? The answer, at least in part, would seem to be an extraordinary belief in some political circles in the state ownership model.
Bulgaria is by no means the only member state that joined the EU with state enterprises in key economic sectors. Ireland is a case in point. When Ireland joined the then EEC in 1973 state-owned enterprises were key players in energy, transport, communications and had a presence in a range of other sectors. Ireland’s state-owned enterprises were established for practical rather than ideological reasons. They played an important role in their time. In the years since Ireland joined the EU a significant number of those companies have been absorbed in whole or in part into the private sector. Others for a variety of reasons have gone out of business. Those that remain operate in a liberalised and competitive market. While some may regret these changes, the practical reality is that an open competitive economy where private enterprise is encouraged to thrive is a key to Ireland’s economic growth. Bulgaria is not so different to Ireland – an open competitive economy is more likely to deliver than clinging onto an economic model rooted in the past.
Dick Roche is a former Irish Minister for European Affairs and former Minister for the Environment
Photo by KWON JUNHO on Unsplash
