The Current Status of the Bulgarian Energy & Natural Resources Sector

The Bulgarian energy sector is a key sector for the development of the country’s economy.  Most of the resources in Bulgaria are imported, mainly from Russia.  The Bulgarian energy sector is primarily comprised of electricity generation and the transmission of gas to foreign markets. 
 
In 2011 the Bulgarian Parliament adopted a new energy strategy until 2020 (the “Energy Strategy”).  Besides the general EU principles of sustainable, independent, clean energy, the Energy Strategy also sets out the specific priorities of the country.  Such priorities include the diversification of energy sources and supply, energy efficiency, furthering the country’s independence from foreign energy sources, balancing the energy mix and the development of a competitive energy market.  The energy mix in Bulgaria is: 34.1% crude oil; 35.5% coal; 21.3% nuclear; 0.1% renewable energy sources; 5.5% natural gas; 2.2% hard fuels; and 1.3% oil products.
 
The state independent energy regulator, State Energy and Water Regulation Commission (“SEWRC”), is the competent authority for price regulation.  The sector is governed by the Ministry of Economy and Energy (“MEE”), with a designated deputy minister for the energy sector.
 
Since 1 July 2007, the Bulgarian electricity market has been fully liberalised.  Bulgaria’s electricity grid has good geographical coverage.  The national trans-border electricity infrastructure is well-developed.   
There is one operating nuclear power plant in Bulgaria, NPP Kozloduy.  Its 2,000 MW operating units account for more than a third of the national annual electricity production.  In 2012 the Government abandoned the Belene new-build project and has instead focused on the installation of an additional unit at NPP Kozloduy, to be built from 2025.
 
Hydro power is the largest contributor in the renewable energy mix with around 29%.  2012 saw the rapid development of photovoltaic (“PV”) plants in the country.  Currently the electricity produced from renewable energy sources is stated to be 15-18%.     
 
SEWRC has issued over 20 licences to district heating companies.  Most of these companies have installations for combined heat and power production, with a total installed capacity over 1,690 MW.  All the heating companies are privately owned.  The MEE has prepared a draft plan for stabilising and developing the heating energy sector of Bulgaria up to 2020. 
 
Bulgaria imports 2,811 million m³ of natural gas, which covers over 85% of domestic requirements.  All imports come from Russia.  Melrose Resources and Oil and Gas Exploration and Production AD are the two major natural gas producers in the country, but their share of the domestic market does not exceed 15%.  Bulgargas EAD is the public supplier of natural gas. 
 
The oil and gas products market in the country is fully liberalised.  Oil requirements are met mainly by import.  
 
The previous government was proud of having about 190 exploration permits and about 480 production concessions for underground resources.  These high results are claimed to be due to the centralisation of the mining sector within the MEE from the end of 2010.  A major part of Bulgaria’s mining industry is still the production of lignite coal.  Bulgaria’s gold mining industry has seen some development in recent years.  There are more than 20 gold exploration permits in the country. 
 
In the last twelve months, the Bulgarian Government has launched tenders for three offshore oil and gas exploration blocks in the Black Sea.  The major one – Han Asparuh, deep water with an area of 14,220 sq km, was won by Total, OMV and Repsol.  Two shallow water blocks, Teres and Sveta Marina, are still to be awarded.  At the same time, the shale gas potential of the country is currently unexplored due to the ban on hydraulic fracturing introduced in January 2012. 
 
The last twelve months have turned out to be critical for the electricity sector in Bulgaria.  The electricity distribution companies have been complaining about the high power purchase prices they are obliged to pay to renewable electricity producers.  At the same time, the customers started regular protests against the high end consumer electricity prices in the country.  In response, the government initiated an audit of the whole electricity sector.  
 
During 2012, SEWRC decreased the feed-in tariff (“FIT”) for renewable electricity projects three times - in January, July and September.  In July 2012, SEWRC ruled that there would be no free capacity for new electricity producers using renewable sources over the next year.  Therefore, only projects that had signed final grid connection agreements by 1 July 2012 could be connected to the electricity grid and commissioned. 
 
In September 2012, SEWRC created a new “grid access fee” to be paid by the electricity producers using renewable sources to the transmission and distribution grid operators.  This meant that the FIT of the existing renewable projects was effectively decreased by up to 39%.  As a result, almost all PV and wind electricity producers launched law suits against SEWRC.  As an additional measure, since April 2013, the electricity system operator has been restricting the power input to the grid from the renewable energy producers by up to 40%. 
 
Currently, NPP Kozloduy’s two blocks are one of the cheapest sources of electricity in the country and can provide almost the entire electricity requirement for end consumers.
 
In January 2013 in a referendum, the people did not approve the proposal of the then opposition coalition party for the construction of NPP Belene.  Since 2011, Bulgaria has applied its strategy for the management of processed nuclear fuel and radioactive waste, valid until 2030.
 
Last year, the MEE published the first draft of the Strategy for Development of the Mining Sector in Bulgaria until 2030.  The MEE’s experts undertook the task of supplementing and improving the draft in accordance with the comments and opinions raised by stakeholders.
 
In December 2012, the MEE approved the national plan for the development of energy from renewable sources.  This follows the model plan approved by Directive 2009/28/EC. 
 
The priority of the newly elected Government is the rational regulation of end consumers’ electricity prices.  Such prices are dependent on series of factors, including gas prices, renewable energy share and energy efficiency.  Although the Government stated some time ago that they would open the electricity exchange, the project is still on hold. 
 
The legislation on renewable energy was adopted in May 2011, and amended in 2012.  New installations may be connected to the grids only if the grid operators and SEWRC announce free capacity for the year ahead.  Availability of free capacity is to be announced by 1 July each year.  The purpose of these amendments was to reflect the huge disparity between the permitted production capacities of renewable projects and the actual technical and financial capacity of the electricity grid operators.  
 
Over the last year, the Energy Act has been significantly amended.  The main changes relate to the independent provision of electricity and gas transmission and distribution.  Bulgaria has chosen the independent gas and electricity transmission operator model.  New amendments are expected to the Energy Act to regulate the current issues in the electricity sector, particularly regarding grid access and the purchasing of electricity produced from renewable sources.
 
The Bulgarian Carbon Capture and Storage Act came into force in February 2012.  The Act was developed to implement Directive 2009/31/EC of the European Parliament on the geological storage of carbon dioxide.  The most significant recent law suits are related to the newly determined grid access fee by SEWRC.
 
 
Kostadin Sirleshtov is a partner at CMS Sofia.  He leads the Energy, Projects and Construction (EPC) practice of the office.
 
His particular area of expertise is in energy and utility law, having worked in the Chief of Minister’s cabinet with the Ministry of Energy and Energy Resources.  Kostadin also served as a board member of the North East Electricity Distribution Company (prior to the acquisition by E-on), Puzzle Consulting and Financing JSCo, and Energy Traders JSCo.  He was recently appointed Chairman of the National Energy Efficiency Chamber in Bulgaria and a member of the Board of the National Association for the Renovation of Buildings. 
 
Kostadin “has been highly recommended as a leading lawyer in Energy” by Chambers & Partners and the Legal 500 since 2005.  His team was chosen as the ‘best energy team of the year’ at the Corporate LiveWire Global Awards 2013.
 
Kostadin Sirleshtov can be contacted by phone on+359 2 921 99 42 or alternatively via email at: kostadin.sirleshtov@cms-cmck.com
 
Pavlin is a core member of the CMS Sofia EPC practice.  In addition to working on EPC projects, he has experience in public procurement, dispute resolution, enforcement and insolvency, and competition matters.  Pavlin advises clients in the oil & gas industry on exploration, concessions, permits, disputes, negotiation with business partners and/or administrative and governmental institutions, and industry regulation.
 
His experience in the energy sector includes advising clients such as a consortium of major oil and gas exploration companies, Melrose Resources, eCORP, PEOS (Switzerland), Marine Resources (a subsidiary of Rompetrol), Gestamp Eolica, Contour Global, BNK, Talisman, SDN and Alaska Metals.  He also advised The Bulgarian Oil & Gas Association on drafting the new oil & gas legislation in Bulgaria.
 
Pavlin obtained a Diploma in Introduction to English and European Union Law from the University of Cambridge in 2008 and has been a member of the Bulgarian Bar Association since 2009.  Pavlin speaks Bulgarian, English, French and Polish.
 
Pavlin Stoyanoff can be contacted by phone on+359 2 923 48 61 or alternatively via email at: pavlin.stoyanoff@cms-cmck.com