The new Law for Energy from Renewable Sources
The new Law for Energy from Renewable Sources came into force on May 3, 2011 and replaced the former Law for Renewable and Alternative Energy Sources and Biofuels. While long awaited with hopes to introduce clear regulations and put an end to the one-year standstill on the market, the new law will actually hinder the development of the renewable energy sector in Bulgaria with grave consequences for the economy of the country.
Where does the problem come from?
The most controversial provisions of the new law were introduced in the last minute at the final reading in Parliament, in direct confrontation with the idea of balanced regulation from the initial draft that Council of Ministers had put up for public consultation. Thus, stakeholders in businesses, NGOs and society were cut off from the decision-making process.
What are the problems exactly?
Shorter terms of the feed-in tariffs
According to Article 31 of the new law, the terms of feed-in tariffs are reduced to:
- 12 years for electricity generated from wind energy, instead of 15
- 20 years for electricity generated from solar energy, instead of 25
Late fixing of the feed-in tariffs and retroactivity
Under the new law the feed-in tariff for projects is fixed for the entire term (12 years) only after construction of the project is completed. This is possibly the most problematic provision, because the downside limit to annual changes of the premium component of the tariff, which existed under the previous law, was removed with new law and now tariffs can be changed without limit every year.
The problem is, that wind energy projects typically take between 18 and 24 months to complete construction from the time of financial closing. This means that investors are expected to undertake the construction of an entire project, investing dozens of million Euro and years of time, while all the time being exposed to that risk that while they are in construction and while all expense have already been fixed, the state regulator might in the meantime cut feed-in tariffs to a level that would be so low, that the entire investment would be worthless before it is even finished. This tariff risk essentially means that banks will be reluctant to lend money to wind energy projects, which would further make the Bulgarian market less attractive to investors.
Beyond this, the new provisions retroactively change the terms on already effective power purchase agreements, negatively affecting the owners of existing wind energy projects. Most of the existing wind energy projects were built and financed under the assumption that the base component of initially 80 % of wholesale electricity prices, now reduced to 70 %, would continue to increase and outperform any downward revisions of the premium component which previously were limited to no more than 5 % a year. These terms are now being changed retroactively, since existing projects will also receive a flat tariff for the remainder of their term. This retroactive change violates the key constitutional principle of sustainable legal framework.Put simply, again, the wind energy projects that already exist were financed under the assumption, that although the regulator would reduce the premium for wind energy every year, the inflation of the base component – wholesale electricity prices – would more than make up for this. So investments were made and financing was provided by banks with an understanding that under the legal framework, in the long run, feed-in tariffs would continue to increase slightly. And while investors and banks are locked into these projects for up to 20 years now, the new law simply changed the rules on these projects retro-actively and removed this up-side potential for feed-in tariffs.
How the new RES law increases development risk for wind energy projects?
The video here schematically describes the reallocation and increase of project development risk under the new law.
There are many stages of development before a wind farm starts operation. These include: wind potential assessment, acquisition of land rights, environmental impact assessment, land use rights, design & engineering, permitting, securing grid connection, construction.
The new law introduces two financial filters which occur within one year of each other.
First, annual capacity allowances - the law puts a cap on the capacity of new renewable energy plants that can connect to the grid each year. How, when and where capacity will become available is currently unclear.
Despite this lack of visibility the wind energy project developer has to pay:
- Non-refundable BGN 5,000 per MW to reserve available grid capacity
Within one year of reserving capacity, the developer must request a preliminary contract for grid connection paying another
- Non-refundable BGN 50,000 per MW for plants above 5 MW or of BGN 25,000 per MW for plants below 5 MW when signing the preliminary connection agreement. The new law does not provide sufficient transparency how these funds will be used for making the grid connection of the plant. What is more it sets an artificial minimum price for connection that might not correspond to actual costs incurred.
In summary, the law creates significant allocation risk meaning that wind energy investors have a lot of costs to cover at a very early stage of the project before they even know whether or not they will be able to connect to the grid. So allocation risk means two things. First, it’s the risk whether or not capacity will be made available in the location where the developer is investing and second it’s the risk whether or not the developer will then be able to secure that capacity.Even if a developer decides to take on the allocation risk, there is the tariff risk waiting around the corner.
The new law says that feed-in tariff gets fixed when construction is completed. At this stage of the development of a renewable energy plant all investments have already been made.
The new law also says that the power market regulator reviews feed-in tariffs for renewable energy once a year. There is no limit to the downward revision of the premium component of the tariff.
At the same time, wind energy projects typically take between a year and a half and two years to complete construction from the time of financial closing.
So, the entire investment in a wind power project is now exposed to the risk that tariffs could be revised downward to an unsustainable level while the project is still under construction.
This tariff risk essentially means that banks will be reluctant to lend money to wind energy projects before completion as there is no way to predict what the future feed-in tariffs will be and hence whether or not the projects will be able to repay the loan.
In conclusion, instead of promoting renewable energy development in Bulgaria, the current law practically sets conditions for a complete stop of the industry here and threatens the fulfillment of the binding EU 2020 climate targets by Bulgaria. The law introduces more restrictions and state control in the renewable energy sector; it increases the development risk, leads to more speculation and higher costs in the sector and ultimately less investment.
BGWEA held a press conference just after the enforcement of the new Law for Energy from Renewable Sources in order to draw the public attention on the flaws of the law and the consequences for the Bulgarian economy. You can find the complete set of the press conference materials here.