Банкеръ Weekly

Briefs

WE'LL HAVE A GRAVE PROBLEM WITH THE PRICE OF ELECTRICITY

Engineer Hristo Hristov, a senior research associate and a doctor, graduated in Electric Power Engineering from the Moscow Energy Institute. For many years he has been occupied with the planning of the national energy system development. In 1993, he began to work in the field of climate changes. He took part in a national research on the issue as well as in the development of two national plans with regard to climate changes. Apart from being an Executive Director of the Energy Institute, he is also a member of the Managing Board of the Scientific Coordination Centre for Global Changes at the Bulgarian Academy of Sciences.

Mr. Hristov, Bulgarian industry suffered a blow when the greenhouse emissions quotas for 2008-2012 were cut. Now it faces another problem - this time regarding the emissions allowed until 2020. How will the new restrictions affect the industry?
- Indeed, on January 23 the European Commission published a draft set of documents aimed at increasing the energy production from renewable resources and amending the emissions trade directive. As to the greenhouse emissions in particular, the quotas distribution is quite radical - the countries will no longer be independent in the trading in emissions and all emission rights will be transferred to Brussels. Governments will only be allowed to take independent decisions on the so called non-commercial sectors - utilities, transport, light industry, agriculture, and waste. Rich nations are required to cut their emissions by 20%, whereas poor ones are allowed to even increase their emissions by up to 20 per cent. The problem is that 2005 instead of 1990 will be considered a starting year.
What does this mean directly?
- If you look at the table showing the emissions of the countries as of 2005 compared to those in 1990, you will see that Spain has increased its emissions almost 50% compared to those it had 15 years earlier. It is followed by Portugal with a 41% increase, Greece with 27%, Ireland with 23%, Austria, Finland and Italy with 10 to 15 per cent. The Netherlands and Belgium have slightly increased their greenhouse emissions compared to 1990. Now the European Union decides to cut their emissions by 20%, but compared to the levels in 2005. So, in practice, they will not feel much of the sanction. Most damaged will be the countries that really restricted their production in this period - that is, the countries in transition. Lithuania cut its emissions by 60%, Latvia by 58%, Estonia by 51%, Bulgaria by 49%, and so on. So, even if they are allowed to increase their emissions, they will again remain much below the levels registered at the time their economies flourished and will be in a more unfavourable position compared to the other community members.
Why hasn't anybody held the rich countries responsible for the increased emissions?
- About two weeks ago I was in the Netherlands for a seminar and I asked the European Union representative this question. They answered me that we needed to stop looking back and turn our attention to what is lying ahead. Poor nations get big profits from the new directive and one cannot say they will lose, they told me.
But you don't seem to agree with them?
- That's right and I said it to all of them. Together with foreign colleagues we asked that the European Commission calculate whether in practice the emission rights of countries in transition would not be transferred free of charge to countries that have increased their emissions. Do you know what they told us: it is absolutely impossible to make a reassessment because it is too complicated.
I will give you an example. Even if Bulgaria's transport sector is allowed to raise its emission by 20%, it will still remain far from the average European levels. Because in developed countries motor vehicles emit about 30% of the greenhouse gases, whereas in the countries in transition this share is at least twice smaller. You only need to compare the density of roads in Bulgaria and Germany to see it clearly. With such rate of development it will be very difficult for us to catch up with the old members of the community.
Let's go back to how changes will affect energy and industry...
- Things are starting to look catastrophic for the commercial sector because, as I said, Brussels takes all the remaining emission rights and puts them in a central register. No free quotas will be launched for the electric power engineering - they will be sold on tenders and power plants will have to bid for them. Unfortunately, Bulgarian thermal power plants have high emission levels for subjective reasons - they use brown coal as a fuel. And Western Europe uses coals of better quality which emit 30% lower emissions in the production of the same amount of electric power. In other words, our companies will need to buy a third more quotas and this will make their production more expensive. For the period following 2012 emissions are expected to cost EUR30 per ton of carbon dioxide.
Eventually, the introduction of the centralized trade with no consideration of the national specifics will strike a hard blow to the power prices. Poland will suffer most since 80% of its electricity is produced by thermal power plants. Bulgaria is second - nearly half of our electricity production depends on coals and this share will grow further when Maritsa-Iztok 1 power plant is put in exploitation. So Bulgaria will do have a problem with the prices of electric power.
You mean that there will be an inevitable price increase.
- The European Commission has calculated that the introduction of the new measures will raise prices by 10 to 15 per cent. But this is only valid for Western Europe. Here prices will grow more drastically because of the quotas that we'll be buying and the increase is likely to reach 50 per cent. The construction of sulphur purifying facilities and electric filters for dust arresting at some of the power plants will add another 10-15 per cent. We are facing a very tough increase in the power price if we want to avoid decapitalisation of the sector. There is a regulator now which keeps down tariffs artificially and impedes the normal economic development of the energy sector. But usually several years of price curbing are followed by a shock attack.
That will certainly have an impact on the industry, too...
- For the entire European Union industry quotas will be distributed according to the best technologies. Those who have more modern installations will be able to produce the entire amount of power. Older plants will be forced to limit their operations. And again we appear in the position of a country that will lose its competitive power. Because from 2013 we'll have to buy additional quotas in order to let our companies operate at full capacity. In fact, according to the figures we have at the Energy Institute, we are sure that even in the period from 2008 to 2012 plants operating in Bulgaria today will have to cut their emissions by 30% in order to meet the requirements of Brussels. Otherwise, they will have to seek additional quotas from abroad. Most of them are at the verge of competitiveness even now and this will hit their production very hard. Many of them will go bankrupt or will have to cut their staff. If there are no protective measures, the economy will collapse. That will repeat the situation that followed the falling of the Berlin wall when East German companies went bust and those in the western part increased their production and covered the entire market. Bulgaria and the rest of the countries in transition must request protection for those of their productions that are inefficient.
However, there is an impression that communication with the European institutions is far from perfect when it comes to ecology.
- Usually there is no established position on these complex issues for the newer member states. That is why they are almost deprived of influencing the decisions that are being taken. Sometimes we try to argue, but we first need a grounded analysis of the consequences from the application of a given measure within the country. And in order to have an analysis we need macro- and microeconomic researches which we can present when we sit down for negotiations. Unfortunately, our ministries do not assign the Bulgarian Academy of Sciences, the universities and the private research organisations the task to carry out such researches. I think they fear they will be criticized if their position appears wrong. But we cannot expect someone else to defend our interests. Instead, the European Union makes a general research of all countries and bases its decision on it. The problem is there are two groups of countries in the community - the very rich ones for which this analysis is not correct and the very poor ones for which it is absolutely irrelevant. The model is arranged to serve the European average level and is not acceptable for those who remain five times below that level. The bad thing is that we'll continue to be in an unfavourable position in the future negotiations. Brussels wants to approve the new set of measures before March 2009 when there will be European Parliament elections and a new European Commission will be established. The fixed quotas will be defined more precisely at that time - richer countries will present their researches and will claim how difficult it will be for them to meet the targets. And we, as always, will only be able to say how poor we are.

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