Bulgaria The role of gas in decarbonisation - April 2018 - Baringa Partners
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Bulgaria The role of gas in decarbonisation April 2018
Bulgaria The role of gas in decarbonisation Bulgaria The role of gas in decarbonisation Copyright Copyright © Baringa Partners LLP 2018. All rights reserved. This document is subject to contract and contains confidential and proprietary information. No part of this document may be reproduced without the prior written permission of Baringa Partners LLP. Confidentiality and Limitation Statement This document: (a) is proprietary and confidential to Baringa Partners LLP (“Baringa”) and should not be disclosed to third parties without Baringa’s consent; (b) is subject to contract and shall not form part of any contract nor constitute an offer capable of acceptance or an acceptance; (c) excludes all conditions and warranties whether express or implied by statute, law or otherwise; (d) places no responsibility on Baringa for any inaccuracy or error herein as a result of following instructions and information provided by the requesting party; (e) places no responsibility for accuracy and completeness on Baringa for any comments on, or opinions regarding, the functional and technical capabilities of any software or other products mentioned where based on information provided by the product vendors; and (f) may be withdrawn by Baringa within the timeframe specified by the requesting party and if none upon written notice. Where specific Baringa clients are mentioned by name, please do not contact them without our prior written approval.
Bulgaria The role of gas in decarbonisation
Contents
1 Executive summary ................................................................................................................................................................................................................................................................................................... 1
2 Introduction ................................................................................................................................................................................................................................................................................................................ 3
3 Bulgaria’s Energy strategy 2020 ........................................................................................................................................................................................................................................................................... 5
3.1 Government energy strategy – update pending .................................................................................................................................................................................................................................. 5
3.2 2020 objectives were set and reached .................................................................................................................................................................................................................................................. 5
3.3 Rapid policy evolution has driven decarbonisation, and triggered the issue of affordability .................................................................................................................................................. 6
3.4 Decarbonisation strategy beyond 2020 ................................................................................................................................................................................................................................................. 7
4 Demand – drivers and barriers for growth ......................................................................................................................................................................................................................................................... 9
4.1 Gas is currently a small component of the energy mix ..................................................................................................................................................................................................................... 9
4.2 Prospects for gas demand growth .......................................................................................................................................................................................................................................................... 10
4.3 Drivers and barriers for the increased role of gas in a decarbonisation pathway to 2030 ........................................................................................................................................................ 11
5 Gas supply .................................................................................................................................................................................................................................................................................................................... 15
5.1 Existing supply sources .............................................................................................................................................................................................................................................................................. 15
5.2 Pricing of wholesale gas ............................................................................................................................................................................................................................................................................ 15
5.3 Infrastructure for new sources being developed since 2009 ........................................................................................................................................................................................................... 16
5.4 Development of a Bulgarian gas hub ..................................................................................................................................................................................................................................................... 18
6 Unlocking market access ......................................................................................................................................................................................................................................................................................... 21
6.1 Access to Transmission capacity is present but limited ..................................................................................................................................................................................................................... 21
6.2 Under EU support access is progressing ................................................................................................................................................................................................................................................ 21
7 Conclusions – ending the silence on a role for gas in the future BG energy mix ................................................................................................................................................................................... 25
Appendix A: Bulgarian gas market - overview ..................................................................................................................................................................................................................................................... 27
A.1 Overview ........................................................................................................................................................................................................................................................................................................ 27
A.2 Gas infrastructure in Bulgaria .................................................................................................................................................................................................................................................................. 27
A.3 Energy market structure ........................................................................................................................................................................................................................................................................... 30
A.4 Domestic supply options ........................................................................................................................................................................................................................................................................... 33
Appendix B: Power markets, and renewables policy support ........................................................................................................................................................................................................................... 34
B.1 Key players power market, and status ................................................................................................................................................................................................................................................... 34
Appendix C: EC cases – Bulgaria, overview ........................................................................................................................................................................................................................................................... 37
C.1 Case COMP/B1/AT 39849 BEH gas ........................................................................................................................................................................................................................................................... 37
C.2 Case 39816 Upstream gas supplies in Central and Eastern Europe ................................................................................................................................................................................................ 37
C.3 Case 39767 BEH Electricity ....................................................................................................................................................................................................................................................................... 37
Appendix D: What if gas did not play a role ......................................................................................................................................................................................................................................................... 38
Appendix E: An overview of Baringa ....................................................................................................................................................................................................................................................................... 39
Notes .............................................................................................................................................................................................................................................................................................................................. 40
Bulgaria The role of gas in decarbonisation
Bulgaria The role of gas in decarbonisation
1. Executive summary
This report – a qualitative analysis of the opportunity for gas to support Bulgaria’s progress towards a decarbonised energy future – is
Baringa’s contribution to the debate on the future of gas across Europe. It builds on a key thought leadership event hosted by Baringa
on the Role of Gas in the energy mix organised in November 2017 with Eurogas and National Grid, and supported by ENTSOG.
This report is intended to be a helpful input to For Bulgaria to meet its 2030 climate change p Ensuring gas is able to supply the market with a flat growth outlook, lacking attraction
the preparation of Bulgaria’s national energy targets, and in particular the reduction of on a competitive basis by ensuring it is for competitive suppliers and investors.
and climate plan over the course of 2018. The CO2-emissions, a more detailed plan for the not detrimentally treated via regulation
key added value of this analysis and report is transition of the existing energy mix is and policy versus electricity The fundamental risk is in Bulgaria not
an integrated view of the complete energy needed. Gas can play a significant role in the meeting affordably and securely its 2030
mix and the combination of power and gas achievement of these targets if its full A key first step is for the Bulgarian European energy and climate targets, and
sectoral issues. potential is realised. government, during the course of its strategy failing to have an appropriate plan for
definition, to engage thoroughly with gas achieving these targets.
The characteristics of natural gas mean that For gas to contribute its full potential in industry participants and stakeholders
it should play a key role in the future energy Bulgaria’s energy future, there are two focus (including trade bodies and NGOs) to build a
mix of Bulgaria. With global prices projected areas for action by policy makers in the plans complete picture of the opportunity for gas
to remain relatively low, gas is an affordable, to be set out in the national energy strategy and the role it can play in Bulgaria’s energy
plentiful fuel, which efficiently delivers and for 2020-2030: future.
stores significant energy content. It can
effectively help address the Energy Trilemma: p Enabling enhanced market access using If the status quo for gas in Bulgaria is
delivering decarbonisation, maintaining the detailed EU-acquis as guidance, and unchanged, the opportunity for further
security of supply, and ensuring that energy is including support for selective decarbonised, low cost and secure energy
affordable. infrastructure investment supply in Bulgaria will be missed. Bulgaria will
continue to be a relatively small gas market
1
Bulgaria The role of gas in decarbonisation 2
Bulgaria The role of gas in decarbonisation
2. Introduction
In the last nine years, Bulgaria has taken steps to increase its security of supply in natural gas A number of critical infrastructure projects the data as gathered by EC-reference case,
– reducing the risks of supply shortage as a result of reliance on a single source. Bulgaria has are being developed (supply pipelines and for period 2000-2015. Whilst Bulgaria does
taken a number of positive actions to support diversification. More recently, the Bulgarian interconnectors with neighbouring states) not have a published detailed plan for
government has taken practical steps in signing license agreements for deep offshore Black that will support diversity and security of growing the role of gas in its energy mix
Sea exploration which could potentially lead to domestic gas production. The government has supply. The map below shows the current beyond 2020, we note that the EC does
committed to support these exploration campaigns and linked them to energy security, one state of the Bulgaria’s gas network (for a assume a growing role for gas towards 2030
important aspect of its energy priorities. In parallel, it has been working to implement description of gas market and market and beyond. See Figure 2 overleaf.
European Union energy market reforms that would support diversity of supplier, consumer structure please refer to Appendix A).
choice and, ultimately, a reduction in costs via increased competition. Gas is a relatively minor part of the energy
Bulgaria has done well in its progress towards generation mix, as well as of the total
2020 climate change targets – buoyed as it is primary energy supply of the country (see
Figure 1 – Bulgaria’s gas transmission network by its significant hydro and nuclear power section 4.1 for more details). An opportunity
capacity and, in principle, increasing exists for gas to become increasingly
renewables development. significant in support of Bulgaria’ tackling the
so-called Energy Trilemma: delivering
Progress has been made, but much remains decarbonisation, maintaining security of
to be done. The steps towards market supply, and ensuring that energy is
liberalisation have not been as rapid or as affordable.
effective is it could have been and the market
remains highly concentrated (as discussed in It is an appropriate time to consider this
more detail in section 6). Moving beyond the opportunity as Bulgaria’s government
2020 climate change targets towards longer contemplates its strategic energy direction of
term goals for 2030 and 2050 will be the next 10 and 30 years by working on the
challenging and, as yet, there is no clear national 2030 energy strategy.
strategy for delivering these longer-term
goals. Gas could play a key part in this In previous energy strategies and more
transition, but is not being voiced effectively a recent publications contributing to the
part of the strategy as yet, nor it appears in recently initiated energy strategy debate, a
relevant key industry planning. For example, growing role for gas has not been a key
there is no significant role for gas generation characteristic.2 With a large coal element to
as part of the draft grid development plans of the energy mix of the country, gas can be
the state-owned electricity transmission part of Bulgaria’s energy future both at the
operator ESO for 2018-2027 period.1 national level and within an EU context.3
The relatively minor role which gas plays in
the power generation mix, can be seen from
3
Bulgaria The role of gas in decarbonisation
With Europe including Bulgaria focusing on (BEH), which financially controls the key
Figure 2 – Generation mix Bulgaria – 2000 – 2050 (EC reference case 2016) Energy Trilemma, the characteristics of gas market participants such as power and gas
should mean that it should play a key role in TSOs, as well as the two key wholesalers NEK
Gross electricity generation by source (GWh): BG, EC reference scenario 2016 the future energy mix. With global prices and Bulgargaz in power and gas sectors.5
projected to remain relatively low, gas is an
affordable, plentiful fuel, which efficiently Baringa Partners has undertaken a desktop
delivers and stores significant energy based information gathering exercise
50,000.00 content. In comparison with other fossil fuels, supported by a set of stakeholder interviews
gas is also low-carbon. Gas offers to provide the basis for a qualitative analysis
tremendous potential in Europe’s and assessment of the current status and
40,000.00 decarbonisation pathways in replacing higher future potential for gas in Bulgaria.
carbon emitting fuels, and working in Stakeholders engaged included
partnership with renewables to meet energy representatives of Government institutions,
30,000.00 demand (baseload) and flexibility (peak) electricity and gas traders, natural gas
needs. Gas is particularly effective in the distributors, renewables generators and
provision of heat; and decarbonising heat is investors, infrastructure developers, NGOs
20,000.00 challenging, with full electrification being very active in the market and on energy issues,
costly. The way gas can meet peak and associations from the gas and electricity
flexibility needs at a relatively low cost is sectors, energy sector advisors and experts
10,000.00
under-recognised, and perhaps the suitability (collectively referred to in this report as
of doing the same purely with electricity ‘stakeholders’).
0.00 overstated.4
Our hypothesis, set out with supporting
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 This report discusses the current energy rationale in this report, is that gas can play a
situation in Bulgaria – opportunities for gas critical role in Bulgaria’s energy future and
demand growth, supply, market access as pathway to decarbonisation, with effective
Solar (GWh): BG Gas (including derived gases) (GWh): BG part of the answer to the energy trilemma, market reforms, followed by some selective
and steps that can be taken to realise the infrastructure development, and by creating
Wind (GWh): BG Oil (including refinery gas) (GWh): BG opportunity for gas to play a key enabling role a level playing field between gas and power.
in decarbonisation. Note that in the report, Gas as a part of the energy mix will help
we discuss both, the power and gas sector in address the energy trilemma – delivering
Hydro (pumping excluded) (GWh): BG Solids (GWh): BG Bulgaria, as these are very closely linked. We decarbonisation affordably and with security
note that the two sectors are also linked by of supply.
Biomass & waste (GWh): BG Nuclear energy (GWh): BG the state-owned Bulgarian Energy Holding
4
Bulgaria The role of gas in decarbonisation
3. Bulgaria’s Energy strategy 2020
3.1. Government energy In mid-2017, the Bulgarian government The strategy definition process is expected to p a 20% reduction in primary energy use
clarified its priorities in energy for 2017-21. continue during 2018, with the Ministry compared with projected business-as-
strategy – update pending They are generally in line with the 2011 aiming to release a draft by the end of the usual levels, to be achieved through
Strategy provisions whilst reflecting some year.9 improved energy efficiency
The current National Energy Strategy, developments in the sector. Particular focus
adopted in 2011, has a horizon to 2020. A continues to be security of gas supplies and As with other EU member states, Bulgaria has Via the Act on Climate Change implemented
number of challenges have arisen which the thus support is provided to domestic gas agreed to meet decarbonisation targets as part of Third National Action Plan on
next iteration of National Energy Strategy, the extraction and commercial exploitation of consistent with the COP21 Paris accords. This Climate Change (up to 2020), Bulgaria has
development of which is underway, will need gas interconnectors with neighbouring means that by 2050, the EU should cut modified versions of these targets:
to deal with. They include: countries by 2020. There is no mention of the greenhouse gas emissions to 80% below
role for gas in delivering the pathway to 1990 levels, with interim milestones of 40% p Based on the National Renewable Energy
p The need to have a clear vision on how to decarbonisation, and what needs to be done reduction by 2030 and 60% by 2040. Action Plan (NREAP), Bulgaria aims to
achieve the 2030 decarbonisation targets6 to achieve such a role for gas in Bulgaria. achieve a share of 16% of energy from
(and ultimately the 2050 and any interim Bulgaria has committed to the ultimate renewable sources in final energy
targets set by the EU); As part of its 2017-21 programme, the target and is in the process of formulating its consumption by 2020
government8 is currently developing its new mid-term 2020-2030 path towards the 2050
p Alignment with the EU Clean Energy National Energy Strategy to 2030, with a objective. Before discussing the 2030 targets, p The individual targets per sector are as
Package (and other directives) including vision to 2050. The intention is to develop this we briefly take stock of the 2020 follows:
market liberalization, enhancement of strategy in parallel to the national energy and achievements.
competition and liquidity and reliance on climate plan (NECP) for the years 2021 to - Heating and Cooling: 24% of heat
active prosumers; 2030. The intention is to benefit from 3.2. 2020 objectives were set consumption met by renewable
synergies, common analytical tools and data energy sources
p The overall financial situation of the sources. Bulgaria also intends to develop a and reached - Electricity: 21% of electricity demand
energy sector and need to find a market low-carbon development strategy to succeed met by electricity generated from
based mechanism to absorb the the Third National Action Plan on Climate The EU 20-20-20 targets were formulated in renewable energy sources
commitments to renewables producers Change (NAPCC) for 2013-2020. 2009 as the EU-wide targets (to be tailored by - Transport: 8% of energy demand met
and high efficiency co-generators Member-States individually), by 2020, to by renewable energy sources
benefiting under long-term feed-in The First Interim Report on the energy achieve:
contracts as well as other existing long- strategy, dated 31 October 2017, was Bulgaria is on track to attain its renewable
term commitments (see Appendix B for published by the Bulgarian Academy of p a reduction in greenhouse gas emissions energy target for 2020. The 2016 level of the
sector description); Science in January 2018, following public of at least 20% below 1990 levels; renewable energy share in final energy
pressure for transparency. The focus of the consumption stood at 18.8%, well above the
p The new tighter limits on thermal power report, according to stakeholders that p sourcing of 20% of final energy 16% target. Bulgaria's renewables share in
plants based on EU-legislation regarding Baringa has interviewed, is mostly around the consumption from renewable sources; transport stood at 6.5% in 2015, still below
Large Combustion Plants posing a threat role of nuclear. It is mostly silent on role of and the 2020 target, while the renewables share
to Bulgarian coal fired power plants (i.e. gas or other fuels versus nuclear. in heating and cooling and the renewables
LCP BREF7).
5
Bulgaria The role of gas in decarbonisation
share in electricity generation reached 28.6% Greenhouse gas emissions targets 3.3. Rapid policy evolution has The costs for the system as a result of the
and 19.1% respectively in 2015. in Bulgaria feed-in tariffs, as well as co-generation
driven decarbonisation, and bonuses, have created financial stress over
The renewables share in gross electricity
Based on proxy values, in 2016 emissions triggered the issue of the past few years. A Single Buyer Model was
consumption was approximately 15% in implemented, meaning all these obligations
2017, estimated to increase to 18-19% by
were estimated at 58.9 mt CO2 equivalent, affordability were transferred to national power utility,
43.5% below their 1990 levels. The relative
2026.10 This is still short of the target for the NEK, a subsidiary of Bulgarian Energy Holding
decrease is almost double compared to EU A number of policies have been implemented
electricity sector of 21% of demand being (BEH) and subsequently to the regulated
average. Based on national projections, by the Bulgarian government in support on
met by electricity generated from renewable electricity market. As a result, a ‘tariff deficit’
Bulgaria will meet its 2020 emissions target renewables, and to achieve the 2020 strategy
energy sources. arose due to a shortfall of revenues in the
with a margin of 21.7%. (see for detail Appendix B). These include: system – a product of tariffs that were below
With a significant nuclear load, “carbon free” the cost borne by the energy companies to
Note that, whilst the greenhouse gas p Feed-in tariffs for renewables and co-
generation is currently around 50%. generate, transport, and commercialize
emissions per capita are below the EU generation bonuses. Producers of electricity.12
average, the greenhouse gas emissions electricity from renewable sources are
Energy efficiency targets in intensity of Bulgaria’s economy is the highest entitled against the grid operator to the As a result, the government is currently
Bulgaria in EU, i.e. the Bulgarian economy consumes purchase and payment of electricity at a looking at options to replace the Single Buyer
the greatest amount of energy needed to guaranteed feed-in tariff Model and integrate renewables contracts
By 2015, the Bulgarian primary and final produce a unit of GDP.11 This presents an
into the market environment, via the
energy consumption increased for a second opportunity for the growth of gas in the p The legal basis for the feed-in tariff is the Independent Bulgarian Exchange (IBEX).
year in a row, reaching respectively 17.9 Mtoe energy mix, which we discuss later in the Energy from Renewable Sources Act Recent changes in the energy regulatory and
and 9.5 Mtoe. Both values are about 1 Mtoe report in section 4.3, highlighting the blocking (ERSA), which is the main element of the legal framework propose that all producers
above the national energy efficiency target role of relatively cheap power prices versus Bulgarian support system. The ERSA also above 5 (or 4) MW should sell their
for 2020, with the road transport sector and gas prices. establishes the obligation to purchase and generation at the IBEX from mid-2018. For
industry recording the biggest annual dispatch electricity from renewable existing renewables with long term PPAs and
increases. sources feed-in tariffs, a new mechanism is being
considered – Contracts for Difference (CfD).
Bulgarian primary energy intensity decreased p The tariffs are set by the regulatory
by more than 25% over the 2005-2015 authority every year on 30th June All of these changes are now creating an
period, and by more than 39% over the last
unstable and volatile policy outlook, with
15 years, despite a small uptick in 2015. p The duration of the subsidy had been 20 many investors in renewables expressing
During the same period the GDP rose by 28% years for plants using geothermal energy, concern, according to stakeholder
(at 2010 EUR) whereas the primary energy biomass and solar energy, 15 years for sentiments.
consumption decreased by about 5%. plants using biogas and hydro power and
Bulgaria however remains the most energy 12 years for wind power plants. Whilst government strategy on energy mix
intensive economy in the EU by a large
has been silent on the role for gas to support
margin.
6Bulgaria The role of gas in decarbonisation
renewables, it has thus far been clear on the The single binding CO2 reduction target was policy support, this growth in renewables was 3.4.3. Bulgarian strategy in
priority for the development of the nuclear submitted by the EU as Intended Nationally at risk (see appendix B on incentives to decarbonisation – 2020+
sector and for broad support of the coal Determined Contribution within the climate renewables having been scaled back and
sector. This was demonstrated by extension agreement signed in Paris in December 2015. changed). The latest draft Ten Year Network
challenging period?
of the lifetime of units 5 and 6 of NPP Bulgaria is part of that commitment. Development Plan 2018-2027, released in
Kozloduy as well as preservation of the coal March 2018, states in section 3.1 that “in the In the face of the post-2020 challenges
capacities albeit under strict environmental The governance system for the 2030 targets last 2 years no new requests for RES described above, Bulgaria must take
requirements and efficiency standards. is seen by energy industry players to focus on connection were received” from investors. proactive steps to remain on track for
the single binding GHG target, and supported Latest RES growth is strongly adjusted 2030/50 targets and gas can play a key role –
Renewables and nuclear are clear low carbon by a strong EU ETS. This approach can enable downwards to be adding only 401 MW by in particular in substituting coal-fired
options and were prioritized in the existing a more cost effective approach to 2027 (instead of former 1,119 MW), for generation and providing flexibility in support
energy strategy (up to 2020) and restated in decarbonisation allowing technologies to commissioning of new renewables of increased renewables capacity, to
the Government Programme for 2017-2021. compete on an equal footing on the basis of a capacities.15 The drop in projections is mostly contribute to achieving single EU-wide 2030
robust carbon market. attributable to withdrawal of PV and wind GHG- targets.
3.4. Decarbonisation strategy projects.
For this to be a viable option however, gas in
3.4.2. Bulgarian strategy to 2030 is
beyond 2020 Nevertheless, renewables capacity will Bulgaria needs to meet the test of being a
not yet formulated secure and cost-effective way of achieving
require balancing/ancillary services to meet
3.4.1. EU 2030 targets the challenge of intermittency. Adding gas these decarbonisation objectives. To assess
As described above, the Bulgarian how gas can pass these tests, it is necessary
generation capacity is one possible option for
Government has initiated the process to to look at key enablers and barriers for gas in
The EU Commission winter package reinforces balancing and regulatory system reserves by
develop a strategy up to 2030 with an the supply situation, the downstream market,
the targets to be achieved in the period 2020- ESO (but subject to further technical and
outlook to 2050, to support the achievement infrastructure and market structure. We
2030, through the following measures: economic assessment).
of the EU 2030 targets (and ensure they are discuss these topics in sections 5 and 6.
on-track for 2050 targets).
p a reduction in greenhouse gas emissions The estimates of generation outlook needs by
ESO (including the current March 2018 Prior to turning to market issues, we discuss
of at least 40% below 1990 levels13; Adding renewables capacity is a choice which
draft16) do not take into account the possible the drivers for role of gas in more detail. To
is identified in the currently valid Ten Year help meeting the 2030 targets, the role of gas
p sourcing 27% of final energy consumption Network Development Plan 2017-2026,14
adverse effects of the application of the LCP
BREF on thermal (lignite/coal) power plants in the Bulgarian energy mix should be
from renewable sources by 2030; and developed by ESO (the electricity TSO). It
operation. This should represent a further considered as a key option given
provided for commissioning of new characteristics of natural gas as a fuel.
p a 30% reduction in primary energy use renewables capacities up to 2026 of new
opportunity for increased use of gas in the
compared with projected business-as- power mix, supporting inter alia the challenge
1,119 MW capacities (resulting in total PV and
usual levels, to be achieved through of intermittency.
wind capacity of over 2,500 MW). Stakeholder
improved energy efficiency and by sentiment observed in Baringa’s engagement
phasing out coal power plants A stable policy outlook, including a clear
in February 2018 was that, that with volatile
strategy for 2020-2030, will be needed to
attract investors.
7Bulgaria The role of gas in decarbonisation 8
Bulgaria The role of gas in decarbonisation
4. Demand – drivers and barriers for growth
4.1. Gas is currently a small component of the energy mix
Real GDP growth in Bulgaria was 3.4 % in 2016 with broadly similar growth for 2017 and 2018 Gas is primarily utilized in industrial processes, with a modest role in the power generation mix
anticipated showing a very encouraging energy demand growth outlook.17 and very low consumption in the residential and commercial sectors. Some 10% of industrial
consumers represent 80% of demand,19 with the largest individual industrial consumers in
Coal plays a significant role in Bulgaria’s primary energy mix, driven by indigenous production chemicals, fertilizers, and glass sectors as well as some large industrial CHPs. From industrial
of lignite. Oil (in transportation) and nuclear also have significant shares whilst gas remains users, major consumption is in the chemical industry (37% in 2016) and energy sectors (30%
relatively small – at around 15% of gross inland energy consumption in the country.18 in 2016).20
Figure 3 – Bulgaria Primary Energy Consumption in 2016 (in %, total 18.1 Mtoe) Figure 4 – Gas Consumption in Bulgaria by market sector (million cubic metres)
Distribution companies (R&C) Other industries Chemical industry Energy (Power)
Renewables 4%
4000
3500
5% 25%
3000
Hydro- Oil
2500
electric 19%
2000
Nuclear
Energy 1500
1000
15%
500
Natural 0
Coal 32% Gas
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: BP world outlook 2017 (2016 data) Source: EWRC, Annual report to EC
9Bulgaria The role of gas in decarbonisation
Natural gas has a relatively minor share in gross electricity generation, with coal and nuclear 4.2. Prospects for gas demand growth
dominating.
The Bulgarian government is currently in the midst of a process to define future energy
Figure 5 – Gross electricity generation by source (GWh) strategy (as discussed in section 3) and the role of gas in this strategy should have a major
impact on gas demand prospects in Bulgaria.
60,000 The most recent projections for gas demand in the next ten years of Bulgaria’s gas TSO,
Bulgartransgaz (BTG), are captured in Figure 6 below. This assumes growth based on sustained
economic growth (GDP growth between 2 and 3 % per year) and associated increase in final
50,000 energy consumption (a 60% increase by 2024) and an increased market share for gas (19% in
2025 against 14 % in 2015).
40,000
Figure 6 – Bulgartransgaz gas demand projection
30,000
Demand (MMcm/year) Peak demand (MMcm/d)
20,000
10,000 4500 25
4000
0 20
3500
2000 2005 2010 2015
3000
15
Biomass & waste Gas 2500
2000
Oil Hydro (pumping excluded) 10
1500
Solar Nuclear 1000 5
500
Wind Solids (coal)
0 0
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Source: EU Reference Scenario 2016 based on PRIMES, GAINS Source: Bulgartransgaz
10Bulgaria The role of gas in decarbonisation
The European Union is less bullish in its demand projections as shown in Figure 7 below. 4.3. Drivers and barriers for the The key inhibitor to the installation of gas in
homes is the relative cost of power – with
increased role of gas in a most homes being heated via electricity,
Figure 7 – EU gas gross inland consumption projection for Bulgaria (ktoe) decarbonisation pathway to consumers must be persuaded to switch form
that to gas. This compiles with switching
Natural gas 2030 costs, connection to network and initial
investment into gas-home equipment
4500
4.3.1. Opportunities for role of gas (cooking, gas-boiler).
4000 There are a number of opportunities to Natural gas has a very minor role in heating,
enhance the role of gas within the Bulgarian with electricity, coal, district heating
3500 energy mix, utilising the decarbonising dominating the heating market.23 Bulgarian
3000 advantage of gas versus coal/lignite in heating association calculations show that
particular. In each major consumption using night electricity tariffs will deliver more
2500 category, opportunity exists, as well as competitive heat over natural gas.24 This
factors inhibiting that opportunity. market sentiment was confirmed in
2000 discussions with stakeholders in February
1500 Residential 2018.
1000 Despite government setting targets of 30% of Power prices are regulated and compared to
Bulgarian homes having natural gas by other European countries, inexpensive
500
2020,21 at the moment there is a much lower relative to gas, making the case for switching
0 number (estimated at 70,000-90,000 of the less compelling (as shown in Figure 8 below).
2020 2025 2030 2035 2040 2045 2050 ~3 million homes in the country or 2-3%).
Government efforts have inter alia22 centred
Source: EU Reference Scenario 2016 based on PRIMES, GAINS on the provision of grants to subsidise the
cost of installation of gas boilers and
associated switching costs (typically away for
electricity as the source of heat). This scheme
has had limited success (2201 households
Given the relatively small role natural gas currently plays in the Bulgarian energy mix, the successful applications as of February 28th
potential for demand growth is significant. In our stakeholder engagement, we heard 2018) but is yet to utilise all available funds (€
sentiments that BTG’s projections were optimistic based on ‘nothing changing’ but could be 10 million is available – which could support
exceeded with certain policy and market reform changes. And the ways in which gas demand 10,000 installations).
could grow, are described in the next section.
11Bulgaria The role of gas in decarbonisation
There is frustration amongst the gas Power
Figure 8 – Ratio of Power:Gas prices in Europe (including taxes and levies) distribution companies in Bulgaria that
regulation supports electricity at the expense In the context of decarbonisation, the
5.00 of gas (e.g. the Security of the Electricity power sector offers the greatest
System Fund25). Since 2017 contributions to the opportunity for improvement in Bulgaria –
4.50 Fund are made also by the two TSOs - primarily to improve the air quality and
electricity (ESO) and gas (Bulgartransgaz). This reduce CO2 emissions by reducing the
4.00 requirement for the gas TSOs to contribute is share of coal. While in parallel adding
seen by stakeholders as unfair. The WorldBank more flexible capacity needed when the
3.50 has proposed changes to operation of the Fund. share of RES in the Power sector grows.
3.00 For more details on Funds rationale please see
Appendix B on Bulgaria’s power markets. As can be seen from Table 1 below
2.50 implicitly, coal’s role in power generation
Achieving the government target of 30% of means that coal is by far the largest
2.00 gasification in homes would mean a gas contributor to total CO2 in Bulgaria.
demand increase of approximately 0.7bcm
1.50 (24% of total gas demand).26
1.00
0.50 Table 1 – CO2 production in Bulgaria
0.00 (mt of CO2 equivalent) 2000 2005 2010 2015
Ukraine
Serbia
Sweden
FYROM
Bosnia and Herzegovina
Liechtenstein
Bulgaria
Netherlands
Greece
France
Portugal
Slovenia
Czech Republic
Lithuania
Austria
Italy
Spain
Estonia
Euro Area
Moldova
Poland
Croatia
European Union (28 countries)
European Union (27 countries)
Latvia
Slovakia
Hungary
United Kingdom
Luxembourg
Ireland
Denmark
Turkey
Belgium
Romania
Germany
TOTAL GHG emissions (excl. LULUCF) 64.39 67.04 61.17 55.55
CO2 emissions (energy related) 44.27 49.12 45.86 40.07
Power generation/District heating 24.55 27.86 31.21 25.14
Industry 10.59 9.82 3.70 3.98
Residential 1.35 1.22 0.99 0.96
Tertiary 1.21 1.10 0.81 0.72
Transport 5.73 8.35 8.25 8.43
CO2 emissions (non-energy and non-land use related) 3.45 3.96 2.97 2.96
Source: Eurostat, 2017, weighted average prices using the most recent (2015) data for the quantity of
electricity and gas consumption by households, Baringa analysis. Source: EU Reference Scenario 2016 based on PRIMES, GAINS
12Bulgaria The role of gas in decarbonisation
Within the role of coal across various sectors in Bulgaria, coal plays its biggest role in power Bulgaria’s coal-fired power supply is under as an alternative source of power supply and
generation. This is shown in the figure below: some pressure via the recently adopted (17 for the economic attractiveness of gas in the
August 2017) Best Available Techniques (BAT) residential sector (see above).
Reference Document for Large Combustion
Figure 9 – Coal consumption in Bulgaria Plants (LCP). The so-called LCP BREF sets, for Some Bulgarian industry stakeholders
the first time at the EU level, limits emissions estimate there is a potential for an increase
of mercury, hydrogen chloride and hydrogen of 20-30% from current level of gas utilization
fluoride from the combustion of solid fuels in in the power sector due to switching from
273
LCPs. In addition, the existing emission limits coal. Identified options (based on technical
276 for pollutants including sulphur dioxide (SO2) suitability) include:
Residential and nitrogen oxides (NOx) have been
189 tightened. p TPP Varna (3 x 210 MW units)
Industry
2191 Existing LCPs have four years to become p TPP Bobov Dol (2 x 210 MW)
Others compliant with the new requirements.
p TPP Maritsa 3 Dimitrovgrad (120 MW)
Other 2468 The Ministry of Energy has stated its
Transformation institutional support to the coal-fired power Such switching is still dependent on economic
plants to apply for derogation and set up a attractiveness and thus relative pricing
CHP coordination unit.27 Further, there are nine between gas (wholesale) and power (sales).28
Plants power plants in Bulgaria that already stated
their intention to apply for derogation (there Natural gas can have a key role to play in the
is a 6-month period to file the application). next phase of Bulgarian power policy. It has
The Maritsa-East power plants have clear decarbonisation advantages over coal
combined efforts in requesting a derogation and other advantages over nuclear and
and have jointly hired Amec Foster Wheeler renewables. Gas-fired power generation does
to support their efforts in the application not require price support as for nuclear and
process. avoids overly-fragmented supply and
network management challenges implied by
Following some initial expert evaluations, if renewables. It further has the advantage of
such LCP BREF compliance investments are to being able to provide flexibility in association
be made, approximately 30% increase in with renewables.
32518 electricity prices could be expected. This
could have the twin impact of supporting gas
Power
Source: IEA, 2015 data, units: kt
13Bulgaria The role of gas in decarbonisation Industry Although natural gas is already a major source of energy in the industrial sector, there are significant parts of Bulgaria without access to natural gas where industrial consumers rely currently on coal, oil and electricity. There should be a clear economic case to switch from oil to gas and if all industrial consumers currently using oil (in 2015 183 ktoe) switched to gas, it would represent an increase of 0.22 bcm/year. Coal (185 ktoe) and electricity (769 ktoe) offer greater opportunity still. However, as opposed to households, the switching case from electricity to gas is economically more robust, which appears from gas playing a major role in the industrial sector (with opportunity for increased share of gas for SME-consumption, if electricity and gas level playing field is addressed).29 Gas network expansion projects are underway to connect some of these municipalities that are not currently connected to the gas grid (for ex. Svishtov, Pirdop, Panagiurishte, Bansko and Razlog30) which will begin to connect some of this latent industrial demand to supply, co-funded by EU. 14
Bulgaria The role of gas in decarbonisation
5. Gas supply
5.1. Existing supply sources The import of gas is carried out by Bulgargaz and gas supplies conditional on obtaining
EAD32, with the most recent 10-year supply unrelated commitments from wholesalers
contract signed on 15 November 2012 with concerning gas transport infrastructure. The
The vast majority of Bulgaria’s relatively small ~3 bcm/year gas demand is met by supplies
Gazpromexport. Under this contract, the EC’s main concerns are that the Bulgarian gas
under a long-term contract with Gazpromexport, with a very small component of domestic
wholesale import price is linked via formula to market is isolated and lacks competition and
production (80 MMcm/year in 2016 or 2.6% of the total).
heavy fuel oil and gasoil and the supplies are it is thus the subject of excessively high prices
under a take-or-pay obligation. compared to Western European benchmarks,
The EU projects domestic production to remain modest (see Figure 10 below, where we are
especially liquid traded gas hubs.35 As can be
taking EU projections for the period from 2020 onwards) although E&P activities underway in
The transit gas transmission network provides seen in section 5.2 below, Bulgarian border
the Bulgarian Black Sea have been described as encouraging by the developers (see Appendix
for transmission of natural gas to Turkey, gas prices are amongst the highest in
A for further detail on local E&P).
Greece and FYROM and has technical capacity Europe.36
of 17.8 bcm/year according to
Figure 10 – Bulgarian Gas Supply Sources, EC reference case projections (ktoe)31 Bulgartransgas. The transit system is 5.2. Pricing of wholesale gas
technically and commercially interconnected
at GMS Ihtiman although only to a very
The wholesale border price paid by Bulgaria
Production (including recovery of products) (ktoe): BG Net imports (ktoe): BG limited extent (limited access – based on
for its gas (via pipeline from Russia) is
February 2018 data, approx. 0.3 bcm/year
amongst the highest in Europe (see Figure 11
which amount to approximately 10% of
below), alongside other states that are
3000 Bulgaria gas demand) to the national
largely reliant on a single source of gas.
transmission network. Capacity in the transit
2500 transmission system has been almost entirely
booked under long-term contract (up to
2000 2030) by Gazprom, with a 90% ship or pay
clause33 (see Appendix A for details on
1500 Bulgarian gas market overview, including
infrastructure).
1000
The dependence on a single supply source
500 and single gas import route has led to
conclusion by the European Commission34
0 that Bulgaria (together with several other
2020 2025 2030 2035 2040 2045 2050 Member States) might have been subject to
an unfair pricing policy due to obstacles to
cross-border gas sales, unfair prices charged
Source: EU Reference Scenario 2016 based on PRIMES, GAINS
15Bulgaria The role of gas in decarbonisation
5.3. Infrastructure for new projects have been identified by the EU as
Figure 11 – European average border gas prices Q1 2014-Q3 2017 being Projects of Common Interest (PCI).
sources being developed since
25 2009 These include:
During the 2009 Ukrainian crisis, which p “IGB”, Greece-Bulgaria, compressor
24
involved a reduction in Russian gas flowing station (Reference EU PCI: 6.8.1.);
west, Bulgaria was among the most affected
23 p “IBS”, Bulgaria-Serbia, (Reference EU PCI:
EU member-states. When gas supplies were
suspended, one of the emergency measures 6.10);
22 employed was to use three sources of
emergency gas, namely i) gas from gas p Infrastructure from Bulgaria to Slovakia
21 storage Chiren, ii) part of the gas normally (currently known as “Eastring”), and the
used as system line-pack by the gas TSO, and “ITB”, Turkey-Bulgaria, (6.25.1, 7.4.2));
€/MWh
20 iii) eventually gas via LNG supply (1 MMcm/d
of gas, which is about 5% of the maximum p Gas storage “Chiren expansion” (6.20.2);
daily gas demand in Bulgaria according to and
19 2017 Security of Supply preventive action
plan37) imported via the Revithoussa LNG- p The reinforcement of the internal
18 terminal in Greece. Another consequence was Bulgarian network and full integration of
the prioritization of the security of gas the transit and domestic system
supplies via diversification of supply sources (currently known as “Gas Hub Balkan”)
17
and routes and a need to quickly increase (6.25.4).
import infrastructure and other measures to
16 Source: EC, PCI Interactive map,
reduce dependency on one source and route.
http://ec.europa.eu/energy/infrastructure/transpare
Interconnectors with neighbouring countries
15 ncy_platform/map-viewer/main.html
were identified as the most feasible option for
DK NL UK BE DE CZ AT SK FR HU PL ES IT SE BG RO GR LV SL LT FI EE quick progress on security of gas supplies as
It should be noted that there already exists
well as a must for market integration.
an interconnection with Romania (Trans-
Source: Quarterly Report on European Gas Markets, Market Observatory for Energy, DG Energy
Balkan pipeline at Negru Vodu and
In order to increase market integration, and
Interconnector Romania-Bulgaria) through
security of supply within the EU, a variety of
which Bulgaria could import Romanian gas
16Bulgaria The role of gas in decarbonisation
(especially as further Black Sea development development of the TurkStream gas pipeline –
is ongoing in Romanian waters). There is for which the precise route has not yet been Figure 12 – Regional projects
currently insufficient compression on the confirmed – could mean an alternative
Romanian side of the border (Interconnector direction of flow for Russian gas entering Phased Romanian
Romania-Bulgaria) to facilitate significant Bulgaria. It is anticipated that the cross-Black system
reinforcement
flow, although this is understood to be Sea pipeline will make landfall in Turkey and
relatively simple to resolve.38 thus utilise the cross-border Bulgarian/Turkish Connection of off-shore
Romanian gas, further
pipeline in reverse flow versus today’s reinforcement of
The most advanced of the new projects is the direction of travel. This would be consistent Interconnector Romanian system
Croatia Serbia
182 km Interconnector Greece-Bulgaria (IGB). with an ongoing – according to public press
It has initial planned capacity of 3 bcm/year sources – objective by Gazprom to minimise Evacuation
(potentially increasing to 5 bcm/year) and will the volume of gas transiting Ukraine after system towards
allow flows in both directions. Partly funded 2019. Hungary
by the European Commission, construction is
due to start in 2018, targeting commercial A number of other major regional and EU
operation by 2020. A market test open infrastructure projects have also begun
Phased
season conducted in 2017 resulted in 1.56 development such as Eastring, TANAP/TAP, LNG terminal
Bulgarian
bcm/year capacity booking by 5 shippers. Eastmed, LNG projects in Greece and Turkey. system
reinforcement
All have an impact on Bulgaria – primarily
No LNG imports are planned directly in with Bulgaria acting as primarily a transit
Bulgarian waters although an FSRU (Floating country, with relatively minor gas demand in Interconnector
Storage and Regasification Unit) in Greece at comparison to Turkey or Romania. Figure Bulgaria Serbia
Alexandropoulos is being discussed as a joint below shows ongoing regional projects under
Bulgarian and Greek project, with a reported so-called CESEC-initiative by EC39:
capacity of up to 6.1 bcm/year. Its initial plan
was to be operational in 2020 although this
may now be a challenging deadline. Given
gas demand in Greece, the terminal would
need to find market demand in the region, Trans-Adriatic
inter alia via IGB. Pipeline (TAP)
Interconnector
Greece Bulgaria
There are also discussions on a new pipeline (IGB)
from Russia, so-called TurkStream. The
LNG Terminal
Source: CESEC 2017, Baringa-analysis
17Bulgaria The role of gas in decarbonisation
Bulgaria has been keen to position itself within the new developments. A broad number of 5.4. Development of a
future gas supply options are available for Bulgaria, as can be seen on the following figure: Figure 14 – Gas Hub Balkan Feasibility Study:
Bulgarian gas hub supply routes
Figure 13 – Gas supply options Bulgaria has ambitions to create a liquid gas
hub40 providing regional and EU-wide
Black sea encouraging finds may offer benefits. The infrastructure development that
Today’s gas market import options EU
an option (subject to infrastructure goes under the name ‘Gas Hub Balkan’ is a
development
flagship project for the Government, and a
Gas developments in Ukraine (Ukraine Feasibility Study (FS) has been launched, co-
capacity to be accessible in long term if funded under Connecting Europe Facility.41
and when transit contracts expire) Under the FS, at least five options on routes
Global LNG (via Greece at present, or – are to be studied (see Figure 14 below) to
once IGB, ISB and ITB active - via support increased natural gas supply options,
Croatia/KrK, or via North-South route and ultimately consumption in the region.
(BRUA, Eastring as options), or via Turkish
LNG terminals
The Balkan Gas Hub project entails
African gas, and/or Mediterranean development of the transmission, storage Source: EC presentation, Varna, September 201542
developments (Israel, Cyprus) accessible and trading infrastructure. This is planned to
commercially via Southern Corridor
and/or LNG include completion of the ongoing upgrade
and modernization projects; completion of Bulgarian-Romanian interconnector receives
Norwegian gas, accessible via North- the interconnection projects; and investment in compression to allow for
South route being developed (Baltic pipe
construction of large-scale entry/exit Romanian gas to be imported, and the
would connect onwards to central-
European infrastructure) infrastructure. successful development of the IGB to enable
LNG from Greece and Shah Deniz gas
Russian gas, via existing or new route Whilst the development of a trading hub (eventually) to be imported - see Appendix A
remains a laudable target, in the short term for details on gas network.
there are some key steps that Bulgaria can
take to significantly improve security and Alongside continued support for indigenous
Source: Baringa diversity of supply (and with it support gas development, these steps will alter the
increased competition). Primary amongst landscape of Bulgarian gas supplies – further
these is the completion of the infrastructure development may not
We see increasing market integration within Europe and globally (LNG),
implementation of the Third Package and the immediately provide such qualitative return
coupled with ample infrastructure currently, and a trend to short-term introduction of market mechanisms that on investment. The development of a ’true’
contracting. increase liquidity and competition. As a hub – supporting trading of all sorts – will
second step Bulgaria will have to ensure the require more than infrastructure build-out
In parallel, encouraging conventional gas potential (Shell, OMV, Petrom) is
being explored in direct vicinity of Bulgarian gas market.
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