Why electricity prices are increasing

In the last few months, the suppliers of the free electricity market in Bulgaria have been dynamically increasing the prices for active electricity. However, this is not a direct result of the ongoing liberalization in the country, but occurs for reasons beyond the direct control of traders and is due to rising energy prices around the world.

In the last few months, the suppliers of the free electricity market in Bulgaria have been dynamically increasing the prices for active electricity.

Electricity supply costs typically change by the minute, although most consumers pay fixed prices based on seasonal or annual electricity costs. Changes in active electricity prices typically reflect changes in electricity demand, the efficiency and availability of generation sources, fuel costs, and power plant operations. The price of electricity also varies according to variations in the national energy mix, environmental costs, including weather-related costs. Typically, prices are highest in winter, when overall consumption is high, as more expensive generation is switched on to meet increased demand.

The final price for electricity also includes charges for access to and transmission on the electricity grid, which in Bulgaria are regulated and are payable to the electricity transmission companies, which have a commitment to maintain and develop the energy infrastructure in the country. In addition to these charges, companies also owe a ‘Public Obligation’ charge, the purpose of which is related to ensuring security of supply, environmental protection and energy efficiency In addition to these charges, legal entities also owe excise duty and VAT, which are also regulated. Fixed charges and taxes payable in addition to the price of active energy account for around 40% of the final price of electricity.

Why are active electricity prices increasing?

In the first half of 2021, traders in Bulgaria found themselves in a difficult situation due to the consistently high, well above historical and expected levels, electricity price on the Bulgarian Independent Energy Exchange (“IBEX“). The trend has also been observed on other European electricity exchanges over the last 6 months. The sustained high prices during this period are due to a number of factors, including rapidly recovering energy consumption following the COVID-19 pandemic, record carbon emissions, increased commodity prices and greater regional energy connectivity in Eastern Europe.

Recovery of electricity consumption

Economic activity is slowly but steadily recovering after reaching multi-year lows in the second quarter of 2020. The increase in economic activity and the easing of COVID-19-related restrictions are contributing to rising energy consumption, and this is leading to increased demand and rising stock market prices.

Increasing CO2 emissions

As electricity consumption increases, so do the carbon emissions associated with its production. At the same time, prices for allowances expiring in December 2023 in April and May exceed €50 per tone of CO2, compared to prices of around €20-21 for the same period a year ago. This is happening because governments want and need to reduce emissions significantly over the next decade, which is why they are introducing additional measures that will limit the most polluting human activities and industries The aim is to stimulate faster and greater investment in alternatives to fossil fuels, more efficient energy storage and transmission, and improvements in energy efficiency.

Electricity producers face the choice of either paying for expensive CO2 emissions or investing in greener generation. Ultimately, the long-term cost of electricity from renewables is expected to be significantly more profitable than traditional technologies, but much of the energy is still from more polluting sources and this drives up the price of energy because of the associated CO2 emissions due.

Expansion of the European electricity market

Closer connection of Bulgaria to the single European electricity market became effective in May 2021, by merging our market with that of Greece. The merger will last until the end of the year, with the Czech, Hungarian, Romanian and Bulgarian markets to be connected, and then a link will be made between these countries and Bulgaria and Greece through our common border with Romania.

An integrated European market guarantees better trade opportunities, increases competitiveness and will make it possible to optimise production in Europe. The opening up of the market leads to a balancing of electricity prices in relation to the markets in Europe, which in the case of Bulgaria means rather an increase. Due to the more isolated market until recently, and especially because liberalisation has been delayed for almost a decade, unrealistically low electricity prices have been maintained in Bulgaria by the regulator, with the state practically subsidising the difference with market levels. Now, with the opening and liberalisation of the market, prices in Bulgaria have started to “catch up” with European and world market levels, further leading to increases in recent months.

Increasing commodity prices

Commodity prices are also soaring globally and have reached levels not seen since the global financial crisis of 2008 and before that, in the 1970s. Timber, iron ore and copper have reached record prices in recent months. Food staples such as corn and wheat also rose to their highest levels in a decade.

This increase is due to multiple factors, including most notably increased consumer demand and reduced production capacity in the wake of COVID-19. End users have increased disposable income due to savings collected during the shutdown due to social distance requirements. At the same time, industries have not yet fully recovered their capacities, creating a supply deficit and driving up commodity prices. Oil, gas and coal prices are also reaching long-term highs, and it is the rise in mineral prices that is driving up the price of electricity.

What happens to the fixed electricity prices under the long-term contracts of TOKI

We at TOKI strive to be as transparent and fair as possible to our customers and make every effort to honour our commitments under our long-term electricity supply contracts. However, in order to maintain our business and to be able to continue to supply electricity on a long-term basis, we cannot ignore the market.

The terms and conditions of our contracts provide that in the event of force majeure and significant increases in the price of electricity traded on the BEM, we may change the prices under the fixed contracts. In the last year, we have made such a change to the contracted fixed prices only once, despite a very dynamic environment and only for a small group of customers. Although, like all traders, we found ourselves in a situation where we had to raise prices, we did not do so retrospectively, but gave our customers more than a month’s notice so that they had the opportunity to study the market and make sure that, even after the imposed increase, the price we offered was still extremely competitive.

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