IBEX (the Independent Bulgarian Energy Exchange EAD) was established in January 2014. The license to operate as a power exchange was issued two months later and the company has been officially entrusted to develop the exchange for electricity in Bulgaria which should be based on competitive, transparent and non-discriminatory principles. IBEX should turn into a one-stop shop for the physical trading that consists of day-ahead, intraday and OTC for longer term contracts.

In order to meet these objectives, IBEX has been powered by the Electricity System Operator EAD (the “ESO”) - the independent system operator in Bulgaria. The two companies entered into a bilateral agreement according to which IBEX relies on technical support, equipment, qualified and experienced personnel being provided by the ESO. Financial support has been secured from IBEX parent company – the Bulgarian Energy Holding EAD (“BEH” is a state owned enterprise and also a parent company of the ESO).

Furthermore, a valuable experience has been drawn from the mature electricity markets in Western Europe. Nord Pool Consulting and Nord Pool Spot have been contracted for consultancy; IT related services and the operation of the day-ahead market. Nord Pool Spot acts as an independent service provider with substantial first-class expertise in the operation of power exchanges, and for IBEX they operate the day-to-day market functions of the day-ahead platform.

IBEX has also requested and it has been appointed as a Nominated Electricity Market Operator (“NEMO”) under Regulation № 2015/ 1222/ EU to perform the single day-ahead and/ or intraday market coupling. The national regulator (EWRC) notified the EU Commission that IBEX would be the national legal monopoly for trading services on the Bulgarian electricity market, and there would be no option for designating other NEMOs since the Bulgarian Law on Energy expressly establishes the granting of a single and exclusive license for the operation of a power exchange in Bulgaria.

Promises to the EU Commission

The position of IBEX parent company came under fire as it drew attention from the EU Commission which initiated an antitrust procedure in 2014. The reason for the inquiry was that BEH owns 100% of the shares of market incumbents in power generation (NPP Kozloduy, TPP Maritsa East II, National Electricity Company – large hydro) and the ESO. The EU Commission accused BEH and came to the preliminary conclusion that BEH exercised “a decisive influence” over their conduct in power generation. BEH was also found to hold a dominant position and abuse its dominance, where the total market share of all competitors on the electricity market “remains at least two times smaller than BEH’s market share.

In light of this, the objectives for setting up a viable and independent trading platform stand awkward and rather stilted. Nevertheless, as part of its commitment to cease and desist the abuse of its dominance, BEH agreed that the power generation incumbents would enter into liquidity agreements with IBEX making part of their supplies available through an auction on the day-ahead platform of IBEX.

Another major commitment from BEH has been the undertaking to divest its ownership in IBEX. Unfortunately, this has been just a compromised solution as the proposal was to have IBEX shares transferred to the Bulgarian Ministry for Finance. Although safeguarding measures were proposed to restrain BEH’s influence over IBEX, the exchange would continue to be exclusive property of the Bulgarian state.

Against this background, IBEX undertook lengthy preparations and conducted a dry-run period in 2014 and 2015. The exchange commenced its actual operations in the beginning of 2016 marking its first anniversary around January 2017.

First Year Self-Assessment

Half way through the first year of actual operations, the CEO of IBEX already announced a very positive assessment of IBEX operational record. With more than 30 members on the exchange nearly all of them actively participate on a daily basis. Approximately 500,000 MWh were exchanged through IBEX in the first two quarters of 2016. Although this figure may be dwarfed by well-established power exchanges in Europe, it is interpreted as a positive outlook for the local market which very small by definition.

The CEO proudly declared that it was not only the state-owned incumbents on the Bulgarian market that stand on the supply side of the exchange – NPP Kozloduy, TPP Maritsa East II and the National Electricity Company (hydro). There had been numerous other suppliers whether participating directly (power generators) or indirectly (intermediated by registered electricity traders).

The Proximate Objective: Market Transparency

Setting up and running a day-ahead market is expected to provide a desired market results – a credible wholesale market reference price, transparency, and liquidity. These are the key ingredients for a competitive wholesale electricity market whereas lack of transparency may only create barriers to effective competition.

The role of IBEX also includes supervisory functions as the exchange platform monitors the market and the incidence of market abuse, anti-competitive conduct, inside trading or market manipulations.

In fact, IBEX adopted the approach of full transparency regarding its operations and the conduct of its members. Special rules for proper conduct on the exchange have been prescribed. According to the Rules of Conduct on the Exchange, all information shall be disclosed publicly as soon as it becomes available and no later than 60 minutes from the occurrence of an event generating relevant information subject to disclosure.

IBEX rules are aimed at creating market practices allowing an equal access to information that may affect the demand and supply, pricing of traded commodities and/ or the behaviour of market participants. As part of the process to ensure transparency in market operations, IBEX has offered reporting services for transaction data in compliance with the REMIT Regulation.

Future Prospects

The Bulgarian electricity market is currently shaped as a hybrid model. The supply of electricity at wholesale and retail level operates with both ‘regulated’ transactions (tariffs are determined by the electricity regulator) and liberalized segment for ‘free’ transactions, where electricity is supplied at freely negotiated prices.

For the regulated segment, household and non-household customers connected to the low voltage electricity distribution network are supplied at regulated tariffs, yet the regulated segment has diminished substantially over the years.

According to World Bank reports issued in 2015 and 2016, about 60% of generated electricity was traded on the deregulated segment of the Bulgarian market, and the scale of the regulated segment has shrunk and will continue further. For this and other reasons, the dual structure of the market is considered unsustainable in the longer run as there are other issues underpinning the market model – tariff deficits, long-term contracts and alleged state aid.

As of 2017 all customers may exercise the right to switch their supplier and become exposed to the market forces of supply and demand. The obstacles even for household customers have been completely removed in 2016. However, the market incentive continues to be weak as the tariffs on the regulated market so far have proved quite of a challenge to match on the deregulated segment.

The 2017 Winter Test for IBEX

This winter became a real challenge for the electricity system when the outside temperatures dropped below “–10 OC” for a prolonged period of time in January 2017. Average prices on IBEX skyrocketed in response to unexpected lower supply on the deregulated segment. The root reason for lower supply is commonly suspected to be that state-owned power generation incumbents had to divert their capacity in order to satisfy the demand on the regulated segment of the market. As a result, the IBEX price on 9 January 2017 was driven upwards by additional 45% increase from the highest price on IBEX by that time. Of the other side, the demand on the IBEX also increased which paved the way and contributed to the price spike.

There have been no conclusive reports, evidence or public statements for the drastic price increases. IBEX did not cast much light on this incidence, and neither the state owned incumbents did. However, the market data seemed self-explanatory since the quantities of electricity on offer in the period with the price increase were half of what had been supplied through IBEX in earlier periods.

Media reports indicated that neighbouring exchange platforms also registered price increases, though in Romania and Hungary those were much more moderate. 

A couple of days later, the Minister for Energy issued an order temporarily suspending all exports of electricity from Bulgaria with effect from the 13th January 2017. The rationale behind the order related to the incurred imbalance between domestic supply and demand arising out of the extreme winter conditions.

Naturally, the actions of the Minister for Energy brought about the opposite extreme causing severe surpluses in power generation capacity. IBEX prices plummeted to the bottom on the 14th and 15th of January 2017, going down more than four times below the prices in Romania and Hungary.

Needless to say, the state intervention resulted in dramatic losses for exporters, but the Minister for Energy denied any connection between IBEX and the suspension of exports. The EU Commission inquired immediately about all circumstances related to the export suspension.

Transparent and Independent or Not

Despite all suspicions the record from the first year does not allow unambiguous reading, though the actions of Bulgarian authorities do so as their interference with the market has been openly manifested. On the other hand, even an optimistic approach requires assessments to take account of the privileged position of IBEX as a legal monopoly and the state-funded support.

Within the larger context, IBEX should be seen merely as a reflection of market reality – demand has been liberalized to a significant extent, whereas supply has been dragging behind being strongly consolidated in state owned assets.

About the Author:

Yassen Spassov is a Senior Associate at DGKV with solid expertise and experience in environment, energy and utilities, including construction of new power facilities, power and gas distribution, trade in electricity and gas.