In June we witnessed the most significant investment event since the start of the reforms. The state-owned National Electricity Company (NEK) negotiated with AES the construction of new generation capacity at Maritsa East 1 (ME1) worth about $ 900 m and with Entergy the rehabilitation of Maritsa East 3 (ME3) power plant worth about $ 470 m, both based on lignite. The NEK will purchase the power generated by ME3 for about 18 years and by ME1 for about 15 years, respectively. The press buried the news at the bottom pages and mixed it up with charges of corruption, clear disappointment that "our guys" missed the commission, and by quoting mainly opponents of the deals, failed to perceive the importance of the event. Due to the politicization of the 'pros and cons' during the election campaign IME would like to indicate the major criteria for evaluation of projects of such type: 1. At present, ME1 and ME3 are the only negotiated intention for investment in Bulgarian power generation. 2. Any judgment upon "high" or "low" price has meaning only in comparison. The more arguable project of AES won a competitive tender with lowest bid price, i.e. all other potential investors offered higher prices. 3. There is no transparency on costs of generation in existing plants. For example, politicians and experts mention prices as low as 1.6 cents per kilowatt in hydroelectric plants and 2.6 cents per kilowatt in thermal plants. There are strong reasons to believe that such rates reflect only current variable costs. 4. The forthcoming liberalization of the energy market might put doubts on the economic rationale of long-term fixed-price contracts by the state company. However, if the next governments strictly apply existing legislation, cancel the indirect subsidies from the budget and state monopolies, and through "soft" implementation of environmental regulations, both projects may appear highly competitive. 5. The actual start of the investment will be probably in 4 or 6 months. The direct effects will be visible next year and during the next 4 year period. The current account deficit will not be financed though due to expected import of equipment. Another investment in Maritsa East 2 however will cover the deficit this year. This is the rehabilitation of the filtering equipment (worth BGN 110 m), which will reduce sulfur oxide emissions by 90%. The important outcome must be sought somewhere else: an alternative to Nuclear Power Plant in Kozlodyi will be financed, electricity export to Turkey and other countries is secured, this investment will add about 1/20 of total environmental protection costs agreed upon in international contracts and EU. Last but not least, both projects are in fact transfer of technology, knowledge and skills. |
