Renewable energy law and regulation in Bulgaria

1. Brief overview of the renewables sector

In 2002, Bulgaria ratified the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which imposed certain targets on Bulgaria to reduce greenhouse gas emissions by decreasing reliance on conventional energy sources and encouraging renewable energy production. 

In 2003, Bulgaria adopted the Energy Act (EA) seeking to develop its renewable energy sector. This act established general conditions for efficient use and generation of energy from renewable sources, but contained no concrete investment incentives. 

Bulgaria joined the European Union on 1 January 2007 and, as part of the accession process, accepted mandatory obligations for the development of renewable energy production. Bulgaria undertook the obligation to achieve an 11% share of electricity from renewable energy sources (RES) in national gross consumption of electricity by 2010. 

Accordingly, in 2007, Bulgaria adopted the Renewable and Alternative Energy Sources and Biofuels Act to establish a system for producing electricity from RES and to create a favourable investment climate. Under this law, electricity from RES was supported primarily through a feed-in tariff (FiT) scheme. Eligible producers of electricity from RES were entitled to enter into long-term power purchase agreements (PPAs) with the Public Supplier, the State-owned National Electricity Company, EAD or directly with end-suppliers. The suppliers were required by law to purchase all RES-generated electricity, other than that sold on the free market and that which was used for the plants’ own consumption. 

The FiTs were subject to annual review by the Bulgarian Energy and Water Regulatory Commission (EWRC or the Regulator). The law provided a formula by which the Regulator calculated the applicable FiT rate, creating a certain amount of transparency in the system, where FiTs could not decrease by more than 5% per year.

Thus, as of 2008, RES investors in Bulgaria were guaranteed long-term PPAs for the purchase of all the electricity they produced at preferential prices that would not decrease by more than 5% per year. 

In 2009, the European Parliament and Council issued Directive 2009/28/EC, which provided that 22.1% of overall energy consumption within the EU should be produced from RES. Bulgaria’s target was to achieve 16% of its total energy consumption from RES by 2020.

The FiT program that Bulgaria developed under the 2007 legislation did not attract enough investment in the renewable energy sector for Bulgaria to meet its new EU obligations. Therefore, at the beginning of 2011, the government approved a draft Energy from Renewable Sources Act (ERSA) to create a more favourable investment climate and to achieve the new EU targets. On 3 May 2011 ERSA entered into force and promoted an attractive and stable FiT support program for renewable energy projects. ERSA confirmed that once a particular FiT applied to an eligible plant, that plant was entitled to the specified tariff for the full duration of its PPA (20 years for solar, geothermal and biomass, 15 years for hydro up to 1MW and 12 years for wind). ERSA also specifically provided that suppliers were required to purchase all electricity produced from RES at the fixed FiT, other than the electricity that producers elected to sell on the free market and that used for the plants’ own consumption.

Thus, the 2011 incentive program resulted in substantial investment and enabled Bulgaria to be ahead of schedule to meet its EU targets by 2013. Furthermore, Bulgaria was ranked second among the top ten emerging markets for renewable energy. 

When Bulgaria realised in July 2012 that it would reach its target ahead of schedule and that the incentives programme would continue to attract more investment in the renewables sector, it decided – along with many other European countries – to take measures to withhold further investment, especially in solar and wind. This led to the gradual decrease of the FiTs until their final revocation for RES projects to be developed after 27 December 2013, which in practice put an end to RES investments in Bulgaria for the coming years.

Between 2016 and 2018, the Bulgarian government adopted certain changes to encourage small roof-top power plants and power plants with installed capacity up to 4MW by limiting the FiT application only to these small producers.

In mid-2018, the government changed the legislation in order to arrange for producers with total installed capacity of 4MW and above 4MW to enter into feed-in premium agreements and terminate the long-term PPAs. Such premiums are arranged to be paid by the newly established Bulgarian Energy Security Systems Fund (ESSF). 

Currently, only producers with installed capacity up to 1MW can be subject to FiT and this threshold is likely to decrease to 0.5 MW.

2. Recent developments in the renewables sector

In the summer of 2012, Bulgaria began to implement several measures that negatively altered the incentives scheme promised to RES projects under the regulatory framework described above. Changes to the scheme were made almost every year between 2012-2015, negatively affecting the stability of the legal framework and the confidence of investors in the Bulgarian energy market. 

Some of the most important changes include:

  • In September 2012 the Regulator adopted a decision, which introduced a retroactive temporary grid access fee for all RES, where for some projects the fee reached 39% of their FiT; 
  • On 1 January 2014 Bulgaria introduced a fee on the revenues of PV and wind farms at the rate of 20% of their FiT (without VAT). This fee was pronounced unconstitutional by the Constitutional Court in July 2014. However, the producers were still unable to recover part of the fees paid after it was declared unconstitutional. The end of July 2019 was the deadline for claiming reimbursement of the 20% fee withheld for the period July-August 2014.
  • Bulgaria also reduced the amount of energy that could be purchased at preferential FiT prices to the quantity of electricity produced on average by the same category of plants minus the producer’s own electricity consumption (eg 1,188 MWh per annum for most PV plants).  Thus, electricity produced in excess of that threshold could only be sold on the free market.
  • In July 2015, Bulgaria further reduced the investors’ FiT payment rights by requiring RES producers to pay a monthly fee to the ESSF amounting to 5% of their revenue, with VAT excluded. 

The above measures led to numerous court proceedings from RES producers against the competent authorities in Bulgaria, the majority of which ended with a positive outcome for the producers. Certain big investors have already started international arbitration proceedings against Bulgaria. 

Since June 2014, the operation of a balancing market has been introduced, and RES producers are required to become part of a balancing group and pay monthly settlements to the coordinator of their balancing group. 

Since 2015, the situation with existing RES has gradually become more stable and, as a result, there has been an increase in M&A activity in the market. 

In May 2018, the Bulgarian government announced that producers with total installed capacity of 4MW and above would enter into feed-in premium agreements with the ESSF. The ESSF will pay the producers up to the net specific production for the respective power plant. Once the agreements had come into force (1 January 2019), long-term PPAs would be terminated. It was agreed that the ESSF would compensate the difference between the FiT and the estimated market price as determined by the Regulator and depending on the energy source. Furthermore, since July 2019, these rules have applied to producers with total installed capacity of 1MW and above. The agreements were scheduled to be concluded by October 2019. Following this change, around 370 power plants would sell electricity on the free market. By the middle of 2021, it is expected that all RES producers with installed capacity of 0.5-1 MW will sign feed-in premium agreements, 

Since mid-2018, every producer that receives any premium under the feed-in premium agreements shall pay the ESSF a monthly fee of 5% of income resulting from the sale of electricity from RES.

Since mid-2019, any deals with producers with a total installed capacity of 1MW and above shall be conducted via the organised fund market at a freely negotiated price. However, such an option will not be available to power plants that come into operation after 1 January 2019.

3. Forthcoming developments / opportunities in the renewables sector

The Bulgarian Energy Strategy (2020-2030) (the Energy Strategy) is a key political document with legal and regulatory importance, scheduled to be adopted by the government and the Bulgarian Parliament by the end of this year. A draft is already being circulated for approval by local authorities. It sets the main priorities for the development of the energy sector until 2030. The Energy Strategy is focusing on some future trends such as the development of the electric car market, as well as systems for energy storage. The use of eco-cars, including those charged with electric energy produced from renewable energy sources is one more step towards the Bulgarian “green” cities of the future and the infrastructure necessary for them. It is therefore expected that the legislation will see the introduction of some obligations for the electricity distribution companies to develop stations for electric cars, as well as further energy storage capabilities for both producers and electricity distributors. Along with that, the efforts of Bulgaria in the years ahead will also be focused on the ‘Smart Grid’ systems.

Now the opportunities related to RES projects are mainly connected to refinancing  of RES projects with view to the decreased interest rates and also related to the increase in M&A activity in the sector. In 2017, CMS advised on the largest renewable energy refinancing in Bulgaria. Currently, CMS is advising on the sale of the biggest photovoltaic project in Bulgaria.

There is also a trend of developments in the free market, but the market is still picking up. There are certain incentives for new RES projects to be developed on the free market in Bulgaria and we expect that there will be a substantial growth of the installed capacities in the coming years. CMS Sofia is currently advising several greenfield PV and wind projects and was instrumental in putting in operation of the first subsidy-free RES project on the Bulgarian market in 2019. 

The Bulgarian integrated plan on energy and climate for 2021-2030 (the Integrated Plan) provides for the development of the RES sector to 27% of the gross end consumption and therefore the Bulgarian Government is expecting that PV installed capacity in Bulgaria will triple by 2030.

Several amendments and supplements of the EA are intended in order to put smaller PV projects (between 0.5 and 1 MW) on the free market – approximately 94 MW in total. They shall enter into the feed-in premium agreements with ESSF by mid-2021. The amendments aim to put cold reserve on auction principle and to further ease the liberalisation of the energy market. As an incentive for new RES producers, it is intended for the abolition of the obligation to pay a 5% contribution on the revenues of electricity producers from renewable energy sources from January 1, 2021 onwards. The aim is to stimulate the production of green energy by regulating measures to promote production of electricity from renewables. 

Portrait of Kostadin Sirleshtov
Kostadin Sirleshtov
Managing Partner
Sofia
Portrait of Borislava Piperkova
Borislava Piperkova
Senior Associate
Sofia
Portrait of Dimitar Zwiatkow
Dimitar Zwiatkow
Partner
Sofia