Bulgaria and Central Eastern Europe: the implications of the EU Green Deal, key challenges, and the role of public-private partnerships

06.07.2020

Executive Summary

Implementing the EU Green Deal in Central Eastern Europe presents a major challenge. Major mobilisation of public and private investment will be vital to avoid this region being left behind and ensure that it meets the EU’s updated renewables targets for 2030 and 2050. The region is facing a risk of serious deficit of base electricity-generating capacities in coming years without a revitalised strategy. Looking to Bulgaria, we foresee that on the path to carbon neutrality, the country may see its older coal plants replaced by a combination of renewable projects coupled with energy storage installations, and gas-fired projects, given that gas could represent a beneficial “bridge fuel” in Bulgaria and other coal dependent countries’ transitions. In this way, combining natural gas and energy storage can facilitate a responsible transition to carbon neutrality that would safeguard security of supply, grid integrity and flexibility. Cooperation between national governments and private investors is key to enabling targeted solutions for this responsible transition. The role of the Commission is thus key to ensuring that such cooperation takes place on a constructive basis.

About AES

AES is a global power company that provides a diversified portfolio of energy solutions in 14 countries. Our actions are guided by the objective to build a sustainable energy future while meeting the ever-changing energy needs of the markets in which we operate. Integration is key to a successful and responsible transition from traditional energy sources to renewables, and AES is leading innovation in the integration of natural gas, renewable energy and storage solutions. AES is committed to reducing our generation (MWh) from coal to less than 30% by 2020 and less than 10% by 2030. Four Clean Energy Growth Platforms are core to our transition strategy: renewables, energy storage solutions, liquefied natural gas (LNG) and energy efficiency. AES has more than 15 years of experience developing and operating natural gas power generation assets around the world. The company also has over 3 GW of solar and wind projects in operation or under construction globally and expects to bring 12 GW of solar and wind projects online by 2022. Our energy storage systems represent some of the world’s largest battery-based energy storage fleets, with 768 MW in operation, under construction, or in advanced development in six countries. In 2018, AES also partnered with Siemens to launch Fluence, today’s leading global energy storage technology and services provider. AES has been present in Bulgaria for nearly 20 years and has invested over 1.6 billion euros in the energy sector of the country, including the largest windfarm in the country and the most modern coal-fired power plant.

Implementing the Green Deal for Bulgaria and Central Eastern Europe requires adequate economic and structural measures

At AES we welcome the ambition of the EU Green Deal and consider it emblematic of the Union’s commitment to climate protection. In coming years, and with the added contribution of the Commission initiative “Next Generation EU,” the Green Deal will form a central part of EU policy and industrial strategy and will also play a significant part in plans for a resilient economic recovery from the COVID-19 crisis. In line with this, private sector investment and public-private partnerships are set to play a critical role.

The impact of the EU Green Deal on the European energy sector and national economies will be extensive, and the transition to carbon neutrality poses a distinct set of challenges in Central Eastern Europe given different Member States’ starting points in terms of GDP, energy mix, emissions reduction targets, and energy investment needs. The possible closure of older coal plants will have a serious impact upon regional employment and business growth. Political apprehension to take immediate steps towards decarbonisation reflects widespread concern about socioeconomic risks, as well as fear that liberalisation and decarbonisation may increase grid stability and security of supply concerns as well as related geopolitical issues.

There is currently no official data on the amount of investment needed in Bulgaria to ensure a smooth transition to carbon neutrality. Total funding requirements are estimated at around €33 billion to achieve the core targets of the Green Deal over the next decade[1]. This is equivalent to half of Bulgaria’s GDP. That means on a steady investment level, approximately 5% of national GDP would need to be spent by the government to meet the currently agreed EU target of 40% reduction in greenhouse gas emissions by 2030, which could potentially be raised to 50-55%.

Targeted investment will help foster the European development of innovative solutions to energy requirements in these regions – including, for instance, energy storage solutions to support grid stability and safeguard system reliability. It is encouraging that the Commission is considering extending the InvestEU fund to €15.3 billion, with the potential to trigger investment of up to €240 billion. Additional funding under Horizon Europe for research and innovation in the clean energy sector will help drive progress in key energy technologies.

The need to guarantee energy security in Bulgaria

In Bulgaria, coal-based power has played a significant role in the country’s economic development, with coal still representing more than 45% of total electricity generation. Indeed, the European Semester country-specific report on Bulgaria had noted that continued use of local lignite resources “… is anticipated in the medium and long term.” Bulgaria still relies to a significant extent upon coal as a secure energy supply for power and industrial purposes and today remains the most carbon-intensive economy in the EU. Much work will be required in the short-term to tackle the future of aging coal power plants, in light of newly tightened limits on emissions being introduced by the Regulation for EU Electricity Market Design.

Any responsible transition must ensure that stability is preserved and that power prices are kept in check. As Europe’s significant energy diversification proceeds, security of supply, system flexibility and stability cannot be jeopardised. In Bulgaria, at least, it is likely that the most modern and efficient coal plants will need to be maintained in the medium-to-long term to facilitate this transition and avoid security of supply and grid stability problems.

Energy storage and natural gas as tools for a responsible and secure energy transition

We believe that battery-based energy storage is one of the keys to unlocking a cleaner energy future while at the same time guaranteeing security of supply. Significant development of energy storage solutions is needed to enable the incorporation of large amounts of intermittent renewable energy into the grid, in addition to strong interconnections between national grids. Grid-scale energy storage can be deployed rapidly and reduce overall costs while supporting transmission and distribution infrastructure by increasing transmission capacity and grid stability. The EU can play an important role in helping markets deal with the non-technological barriers to energy storage, such as contributing to the creation of the regulatory conditions that give incentives for private investments in energy storage. For instance, experience shows that a very effective way to develop energy storage capacity is through the addition of energy storage in grid planning processes and the organization of competitive tenders for the allocation of long-term contracts.

In addition, we consider that the use of natural gas as a bridge to clean energy in specific circumstances should be encouraged. As the closure of older coal plants proceeds, natural gas can strengthen the stability of the transitioning energy systems of Bulgaria and indeed other countries in Central and Eastern Europe while drastically reducing greenhouse gas emissions. Bulgaria is rapidly becoming a gas hub that is currently in the process of diversifying its sources of gas supply.

We believe future support for gas infrastructure projects will be vital to an effective transition in Bulgaria. We note however that in the current Just Transition Mechanism, EU funding opportunities exclude natural gas financing along with all other fossil fuels. We urge this to be reconsidered, and in light of the aforementioned challenges facing the Central Eastern Europe region, we welcome the position paper of Bulgaria, Czech Republic, Greece, Hungary, Lithuania, Poland, Romania, and Slovakia, which sets out the need for natural gas to play a part in Europe’s responsible energy transition. In line with this paper, we agree that an EU-level cessation of funding opportunities for gas infrastructure projects will make it extremely difficult for Central European countries with high carbon intensities like Bulgaria to mobilise sufficient energy investments in the immediate future.

We recommend that the Commission reassesses the possibility of using natural gas infrastructure projects as lower carbon bridge solutions. As the above-mentioned position paper notes, the bulk of gas infrastructure projects will be viable as key power sources in the long run in the context of carbon neutrality, given that they will also be viable carriers of synthetic gases, biomethane and hydrogen. In this way, renewable and decarbonised gases will be able to gradually replace natural gas altogether. Gas infrastructure therefore offers a means to create longstanding opportunities for the Central European energy and industrial sectors, whilst maintaining energy system reliability and flexibility, and without introducing a “lock-in” effect.

On the need for continued dialogue with private stakeholders

High quality energy infrastructure is critical to boosting productivity and lifting long-term economic growth. The EU’s role in attracting private investments by encouraging stable regulatory principles and mechanisms to develop well-functioning, regionally integrated markets is critical. Over the past few years, the Commission has established platforms to promote the exchange of best practices and policy recommendations between the public and private sector, both at EU and regional level (e.g. the Coal Region in Transition Platform and CESEC). It is however essential for these initiatives to develop and adapt to the current circumstances. By way of example, CESEC could be expanded to support Central-East European countries with the transition to decarbonisation and the promotion of engagement between national governments and private investors. This would further allow the elaboration and implementation of effective strategies targeted to regional challenges[2]. Furthermore, Member States are currently involved in designing their respective territorial just transition plans to define the social and economic priorities of the transition towards a climate-neutral economy. The Commission is involved in this process to provide tailor-made expertise to national and regional authorities. Given the critical role of private investors in facilitating the transition process, we do hope that the Commission promotes the dialogue between them and member states’ authorities in order to achieve optimal results.

At AES we are ready to work closely with the EU Commission, and Bulgarian government, to ensure an effective implementation of the Green Deal objectives, in a way that preserves security of supply and energy independence in Bulgaria and, at the same time, is considerate of the social costs deriving from a responsible transition. Private investments will be crucial to helping the energy transition proceed efficiently and responsibly. If driven effectively, predictably and fairly, public-private cooperation in the EU energy sector will ensure a win-win solution for all.

[1] Euractiv, 28 February 2020.

[2] Delivering the European Green Deal for southeast Europe – Do we need a regional approach? CEPS research paper, Mihnea Catuti / Irina Kustova / Christian Egenhofer