site.btaElectricity Price Cap Severely Distorts Market - Expert

The cap on electricity prices distorts the market structure severely - it encourages short-term buying instead of the market moving towards longer-term contracts, Kaloyan Staykov, Chief Economist at the Energy Management Institute, said at a roundtable  "Charting a Course Through the Energy Crisis: Assessing Bulgaria’s Response to Soaring Prices and Outlook on the New EU Market Design" which took place here on Friday.

He added that at the beginning of the crisis, initially in Bulgaria, the difference between the market prices of electricity and the price cap was relatively small and the aid did not constitute a serious interference on the market, but after mid-2021 it became extremely large.

Compared to other EU countries, Bulgaria has acted very quickly to introduce electricity price support, Staykov added. The aid in Bulgaria has maximum scope - it involves absolutely all commercial players. "The aid is dispersed to absolutely all market participants, with absolutely no assessment of need and size. There was no focused approach," said Staykov. According to him, if at the beginning it had some logic, because the situation was a shock, then later some correction could have been made. Moreover, the amount of aid in Bulgaria is extremely high.

"Even if we just take the three months in the autumn of 2021, all the aid that has been granted in those three months is equivalent to the same aid that companies received in 2023," said Staykov. In addition, there have been monthly changes to the mechanism itself, giving the impression that the government thought this was something temporary, even though it was clear that this situation would last longer. This, he said, created further uncertainty on the market.

In countries that introduce subsidies without any elements of influence on consumption or commitments to energy savings, this does not lead to a reduction in consumption, said Staykov. He pointed out that this is the case in Bulgaria. "The logic is that when you have high prices, it signals that there is a shortage of something on the market. When there is a shortage of something, the normal behaviour is for consumption to adapt at least a little bit to this situation, but as you can see with the price ceiling, in our case the effect is exactly the opposite," the economist said.