Bulgaria, along with the entire CEE region, has been experiencing a surge in investment and transactions over the past two to three years. Prior to that, hit by a late wave of the global recession, Bulgarian business faced problems with over-indebtedness, resulting in a large number of insolvencies, especially in the real estate sector. Since then, however, insolvencies have been decreasing. Thus, the recent uptick in the number of insolvency procedures being initiated in a particular sector – energy – deserves special focus and attention.
The Bulgarian energy sector has been liberalizing for the past 20 years, moving from a centralized state-controlled economy to a market-oriented model of operation. Bulgaria, following the example of countries like Spain, Italy, and the Czech Republic, offers fertile soil, an abundance of sun and wind, and favorable legislation to renewable energy producers. Accordingly, the renewables sector boomed in 2011-2012, before stringent governmental reactions slowed it down. However, the latest trend in the energy sector is full liberalization, fueled by the newly established energy marketplace for producers and consumers.
In the wake of increased competition stemming from the recent liberalization of the Bulgarian electricity market, more and more electricity players and major electricity traders have been facing serious financial difficulties. According to reports, some are now fighting to stay afloat after the initiation of insolvency proceedings. Given this increased market pressure, analysts state that it is likely that these and other energy traders may declare bankruptcy and face eventual liquidation. The most recent newcomer to the list of insolvent companies is the Future Energy and Energy Finance Group, one of the largest players on the market, even though a year ago, Future Energy was bidding to acquire the largest grid operator in Bulgaria. They went from boom to bust in a couple of months.
The disruption appears to be connected to the arrival of renewable energy companies into the free market and their ability to sell power at non-regulated prices (i.e., without a feed-in-tariff (FiT)). The FiT was the key incentive for renewables but it was slowly curtailed over the past two to three years and a portion of the energy they produced had to be sold by the brokerage of energy traders looking for large quantities of energy. At that time, many of Bulgaria’s electricity traders opted to seize the opportunity and obtain new clients by offering competitive prices to these renewable energy producers.
Initially, the renewable energy producers were competitive on the free market despite the costs of this type of power generation. Low-margin operations, however, now seem to be turning against both RES producers and the electricity traders with a crushing effect on the market as a whole. Electricity traders have been unable to generate more profit in order to pay off increased prices to RES producers, resulting in delayed payments to these producers and other creditors, ultimately pushing many traders into insolvency.
Because many of the endangered energy traders are tied to each other commercially, this insolvency avalanche is expected to cause more instability in the near future. A further twist in the tale is brought by recent legislation, which in mid-2018 abolished the FiT entirely, meaning most RES companies will now have to sell a significant amount of the energy they produce on the free market, whereas this previously was the agenda only for the larger ones.
Unfortunately, creditors may have little luck recouping losses in insolvency proceedings since energy traders traditionally do not have properties or assets beyond the receivables they are owed. This factor seriously jeopardizes the interests of these creditors. As the new legislation jeopardizes RES producers as well, it is possible that Bulgaria will see a growing number of insolvencies in the renewable energy sector stemming from its ongoing liberalization.
By Assen Georgiev, Partner, Iliyan Petrov, Senior Associate, and Deyan Draguiev, Associate, Dispute Resolution, CMS Sofia
This Article was originally published in Issue 5.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.