Bulgaria is defying the trend in the European electricity market which has seen many projects shelved or cancelled altogether. The country’s electricity distribution companies are up for sale and the government is preparing a new energy law establishing competition in the supply of electricity. In April, the landmark Maritza East III Project - the largest single private investment ever made in Bulgaria - reached financial close.

The Maritza East III Project centres on the rehabilitation of the existing 840MW lignite fired Maritza East III power plant near Stara Zagora in Eastern Bulgaria. The Euros 650 million project is being undertaken as a joint venture by Enel, Entergy and the plant’s original owner, Bulgaria’s Natsionalna Elektricheska Kompania (NEK).

Maritza East III and the Bulgarian energy sector

Bulgaria is heavily dependent on imports of primary energy and the country’s only significant indigenous energy resource is a vast but poor quality lignite deposit in the Maritza valley. This resource is exploited by the government-owned Maritza East Mines (MMI). MMI supplies three mine mouth power plants at the Maritza East complex, including the Maritza East III plant, along with a domestic solid fuel briquette plant.

The Maritza complex is expected to assume an even greater importance in the coming years, with further units at Bulgaria’s Kozlodui nuclear power plant - which accounts for more than one third of the country’s electricity production - scheduled for decommissioning. The refurbishment of Maritza East III will extend its remaining life by more than 15 years and help to secure the country’s future electricity requirements whilst preserving Bulgaria’s position as a major exporter of electricity to other countries in the region, such as Turkey.

Construction of Maritza East III began in 1973 and its four units were commissioned between 1978 and 1981. Accounting for about seven per cent of the country’s installed capacity, it supplies base load and middle order demand. In recent years, it has generated around 3,800 GWh per year.

Bulgaria’s coal-fired power plants are responsible for about 80 per cent of the country’s sulphur dioxide emissions and about 60 per cent of its emissions of carbon dioxide. Maritza East III is fitted with dry electrostatic precipitators to remove dust from its flue gases but it does not comply with current regulatory requirements relating to greenhouse gases. A major part of the rehabilitation work will be the installation of flue gas desulphurisation equipment. When the refurbishment work is completed, the plant will, for the first time, meet Bulgarian, EU and World Bank standards for S02 and CO2 emissions. The rehabilitation of the plant is a major pollution control initiative and will contribute to meeting Bulgaria’s Kyoto commitments. Improvements in waste handling practices will also lead to a 30 per cent reduction in the plant’s water consumption.

Commercial structure

Entergy started to develop the project under a joint development agreement with NEK in 1998. A special purpose project company was established and a package of project documents was signed in June 2001. These documents included a power purchase agreement (PPA), a shareholders’ agreement and an asset transfer agreement, under which NEK has transferred the power plant to the project company.

As well as benefiting from NEK’s participation as a sponsor, the government issued a letter of support for the project. The letter of support is not a sovereign guarantee. Shortly after the project documents were signed, a general election saw the defeat of the UDF government, which had begun the process of reforming the country’s power sector with the Energy and Energy Efficiency Act in 1998. However, the new government, led by the country’s former monarch, Simeon Saxe-Coburg-Gotha, continued to support the project and the sponsors mandated lenders to arrange financing for the project in early 2002.

Enel joined the project at financial close, acquiring a 44 per cent equity stake from Entergy Power Development Corporation. Enel also has an option to acquire Entergy’s remaining 29 per cent interest. The remaining 27 per cent is owned by NEK.

The project is underpinned by the PPA with NEK, which is currently the single buyer of electricity in the Bulgarian wholesale market and the operator of the electricity transmission network. The PPA covers the three-year rehabilitation period and runs for a further 15 years.

Initially, NEK will buy the plant’s entire generating capacity and output. However, the Bulgarian power sector is undergoing a process of reform as the country prepares for accession to the European Union. Ownership of generation, transmission and distribution activities has already been separated. The government is preparing a new energy law which it is anticipated will enable generators to sell directly to a variety of market participants, including electricity supply companies, electricity trading companies and large industrial consumers.

The government was keen to ensure that the PPA would not become an obstacle to liberalisation of the wholesale electricity market. The sponsors were also keen to take advantage of the opportunities presented by the opening up of the market. This had to be achieved in a way that would not compromise the project’s bankability. The solution was to include a market liberalisation clause, unique in the region, which requires the project company to make reasonable efforts to find substitute buyers for the plant’s generating capacity and electricity output, as and when this is permitted under Bulgarian law. NEK’s obligations to buy generating capacity and electricity are reduced to the extent that the developer concludes sales with alternative buyers.

The tariff under the PPA is structured as a capacity payment and an energy payment in the usual way. Capacity payments are designed to meet the project’s base case fixed costs. NEK has to make capacity payments whether or not it dispatches the plant. The energy payments are designed to meet the plant’s fuel, limestone, waste disposal and variable operation and maintenance costs. The energy payment is calculated by reference to the plant’s output. NEK has to dispatch the plant so that the project company can meet its minimum take or pay quantities under the lignite supply arrangements with MMI.

The energy payments are denominated in Bulgarian Leva and the capacity payments are denominated partly in Leva and partly in Euros. These are tailored to match the currencies of the project company’s costs. The decision to include a Euro element in the capacity payment was taken at an early stage of the PPA negotiations and avoids the need for the project company to hedge foreign exchange rates in order to service its Euro-denominated financing obligations.

The refurbishment contract was awarded to a consortium consisting of DSD Dillinger Stahlbau (part of the MAN Group) and RWE Industrie-Losungen. RWE Industrie-Losungen has previously refurbished two units at NEK’s nearby Maritza East II power plant. The Maritza East III refurbishment contract is a turnkey engineering, procurement and construction contract. The plant will be operated and maintained under an O&M agreement with a special purpose operating company.

Financing

Limited recourse debt finance for the project is coming from a number of sources. EBRD is lending Euros 132.1 million. This includes a participation of Euros 20 million by the regional multilateral, Black Sea Trade and Development Bank (BSTDB). The EBRD/BSTDB facility has a tenor of 15 years. A commercial bank facility of Euros 140.7 million has been arranged by Crédit Agricole Indosuez and Société Générale and Banca MedioCredito. The commercial bank facility has the benefit of political risk cover provided by the Multilateral Investment Guarantee Agency and has a tenor of 12 years. Four Bulgarian commercial banks, CB Biochim, United Bulgarian Bank, Bulbank and SG Expressbank, are providing a further Euros 75 million.

Enel and Entergy have made their equity contributions in cash, whilst NEK’s equity contribution was made partly in cash and partly by way of an in-kind contribution of the power plant. The plant will continue to operate during the rehabilitation work and part of the cost of the project will be met from revenue generated by the plant during this period.IJ

About the authors: Richard Metcalf is a partner and Steffan Shute is an associate in the Energy Group at international law firm Norton Rose. They advised NEK and the Government of Bulgaria on the Maritza East III Project