1. ELECTRICITY MARKET IN BULGARIA an attempt for realistic point of view Lubos Pavlas Regional manager of CEZ for Bulgaria Sofia, 27.02.2008

2. 2 OUTLINE OF PRESENTATION 1. CEZ POSITION ON BG ENERGY SECTOR 2. BULGARIAN ENERGY MARKET MODEL  Market model  Regulatory framework  Market development 3. REGIONAL ENERGY MARKET  Cross-border capacity market, regional prices, energy flows 4. CHALLENGES TOWARDS BULGARIAN ENERGY SECTOR

3. 3 CEZ GROUP OPERATING IN BULGARIA 42% SHARE IN DISTRIBUTION & SUPPLY AND 11% SHARE FROM GENERATING CAPACITY TPP Varna (100% owned by CEZ a.s.) - production license CEZ Distribution Bulgaria (67% CEZ a.s., 33% BG State) – distribution license CEZ Electro Bulgaria (67% CEZ a.s., 33% BG State) - public supplier license CEZ Trade Bulgaria (100% CEZ a.s.) - trading license CEZ Bulgaria – 100% CEZ a.s. PRODUCTION DISTRIBUTION SUPPLY (REGULATED) WHOLESALE CORPORATE GOVERNANCE

4. 4 ELECRICITY MARKET MODEL - SEGMENTS Traders Consumers HV Consumers HV/MV Free NEK Public Provider & Trader E.ON EVN CEZ Consumers MV, LV, households R.Tariffs Consumers HV Bilateral contracts Scheduling Balancing According to Market Rules Unprotected Consumers Producers 85% regulated Quotas & PPA 15% PPA R.Tariffs Free Export? Not clear R.Tariffs

5. 5 OPEN ELECTRICITY MARKET IN 2007 REGISTERED MARKET PARTICIPANTS 65 Eligible Customers, 7 Producers, 26 Traders TOTAL VOLUME ON THE BG OPEN MARKET FOR 2007 IS 4.3 TWh  11-12% from production 35 TWh (net)  15-16% from the end user market in BG 27 TWh (net)  3.0 TWh traded by traders, or app. 8% from production 15% market 85% Tariffs Generation 2007 - 35 TWh (net) Open Market 4.3 11% Production 35 89% Production Open Market

6. 6 REGULATORY FRAMEWORK THERE ARE STILL SOME GAPS IN THE LEGISLATION CONCERNING THE OPEN MARKET  Energy Law 2003 and amendments from Sept. 2006:  Dominant role of PUBLIC PROVIDER (NEK) as a hidden “SINGLE BAYER”  Eligibility is a matter of choice  Unclear difference between protected consumers and eligible customers, no clear function of public supplier / end supplier, purchase from the producers side still under regulations.  Market rules – not changed significantly since 2004, at the moment there is a proposal for changes in the Market Rules, however the changes are concerned to keep the regulated market which is full contradiction to market opening approach.  Grid Code – contradiction between central dispatch and liberalized market.  Quota mechanism - generators are obliged to sell most of their production to the Public Provider

7. 7 CROSS-BORDER CAPACITY MARKET  FIRST CROSS-BORDER TENDER ORGANIZED BY ESO IN OCTOBER 2007  LIMITED NUMBER OF PARTICIPANTS DUE TO TWO MAIN REASONS: a) Lack of power on the BG market (due to high regulated quotas) b) Power companies can NOT export it due to the Criteria in art. 3 according to which traders can NOT export more than 25% of their sales portfolio on the open market. This eliminates all new market participants and puts a “Chinese wall” for the current ones. Conclusion  VICIOUS CIRCLE

8. 8 RO BG GR SR HU REGIONAL ENERGY MARKET – PRICES EUR/MWh Prices in Bulgaria remain the lowest in the region 32-35 euro Consequently, Energy flows are towards West and South 36 55 50 200620072008 25 28 32 200620072008

9. 9 VISION FOR ELECTRICITY MARKET PROGRESS 1. PRODUSERS / WHOLESALE  Allow power plants to sell at freely negotiated prices to cover costs and to increase availability of power on the open market;  Suspension of the “quota mechanism”;  Development of market for “System services” (primary, secondary regulation, etc.) 2. MARKET MODEL -> CREATE SHORT-TERM MARKET  Switch from week ahead to day ahead – key factor for optimization and lower risk  Create Power exchange or OTC to show market reference price  Introduce Balancing groups - optimize costs and implement standard products. 3. CROSS-BORDER CAPACITY MARKET  Equal access for all market participants to the cross-border capacity 4. TRANSPARENCY AND ACCESS TO INFORMATION  Equal access for all market participants to the information for production, end users demand, cross-border trade, ect.

10. 10 CHALLENGES TOWARDS BULGARIAN ENERGY SECTOR 1. PRACTICAL IMPLEMENTATION OF EU DIRECTIVE 87/2003  National Allocation Plan /NAP/ 2007 and NAP 2008-2012 have been significantly reduced by European commission  NATIONAL REGISTER FOR TRADING WITH ALLOWANCES NOT OPERATING YET  FUTURES PRICE FOR CO 2 ALLOWANCES FOR 2008 RICH 23 €/ton 2. INCENTIVES MODEL FOR RENEWABLES  The present incentives model is unfair to regional “end suppliers” and customers  The high priority for connection of renewable power plants leading to conflicts within DISCOs and TSO 3. GAP BETWEEN BULGARIAN AND REGIONAL ELECTRICITY PRICES