BULGARIA'S UNTAPPED RENEWABLE ENERGY SOURCES

UNCLAS SECTION 01 OF 03 SOFIA 001293

SIPDIS

SIPDIS
AIDAC

DEPT PLEASE PASS TO USTDA

E.O. 12958: N/A
TAGS: ENRG ECON ETRD BU
SUBJECT: BULGARIA'S UNTAPPED RENEWABLE ENERGY SOURCES

SOFIA 00001293 001.2 OF 003




1. SUMMARY: Bulgaria's alternative and renewable energy
sources hold great potential, but most will go unrealized
for the foreseeable future due to a lack of financial and
manpower resources and a comprehensive national plan.
Diversification of the energy sector is nonexistent. In
2004, 96 percent of Bulgaria's primary energy supply came
from fossil fuels (mainly coal) and nuclear energy. Today,
approximately 60-70 percent of Bulgaria's energy is
imported, primarily from Russia. The share of electricity
produced by renewable energy sources (RES) fluctuates
between 4 and 11 percent. In 2005, RES contributed 10.8
percent of the country's total electricity produced in
comparison with only 4.5 percent in 2004, primarily due to
an abundance of rain overflowing local river systems and
fueling the country's hydroelectric power plants. Experts
estimate that the Bulgarian economy has the potential to
produce 755 million kWh of hydropower, 30.65 million kWh of
energy from biomass, and 440,000 kWh of geothermal energy.
However, Bulgaria must further develop and diversify its RES
if it is to begin to alleviate the country's overwhelming
dependence on Russian energy imports. END SUMMARY

Hydroelectric Possibilities are Flowing
--------------


2. Bulgaria's greatest potential for renewable energy
generation, as well as investment opportunities, lies in its
hydroelectric sources. In 2005, hydroelectric power plants
(HPPs) were responsible for more than 96 percent of
renewable energy production. Although the larger HPPs
logically generate the majority of electrical power, many of
them are over thirty years old and must be updated in order
to restore their peak capacities. The Government of
Bulgaria (GoB),in an effort to limit dependence on foreign
fuel imports, is modernizing many of the larger HPPs.
Approximately sixty-three small and micro HPPs are located
on the National Energy Company's (NEK) property and all are
targets for privatization initiatives in the future. The
GoB has also initiated new licensing methods to encourage
the development of HPPs and associated projects. Although
the investment required to build a small hydroelectric power
plant is between USD 8,000 and USD 1.25 million depending on
the plant's capacity, the great investor interest in
constructing and operating these plants is due to the
guaranteed market opportunity; under Bulgarian law, the NEK
must buy all the energy produced by HPPs at preferential
prices.

Biomass Gaining Ground
--------------


3. Biomass may also serve as a good renewable energy source
in Bulgaria. Officials from the Ministry of Economy and
Energy report that biomass officially accounts for 3.7
percent of Bulgaria's renewable energy production; however,
they tell us that in reality the percentage is much higher
since most of it is done in rural areas and is difficult to
track and measure. In late September 2006, the Ministry of
Economy and Energy will present a comprehensive plan for the
development of biomass and biomass technologies. Although
initial steps have appeared promising, a lack of project
funding has hindered further progress. We have heard of at
least two American companies interested in investing in
biomass facilities.

Wind Technologies Picking Up Speed
--------------


4. Development of wind energy projects in Bulgaria holds
some promise as both the U.S. Trade and Development Agency
(USTDA) and USAID are funding feasibility studies for wind
generation. However, currently there are no operational
industrial-sized wind energy power plants and only ten small
wind parks in the entire country. Similar to hydroelectric
power, current Bulgarian legislation requires that the NEK
buy all wind-produced electric energy at a preferential
price. In addition, there are many favorable financing
methods for the creation and operation of wind parks. For
example, there is a credit line of 20,000 to 1.5 million
Euros with a 20 percent grant from the European Bank of
Reconstruction and Development to finance wind power
projects. Through the Kyoto Protocol, Bulgaria has
contracts for grant financing of wind power projects with
the governments of Holland, Austria, and Switzerland.
Available wind resource data indicates that there are areas
throughout Bulgaria with sufficiently strong winds to

SOFIA 00001293 002.2 OF 003


generate power economically. The highest wind resource
regions are located along the northern Black Sea coast, the
central mountain range, and the Rhodope Mountains in the
southwest.


5. Progress is being made in the construction of Bulgaria's
first industrial-size wind park. Forty-four wind generators
with an estimated combined force of over 100 megawatts are
being built on Mount Murgash in the Balkan Range by the
Bulgarian firm "Eco-Source Energy." The project is
underway, and the first twenty generators are slated to be
active by the end of the 2006. The entire project is
estimated to be worth near USD 110 million. However, the
project is currently awaiting an environmental impact
evaluation by the Ministry of the Environment, which may
take anywhere from several months to a year to complete.


6. USAID/Sofia, working with EnCon Services International,
General Electric and the Utility Wind Interest Group is also
implementing a two year project to develop and operate a 5-
10 MW pilot wind farm in partnership with a local government
and local energy services company. The project structure
requires the establishment of a public-private partnership
with a municipality and private energy services company that
will be responsible for operation and maintenance of the
wind farm. The municipal leasing approach is designed to
overcome many of the financial obstacles that currently
impede private power projects, and should help provide a
needed source of revenue to cash-strapped municipal
governments.


7. Several foreign firms are also awaiting licenses for
potential projects along the northern Black Sea coast to
develop wind technologies. "Bulgarian Wind Plants," a
subsidiary of the French "Electricit de France," has plans
to construct a wind park in Kavarna. The Japanese firm
"Mitsui" also has plans to construct a wind electrical plant
in Burgas. Despite growing investor interest, several
ecological and bureaucratic challenges remain. For example,
wind parks pose a danger to migrating birds. Mitsui's 12
million Euro project near the city of Burgas has been
temporarily frozen due to arguments with environmental
groups. From a bureaucratic standpoint, many administrative
obstacles such as excessive licensing and formal
documentation requirements nullify any favorable and
preferential financing given to investors.

Geothermal Possibilities are Untapped
--------------


8. Bulgaria has a sizable reserve of geothermal energy
which has gone untapped and unexplored. According to
Kostadinka Todorova, the Director of the State Energy
Efficiency and Environmental Protection Directorate, the
country is positioned on top of "a large geothermal sea" and
only utilizes a small percentage of its potential. Although
there are no active geothermal energy production sites in
Bulgaria, there are a number of state organizations that
have performed research into the exploitation of this
resource. All activities regarding the use of geothermal
reservoirs for energy purposes are channeled through
governmental agencies such as the Ministry of Energy (ME),
State Energy Regulatory Commission (SERC),State Energy
Efficiency Agency (SEEA),and the Ministry of Environment
and Waters. Recent legislative reorganizations have also
led to the possibility of foreign investment to develop
geothermal sites. Similarly, the World Bank is financing a
project for the development of heating utilities at eight
geothermal sites.


Solar Prospects are not Bright
--------------


9. The prospects for solar energy generation in Bulgaria
are minimal, since only a relatively small portion of its
terrain receives sufficient levels of solar radiation. The
opportunities for solar technologies are greatest for low
temperature thermal applications, such as solar thermal
systems for residential, public and agricultural use, hot
water passive solar systems for heating, and systems for
drying wood material and agricultural products. However,
the GoB's Energy Efficiency and Environmental Protection
Directorate would like to develop solar energy beyond
household application. But all parties agree that due to
the high cost of solar technology, with the exception of a
few experimental and prototype photovoltaic projects, the

SOFIA 00001293 003.2 OF 003


prospects for further exploitation are not very bright.


10. COMMENT: The Ministry of Economy and Energy and the
Energy Efficiency and Environmental Protection Directorate
are working on legislation that will provide a comprehensive
strategy and plan for developing Bulgaria's renewable energy
sources. A secondary objective is to provide future
investors with additional concessions and incentives to
exploit these largely underutilized energy resources.
Although the GoB currently lacks a comprehensive national
plan, officials told us that Bulgaria is working to achieve
11 percent of its total energy production from RES by 2010,
with an eventual target of 40 percent sometime in the
future. Although Bulgaria clearly recognizes its over-
reliance on foreign energy imports, it does not yet have the
financial resources to adequately exploit its RES potential.
In a country faced with competing economic priorities, RES
has not yet made it into the top tier. Nevertheless,
opportunities abound for U.S. investors entering the energy
efficiency and RES sectors market early.

KARAGIANNIS