Undergoing an ambitious process of internal transformation, Electrica group is facing this year rather unclear market conditions after the legislative and regulatory turmoil in 2019. No time for “business as usual”! The purchasing opportunities in Romania and the new reality of the national energy system being net importer asks for a reinterpretation of the roles that the Electrica group can assume. We talked with the CEO Corina Popescu about the progress in turning the organization into a more flexible one, but also about the investments of over 600 million lei planned for this year.
Dear Mrs. Corina Popescu, the legislative and regulatory perspectives dominate once again your agenda of the CEO of Electrica SA. However, I suggest to start with some conclusions on the year 2019, all the more because the effects of GEO 114/2018 seem not to be gone. What is your understanding of the year 2019?
The year 2019 was a very difficult one, full of challenges, especially since, beside GEO 114/2018, it also was the beginning of a new regulatory period, which came with important changes.
Significant changes in the legislative and regulatory framework have had visible effects on our business, and the purchasing costs of electricity have increased by approximately 25%. However, through a remarkable team effort, the Electrica Group achieved consolidated net profits higher by over 71% compared to the budgeted target for 2019.
The net individual profit ensures a stable dividend per share and an attractive dividend yield of over 7%, in line with the level which we have accustomed our shareholders with. Electrica is a listed company, with approximately 7,000 investors from abroad, and an additional communication effort was needed to help them understand the impact of the new legislation on our business.
On the other hand, the year 2019 meant new economic opportunities, as the Bucharest Stock Exchange was upgraded from frontier to emerging market status. This evolution is beneficial for all listed companies as well as for those that consider listing themselves, because they can attract investments from larger funds, which until now could not take into account Romanian market due to the restrictions stipulated by the prospectus.
At the same time, the most intense debates in 2019 were held on the definition of vulnerable consumer and of energy poverty, two concepts that, once applied to real situations, would lead to changes in the way the energy sector relates to its beneficiaries. Although these discussions have not yet materialized in the definition of the vulnerable consumer and of the support schemes, we are optimistic that this will be regulated as soon as possible by the authorities.
We are confident on the evolution of the Electrica Group, especially as at the end of last year we launched the Electrica Group Strategy for the period 2019-2023. I am convinced that the implementation of the strategy gives us solid grounds for the company’s future development.
The re-liberalization of the electricity market created a lot of excitement, especially among politicians. Do you anticipate significant changes in final prices this year?
The liberalization process brings opportunities for all the market, as it stimulates competition, and suppliers are motivated to develop more complex products, which are more advantageous to customers. We have already taken important steps in this direction at Electrica Furnizare.
However, there are some risks, which could be mitigated through legislative changes. One of the risks of a liberalized market is related to the higher exposure of consumers to price fluctuations. In order to prevent pressure on consumer budgets, the vulnerable consumer needs to be defined and also the support schemes that can help mitigate any price fluctuation in these specific cases need to be established by law and regulations. In terms of prices, there are elements that indicate the need to improve the legislation and correct some market behaviors, in order to encourage long-term contracts and reduce the appetite of operators to trade significant quantities on the Day Ahead Market (DAM) and on the Balancing Market. In this regard, we are confident that the authorities will use all the necessary tools.
Defining vulnerable consumers, identifying the people who really need support and the concrete mechanisms by which they are helped, is still an ever-delayed objective. What are the chances that this topic will be well-addressed in 2020?
Defining the vulnerable consumer is vital both for ensuring a fair climate for those in need of support and also for the smooth running of investment programs of electricity and natural gas distribution operators.
First, the definition of the vulnerable consumer and the establishment of a financial support scheme is necessary in order for people in real need to have real support from the authorities and to be able to bear the burden of the bills. Because the bills can burden the budgets of the vulnerable consumers, the investment programs are capped so that the price to be maintained within the limits considered accessible by the authorities.
In the context of the Green Deal provisions, which cannot be implemented without massive investment plans, we hope that the authorities will regulate this topic as soon as possible.
What is your opinion on the present provisions regarding the rate of return for the distribution activity? Are they likely to encourage investment?
In order to capitalize on the opportunities that arise and to reduce the development gap between Romania and the other countries in the European Union, we need a long-term national energy strategy, to be implemented and to provide predictability and long-term stability. The local market is in the phase in which it needs investments in the modernization of the networks, and their stimulation can be achieved, first of all, by an attractive level of the WACC (return on the invested capital). The WACC level is regulated by each country, depending on the networks conditions, and in Romania it is regulated by ANRE.
The Board of Directors of Electrica SA has recently approved an investment plan of about 600 million lei for 2020, money that will go mainly in upgrading the distribution network. Are the main priorities the same as in the last years: improving the quality of services, respectively energy efficiency and reducing the own technological consumption?
Electrica is an utility company with tradition in the local market, and our goal is to become an integrated company and a regional player. For 2020, we have planned an investment budget of more than 600 million lei to improve the indicators of the continuity in and the quality of the power distribution services, to reduce losses and to increase the operational efficiency.
In order to increase the Group efficiency we also rely on digitalization. We constantly invest in improving and modernizing our IT infrastructure, cyber security and management systems, and, implicitly, the quality of the services we provide to our clients. Also, through the automation of the distribution system and the expansion of modern measurement systems, we want to have better control throughout the value chain, to reduce losses and to intervene promptly when needed. Moreover, we have funds allocated to upgrade the equipment in the transformer stations and in the medium voltage network; we have also taken steps to introduce equipment with low technological consumption.
In the medium term, we analyze the options we have in order to extend our presence in some related sectors and to achieve synergies with the sectors where we are currently active. In this respect, we have allocated resources to diversify the range of services we offer. All the investments we have envisaged will help us to better respond to our clients’ needs, to strengthen our solid financial profile, but also the confidence of our investors.
2020 means numerous new European regulations for power markets entered into force. Which of these do you see as the most relevant for Electrica and what impact do you anticipate they will have on the market as a whole?
The industry as a whole is undergoing a process of transformation globally, against the measures related to climate changes, the legislative changes, but also because of the new opportunities emerging as a result of technological developments.
The new European regulations will radically change the entire industry – Green Deal translates into a new vision of the energy industry, and any change means a new challenge. All stakeholders must show openness to adapt to these new standards. This transformation will take place over time and will be facilitated by new technologies, through digitization and artificial intelligence.
The main challenge is to find environmentally friendly solutions and to reduce the carbon footprint. Such an objective can only be achieved if all the politicians accept a clear implementation plan through massive investments in research and development. Estimates show that an annual investment budget of about € 260 billion is needed.
In the long term, Green Deal will contribute to increasing the share of renewables and to more digitalized and integrated networks. Electrica’s new strategy has taken into account these changes, and our goal is to have a balanced portfolio, which also includes renewables.
Various types of assets are offered for purchase on the Romanian market, at present. What is Electrica’s approach on these opportunities? Are they the solution to complete the Group’ portfolio with activities in the generation or trading areas?
Our goal is to find the best solutions to offer our clients the best services and solid returns for investors. We analyze all the opportunities in the market, including those that could contribute to the realization of our ambition to become a regional player. If we were to identify opportunities compatible with our development strategy, they will be communicated in a transparent and non-discriminatory manner, in accordance with the provisions applicable to listed companies.
The group’s strategy for the 2019-2023 period mentions Electrica’s ambition to become a regional player. How can this ambition be materialized and what are the specific steps you take in this regard?
Electrica is one of the most important companies in Romania, with great development potential in the coming years. The know-how we have accumulated over the 120 years of activity offers us great advantages and allows us to identify and capitalize on the opportunities that appear in the regional market. We are actively looking at both the internal market and the neighboring markets.
At the same time, we are concerned to expand our business; we have already launched on the local market new attractive services, which are folding on our development plans. Also, in 2019, Electrica obtained the corporate rating of issuer BBB (investment grade) from Fitch Ratings, which confirms our solid financial profile. This is further proof that we have resources both to support the process of network modernization and development, but also to attract additional resources if needed.
This interview firstly appeared in the printed edition of Energynomics Magazine, issued in March 2020.
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