Ion Lungu, AFEER: It’s time to define the vulnerable consumer (Energynomics Magazine)

In 2019, the Romanian supply market has been dominated by maximum turmoil, to which the private environment has adapted in various manners. We discussed with the President of the Association of Electricity Suppliers in Romania – AFEER, Ion Lungu, about the pressures experienced by the energy supply companies this year and about the prospects for 2020.

The provisions of GEO 114/2018 entered into force in December 2018, but began to directly influence the energy markets only from the second quarter of this year. What are the main effects that you have noted in the supply market, either on prices or on the behavior of the main actors (producers, suppliers, traders)?

The GEO 114/2018 was an unpleasant surprise for most market participants; no one, other than those who wrote and approved it, understood its need and even less its urgency, considering that, on the electricity market, no control and no analysis performed by the competent authorities (ANRE, the Competition Council) identified major distortions. On the contrary, each of these institutions has found that the electricity market is a functional one.

The return to regulated market was a big step back, and the implementation of the 2% percentage contribution due to the regulatory authority had no logic. This measure came after ANRE published Order 224/2018, by which, taking into account all its needs (including the construction of a new office!), resulted in a percentage of only 0.1% (0.2% in the case of the network operator). Today, different solutions are wanted for spending the huge amounts collected by ANRE; I think it would be best to reimburse these amounts to those who paid them!

The first effects were represented by a drastic decrease in market liquidity and panic among investors or potential investors. They have less and less confidence in the stability and predictability of the regulatory framework in Romania; let’s not forget that trust is hard to earn, but it is easy to lose!

In terms of prices, there were several influences that caused the “explosion” from 2019, but the GEO was the first element, over which the other ones overlapped.

The freezing of prices for natural gas for domestic production is considered responsible, at least in part, for rising prices in the competitive market segment. Do you agree with this perspective?

I am not very involved in the gas market, but it is obvious that the producers were selling at a certain price at the end of 2018, which was higher than the price capped by the GEO 114. In the new situation, to maintain an average price comparable to the previous one, the easiest thing to do was to increase the price in the competitive market. This is the behavior of all producers, not only of those in the energy field.

What are the main reasons for the electricity price advance in 2019? Will this trend continue? And until when will?

As I said, in 2019, there were several reasons why prices increased. First of all, there was the panic induced by the GEO 114. Then, a substantial contribution was represented by the price of the CO2 emission certifications, which increased the price of thermoelectric energy, the relatively dry weather during the summer, as well as the unavailability of the production units. 2019 was marked by a “lack of energy” throughout the Balkan area.

However, we must not overlook that, in the last few months, the prices recorded on the Day-Ahead Market (DAM) in Romania were higher than the prices on all the other coupled markets (Hungary, Czech Republic, Slovakia), provided that the consumption in Romania remained at the same level as the one of last year. I think that this needs to be analyzed by ANRE too, to be convinced that everything is fine on the market.

It is difficult to make a prediction for the immediate future, but surely the price of the CO2 emission certifications will play a major role.

Do you consider that the regulated prices have succeeded in protecting domestic consumers, guaranteeing a lower financial effort on their part to pay the electricity bills?

Of course, the regulated prices that remained fixed in 2019 provided greater comfort for the domestic consumers, especially in the second part of the year, when the prices in the competitive market increased, following the trends from the wholesale market.

The financial effort is relatively small; for a family that consumes an average of 150 kWh per month, it results in an economy of about 15-20 lei, maybe a little more in the coming year. This economy was achieved on account of the decrease of profit for the producers who were forced to sell at regulated prices.

However, I think it’s time to define the vulnerable consumer so as to provide help only to those who really need it.

The figures show that the migration of domestic consumers to the competitive area continued in 2019. How do you interpret this trend?

Consumer migration continued, but to a much lesser extent.

This was mainly due to the competitive market offers, which usually include other services too. At the same time, many consumers, especially new ones, have understood, including due to the public debates reflected in the media, that the GEO 114 cannot have a long existence. Taking into account that these measures can be repealed at any time, which could cause the offers after the repeal of GEO 114 to no longer be attractive, they decided to go on the right track from the beginning.

The volume of Romanian imports of electricity increased considerably in 2019. How do you explain this phenomenon? Is this a trend that will continue in the short and medium term?

The fact that Romania is a net importer at present, after years of being an exporter, given that domestic consumption has not increased, shows that we really have problems with domestic power generation. In the first 10 months, domestic production is 7.6% lower compared to the same period of last year. This is the effect of the lack of investment in generation and of the lack of vision regarding the future of the sources, as well as of the obligations that result from the “Clean Energy for all Europeans” legislative package.

The price of energy on the wholesale market is very high and I expected that, given these prices, any producer would like to sell… The fact that we import, however, makes me think that we have problems even with the generation capacities themselves.

From my point of view, this is the most critical element of the energy system because it seems to be not only a price problem, but also a problem regarding the possibility of producing energy. Given the qualification of the people in the energy sector, their dedication and sense of responsibility, I hope with all my heart that we will not reach a situation of limiting the energy supply.

Apparently, the shock of unpredictability in the market is more intensely felt by small players. Do you anticipate a reduction in market competition after the disruption of 2019?

Of course, in crisis situations, the shock is stronger for participants with lower financial possibilities. We must not forget that banks have a great reluctance to finance the trading and the supply sector, precisely because of the major risks they face.

Even if, in the household segment, the competition between suppliers has decreased a great deal, the industrial and commercial segments are still maintained. For the moment, the market signals are not alarming. The shock of unpredictability and instability, however, causes the appetite for supply to decrease. Remember last year’s effervescence in the market during this period – commercials in all media, especially on television, the Energy Fair, many shops opened etc. Now we all are in total silence.

With the change of political equilibrium in Parliament, it seems very likely that many provisions of the GEO 114 could be eliminated, including the 2% contribution to ANRE, but also the freezing of electricity prices for household consumers. What would be the optimal course to avoid further market turmoil arising from these changes?

I think that the most important thing is the market participants to be consulted. Apparently, we could say that it is simple; as the changes were simply introduced overnight, the same simplicity could apply in terms of waiving these measures. However, in order to avoid any turmoil and negative impact on some market participants, it is advisable to have some discussions and provide for a period of time between the approval of the legislation and its implementation.

In addition, the negative impact generated by the implementation of the GEO 114 must also be analyzed.

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This interview firstly appeared in the printed edition of energynomics.ro Magazine, issued in December 2019.

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