With a history of 120 years, Electrica is once again a young company in the process of reinventing itself, says general manager of the Group, Dan Cătălin Stancu. The external context is the most difficult as the rules of the market are redrawn (by liberalization) and technological updates challenge the business model verified for decades. At the same time, there are many opportunities at hand, especially for Electrica, an organization with a good financial position and a scope of activities which allow it to design a future similar to those of the large integrated energy groups in Europe.
Dear Mr. Dan Cătălin Stancu, you come back within Electrica after many years. How has the electricity market in Romania changed and how has Electrica changed in the last decade?
My first job was in Electrica and I spent here over 20 years of my career, advancing through all the positions that you can think of: from a simple engineer, to head of department, a technical director at Electrica Muntenia Sud, and since 2005, I was the deputy director for Privatization in Electrica. Since 2008, besides the duties related to privatization, I took over the corporate affairs and strategy responsibilities.
During the last decade, the privatizations were the most important driver of change in the energy sector, and they of course also brought significant changes for Electrica. Afterwards, the company being listed on the stock exchange, in 2014, led us to major changes in terms of how we understand and how we manage our business.
How do you find Electrica, when compared to the other actors on the electricity market in Romania?
Today, Electrica is a company which has all the chances to perform. First, because it is part of an area of business that all major European companies declare it is the best mix: distribution networks, supply, and renewable energy sources. Electrica is not a notable presence in the generation sector, yet, but it still has two of the ground elements that allow large companies to succeed.
In addition, Electrica has a great advantage which is rather rare, if not unique, in the industry. In general, because of the post-crisis (2008-2009) developments, the big companies are, in various degrees, in a situation not comfortable at all. The years before 2009 were years of boom in mergers and acquisitions, when the dominant logic was “expansion by buying markets share”, with transactions worth tens of billions. Suddenly, the crisis has made that, at the same level of indebtedness, a higher one in general, because of the pevious M&A strategies, the market value of some companies to decline by 80%! As a result, the leverage or the exposure of such companies increased significantly.
Fortunately, Electrica has significant financial resources of over 600 million euros. This is an advantage if you manage to use this resources properly. And expectations are high from the shareholders, from the management, from the employees, and probably from the authorities, also.
What are the priorities the Electrica group should focus on, in the coming years?
We start from the question ‚what we can do with our money in order to produce value for shareholders’. First, we intend to finance our own investment projects and we have a plan which provides about 55-60 million euro every year, at least for the next two years, to each of our branches. In total, around 170-180 million euro per year, which is an extremely ambitious target, and it brings some major challenges. First of all, we are talking about an internal system of organization – processes, people, procedures – which should be able to deliver such results. If you look at the historical achievements of Electrica, in each subsidiary, will see that they manage to invest somewhere around 20 to 25 million euro per year. We are in full implementation of a project to completely revamp the investment process, so that it allows us to double investments, in one year. Secondly, in the rest of the industry there is no company that has carried out such an investment volume for several years in a row. What we saw is an investment of 40-42 million euros a year, at maximum, and this was possible only years after privatization, with companies that already had functional and verified internal systems, highly trained people etc.
Then we look for the opportunities there are in the market. One is related to the transaction that everyone expects, taking over from the Property Fund the minority shares it has in our three distribution companies. Shareholders ask, and for a good reason, to better use our financial position. All that we want is to close the deal, but for the right price.
Is there any risk that this transaction, once decided, to affect your investment plans?
No, there is no such risk, because this is an opportunity which might use just a part of our cash, for a very good leverage. În addition, if we would find it necessary, we are capable to access other sources of financing on favorable terms. When you got 600 million euro in cash, you can rely in fact on up to 2 billion euros.
Besides taking over the minority stakes, we also look for other opportunities of mergers and acquisitions. Naturally, the handiest are businesses which run on a model similar to that of Electrica’s, because chances are we do better in understanding the associated risks of such an acquisition.
Finally, we look at opportunities in the generation segment, too, because it is related to our electricity supply operations. Currently, we are the largest player in this market, a great position that comes, however, with some considerable challenges. As recently as earlier this year, we saw what can happen in a market where unexpected developments might occur. In addition, as a supplier, we have also the obligations related to green certificates. It is natural to seek for solutions and, to a certain extent, we need renewable energy for this.
You mentioned the situation in January, when prices abruptly increased in the OPCOM market. Are there any necessary changes you see in the regulatory framework in order to prevent such developments to happen again? Do you think Electrica might adopt some specific business practices for better positioning itself in such situations?
First, I tell you, with all sincerity that we did not expect anything of such magnitude – no one expected that! Naturally, we make use of risk scenarios, but they are built on a principle similar to the n-1 criterion, in networks. This means, we are looking at a functional network and compute the regime they’d arrive if something breaks down. The point here is very simple: if we calculate the n-2 scenario, then the costs of prevention for the whole system would become onerous. Unfortunately, now we were close to what we might call “the perfect storm”: unprecedented high demand and extremely low temperatures, which have affected hydropower production, the nuclear also, in part, and wind production, too. We should add the fact that the frost affected the entire region, so the mutual aid mechanisms and the capacities elsewhere could not be used. All this led to higher prices and quite a few players who worked on in a specific manner – which now proved to be risky, but it was valid for many years! – were put under a great exposure that only the large players can afford. The big players have suffered, that is true, but some of the small and medium players “died”. The whole market is affected and, it is not before the month of April that we will fully understand the impact of what happened in January and February.
We immediately reviewed all the risk procedures and we analyzed the ways in which we can limit our exposures. We begin to integrate the lessons we learned and to enter into contractual provisions that allow us to supervise our partners, almost in real-time; we introduce some conditions for limiting the risk which, once trespassed, would translate into an almost automatic set of action: guarantees, notifications etc. We updated the procedures, but fundamentally, it is all about the procurement policies, about how we play our short and long term positions.
We also wait for the detailed findings after the regulator investigation, because a regulated system imposes obligations, and it should also provide the right of recognizing the costs. The regulator’s role is essential to ensure balanced framework-contracts, for example. It is just fair that conditions to be in place so that those who have not done wrong to not suffer in any way, whether we are talking about companies or about the final customer.
Back to the priorities of Electrica, you were talking about the opportunities in the generation sector, renewable, maybe…
Yes, but I would like to address another issue of importance for Electrica at the moment. Just like our colleagues in the industry, we are looking to escape from a competition which bears solely on price. In fact, people do not need gas or electricity, they need heat, for example. We believe that we can offer integrated solutions, starting from primary resources, the equipment for generating heat, the installation, the maintenance and the monitoring, too. Our objective is to be able to offer all these at a competitive price, because we can cut some costs, by means of scale economy, which is not an option for the end user. This approach, the concept of “product as a service”, leads us to the development of new businesses, perhaps by means of buying technology for offering integrated services. Big companies like ourselves are already doing this. And so, we get back to renewable, from a different perspective, now: small distributed generation. In this case, for the end user might be more convenient to choose an integrated solution in order to avoid all the stress that may accompany the purchase of the generation equipment, the grid connection, the maintenance contract, complying with all prerequisites necessary for injecting energy into the network etc.
One of the goals the consumers have in mind all the time is how to get services of increased quality, while keeping the costs down. What are Electrica’s objectives for the coming years, in this respect?
Primarily, what we are monitoring is to reduce the number of outages (SAIFI) and the average outage duration for each customer served per year (SAIDI). We all must understand that the correct approach in discussing the quality issues must take into consideration, at the same time, the costs. In Germany, the SAIDI indicator is less than 30 minutes, while in Romania the average exceeds 250 minutes. But the price of electricity in Germany is, and for many years, much higher than in Romania. The German customer can afford to pay for this level of quality, while Romania, unfortunately, is not in the same situation.
Our objective can be summarized like this: fewer and fewer disruptions, for shorter and shorter periods of time. The investments that we have planned will certainly contribute to the improvement of these indicators, in a rhythm that is bearable for beneficiaries.
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This interview firstly appeared in the printed edition of energynomics.ro Magazine, issued in March 2017.
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