Power Rangers

By bne IntelliNews October 26, 2006

Rob Whitford in Sofia -

Southeast Europe is seeing a mini-boom in electricity trading and Energy Financing Team (EFT) has emerged as a major, but controversial, player.

A confluence of events, from EU accession to post-war reconstruction, is producing a mini-boom in the trading of electricity in Southeast Europe. And a firm called Energy Financing Team (EFT) has emerged as, to some, the Wunderkind - but to others the enfant terrible - of the business.

EFT's financial figures say a lot about how this business is developing. In terms of volumes of power traded, EFT's sales started off high at 5.4 terawatt hours (TWh) in 2001, its first full year of operation, and by 2005 this had more than doubled to 11.7 TWh. To put that in perspective, Bulgaria is one of the region's largest producers of electricity and currently its biggest exporter, yet the volumes EFT traded in 2005 were equivalent to more than a quarter of Bulgaria's total output of 44 TWh that year and considerably in excess of its record exports of 7.6 TWh.

With power prices rising, EFT's revenues shot up 145% between 2001 and 2005 to €404 million and are expected to increase another 27% this year. In terms of countries served, EFT was selling power into just six in 2001; now it's 16. Evidently, they're doing something right, but why is this business booming?


For a start, Southeast Europe is a region with a lot of countries where consumption and production capacities of electricity simply don't match. That's partly for historical reasons, partly a result of patterns of economic growth and partly a matter of natural resources.

For example, Albania is very short of capacity - and even shorter of power in dry years, since a lot of its power plants are hydroelectric.

Bulgaria, on the other hand, is well provided for because its power industry was geared to a fairly large communist-era industrial base, and its plants are, broadly speaking, not past their sell-by date - though some of them are certainly getting there.

Collectively, power traders act as a sort of exchange, absorbing the performance and credit risk of the region's largely state-owned power companies and - where they're eligible to buy high-voltage power - big industrial enterprises. National utilities can sometimes deal direct with each other, but using intermediaries is generally a lot easier because they are better equipped to bear risk and costs over time, and deal with headaches such as routing the electricity to where it needs to go.

Another reason why power trading is on the up is the so-called “resynchronization” of the power network in Southeast Europe.

When EFT began business, most of the power system of the region was effectively cut off from the rest of the continent because of the damage to transmission lines in Bosnia & Hercegovina caused by the war.

In late 2004, the tricky and technical business of reconnection was complete so power was able to flow southeast or, more usually, northwest to where the money is. Out of the €481 million in sales EFT forecasts this year, €100 million apiece will come from the new EU states of Hungary and Slovenia. Another €80 million will come from Greece, where incomes are high by regional standards and air-conditioners are multiplying.

Trading is part art, part science, involving a lot of intelligence gathering and forecasting. For example, traders need to absorb and crunch all the available power generation data together with forecasts for consumption, while at the same time factoring in information on the maintenance work that's planned for the generation and transmission systems. Needless to say, parties have to react quickly to developments on both sides as they occur.

Finally, like traders everywhere, EFT and its competitors need to have a portfolio approach to the business. Southeast Europe is a region where the weather can make a lot of difference - for instance, hydroelectric power can vary a lot according to rainfall. Risks are minimised, therefore, by the appropriate structuring of the supply portfolio.

“Defaults in supply to EFT have been absorbed in the past and should continue to be absorbed”, explains Nenad Savic, spokesman for EFT's Danish-registered holding company, the EFT Group.


EFT's ability to absorb such defaults - and in doing so achieve an “unblemished record” of power receipt and delivery in a problematic region - is a key part of how it has managed to hold its own against increasing competition. Western European energy traders operating in the region include Germany's RWE, Switzerland's ATEL and EGL, and the UK-based Sempra.

And there are local heroes: Croatia has Montmontaza; Romania's Energy Holding involves powerful local figures as well as Swiss partners; and the Bulgarian national power company NEK adroitly handles some of its own exports as well as tendering for others.

EFT attributes much of its success to being able to respond at short notice to changed circumstances: the last few years haven't been short of trip-outs, unscheduled maintenances, customer defaults and other extraordinary circumstances. “Flexibility is a key competitive edge,” reckons Savic.

EFT has always had to punch above its weight, which meant accepting a higher level of risk to compete. Experts recall that, in the early days, at least one tender was won over a big-name rival because the latter insisted on a foreign bank guarantee while EFT, on the basis of its local knowledge, was willing to settle for a local one. True, taking on more risk has resulted in some hiccups and re-schedulings, but EFT claims that amounts deemed irrecoverable or written off in its history are “vanishingly small.”

Some observers, though, hold a rather more cynical view of EFT's success, arguing to the effect that the firm hasn't played fair.


In many Westerners' eyes, power trading is synonymous with the sophisticated fraud that caused Enron to collapse. In Southeast Europe, things are a bit less hightech, and the main fear is that intermediaries will be chosen on the basis of cosy and corrupt relations with state utilities. In EFT's case, critics say the firm has benefited from the influence of its partowner, the controversial Serbian businessman Vuk Hamovic, and of a coterie of former Serbian power officials.

In February 2003, a special audit into the affairs of the state utility Electric Power Republika Srpska, or EPRS, commissioned by Bosnia's Office of the High Representative arrived at some unsettling conclusions: the sale of surplus energy to EFT at below market, tariff and generation costs; the binding of future sales of surplus energy to EFT for years to come at below-cost rates; the manipulation of tender processes enabling EPRS to award bids to “favoured businesses.”

Action against EPRS swiftly followed, with the chief executive and one board member suspended by OHR decree. And in May 2004, the UK's Serious Fraud Office searched EFT's London offices and seized some documents.

In the meantime, EFT has been adamant in its defence. The firm commissioned forensic auditors from KPMG to examine the OHR's special audit back in 2003. KPMG concluded the OHR's audit was flawed in a variety of respects: it made factual mistakes; its grasp of energy concepts was tenuous; and it showed a lack of fairness in not talking to EFT during the process of compiling the report.

Since field work for the audits began back in August 2002, “no one has ever asked us any questions, interviewed us, or engaged in any way,” complains Savic. “Indeed, no specific allegation was ever put to EFT by the investigating authorities.”

As of early 2006, things still hadn't quite been settled, though Savic believes “the investigation will be concluded satisfactorily soon.”

Regardless of how the issue is resolved, the times, the region, and the company itself have moved on.


Economic growth is surging across the whole region, intensifying demand for electricity; and in order to keep that economic growth humming along, more supply needs to be built. The European Commission's energy commissioner, Andris Peibalgs, has described Southeast Europe as “energy poor,” somewhat like Central Europe at the end of the 1980s when the region's infrastructure was creaking from years of underinvestment and the effects of subsidised pricing. Worse, the western Balkan states experienced years of military conflict and economic turmoil, which had further degraded the system.

“Southeastern Europe will need some €25 billion to be able to integrate into the energy market of the European Union in 2012,” Bulgaria's economy and energy minister, Rumen Ovcharov, said following a meeting in December at which energy ministers from across the region agreed to stump up $30 billion for a special fund to spend on energy projects by 2012.

Integrating Southeast Europe into the EU's energy market - and Southeast Europe with itself - promises to vastly expand the opportuni- ties for power traders. So far, traders in the region have mainly been buying from national utilities, or selling to them, or both. As the region liberalises, that will change as traders begin dealing with individual power plants and with particular end-users - and, in some cases, doing so across borders.

It's already happening in the two states on the verge of EU membership. Romania is furthest ahead with a free market segment in place since 2000. According to Alexandru Sandulescu, director of the Romanian sector watchdog ANRE, the country has now opened up 83.5% of its electricity market to competition, with full opening expected by the same 2007 deadline that applies to all the member states of the EU. As everywhere, the market's less liberalised in theory than it is in practice, but progress is undeniable.

Bulgaria isn't quite so far along and, unlike Romania, still doesn't have any power exchange. But it's subject to the same deadlines and the foreign trade monopoly of NEK will disappear at the start of next year.

Meanwhile, players are positioning themselves for internal trading and exporting of power. Eleven firms have been granted trading licences so far, including affiliates of CEZ, EVN, E.ON, Romania's Energy Holding, Germany's PCC, and various other local firms. Unsurprisingly, EFT was first in the queue.

Other countries should follow suit. In October last year, all the states of the region signed a treaty setting up a South East Europe Energy Community. This was the latest step in a process in train since 2002, by which Brussels has been trying to drive liberalisation - getting the institutional and technical infrastructure in place in the various countries needed to allow market liberalisation on both a country and regional level.

The treaty calls for the region to adopt a European energy model that includes the free cross-border trading of power and commits these states to opening up their energy markets to competition. Except where countries belong to the EU, that opening won't extend to household customers until 2015, but the deadline for commercial customers will be a lot earlier in 2008.

Many, however, remain sceptical.

“The Treaty is too ambitious, especially given there is no carrot of EU membership for many of these countries,” says Emmanuel Bergasse, administrator for Central and Southeast Europe at the International Energy Agency (IEA).

There are doubts at EFT too.

Savic argues the EU is following a familiar path of a lot of talking and endless studies, married to the hugely ambitious goal of a “a highly sophisticated regional market, many years ahead in design from what already exists and is likely to exist to the north-west.”

Savic cites the case of Serbia, which is a signatory to the Treaty but is still a very long way away from establishing a local market in which power traders could operate.

“US Steel still pays a heavily subsidised price for energy, providing no incentive for it to contract with an independent third party at a market price,” he says.

Still, imperfect as the Energy Community project may be, as the emphasis of the Southeast European electricity market continues to shift from utilities to liberalised deals, so will EFT's. “In most places the general rule is that we are targeting industry and hoping to produce healthy competition for the European majors that are looking at the same markets,” observes Savic.

And that makes it a Wunderkind of sorts.

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