Romania's champions of energy

By bne IntelliNews March 2, 2010

Graham Stack in Kyiv -

It has become fashionable in some parts of Europe to create national champions of energy that are big enough to stand up to powerful oil and gas suppliers (read: Russian ones), to invest the enormous sums needed in plants and infrastructure, and to expand abroad. Romania is now vying to join that crowd.

As the country shivered under a thick blanket of snow earlier this year, the government announced a radical restructuring of the state-owned power and heat generation assets, with the aim of creating more domestic competition, halt the decline in electricity output and kick start a regional expansion effort.

After a year-long process of discussion and debate, including impressive public debates, Romania's government has decided to bring its ageing power generation assets into the 20th century by merging them into two equally-matched national champions. The plan announced by Economy Minister Adrien Videanu in January envisages setting up two energy giants: one of the companies, to be named Electra, will take control of the Cernavoda nuclear power plant, the largest combined heat and power plants, a brown coalmine and three hydropower plants; the other, to be called Hidroenergetica, will consist of Hidroelectrica's nine hydropower plants, Romania's largest mine in Petrosani (CNH) and heat and power plants in the central part of the country. Hidroenergetica will have turnover of roughly €2bn and Electra €1.7bn; together they'll have a combined workforce of around 40,000.

The mix-and-match approach is intended to kill two birds with one stone: establish national champions that could expand regionally and attract investment, similar to the Czech Republic's CEZ, while creating a competitive domestic market that would keep prices down and halt the slide in output in a region that is becoming worryingly short of electricity. On February 11, official data showed that Romania's energy output fell by 5.8% in 2009.

Creating competition on the power generation market requires that companies mix their energy sources to have roughly equivalent costs. Nuclear power is far more expensive than hydroelectric power, with coal-fuelled power somewhere in between, so the trick is to mix them so the companies have roughly the same cost structure. "At this moment, the cheapest electricity in Romania is being produced by Hidroelectrica at €26 per megawatt-hour [MWh], while the most expensive electricity is being produced by [nuclear power producer] TPP Galati at €109/MWh," says Marko Kosoric of Balkan Energy. "The mixed use of primary resources will lead to balanced production costs and market share." Currently, 54.3% of Romania's electricity is derived from thermopower (combined heat and power production), 28.4% from hydropower, and about 17.3% from nuclear power.

Competition and markets is not just intended to increase cost efficiency, but to reduce shady deals in the sector. "We have failed to create conditions for real competition, because you can never have hydropower competing with coal-power in a transparent way on the market. That's why the 'sly guys' appeared here," Videanu said at the press conference announcing the plan, referring to corrupt traders.

At the same time, the companies are intended to be big enough to attract the investment they urgently need, not least to comply with EU environmental regulations. The companies are estimated to need €2bn-3bn in investment over the next 10 years to build new production units, including capacity for export. "We are already in discussion with banks about financing investment. Everyone is curious about this project," Mihai David, CEO of Hidroelectrica, was quoted as saying on February 10.

Devil in the details

However, as of yet very little detail is available about the plans, which are now waiting approval from the anti-monopoly committee. Almost nothing, for instance, is known about how they are going to trade energy. The two companies will together control 92% of the market, although according to the government in the course of time this share will diminish as foreign investors such as Enel build their own capacity in Romania.

Another damper on competition is that the plan does not envisage privatization of the companies, but they will stay in state ownership, with all the drawbacks associated with that - a lack of management incentives and transparency, and the inevitable risk that the firms will be used for political patronage. Mihai David, for instance, the current head of Hidroelectrica and chosen head of successor Hidroenergetica, is a functionary in the former Communist Party, the Social Democratic Party. David was appointed head of Hidroelectrica when the Social Democratic Party was a member of the governing coalition. Four months after being appointed, the coalition collapsed and there were already calls for David to be fired from Hidroelectrica, including from the state secretary in the Economy, Commerce and Business Environment Ministry, Tudor Serban, himself a former manager of power company Electrica and functionary in President Traian Basescu's Democratic Liberal Party.

Politics is also seen influencing the risky decision to lump profitable companies together with loss-making companies. "The creation of such holdings means the subsidisation of unprofitable mines by hydropower plants, which generate high profits," says Tomasz Daborowski of Warsaw's Centre for Eastern Studies. The consequent lack of financial transparency, critics say, will deter investors.

Romania's coalminers are political dynamite and governments have fought shy of closures. The plan will not coincidentally see the considerable debts of the coalmining companies offloaded to the government. "The chosen form of restructuring will reinforce the negative features of this sector - a lack of transparency and a shortage of investment funds - and indicates that Bucharest is more ready to protect jobs in inefficient state-controlled companies than to carry out the necessary reforms in this sector," argues Daborowski.

Critics also question the wisdom of breaking up the current hydropower company Hidroelectrica, Romania's most valuable company. Most of it will be included in Hidroenergetica, but some facilities will go to Electra. There are added security concerns arising from the very idea of such an energy mix, with one and the same structure handling extremely hazardous and very different energy sources such as hydroelectric power and nuclear power.

One definite bright spot for investors is, however, the possibility of floatation of minority stakes in the companies a little further down the road: "The ministry could list some 15-20% stakes in the new companies on stock exchanges in two or three years," reckons Kosoric. However, here as well there is a lack of information. "Nobody seems to know the plans for their privatization, an issue quite controversial, considering the inclusion of large hydro facilities within them," says Jean Constantinescu, previously reformist head of national power transmission company Transelectrica, and now president of the Romanian Institute for Energy Development. "To my mind, it is a counter-reform that has no strategy," he concludes.

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