CEZ sees end to local renewable rush

Martin Zmelik, country manager of CEZ Romania Group, part of the Czech utility firm, reckons that the era of major projects in the renewable sector is over. He says that CEZ is not ‘actively seeking’ investors for its EUR 1 billion wind farm in Dobrogea, which has been hit by changes to the incentives system. The company is currently looking to consolidate its local operations instead of expanding through the acquisition of new ones, revealed Zmelik.

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Is the current backdrop in the energy sector favorable to starting new investments, if we take into consideration for instance the low wholesale electricity prices?

We are not planning big new acquisitions/investments. Regarding other investments, we will definitely fulfill our commitments to our customers and I strongly believe this is a long-term industry so you should be very careful about suddenly reconsidering the investment strategy. At the moment, we have our five-year commitment to ANRE in terms of the volume of investments, but we are lacking on the revenue side because there has been a drop in consumption.

Oltenia is one of the regions heavily affected by this. We are seriously analyzing the source of this because there is not one reason – it’s quite complicated.

We have our own macroeconomic experts working on it to better understand the performance of the economy, because that is one part of the problem. Of course, there are some partial parameters we have already seen: there is the drop in consumption from some big clients, which are also facing problems on their side.

We’re also seeing problems like the seasonal ones. The best hope is to come up with a proper understanding of what is happening in the macroeconomics at the end of the year, because the GDP is going up slightly, but consumption is going down.

How do you plan to reduce losses in the distribution segment?

The losses have really been our main priority for the last two years. It’s definitely a long-term mission and I think now we are, let’s say, in the third year of our strategy focusing on the losses. What we have achieved up to now is full and transparent control over the energy balance.

Secondly, we are working with specific parameters on the technical and non-technical assistance to really understand the causes, and we’re trying to identify the right areas and regions to change our investment program, first of all to really change the point of view regarding technical losses and also in terms of prevention and stopping commercial losses, because this is a very big part of our overall losses. So far this year we have had very positive results and this is the first year we have seen a decrease in both parameters, in the absolute volume of losses and also in the percentages.

How much has CEZ invested locally since entering Romania in 2005?

The whole group has invested over EUR 2 billion. One half was invested in renewable and the other half through acquisition and the investment program in CEZ Distributie.

What is the latest on the litigation with Electrica?

We are awaiting the final result of the arbitrage. All the necessary information that has been requested by the arbitration (e.n. court) in Paris, we have delivered. We have open books; from the beginning we stated that we were long-term investors and our intention was not to hide any information or not to follow the law or the regulations. We pay attention to this, and of course we believe that all the proofs that we submitted will show that we did our investment program properly. I think we are the ones that really invested in the distribution network. We are putting over RON 200 million (around EUR 45 million) annually into the network and we are going to continue.

The (arbitrage) decision will be made by the end of this year. The International Court of Arbitration has its own timing and it is really hard to predict. Of course, I think the best thing for everyone is to receive an answer as soon as possible, so as to close this chapter and really focus on the investment program and working with Distributie.

CEZ had initially said it was looking to sell its wind farm in Romania, but has now changed its mind. Why is that?

Categorically, we are not actively seeking any investors because nowadays we are focusing on something else. We would like to really go through the notification process (e.n. for the farm) in Brussels (e.n. with the European Commission) and to complete our dialogue with state representatives because some of our wind farms are in a very complicated situation that needs to be somehow solved. They ended up somehow between Brussels and Bucharest in terms of notification of the legislation.

Under the current legislation our wind farm needs to go through an individual notification process because it exceeds a certain threshold of installment capacity, so the notification needs to be done individually. It is not us but the Romanian state that is tasked with the notification process for the wind farm and this is ongoing and not yet completed.

So our primary focus now is to fix the entire environment around the wind farm. We are focusing on improving its performance, because we see there are areas where we can do better, and in the future we would definitely like to optimize the overall performance in terms of best practices and processes implemented. So this is our current priority.

Is the wind project profitable at the moment, given the changes in the incentives scheme?

I will not tell you if the project is profitable or not, but the changes significantly influenced the return on this investment. That is obvious. There are several parameters influencing this result, and we expect there to be further changes that will balance the whole system.

Changes in the legislation?

That is the ideal solution, of course.

Can we say that the rush in the renewable sector in over?

I think the peak is over, which we’re also seeing in our region through our distribution company as we are connecting several renewables. The era of the major projects is definitely over.

CEZ is reportedly looking to buy Enel’s operations in Slovakia. What about the Enel assets in Romania that are also up for sale?

At the moment we are in a situation where we would rather consolidate our operations here than expand. One of the reasons why we are not expanding is that we need to solve the problems around the wind farm. This is our priority and also shapes our appetite to invest here in Romania. We would rather make investments in expanding our current activities so we will continue where we know very well that we can do better, or where we can lead on the market, like energy efficiency – this is definitely the direction, but don’t expect any typical acquisition transaction from us.

Could Romania lose new energy investments because of what is happening in Ukraine?

I would say that instead Romania may gain some, for two reasons: first of all I still believe this is a very attractive market, very secure, with proper authorities with whom we always have open discussions. Secondly, as a general rule, if one of the emerging markets is closing, the others may benefit, and Romania is one of the emerging markets with a stable environment, so I would instead say that this might be an opportunity.

CV Martin Zmelik

Zmelik started working for CEZ Group in 2005 as director of international operations. He came to Romania in 2010, worked as COO and was promoted to country manager of CEZ Romania Group in July 2014. He is a graduate of the Management Faculty within the University of Economics in Prague and holds an MBA from the US Business School.

The era of major investments in Romania’s renewable sector is over, according to Martin Zmelik, country manager of the Czech utility group CEZ in Romania, which operates a 600MW wind farm locally.

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