Prospect of national energy champions raises competition fears

The Economy Ministry has announced plans to set up the two national energy champions, Electra and Hidroenergetica, by the end of the year, privatize the management of the two companies and list them on the stock exchange. However, the private sector has flagged up some negative effects that such a move will have on the energy sector, such as a non-competitive wholesale generation market and fewer private investments.

Dana Verdes

“The most important objective for me as minister is to complete the reorganization of the energy system by setting up the two national energy companies, Electra and Hidroenergetica,” Ion Ariton, economy minister, told Business Review. With this statement Ariton has reopened a sensitive subject put on the agenda of the Economy Ministry by successive administrations, each with its own view.

At first, the plan was less ambitious. According to a Candole Partners report “Double trouble: why Romania should drop its plans to create two CEZs”, the 2006-2008 Liberal government wanted to bundle profitable electricity generators (Hidroelectrica, Nuclearelectrica and the coal-fired energy compounds Turceni, Rovinari and Craiova) with the state-owned electricity distribution firm Electrica.

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But the Liberal-Democrat coalition (2008-2009) was much bolder. It is now planned that the Romanian electricity market will have two instead of one national champion. Moreover, the bundling will not incorporate only the electricity sector. The two vertically integrated energy firms will include hard coal and lignite mining companies from the Petrosani and Oltenia regions and the state-owned gas producer Romgaz.

With the strike of a pen few electricity generation capacities were left outside: the obsolete and inefficient cogeneration sector administered by incompetent municipalities and the collapsing Termoelectrica, which desperately hopes to renew its coal and gas-fired generation fleet (Doicesti, Borzesti and Braila), about 2,200MW of installed capacity, reveals the quoted report.

High hopes for the energy champions

The recent publication of the emergency ordinance to modify Law 51 gave the green light to the minister’s plans. “So far all the national companies included in the two energy champions have the administration council’s approval. Also, the new division and merger project has been presented to the Commercial Registry,” said Dragos Zachia, exploitation manager at Hidroelectrica.

The Economy Ministry official added that setting up Electra and Hidroenergetica by the end of 2010 is a must. “I hope that by the end of the year the two companies will be set up; otherwise we will have problems in ensuring Romania’s energy security,” said Ariton.

The two national energy companies’ managers are looking optimistically to the future, seeing in Electra and Hidroenergetica two potentially regional players. “We do not think of this presence as one that will operate just locally, but one that will become a regional presence as well. We believe that these two companies could invest in production capacities in South-East Europe and could export electricity. Also, we see an opportunity for Hidroenergetica to participate in a regional services market,” said Zachia.

Market concerns

Market specialists say that competition on the electricity and gas markets will be impeded by the creation of the vertically integrated firms and that the government’s claim that the market shares of the two vertically integrated companies will decrease over time is flawed.

Massive market power concentrated in the hands of a few firms is detrimental for several reasons, shows the Candole Partners report. First, electricity prices will increase at the expense of consumers. Second, the incumbent firms are likely to attempt to block access to the market for other electricity firms. Third, technological innovation is likely to be stifled as the powerful monopoly-holders will have no incentive to invest in the development of new technologies.

Also, the creation of the two vertically integrated energy firms will significantly decrease the competitiveness of the electricity generation market.

“The system services market will be monopolized by the two national energy companies which will be driven to make profit to the detriment of private investors, especially those investing in renewable energy units,” said Razvan Grecu, consultant at Candole Partners. “It is expected that the futures and spot markets will also see less and less liquidity if the two companies become operational.”

Despite the negative feedback from the private sector, the authorities are forging ahead with their big plans for the two energy champions: “The next steps after setting up the two national energy companies are targeting the privatization of both national energy companies’ management and their stock market listing,” Ariton told BR of his optimistic plans.