Thermo power plants profitable only with state aid

The price of heating in Romanian is on average 18 percent higher than in other European countries due to inefficiency. This generates a significant extra burden on local and state budgets which subsidize heating for Romanian households – while the Romanian industry is suffering from higher production costs. This is just one of the conclusions of a recent study conducted by consultancy firm A.T. Kearney. According to the study, operational restructuring could lead to lower production, transportation, distribution and supply costs, finally reducing the burden on the state and local budgets. In 2008 operating losses almost tripled for most of the companies in the sector compared to 2007, which is partially driving the differences in profitability.Just a few thermo power units have reported profit, and only because the state continues to heavily subsidize heating costs for the public. A calculation shows that the subsidy paid annually by the authorities for heat consumed by the public reaches EUR 400 million, or 0.2 percent of last year's gross domestic product. This money covers the differences between production costs of old thermal power plants and paid invoices for nearly four million people served.”We are not expecting the current subsidies to be cut, as the political context will not allow a doubling of the prices for end consumers, although the pressure from EU is obvious. Finally it is the local taxpayer's money that is paying for the current inefficiency of the district heating industry,” Michael Weiss, vice-president of A.T. Kearney, told Business Review.

Glitches in the system
Market specialists believe that the companies which provide thermo energy in Romania are suffering ongoing losses because the tariffs imposed by the National Energy Regulatory Agency (ANRE) do not cover their costs, saying that these costs are not affordable for the public. It is an unclear situation because the same authority regulates the fuel price (natural gas), its transport and distribution services, without taking into account statistics such as the average net salary in Romania, as these costs and tariffs are later reflected in the price of heating. To sum up, the losses registered by thermo energy producers are explained through the social protection measures taken by these companies, a situation imposed by regulators. Moreover, the seasonal functioning regime of the cogeneration units leads to higher expenses. For instance, heat consumption during the summer is about 8.9 times lower than in winter. “Another important factor which explains the poor situation of the thermo system is the current over-dimensioning of the heating system, which leads to heat losses during transportation. Let's not forget that these companies were designed and built before 1989 in order to supply both the public as well as industry, which has consistently declined, with many factories closing over the years,” Irina Duica, commercial manager at Electrocentrale Bucuresti (ELCEN), told Business Review. According to her, an important factor in the negative financial results are the delays suffered in recovering the money that funds the public subsidies. “The result is a penalty of 36.5 percent per year of the unpaid sum or, if the company has assets which can be put up as a guarantee, it takes out loans and thus the interest makes the producers' financial situation even worse,” said Duica. For instance, ELCEN has to recover from RADET Bucuresti and Constanta about EUR 195 million (RON 840 million) and another EUR 30 million (some RON 130 million) representing penalties. All these penalties, interest and other costs do nothing but increase the burden that citizens pay, directly through heat prices or through taxes, in the case of subsidies.

Action plan
The ELCEN official proposes a four-step plan to shake up the thermo power industry. The first step would be to reorganize all thermo units into a single entity managed by the Economy Ministry, as these units are currently controlled by city councils. “The system needs resizing, both in terms of sources and transportation networks, thus reducing the amount of pipeline and heat loss,” said Duica. According to her, the authorities must invest in building new sources of heat production, which are much smaller and specifically located so as to reduce the transport distances for heat, and even more importantly invest in new cogeneration units, which have an 80 percent efficiency rate when using the fuel. The ELCEN official put at EUR 7 billion the total value of investments which have to be made in Bucharest and Constanta alone in the thermo power units.Market specialists have also been debating the Economy Ministry's solution for the thermo system. The ministry has for quite some time been talking about forming two national energy companies which would include the thermo power units, the financial black holes. Can the national energy champion be a solution? Consultants do not see the advantages that such a measure would bring to the industry. “It is absolutely unclear how the current preferred solution will lead to any improvement in the Romanian energy costs for industry and households. Romania is still lacking a sustainable strategy for the energy industry to enable the survival of energy intensive industry within EU markets,” said Weiss. According to him, it is crucial to ensure that restructuring, especially of the generation assets, goes ahead, especially in the areas of organizational efficiency, adequate asset management and last but not least optimization of the non-headcount related costs. “Romania's costs for purchasing goods and services are still significantly above the international average. This means that suppliers are still earning above average margins partly due to limited competition, partly due to outdated or over engineered specifications, and partly because of missing skills in procurement and project management.”Investments are being postponed in the current troubled times, even in public-private partnerships (PPP). Companies such as Enel, E.ON, GDF Suez and CEZ have even signed memoranda of understandings with Termoelectrica for a PPP, but nothing concrete has been done so far.
dana.ciuraru@business-review.ro