The supply of electricity on the free market becomes a topic increasingly present in the business strategy of companies in this industry. More or less skilled or honest, they begin to offer services to a range of consumers who, until now, have not had the luxury of choosing their electricity supplier: households. In response to an invitation by energynomics.ro Magazine, Laurențiu Urluescu, member of the Board of Directors of the Association of Electricity Suppliers (AFEER), scanned the opportunities and risks brought along by a competitive energy market.

Esteemed Mr. Laurențiu Urluescu, please explain what the supply segment looks like in Romania. What are the good things that happened, what do we still have to achieve to reach a competitive market and what are the vulnerabilities we are facing in the future?

For now, the electricity market segment represented by the supply to industrial consumers shows the highest level of competition. I say this because the market has been open for many years, most industrial consumers are already knowledgeable on how this market works, and there are more than 75 active suppliers and more than 110,000 consumers who have chosen a supplier from the competitive market segment. Tenders organized by large consumers are now awarded to the best bidder, at second decimal differences. Unfortunately, the same level of competition is not matched in the other segment of electricity supply (households), but things are moving in the right direction; there are offers for household consumers on the free market.

The OPCOM energy exchange announces record after record for participation on the spot market and the weight of this market in the net consumption forecast is increasing. Why has this market grown so much?

The increasingly large weight of the spot market (Next Day Market – PZU) in the supplier’s acquisition portfolio is, unfortunately, one of the problems on the market in Romania. I say “unfortunately” because the widespread use of the spot market, with a high volatility in prices, proves the supplier’s risk appetite, as, further to a sharp increase in competition, they are ready to undertake speculative risks.

We shouldn’t forget that the boost in the increase of the volume traded on this market is also explained by the impossibility to trade flexible products on the long term, by the lack of liquidity of forward delivery markets and the existence of a significant price difference between long term and short term transactions. In general, the distortions on the energy market were generated by two factors: unclear regulations or regulations issued without an impact study; external influences, generated by the technical outages occurred and/or by the evolution of prices on markets neighboring Romania.

Has Romania taken care to create all the tools necessary for a healthy evolution of the business practices in the industry? Where would there be room for improvement and what does AFEER do to get such improvement for the business environment and the consumers?

First of all, eager to avoid uncontrollable electricity sales by some producers, the state implemented in the primary legislation one of the strangest ideas for any free market, namely a prohibition to conclude freely negotiated bilateral contracts. Moreover, the secondary legislation also banned transactions with flexible products. There is, however, a positive side to this story: following the requirements of market participants, we managed to implement a market platform which covers the needs, at least partly. I am talking about the OTC market (Over the Counter market – editor’s note), a market that AFEER proposed and strongly supported. As shown in its 10 years of activity, AFEER is campaigning for a truly free and fair electricity market, in compliance with risk management requirements and international practices.

How easy would it be for a company to enter the supply segment and what are the clients you would recommend it to target primarily?

In terms of infrastructure, it is not very complicated. Over time, clear rules were created for market entry, licensing, the conclusion of infrastructure usage contracts. Problems only start to occur in the second stage, where, while selling to consumers, one faces a strong competition and in terms of purchasing one faces strong risks (price volatility due to lack of liquidity on the forward market, risk of non-payment, risk of non-performance or potential insolvency of the client, changing legislation, etc.).

In what regards the type of clients, I don’t have any express recommendations to make. Each supplier should first set its own strategy based on the infrastructure they are ready to develop: they could target household consumers, who require a high volume of automation, or industrial clients, who, in limited numbers, can be more easily managed. It is certain that good payers are always preferred.

Is a household consumer sufficiently attractive to be part of the portfolios of suppliers that are not in the same group as the distributor?

If a few years ago the free market could not compete against the regulated market segment, in particular due to the price factor, as the electricity price on the wholesale market has decreased, the two markets have come much closer. This is why we can say that household consumers are starting to become attractive to suppliers, as shown by the offers on the market. In my opinion, the biggest problem at the level of the household consumer is the limited knowledge of what a distributor-independent supplier means, as well as of the possibility to change one’s supplier.

AFEER started a campaign to inform consumers last year. In this campaign, we are trying to explain in simple words what the risks and benefits to changing one’s supplier are, what does this decision involve, what are the pitfalls that may exist in the supply agreements. It should be considered that, generally, electricity is approximately one third of the cost on a household consumer’s bill; very often, a smaller price does not necessarily translate into a huge reduction of the total cost on the bill. Therefore we are trying to warn consumers to compare offers in terms of the total cost for the estimated consumption, not in terms of just one component.

Do you believe that a producer should export energy directly or is the current option, to only be allowed to export energy through a supplier, the correct one?

Any market participant (producer, supplier, trader, and consumer) should be free to sell and purchase electricity where the conditions are most favorable (price, payment terms, and the partner’s solvency). Regarding trading on specialized exchanges, I believe the market should have its say. Each participant should be able to trade where and when it deems it appropriate for its own business.

Let me give you an example: in 2011-2012, when the market was truly free, transactions on foreign exchanges brought along additional costs, but many participants choose to transact on them. I should mention that every owner of a supply license is required to report all transactions to the market monitoring departments of ANRE and ACER (European Agency for the Cooperation of Energy Regulators – editor’s note), these authorities having the right to request further details or to thoroughly investigate any suspicious transaction.

Do you think that in Romania it will become possible for consumers to obtain income from renting their roofs for the placement of panels, while the supplier takes over the resulting energy?

I do not think the roof rental model could be successful in Romania because surfaces are relatively small for the business to make sense in the eyes of an investor. However, self-production can generate income; in order to get there, we need to change the rules, but they will change, under market pressure. Furthermore, I believe that in the long run the entire energy industry will change radically. For example, huge efforts are being made in the development of cheap energy storage devices. Once the storage method is provided, micro investments will explode. From that moment onward, distribution, transport and supply operators will be obliged to rethink their businesses.

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This article can be read in printed edition of energynomics.ro Magazine, issued in May 2016.

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