Fondul Proprietatea: Hidroelectrica will unfairly bear the burden of the regulated energy market, risking to lose up to one billion RON

Fondul Proprietatea warns of the dire consequences for Hidroelectrica’s profitability, and overall business performance, as a direct result of the implementation of ANRE Order no. 10/2019 (the “Order 10”) regarding the regulated energy prices and quantities for electricity sold by the producers on the basis of regulated contracts, issued by National Regulatory Authority for Energy (ANRE). According to Order 10, Hidroelectrica, the most  profitable state owned enterprise (SOEs), will bear the burden of the regulated energy market, thus being unfairly punished for having increased its efficiency.

Order 10, issued by ANRE on 1 February 2019, has prompted electricity producer Hidroelectrica to submit to shareholder vote at the upcoming General Shareholders’ Meeting, on 23  July 2019, the suspention  of its  previously approved  energy  trading  strategy as long as Order 10 and Government Emergency Ordinance  no. 114/2018 (“GEO 114”), which Order10 sets the methodology for being implemented are in force  and to  reduce to only up to 35 percent of its next year expected annual production the level of electricity to be contracted one year ahead through the centralized electricity markets administrated by OPCOM.

The proposed  decision  was deemed necessary by the company’s management because Order 10 is unclear  as to the exact quantity Hidroelectrica could  be obliged by ANRE  to sell on the regulated market for the period from 1 January 2020– 28 February 2022. The document only specifies quantity of up to 65 percent of its next year’s expected production that Hidroelectrica could be required  virtually in a discretionary manner  to  sell at regulated prices, with a profit margin of only 5 percent. To this day ANRE has not clarified the electricity volumes that Hidroelectrica and other concerned companies are required to provide for that period at a regulated price, leaving them in a state of prolonged uncertainty. A reply by ANRE to Hidroelectrica’s request sent in May 2019, for an estimation of the energy quantity to be assigned by ANRE to the  company to be sold through regulated contracts  at regulated prices has failed to result in any clarifications being made.

Even though ANRE has not yet specified the quantity of energy that Hidroelectrica has to reserve for the regulated market for the period between 1 January 2020 and 28 February 2022, some of the severe risks the company faces in case it fails to deliver the required quantity are known:

• A fine up to 10 percent of the previous year’s turnover for not delivering to suppliers of last resort (SoLR) the necessary quantity of energy for household consumers benefitting from regulated prices. Based on the estimated company turnover for 2019, of RON 3.5 billion, such a fine would amount to RON 350 million.
• A hydrological risk. In case of being compelled to sell 65 percent of its estimated energy on the regulated market and being unable to produce the estimated quantity due to the hydrological situation, Hidrolectrica will be obliged to buy more expensive energy from the competitive market and sell at a cheaper price in order to fulfill its contractual obligations on the regulated market.
• Potential loss in revenues. As a direct result of GEO 114 and Order 10, Hidroelectrica will be unable to offer a significant quantity of energy on the competitive markets managed by OPCOM, although there is a price increase trend on these markets. Thus, Hidroelectrica will be unjustly deprived of potential revenue.

Commenting on the impact of Order 10 on Hidroelectrica, Johan Meyer, CEO of Franklin Templeton Investments Management Limited UK Bucharest Branch and Portfolio Manager of Fondul Proprietatea said: “More than six months after coming into force, GEO 114 and the subsequent Order 10 issued by ANRE continues to wreak havoc on the Romanian energy market, introducing severe distortions in the electricity market. The most significant impact is being absorbed by companies such as Hidroelectrica which has made huge efforts in recent years to improve its efficiency and improve the operational and financial performance of the company. The lack of clarity  brought by these unwelcome regulations has put Hidroelectrica in the situation where it is impossible to implement is business strategy as approved by shareholders and raises the risk that the company may again suffer losses such as in the times of the  «smart guys». If ANRE decides to request  from the company the maximum quantity to be sold at regulated prices, that is 65 percent of its energy output, the company  would stand to lose as much as RON 1 billion.  While the benefits for household consumers remain insignificant, it is obvious that, as the country’s most profitable SOE, Hidroelectrica’s losses will be the loss of each and every Romanian. This uncertainty introduces not only massive negative consequences for the company’s financial performance but also for the proper functioning of the domestic wholesale electricity market.”

Fondul Proprietatea has previously underlined Order 10’s potential for creating severe imbalances in the Romanian energy market and urges again the Government and the energy regulator ANRE to engage in thorough consultations with industry stakeholders in order to avoid further painful consequences for Hidroelectrica, as they will have a ripple effect on the energy market, the State budget, and investor sentiment towards Romania.