Big electricity consumers, EPS and price reform

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Vast majority of the eligible buyers have in principle decided to choose EPS as their supplier even under the market conditions. – Contracts should be signed by the 1st January 2013 – EPS offered secured supply at about-the market prices

By mid-December, PE “Electric Power Industry of Serbia” (EPS) has not signed yet a single contract for the supply of big customers in Serbia, who, from the very beginning of New Year need to abandon the domestic tariff system and opt for suppliers in the open market. This means that big customers, whom in Serbia there are about thirty, from the New Year will not be able to take advantage of the adjusted (low) price of electricity, but will instead have to contract their supply under market conditions. Subsequently, they last month entered into negotiations with EPS, as a prospective supplier.

We wrote in the last issue on how some of these major customers, who meet their consumption needs from the electricity transmission system under the “eligible”  status until the New Year, were caught by surprise to learn that, in the future, they will need to pay for electricity provided by EPS at a price close to market prices. The letter that EPS communicated to them in the summer, within which it offered them to continue their business relationship, apparently was not read carefully. Otherwise, they would have known that, from the 1st January 2013 big customers will have to negotiate prices and quantities of electricity, as well as delivery conditions. What only remains the same is adjusted price of electricity transmission.

The issues solved

Miladin Basarić, Assistant Director of EPS for electricity trading, said that the initial confusion was dispelled after the talks conducted between representatives of EPS and all the buyers showing interest to stick with EPS as their electricity supplier. He added that all doubts were removed based on the long good cooperation and mutual trust, and that the principle agreements were reached with most of them to continue business cooperation.

When asked why not a single contract has been signed yet, Basarić responded that in fact offers that customers enquired about were prepared and administered, and model contracts on the sale of electricity have been worked on so to become acceptable to both customers and the EPS. Our interviewee did not want either to confirm or deny rumors that the EPS will conclude first contract of full supply with electricity one large customer in the public sector, who also comes from the energy industry. He explains that it would have been otherwise unduly prejudicial, pointing to the statutory rights to freely choose suppliers in addition to “everyone’s right to change his mind”. The job is not finished until a contract is signed. Stating the same reason Basarić rejected to disclose number of customers with whom they made an agreement in principle on the continued cooperation.

– It is not just that the contracting is placed under a veil of secrecy, which would be harmful for any party. Simply, the market opening means that new relations and new rules of conduct are being established, which also involves a lot of respect for the partner’s right to reveal the secret at his own discretion. No information on contract negotiations shall be disclosed by EPS until the contract is signed, otherwise it would jeopardize important business right of the buyer. The EPS Department for Electricity has a lot of experience in these market relationships both in the purchase and sale of electricity. Since our formation (2006), we are buying the missing amounts of electricity for winter consumption of tariff customers and sell the surplus produced in good hydrological conditions and large inflows resulting in greater portion of hydropower. However, sale contract negotiations with big customers in Serbia are somewhat different. That door is to be slightly opened from the 1st  January of this year, and by January 2015 it will be completely open – Basarić explains.

Mutual interests

To remind you, getting eligible buyers out of the tariff system and their transition from the adjusted electricity price to market price is a major first step in opening up the domestic market. After one year (in 2014) only households and small customers will be eligible for public supply (adjusted price of electricity), while all others will have to be supplied with electricity under market conditions. From January 2015 households and small consumers will have the right to choose their suppliers, but they still retain the right to public procurement if they find it more suitable. With that in mind, Basarić estimates that the market opening would bring new social norms in the business relations, particularly in the public sector, even in companies which are not technically obliged by any law to establish and create a market, but that are, inter alia, required under the Code of Corporate Governance to develop and nurture the best business practices.

Given this view of our interviewee, we did not ask for the price of kilowatt-hour offered to big customers. We did not even ask how much their expenditure on electricity will increase as they will be charged with more expensive kilowatt-hours in addition to the energy transmission costs they will need to bear. Once this enters into force, it will build the elements of the overall picture of the opening market. But one question we could not helped to ask even this time. Why big customers tend to keep EPS as their supplier, even though they may choose one of the thirty licensed suppliers in Serbia?

– Not only buyers tend to stay loyal to EPS – it is also EPS trying to retain them. The “Electric Power Industry of Serbia” is trying to keep the whole hundred percent stakes in the sale of high voltage electricity, which makes about 10 percent of total sale in Serbia. At that, EPS is ready to guarantee secured supply to each customer with whom it signs the contract – Basarić said, adding that it is better to ask customers why they opt for EPS. He added, however, that such preference of customers is likely based on their long-term good cooperation with EPS and security of the supply arising from the fact that EPS has its own, significant production capacities which makes his obligation of supplying electricity to customers lesser depend on the vagaries of the market.

Before they sign new supply contracts, big buyers will have to settle all their obligations, to repay debts completely or reschedule them. Be as it may, the law stipulates that the foregoing obligation must be met completely, not only at the moment when the customer leaves the tariff system and introduce market relations, but also each time it wishes to change supplier. Transfer of the debt to another arrangement will not be possible, nor will anyone who fails to settle the obligation to the previous supplier be able to sign a contract with the next supplier.

EPS reliable player

The opening of the electricity market in Serbia is essential for EPS, because it creates an opportunity for good business and company profits, which can only be created through significant share in the market and appropriate pricing. According to its plans, EPS wants to retain and maintain a position of dominant supplier in the Serbia market, whereby its share in the regional electricity market shall see gradual increase in the years to come. The realization of these plans will depend on the gradual opening of the market and the construction of new production capacity as well. At this point it is essential that the EPS is a reliable player in the open market and that such a position is strengthened by the trust of customers it has won in recent decades – said Basarić.

Source; Kwh/Serbia Energy