Serbia exclusive: Risk and issues of power utility EPS, lack of financing for new power generation facilities, analysis

Published on 3. November 2014., News Serbia Energy

The state shares the responsibility for the problems in power utility holding EPS (Elektroprivreda Srbije – EPS), since as the owner and the supervisor, it has tolerated the non-payment of bills, the low price of electricity and various irrationalities and inefficiencies in the system.

The complicated organisational structure of the “Еlectric Power Industry of Serbia“ leads to a lack of responsibility in the management chain, and even to the generation of internal insolvency between the EPS and its subsidiary companies. There have been suggestions in the public that the centralization of the system management should be increased, because, now, it is impossible for the director of the EPS, if he is dissatisfied with the business operations of a subsidiary, to influence it directly, for example, to dismiss its director. The centralization would affect the reduction of unnecessary costs caused by the duplication of the same jobs and the economies of scale disappearance.

The Government has adopted certain documents by which the basics for the EPS reorganization have been determined. Among the rest, they presupposed a change in the legal form of the EPS from a public enterprise into a joint stock company and a greater centralization in the management of economic, financial, legal operations and in other spheres. However, these changes have not been realized yet. This indicates irresolution and an undefined attitude of the state towards the future manner of functioning of the EPS. So, there is the impression that the state still does not have a clear vision about the future appearance of the company, аnd without a defined and in the long run sustainable objective, any proposed company reorganisation cannot be optimal.

The EPS has serious problems in its business operations the resolution of which must not be delayed. The financial indicators show that, currently, the EPS does not have sufficient inflows to settle even the current liabilities for the previously raised loans or towards the suppliers, for instance. Therefore, it has to run into debt, even for liquidity, аnd large investments from its own funds cannot even be discussed. The borrowing for liquidity in 2012 and 2013 is an indication of difficulties in repayment of due liabilities from its own funds. A similar thing happened in “Serbiagas“ several years ago. The deepening of these tendencies could result in state intervention and the payment of due financial commitments of the EPS from the budget.

The main problems of the EPS are the high uncollectibility of delivered energy, the low sales price for households, the large losses in the distribution network and the theft of electricity, as well as the manpower surplus. The problems of business operations within the territory of Kosovo, also including the payments for the employees in Kosovo and Metohija, add to all this.

Through investments and business operations, the EPS would have to be a strong driving force and support for the economic growth. Currently, it does not have such role. On the contrary, the EPS is now generating insolvency, hindering the economic growth and threatening to become a large fiscal cost if it does not solve its problems.

The state shares the responsibility for the problems of the EPS, since, as the owner and the manager, it has tolerated the non-payment of bills, the low price of electricity and various irrationalities and inefficiencies in the system. The solution to the problem again depends on the state – whether it will turn to the principles of sound business operations or it will continue to carry out the social policy via the EPS.

The total uncollected but not written off claims have more than doubled since 2009. The amount of the uncollected claims indicates that the EPS indiscriminately tolerates the non-payment of electricity. The uncollected claims have their social and political dimension. They are largely related to the companies undergoing restructuring, since they do not pay for electricity. It is clear that the losses of the EPS on this basis can be reduced only if the delivery of electricity is suspended for the users who do not pay for it. This may be painful in the short term, but this is the only economically justified and viable solution. If the state has decided to support the survival of certain non-payers at any cost, then it is much better and more transparent to give these companies the subsidies from the budget which they would use to pay for electricity, without, as has been the case so far, their loss contaminating, and even jeopardizing, the business operations of the EPS.

Another problem because of which the EPS is not achieving a sufficient inflow of funds is the low price of electricity. According to the data of the Energy Agency, the price of electricity in Serbia, calculated according to the comparable methodology of the “Еurostat“, has been convincingly the lowest in Europe for several years already, and apparently, insufficient for the EPS to be a successful company. The too low price and, consequently, income, have practically disabled an intensive investment activity from the company’s own funds, which is necessary for the long-term sustainability of the electric power system. The lack of own funds for financing the revitalisation of the existing plants has been compensated by raising loans for investment projects with a state guarantee, which contributed to a high increase in the indebtedness of both the companies and the state. The low price of electricity has also resulted in the establishment of illogical parities of the prices of electricity with respect to other fuels and thereby also in an irrational use of electricity in Serbia. The prices of electricity that were lower than the prices of other fuels have contributed to the irrational use of electricity in a large number of households, аnd the low prices of electricity have also led to a lack of motivation among the citizens with respect to increasing the efficiency of its consumption. As a consequence of stimulating the irrational use of electricity, Serbia has a very unusual consumption structure with respect to other European countries, because the participation of households in the electricity consumption of around 50 percent is almost two times higher than the one in the EU.

The problem of cheap electricity is partially solved by liberalization and it has already been carried out for the middle and high-voltage consumers. However, the process of the liberalization of prices at the low voltage, where most consumers are, will be critical. This liberalisation has been scheduled for the beginning of 2015. Commercially speaking, the EPS will have room for increasing the prices for households, because its current price is the lowest in the region. However, it is questionable whether the EPS will actually use this possibility, because it is owned by the state, аnd so far, it has been a practice to carry out the social policy through a low price of electricity. Such practice is bad, аnd the social protection carried out in this manner is expensive and aimless. So, with the protection of the most vulnerable, an additional increase in the price of electricity for households, by around 15 percent, would have to be allowed to the EPS. Such price increase would be sufficient to enable a regular payment of the EPS liabilities and to provide a minor surplus of funds for the revitalization of the existing infrastructure.

For establishing a desirable parity of the prices of electricity with other fuels and the transformation of the EPS into a profitable company, the price increase would have to be even bigger. It is still early for such price increase, because, before this, the EPS must solve its organisational problems – resolve the manpower surplus issue, regulate the employee wage and reward system and rationalize the inefficiencies. If these processes are not finished, the inflows from the increase in prices could be spent irrationally, аnd the company would lose the motive to reform.

The energy policy is an important element of the EU economic policy, so the future business operations of the EPS will also depend on the forthcoming negotiations about the accession of Serbia to the EU. The electric power system is an important part of the common economic policy of the EU (the strategy “Еurope 2020”, for example). Ever since 2005, Serbia has been a part of the Energy Community of the European countries which is based on the implementation of the EU acquis and the liberalisation of domestic energy markets of the Community members. However, in the negotiation process between Serbia and the EU, numerous new issues will also be opened with respect to the achievement of environmental standards, renewable energy resources, which can affect the business operations of the EPS to a large extent. Therefore, it is important that the interests of the EPS be protected to the maximum in the negotiation process, аnd that the costs of adjustment to the European standards, which will undoubtedly exist, be reduced to a minimum.