Power market liberalization ends in fiasco

The ignoble end of electricity suppliers Energa and Hellas Power may have come as a surprise to their 200,000-odd unsuspecting customers, but for the power market and those following developments in it, the closing credits had begun rolling well before January 2012.

The main culprit behind the closure last week of Energa and Hellas Power is the institutional framework within which the liberalization of the Greek electricity market was carried out. Centered on the objective of preserving state-owned Public Power Corporation?s (PPC?s) hold on the market and the clientelist relationships it has forged over several decades as a monopoly, every government since 1999 — when the liberalization of the electricity market first came up — and until the present enacted decisions that ultimately constructed a market model that not only quenched any real competition, but now threatens to gobble up every independent player within it as well. This model created subsidized private electricity production units at a time when demand in the domestic market stood at a rate of 4.5 percent annually, it allowed companies into the market that were solely after short-term gains and it now threatens PPC and the Hellenic Transmission System Operator (DESMIE) with bankruptcy.

The fact is that the environment for healthy competition never existed in the retail market also because the pricing of electricity remains in the control of the Energy Ministry. The situation is made even more disheartening for potential investors by the pooling system that is in place in the wholesale market, but not in the retail one.

Electricity producers, both private and public, as well as importers, sell the energy they produce to DESMIE at an hourly rate that is determined by their operational cost. DESMIE then sells the electricity at the same price to suppliers, who, however, sell it on to customers at a price determined by the energy minister. This discrepancy between the wholesale and retail price is one of the main reasons why big energy groups were and still are reluctant to do business in the Greek electricity retail market.

Nevertheless, in 2009, Energa, through Austria?s Verbund, and Hellas Power (as Aegean Power, a company jointly owned by the Melissanidis group and Vassilis Mylionis, until recently a shareholder) tried to make a dynamic appearance in the market. The two companies hastened to take advantage of the drop in marginal prices that began in November 2008. This decline in prices, which went down to an average of 49.46 euros/MW in 2009 from around 80 euros/MW in 2008, created a high-profit margin for sales to a particular category of PPC customer, those using commercial electricity, the price of which PPC kept at high levels.

Total turnover in this category reached 400 million euros in 2009, and this was the goal set by the two companies, who offered discounts reaching as much as 20 percent below the price asked by PPC. Energa and Hellas Power gradually attracted 9 percent (or 200,000 consumers) of PPC?s clientele to their services, but the elation was short-lived as the course of the marginal price reversed and began climbing up, squeezing the profit margin along the way.

Seeing where the situation was headed, Verbund bowed out of the market in December 2010, transferring its share of Energa over to the Floros family. Melissanidis did the same with Hellas Power, and the group?s shares were bought by Mylionis. A few months later, the remaining shareholders began jumping ship in both companies when they were no longer able to make good on their financial commitments.

The acquisition of both Energa and Hellas Power by the Russian-Arabic Worldwide Energy Limited fund in early January was the last chapter in the woeful saga, which has ended with DESMIE pulling the plug on both and a judicial investigation into alleged unpaid debts worth 200 million euros to DESMIE and PPC.

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