The non-monopoly electricity market will be formed in the future by about 100 companies – CEO of LLC “Energum”

05/11 News

How did the history of your company begin and what goals did you set?

Energum was founded about five years ago. At some point, a European partner appeared, if I remember it correctly, a Greek company, which became interested in buying electricity in Ukraine, as the price in our country at that time was lower than in Europe. So we started working on obtaining a license for the so-called supplier at an unregulated tariff (SNT).

In Kyiv, if I’m not mistaken, there was only one SNT then. So getting such a license was not easy. It had to be substantiated very well in the National Commission for State Regulation of Energy and Public Utilities. They asked many questions, clung to references, postponed decisions. Then we already had the legislation plus/minus working, and they, after analysing our documents, realized that we do not pose any threat, and gave us a rare license at the time. There were small deliveries, but it turned out that engage customers by taking them, for example, from the regional power company, is not so easy.

It was possible to sign the contract, it was open, but at the time of connection from the supplier required a million certificates, which could not be collected. That is where it all died. Given that the market as such did not exist, the price was the same for both regional power and for SNT, it was not possible to make money on it. Thus, you know, we were ready to give up this business, but then the law began to change and new opportunities began to open up in this business.

We can say that we waited for the opening of the market a year and a half ago, from January 1, 2019. When the window of the opportunity to engage new buyer and the inability of regional power to interfere that. Then, in the summer, the bidding has already begun. We engaged the cooperating companies and, at some stage, were able to prove something. At first, we did not even intend to make any huge profit. There was a task – to master this sector. Despite all. Honestly working long-term with partners, giving them the opportunity to save, and yourself, respectively, supporting employees and accumulate some small margin for development.

How many customers does your company have and how much resource do you put in?

Energum now supplies about 30 million kWh on average per month, serving about 150 contractors. We believe that we have already reached a normal level; we are building ambitious plans for the future and understand how to achieve them. At the same time, I will note that we do not want and do not intend to compete with regional power. We clearly distance ourselves from them conceptually. This is a monopoly, and monopoly has its pros and cons.

Now, we believe, there is a window of opportunity for small companies like ours, and there is a niche for them. I just welcome that 500-600 licenses have already been issued in this sector. Yes, about 30-40 companies are regional power satellites. The rest of the players are companies that are trying to develop on their own.

We believe that this is very useful for the consumer market, because small companies can provide the highest service to the consumer. It does not make sense for a conditional monopolist to create services issuing interesting packages for the consumer, for example, with some delays and minimum prices. Moreover, we are even faced with the fact that they put pressure on the consumer to switch to another supplier.

There are, of course, steel giants attracted by first class. These are not our customers. Look, the average monthly electricity consumption is about 9 to 12 billion kWh, about 3 billion kWh of which is consumed by the population, all the rest – by legal entities. The main part of them – about 80% – with consumption from 0 to 1 million kWh. If it is up to 100 thousand kWh per month, it is a plant with employment capacity of 200-300 people. Such factories, small and medium-sized businesses, service or production of consumer goods and products entities, – these are our potential customers.

Still, there is one more interesting nuance. Power engineers at such plants are on average 50-60 years old and they have known all their lives that there is a well-known inspector with whom they negotiate. As a decision-maker, the power engineer has no motivation to change anything at all, and business owners are usually used to have a power engineer or engineer come to him and bring a bill for the electricity to be paid. Because the electricity tariff is perceived as a tax, – I paid and forgot. Thus, it is very difficult to fight this attitude to the situation that has developed in people’s mind over the years. You come, you start showing the product, convincing with numbers, but it is hard. Furthermore, here satellites of regional power say that only they can provide deliveries. Here it starts…

The main story in our business – to bring the owner efficiency and savings for his business, to perceive him to upgrade and become more competitive in the labour market, given that the energy sector is not interested in financial results at all and it, similarly to a service staff, lives on the principle of “quieter you go – the further you will be”.

You said that a window of opportunity is being created in the electricity and gas market. Does this mean that despite several hundred existing players, new companies may emerge? May there be a redistribution of so-called spheres of influence?

I think that now is the time when new companies can be formed, and there are still opportunities for their diligence and efforts to reach the consumer and explain to him that it makes no sense to stick to some old stories, but there is a real opportunity to save. As the practice of European countries shows, then consolidation will take place again.

Again, those companies that survive in two or four years will be able to compete with monopolies. And they will collapse, and a non-monopoly consolidated competitive market will be formed, in which up to 100 companies will operate, from which the consumer will choose the most suitable one for himself. It’s like a phone call, for example. Yes, to some extent a monopoly, but there is a right to choose.

And if, for example, government agencies hold tenders for the supply of electricity, then approximately how many competitors come to them now?

We participate in public procurement bidding, but this is a specific market. It is still being formed and, as a rule, the supplier is determined by monitoring. More or less conscious companies with the energy involved in the process, or the owner, hearing about possible savings, monitor, ask prices from companies and determine for themselves either the minimum prices or the appropriate conditions of cooperation.

By the way, as far as I know, gas is usually a tender from five to 15 companies, which I think can be dropped out into three or four groups. Still, the gas market is five years old. It is not consolidating yet, but completely inadequate players have left the market because they are not satisfied with the margin, and those who remain are fighting. There are, of course, influence groups that have established many companies. There are also free players who buy at hubs. They do not have their own production, but they have some capital to operate with.

If we talk about electricity, what is the margin, the discount in your company compared to monopolists or large suppliers?

This is a very low-margin business and its profitability is very low. In a business like ours, they work on the shaft. That is why I believe that companies will consolidate in the future. Those of them, who will not be able to gain any shaft in the volume of sales, simply will not be able to maintain the service properly. This is live communication and it is a business where you have to exchange data with your consumer constantly. All this requires people who will serve it all.

If we have recruited customers now, it is because we were able to reach consumers by making them more interesting offers than the same sales companies of regional power. For example, the minimum delay of payments, while regional power offered with a prepayment for two months in advance. Businesses do not have enough working capital to pay double the amount, and they were looking for ways out of the situation. As it turns out, we were able to offer him the right option.

The margin is about 5%. That is why we focus on service and products convenient for customers. A company with a monthly consumption of 20,000 kWh and 20-30 people will simply not be able to address government power issues properly. That is why they work in the old-fashioned way, getting inflated electricity bills.

We take it all on ourselves – all the documents, create a single window, select a manager who personally runs this company, give him analytics, analyse what time it is better to consume electricity, in order to save. Still, giving additional service to one company, we expect that in time another company will come, the third one…

In addition, by the way, we had to provide legal assistance regarding the illegality of issuing fines by regional power for switching to another supplier. Regional power have abused many times it by imposing penalties in contracts that occurred when the contract was terminated, while basically violating the law. We understood that in a month the consumer, to whom we provided such service, could choose but not us. Sure, we are not Robin Hood, but we understand that without complex solutions, market evolution is impossible.

Does big issues with regional power no longer arise?

They occur with some periodicity. The farther from the centre, the more skew in place. Still, our lawyers are strong we know the position clearly. When you start laying them out on the shelves, they back off. It has not yet reached the courts. They manage to insert sticks into the wheels. We no longer see it as an obstacle, but smaller companies can be stopped that way.

Is it still because the unbundling in the power industry did not take place in full?

The influence of local authorities on local businesspersons is very strong in regional cities. I heard that until now somewhere the local head gathers all businesspersons and distributes tasks. Although, what does he has to do with private business? That is why there are cases when some regional power companies do not let go of customers, sometimes, by threatening. They threaten us too. Still, they know we do proper work with them. As to the ultimate consumer… He sits and thinks if he should quarrel over 5% savings from regional power?

Let us clarify: if you take service of the company turnkey, do you fully deal with the issues of its energy supply, up to the change of energy supplier?

No, we do not want to change energy supplier. What does “turnkey” mean? There are B-group consumers who do not have, for example, an accounting system. We are currently developing a product that will provide the company with a package of services with the purchase and organization of an accounting system. At the same time, we agree upon existing together under some indications for some period, as we invest our money in it. Then we pay for ourselves with this system. The contractor does not care about the installation, does not go to the offices. Instead, we do it, thus creating a service for him.

Do you work in five regions, as stated on the site? How long ago did you open them?

Since the beginning of the year, we have been actively opening representative offices, opening them in four regions plus a head office in Kyiv, but we have contractors who are outside the areas of these chain offices. We understand that there are regions with strong territorial affiliation, such as Odesa or Kharkiv, so we are opening offices where there are already companies served by local employees. We still have plans to open our representative offices in each regional centre of Ukraine.

You said that the average monthly electricity supply is 30 million kWh. Does your company have a lower consumption threshold for customers?

Mostly, we take for service everyone. We have customers with 5 thousand kWh supply. We grind the service on them. The principle is this: if everyone is happy, then customers bring someone else. We are on the path of maximum openness.

What is the maximum limit?

The maximum is probably 10 million kWh. Again, we have no illusions and do not want to go to the five million-suppliers as a priority, because there is no earnings at all. The guys, who felt the difference in savings, pushed everyone out to the extent that somewhere companies can go into the red. Because no one knows the price. This is a whole story – how to buy. Nobody knows, and everyone asks to fix the price. How to fix? We have already had a case where we suffered heavy losses due to a sharp drop in prices. We bought on bilateral agreements’ market, but the price on it “for the day ahead” dropped down sharply. We have fulfilled our obligations to the client, but not all companies could withstand such a blow. This suggests that we do not have a market structure, not yet market instruments, and price regulation and formation takes place outside the market.

It cannot be that for a couple of months the price of DAM remained at the level of 1.60 UAH/kWh, and then immediately dropped to 1.2 UAH/kWh.

Then they talked about manipulation and selling the air.

We do not know how to sell the air, so I cannot do it. According to one of our versions, this situation was due to the excess of “green” electricity in the market, but in fact, there were no preconditions for reducing the price of the resource by 40 kopecks at once in that period.

Medium-sized companies are not able to sell air. Trading of that sort can be organized by larger players, who have the ability to balance.

Moreover, we are, in fact, an intermediary who sells electricity to the final consumer. He himself needs 2.5 persons to buy a resource in three markets. He simply does not have access to these processes and the ability to organize them.

We find ourselves hostage to the games of large market participants. We try to buy with maximum efficiency, realizing that if we buy expensively, we will have to sell expensively, and next month the same regional power company will come and say: “Look, I can be cheaper”.

That is, all the energy you buy, you sell to the final consumer?

Right. We work for the ultimate consumer.

When we opened the electricity market, the general idea was this: you sign a conditional bilateral one-year contract, get cheap electricity, then gain 150 customers, and you can offer lower prices owing to that number. As far as I understand, this idea does not work now, doesn’t it?

This is a paradox. We predicted it as well. This is how the economy works. Still, the opposite happened. The Committee has decided that they have nothing to sell cheaper if they have this conditional DAM. By their logic, why sell cheaper according to bilateral, if you can sell more expensive at DAM? We failed to convince the committee.

The Committee is not ready for this. Although there is another logic: it is important for any production to ensure its constant sales, long contracts for the shaft. You may not earn anything, but you provide yourself with the cost, and for some 5-10% of sales you start earning. Nevertheless, this did not happen, and we cannot influence it. We were pushed to DAM and IDM where we try to somehow level the characteristics of customers.

What about the recent government resolution that allows “Energoatom” to sell up to 40% of its electricity under bilateral agreements? Ideally, should you support it?

I think that is right. By logic, this should give some competitiveness and transparency of processes. How it will actually be is still unknown, but we are clearly in favour of transparency and standardized conditions for all market participants. This will definitely bring conceptual benefits to the country, the consumer, the trader. Because the rules must be the same for everyone.

How many lots should “Energoatom” offer to be interesting for traders like your company?

Definitely, if they supply lots of 1.000 MWh, they will cut the participation of middle-class companies. Because it is a big risk. Sure, we can do that. I repeat, that still, it is a considerable risk. In the past, we had been buying both 50 MWh and 100 MWh.

How do you assess the work of the exchange now? Maybe something needs to be improved: to introduce a term market, futures, for example?

The fact is that the futures market needs to grow. They can be physically implemented, but until market participants grow up to this tool, it will not be in demand. Clearly, we need transparency, simplicity.

Based on one and a half years of development, what are your plans? You have already reached the volume of deliveries of 30 million kWh.

We plan to reach 50 million kWh from the middle of next year. For ourselves, we see the direction of retail. We go to retail, give service, give the minimum prices, convenience of working with us, and use it as a tool to develop. Do not want to go in bulk. I have already said that our customers are medium and small businesses, those whom, as we can see it, were put in front of the fact by larger suppliers: either with us or with no one.

Do you think it is necessary to abolish cross-subsidization and set market prices for electricity for the population?

My personal opinion is that the state is not able to subsidize something qualitatively. By large it is an illusion that the consumer gets cheap electricity. In fact, he pays for it in any other product he buys.
I believe that people need to be honest about how much the resource they use costs. How to compensate for these prices for the population with a minimum income? If it is a direct trade with a person, then there will be less manipulation for officials. Again, let us take the gas reform. It is long struggling, but successful. Still, the market is formed, there are some prices, and you can organize a tender, monitor and choose a supplier. The right to choose is always better than monopoly. The monopoly is not able to provide quality services. Is it bad? Is it okay? This is the nature of life, when something has an uncontrollable impact on a process; it is always done in the best way but not for the customer of the process.

If the population is brought to the open market of electricity, will you be interested in such clients?

This has been discussed recently. I was in favour. Still, many say that there are many risks in that, they say, consumers will stop paying.

I think everything will depend on the rules and the level of security of the supplier. Will be able an individual who stopped paying you, go to the next supplier without repaying the debt? If you do not provide this fuse, there may be abuse. To sue a large number of individuals? What will you do with them?

We are now preparing for integration with ENTSO-E. Are traders ready for this?

I do not think they are ready. As they were not ready a year and a half and a year ago to enter the market. Still, even when you are not ready, you still have to dive into it. Now it is much better than before, when they sat down in the National Commission for State Regulation of Energy and Public Utilities and were deciding, what the price of a resource to put in either month. Now the processes are not perfect, but they lead to something more effective every month. Every month they are polished, every month something unnecessary is dropped out. The regulator also delves into some processes, starts to cut something off, for example, if there is an “air trade”, as you say. But nothing can be predicted 100% in advance. No genius will sit down and write how it will work. For example, we even had export contracts with Belarus. Went there and negotiated difficultly. They signed a contract and banned exports.

For now they restored it. “Energoatom” began to export little by little.

This is a step forward. We definitely need to integrate with Europe. This will lower prices for the consumer. It is occasional for now, but the price of electricity is more expensive than in Europe.

However, if, conditionally, it is unprofitable to generate heat electricity, this is not a consumer problem, that we have expensive coal, right? He should not subsidize the coal industry just because we have it. It seems to me that all countries have gone through this, there is nothing new. It is just about efficiency, that’s all. It seems to me that the focus should lay on the customer, the consumer. He must get the conditions for the production of competitive products. If our producer, let’say for steel, pays one dollar for electricity and a Pole pays 50 cents, how can he compete?

We now have, in fact, one competitive advantage – the salary fund. But the negativity in Ukraine is much more. If we want to develop the country, then only energy efficiency, only minimum prices. Moreover, this is achieved through integration with already developed countries.

What about the gas market. Have you decided to enter the gas market and provide additional services to existing customers?

There are customers to whom we supply electricity, and they still need gas. We know at what price they buy it. We analysed what we can do cheaper. Again, plus a comprehensive service. Then the minimum possible prices, someone has signed, someone is still thinking, someone is planning for the next period. So far, we have bought a small amount of gas – about 2 million cubic meters.

Bought on the stock exchange?

The trader, and I do not remember, he had or had not his mine.

Now the gas market has been opened for the population. Will you defend your place in this segment?

I think we will study the legal framework very closely, and if it allows… I believe in retail, in the ultimate consumer, such a small European Ukrainian who wants service and cheap goods.

By the way, with the opening of the gas market for the population, your colleagues – suppliers – hav #e made several loud statements that “Naftogaz” is ousting them from the market, having the opportunity to give a lower price to the population.

Here the question arises: how long will the monopolist be able to give a low price? Yes, now, from the consumer’s point of view, it is good. However, if all the competition dies, “Naftogaz” will remember that it is a monopolist, and will rise again as it was. That is bad.

Nevertheless, I believe this is a natural way of development. The task of medium-size companies like ours is to assert itself. If “Naftogaz” makes such a decision, it must finance it with something. Given that our gas price is formed on a market basis, the question is how long it will be able to finance its expansion.

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