Valerii Nozdrin: We not only supply electricity to our customers, but also protect their interests

In our country, working with the public sector is not an easy process. And being a supplier of such an important service as electricity for a large strategic state-owned enterprise is two times difficult. Valerii Nozdrin, director of Energo Sbut Trans LLC, told about the peculiarities of working with utility companies and state-owned enterprises, whether it is difficult to be an electricity supplier for Ukrzaliznytsia, and why it is necessary to increase the client base.

- Mr. Nozdrin, in February 2021 the Cabinet of Ministers decided to alienate 100% of Ukrzaliznytsia's share in the authorized capital of Energo Sbut Trans in favor of Sbut Energy LTD. Energo Sbut Trans was established at the end of 2018. In other words, the unbundling was carried out almost 2 years later. Why did it happen?

- The electricity market reform was carried out in several stages. In accordance with these stages, Ukrzaliznytsia also had some changes. The first challenge was to separate the distribution and supply functions. In May 2018, it was decided to separate the electricity supply function into a separate legal entity. This is how Energo Sbut Trans LLC was created. From January 1, 2019, the company began supplying electricity to both Ukrzaliznytsia and other consumers. Thus, the first task was solved within the time frame established by the legislation.

The next stage of separation is due to the requirements of Article 47 of the Law of Ukraine "On the Electricity Market". A provision of the Law prohibits the distribution system operator from owning any part of the shareholder rights, shares in the authorized capital of the company that supplies electricity. And this procedure had to be carried out until June 11, 2020. However, for various reasons, it was not possible to meet the deadline.

One of the reasons is that our corporate rights are property owned by Ukrzaliznytsia. And the company, like any state enterprise, has a very complicated procedure for the alienation of its property. There are many issues why Ukrzaliznytsia cannot make decisions on its own, it requires approval from the government. This process takes some time. On February 3, 2021 The Cabinet of Ministers considered the issue of alienation of corporate rights and made the appropriate decision to alienate 100% of Ukrzaliznytsia's share in the authorized capital of Energo Sbut Trans. This process is now awaiting completion.

- Your largest client is Ukrzaliznytsia. But your website says you are supplying electricity to 400 more consumers. Why is this necessary with such a large client?

- According to the decision of the management of Ukrzaliznytsia, we must supply electricity for it with zero profitability, that is, at cost. It doesn't matter how much she consumes - we must purchase this product and deliver it to her at cost. Moreover, this cost does not include the necessary costs associated with the maintenance and operation of our company.

Today we sell electricity to other 400 customers throughout Ukraine, expand our presence on the market, and hold events to increase sales to other consumers. The more electricity is sold to consumers, except for Ukrzaliznytsia, the higher the income and the more profit that we can use for our development, ensuring the functioning of our company.

By the number of clients in our portfolio, commercial structures account for 75%. These are sole proprietorship, LLC, small enterprises, as well as larger ones - chemical, transport. Another 25% are state and utility companies, which we attracted through participation in tenders in the ProZorro system. But in terms of electricity consumption, public sector companies prevail over commercial structures.

 - Are there any peculiarities in working with government agencies? How do you work with them?

- Working with Ukrzaliznytsia is a colossal experience. We are ready for almost all the challenges that may arise in working with any other consumer - a budgetary or utility company. And we consider this to be our competitive advantage.

There are several transport companies among our customers: trolleybus and tram depots. Mostly in regional centres. They consume a fairly large amount of electricity.

In order to expand the portfolio of clients, we actively and quite successfully participate in tenders for ProZorro, so the number of companies with which we cooperate is constantly increasing. Quite recently, in March, we won a tender for the supply of electricity for another state-owned enterprise - the Administration of the Sea Ports of Ukraine.

This is a new large consumer for us to whom, in addition to the optimal price offer, we can offer our knowledge and experience acquired in cooperation with Ukrzaliznytsia.

- Are there those among your clients who are traditionally considered non-payers?

- Before taking part in a tender, we thoroughly familiarize ourselves with the history of a potential client, including his payment discipline, and take into account all the risks. Let me give you an example: there are several water utilities among our clients. I don’t know why, but there is an opinion on the market that everyone refuses to cooperate with vodokanals. Yes, there are water utilities that do not pay for electricity, and everyone knows them. To conclude contracts with such consumers for the supply of electricity is tantamount to bankruptcy. And we try not to work with them.

But in general, a water utility is a consumer that has a more or less stable load both in summer and in winter. Most vodokanals in our country have a balanced tariff and have the opportunity to pay bills for consumed electricity on time. An important feature is that they pay part of the amount for electricity with the funds that they receive directly for the water supply and sewerage services provided, and the other part is provided to them from the budget in the form of compensation, benefits and subsidies.

Of course, this has its own technical nuances, but you can live and work with them. Sometimes the water utility has cash gaps, a shortage of funds, and then you need to look for some kind of solution: either turn it off for debts or wait. So far, we have been able to find solutions that are not at a loss for ourselves and are optimal for the client.

As of today, we have not abandoned a single consumer, not a single one has been transferred to a supplier of “last resort”. And this, believe me, is not easy. We diligently continue to earn a reputation as a reliable partner. And the reliability of a supplier is precisely determined by how he serves and accompanies his customers.

- How do you form your procurement portfolio, where do you buy electricity for your consumers?

- After the second stage of market reform, when instead of the “single buyer and single seller” model, the wholesale market split into 4 components - DAM, IDM, balancing and the market of bilateral agreements - we buy some amount of electricity in all four segments. To form a portfolio of purchases, we focus on our load schedule and forecasts of the portfolio of our consumers.

In the balancing market, of course, the most unfavorable price for the supplier is, we try to minimize the volume of purchases and sales there. DAM and IDM are two work sites where we buy or sell every hour. The bulk of the purchase takes place in the bilateral contract market. Here are both longer contracts and the lowest prices.

Our strategy is not to be dependent on one supplier, trader or generation. Therefore, we diversify our procurement package so that we do not buy more than 30% of electricity from one supplier. We sell about 90% of electricity to one person (Ukrzaliznytsia). If we also buy this way, this is a very risky business. The slightest failure - and we will leave the market. There have already been such cases among suppliers, we do not want to repeat the sad practice of our colleagues and cannot leave without electricity a strategically important enterprise for the country - Ukrzaliznytsya.

In general, the big disadvantage of electricity trading among generations is that the auctions take place in advance, and the lots are traded at a fixed price. For example, while we are communicating with you, Energoatom is bidding for 500 MW of night hours for April.

What will be the price in April on the market at night? The same as in March - at the level of 1 UAH / kW • h, or as last year - 70 kopecks / kW • h? We don't know now. Therefore, the purchase of such electricity at a fixed price in advance is something comparable to the "Russian roulette": lucky or not. If we buy for 1 UAH, and the price on the market is 1.10 UAH, it means that we saved 10 kopecks. for each kW • h. After all, only for Ukrzaliznytsia we sell electricity without profit, but for other consumers we work like a regular supplier, therefore we focus on the market, looking for opportunities to make money.

And if we bought electricity for 1 hryvnia, and on the market, it became 90 kopecks, then we will incur losses. This is one of the greatest risks for the supplier. Therefore, it is risky to buy all electricity only from the state-owned generation. The procurement portfolio should be diversified and balanced, while the financial burden on our consumers should be minimized. To do this, we buy electricity not only from generators, but also from traders.

- Energo Sbut Trans is one of the largest participants in the non-residential consumer market. What problems in the energy market do you consider the most critical, and do they have solutions?

- During the year and a half when the electricity market operates according to the new rules, a lot has changed. But some of the problems remain and are being resolved rather slowly. For example, a data hub should already be created on the basis of Ukrenergo, the task of which is to aggregate all the commercial accounting data, take them into account in a hierarchy and provide accurate information. But this has not yet been done. Therefore, a loophole remains for the distribution system operator that allows data manipulation, causing certain financial losses to suppliers.

There are other issues as well, for example, PSO and green generation issues. However, I would not call them the problems of the new energy market. The reasons also lie in the peculiarities of public administration as a whole.

- According to Youcontrol, Energo Sbut Trans is mentioned in 3 criminal proceedings and about 10 economic and administrative ones only in 2021. What is the reason for such attention of law enforcement agencies to your company?

- There is a registered criminal proceeding, within the framework of which an investigation is being conducted: was the misappropriation of funds that belonged to Ukrzaliznytsia in the process of supplying electricity. It is registered with NABU.

Within the framework of this proceeding, there were several court decisions on carrying out certain procedural actions. I do not know about other industries.

I want to note the main thing: we are as open as possible to cooperation with any regulatory or law enforcement agency. In our work, transparency is a guarantee of a good reputation, and reputation is one of the main assets that allows us to develop and attract new clients. So, we are ready to provide any regulatory authority with all the necessary information. I have no right to comment directly on the actions of law enforcement officers. I hope for an objective and fair investigation.

As for the administrative and economic courts. If you are an electricity supplier and you work in retail, be prepared to face litigation. Some unscrupulous consumers deliberately do not pay, some are trying in every possible way to get out of debt.

Since we actively work with the communal and public sector, some regulatory factors sometimes interfere with the work, even if the consumer himself is determined to do everything well and on time: either the treasury does not allow payments or some other nuances. You have to go to court and collect the debt.

Administrative courts often arise when scheduled inspections by the state audit service are carried out on utilities or government agencies. When the auditors disagree with some of the materials within the framework of the execution of our contract, they give their comments, draw up acts of inspections or audits. And such conclusions can only be challenged in an administrative manner through a court. Consumers agree to this, and we provide them with legal assistance: we prepare documents, accompany in court, prove that our position with the consumer is correct.

- What other services do you provide to your customers?

- Sometimes a consumer has questions to his distribution system operator, to whose networks he is connected. Most of them are oblenergos. We stand on the side of our consumers in case of any disputes, we help to find a way out of the conflict. Our clients highly appreciate our additional services and services.

But, unfortunately, all of our highest quality related services and additional services, which are important and needed by every client, cannot be decisive for enterprises in the municipal and public sector. The law prohibits them from choosing a supplier otherwise than focusing on the lowest price offered during the tender procurement in the ProZorro system. Therefore, in our country everything is not so simple with state structures.

In this sense, commercial companies are much easier to work with. Our regular customers, knowing about the quality and level of our services, renew their contracts with us, bring their partners to us, recommend our company. This is very valuable and is an indicator that we are doing everything right.

- How did quarantine affect you, did you adjust your plans? In general, what are the company's results for 2020?

- Quarantine affected us very strongly because it affected our consumers. We had gaps in sales volumes, significant delays in payment for the supplied electricity.

The rise in the price of RSV in the fourth quarter also added to the problems. Indeed, for that part of our clients with whom we have concluded contracts after winning tenders, according to the Law "On Public Procurement", there are restrictions on raising prices. No matter how the price on the market has grown, we cannot raise it by more than 10%. And the price rose only in November 2020 by 17%. The resulting price difference is our loss.

Nevertheless, despite all the difficulties, by the end of 2020, we managed to gain a profit. The net profit for the year amounted to UAH 5.3 million, we completed the documents and submitted them for approval for the payment of UAH 2.6 million in dividends. Of course, I would like to see more profit. But again, we must take into account how difficult the past year was and the fact that we sell 90% of electricity to Ukrzaliznytsya at cost. Following the results of the first year of operation in the market (2019), the company worked with a net profit of UAH 4.3 million and paid UAH 2.2 million in dividends.

All of our financial results are published on the company's website, and anyone can view them. They are also regularly reviewed by independent auditors. The financial statements for 2020 were audited by the well-known company Grant Thornton Ukraine. This is another important confirmation of the transparency and efficiency of Energo Sbyt Trans. The audit results for 2020 have already been published on the website.

- Do you think there will be fewer difficulties in 2021?

- Today, the UPS has a surplus of electricity, and the price on the market does not rest against price caps, you can work like last year. We hope that we will work out 2021 as successfully and with a profit as in the previous two years of our activity.

From May we intend to start gas supplies. Ideally, in the future 1-2 years, we plan to enter the electricity generation market, for example, the same green one. In many ways, the implementation of long-term plans will depend on the decisions of our shareholder and the main consumer.

Tags: legislation, coronavirus, electricity market, price, infrastructure, IPS, power system, electricity consumption, supplier

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