Industrial Engineer from ICAI, Jose Bogas (Madrid, 1955) has held the position of CEO of Endesa since 2014, after receiving the trust of Enel, the majority shareholder of the Spanish electricity company to which he has been linked since 1982. In his long career, Bogas had not seen an increase in the electricity prices like the one we live in at the moment. A crisis that has the Government in check, which has approved a controversial rule from which a cut in the income of nuclear and hydroelectric power is derived to alleviate the electricity bill. A reduction from which those that support the industry will be freed, according to the condition imposed by the vice president for the Ecological Transition, Teresa Ribera.
What do you think of Vice President Ribera’s offer to eliminate the reduction in electricity companies that offer fair prices to the industry?
It would be reasonable to apply a reduction if we had sold at the wholesale market price (pool), but it’s not like that. And if we really sell our generation to the industry at a reasonable price, we are already collaborating with the industry. And, in fact, it is so. We have not broken any contracts, it is costing us some money, but we have not broken them. The problem is that when it is necessary to renew if, for example, our generator sells at 60 euros / MWh and they reduce us 90 euros / MWh, we would be selling at -40 euros / MWh. In that case we will have to go to the pool and collect its price. They are two things that go in the same package: it is not that they take away the reduction if we sign contracts at reasonable prices, it is that we are already doing it and, therefore, the cut makes no sense.
“” You have to lower the price of the wholesale market, whatever the way it may be “
Endesa has revealed that it sells its entire generation internally to its marketer at a fixed price, so it does not charge the so-called benefits from heaven or windfall profits by the marginal price of gas. Was this a well kept secret?
In this there may have been a misunderstanding. There is no opacity because we inform the system operator, REE, and the latter to the market operator, OMIE, of the facilities that do not go through the wholesale market because they have a direct contract with the marketer. It is often said that all energy passes through the pool And it is not like that. If you subtract demand and generation, the price comes out exactly the same as if you had put it in the pool. And why are they removed? Because the nuclear and hydraulic we have it sold directly. Sometimes, when the pool is cheaper than our contracts, we save that energy and buy in the market. It is not what happens now, logically, with prices so high. But it was no secret.
But companies could have used that data to defend themselves against allegations of pocketing. windfall profits in the marginalist market.
We can all make mistakes. Someone may have forgotten or not taken it into account. And yes we have defended ourselves against that accusation. The windfall profits are an urban legend that goes back to the end of the regulated market and the collection of costs of transition to competition (CTC), according to which, with this mechanism [que compensaba a las empresas en dicho tránsito] We had recovered all the investment and, therefore, when we went to the market, everything was profit. This is not true because when the CTCs were calculated, a 31% deduction was made, which was not recovered. In addition, 350 million have been invested in nuclear power per year since 2006, 150 million in the case of Endesa. Since that year there is what I call windfall taxes, or a multitude of fees and taxes that tax this energy. A nuclear power plant has operating costs, including investment, of around 47 euros and, for a profitability of 5.5% -6%, as in distribution, the cost is 57 euros / MWh. When it was believed that until 2030 the market price would be around 50 euros / MWh, profitability was low but it was better to produce and get money to amortize the capital invested. At Endesa, the net book value of nuclear power plants is 2,800 million and 800 million of hydro.
“Our contracts to the industry are already reasonable, they cannot reduce us”
If they already meet the ministry’s requirement, why are industries stopping?
Endesa has always sold more energy than it produces and even more so after the strategic decision to close the coal plants to fight climate change and because they were not profitable. With inframarginal technology we produce 36 TWh per year, at a fixed price we sell 20 TWh and indexed to the pool another 20 TWh. Without coal, we have stopped producing 25 TWh per year. Combined cycles play another role, make the adjustment and serve as a backup. Therefore, if before we were 10 TWh short, now we are about 40 TWh. We have given a tremendous boost to renewables and we buy into the pool to supply customers. When we estimated a price of 50-55 euros / MWh we could do it, but what happens now? For November and December the futures are above 200 euros; in the first quarter of 2022, at 160 euros, and for the year, at 130 euros.
Can’t they, therefore, make new contracts at a lower price?
We contracted half of the bilaterals two years before and the other half a year before. For 2021 and 2022 we have contracted practically everything with domestic and industrial companies, 32 TWh, at just over 50 euros. We have 18 fixed TWh and 19 indexed TWh. But the big problem with contract renewal is buying at pool at 130 euros and sell at 60, for example. But we are going to seek solutions with the industry, signing PPA.
Why does the Spanish industry go to a large extent to buy at spot? Is there no volume or is it cheating?
No, they do not cheat and there is more than enough volume. We have some contracts, which we call Click, at a fixed price that, at a certain moment, at their request, we can index it to the pool or vice versa. In 2020, with the average price at 36 euros / MWh and an expected decrease due to the incorporation of renewables, we recommend indexing to the pool. But when it started to rise and we asked them to close at 70 euros next year it seemed expensive … and now it is at 130 euros. It is really a drama.
“We have not broken any contracts with the industry, although it costs us money”
Is there no long-term culture?
There is a lot of talk about long-term contracts, five years, but the industry competes in the international market and if it is not sure what will happen in that period, and then the price falls, it is left out of the market. That is why there is a lot indexed to the pool. The problem is 2022, and hopefully it’s only 2022.
How would the reduction still in force affect the results of Endesa, a power company that, unlike Iberdrola, confines its business to the Peninsula? Would you make a loss?
Everything is still pending. But with the Government’s forecast of raising 2,600 million euros in six months, 80% would correspond to Iberdrola and Endesa, half each. We are talking about more than one billion, which would mean a cut of our 4 billion ebitda of 25%. And with a net result of about 1,700, we would get 800 million. We would not have losses this year but the income statement would shake.
What proposals have you made to the ministry to alleviate the crisis?
Among others, intervening gas prices, resorting to a deficit and advancing the adjustment of the profitability of the plants of the special regime or Recore (renewables, cogeneration and biomass) that receive specific remuneration, which, due to the high prices, are advancing said profitability, which is paid every three years. Who can tell me that Recore can charge 200 euros / MWh in the market and that I buy at 200 and sell at 60? Can not. If, for example, you bought 40 TWh at 160 euros, you would have 2,400 million losses in one year. The price of the pool must be lowered, be that as it may, because 30% and 40% of the demand is indexed to it and the price cannot be lowered. Small consumers with PVPC pay in vein. Therefore, part of the Recore could be dedicated to this supply, now adjusting its remuneration.
This implies a regulatory change that the Government rejects.
The commitment is that they obtain a return of 7.1% and that commitment would be maintained, but, due to an exceptional circumstance, it would have to be adjusted now, without waiting for 2022. Of course, the adjustment should be made taking into account 2020, in which prices were very low.
“The proposed measure would cut our EBITDA one billion, 25%”
But the Endesa marketer that buys from its generator also shoots up its profit when the price is low.
In our income statement it can be seen that our marketing margin is not very high: between 9 and 10 euros / MWh, with that we try to make it profitable.
If the cut with which the Government planned to collect 2,600 million is not applied for a reduction in the charges in the electricity bill, which is already applied, will it have to resort to the Budgets?
I think there are elements that can even generate a deficit. We have always had a fluid dialogue with the ministry and I am hopeful that good sense will prevail. Companies that have bilateral contracts at reasonable prices cannot be reduced and a solution must be found for the industry: either we lower the pool price or we intervene in gas prices or we generate a deficit or we already adjust the Recore.
What is the intervention of the gas market that they raised with the minister?
prices, which we hope will be temporary and extraordinary, that a temporary and extraordinary solution would have to be applied. Although I recognize that it is complex, if we are going to intervene, let us intervene what is most efficient. If the electricity market has been intervened, why not the price of gas for combined cycles, postponing, via deficit, the difference between 90 euros / MWh and the reasonable price of 20 euros. The deficit that would be paid by raising the toll charges a little: the cost would be 4,000 million, about 450 million a year with interest, or one euro in charges, compared to 25,000 million of the current cost for gas.
What has the ministry responded?
That it is a market intervention and if only Spain does it and the rest of the countries do not, we get into a mess with Brussels. This has led to the request to buy gas together. There is a very urgent problem for the industry and agreements must be reached. Europe has refused to change the marginalist market because it is the most efficient to price, give the price signal and the correct allocation. This is indisputable.
There is talk of a sit-in by the large electricity companies to the Government in the last auction of renewables.
From Endesa, which was presented to the first auction, we have explained it to the ministry. We lack between 10 and 15 TWh, depending on the year, to supply our customers and we solve this with renewables. The auction aims to accelerate the implementation of these energies, but we ask ourselves whether we should dedicate the scarce resources we have to these auctions or build plants to sell the production to our clients. And we have opted for the latter: to build them and offer the energy with our own PPA contracts. It makes more sense than going to the auction. Our decision was not due to any question of legal uncertainty, but because I need resources to serve our clients.
“The PVPC must be linked to futures, because they are insurance”
The CEO of Endesa considers that consumers with PVPC “have to lower their bill in some way” and in the future (now it is not possible with prices so high), tie their rate to market prices to futures and not of the pool, “because they carry implicit insurance as they are more expensive.” And it offers a piece of information: “From 2013 to 2019, if instead of the spot Had the futures been applied, we would have paid only 0.8 MWh more. That’s the insurance and it would have been worth it ”. If instead of the old quarterly auctions the Government chooses to configure the PVPC with the futures markets, “the companies will hedge ourselves in one or two years.” Although charges and taxes have dropped, “the current price is nonsense,” emphasizes José Bogas.
The executive is also in favor of extending the benefits of the social tariff for electricity or paying a bonus, as other countries have done, to vulnerable consumers.
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