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Alteo Exploits Increasing Volatility in Electricity Market from Growth in Renewable Generation

Power

In the Alteo 2020 company report, under a section entitled “What we at Alteo like most about Alteo,” the first entry is “Diversity of Tasks,” followed by “professional challenges and opportunities.”

This is perhaps just as well since the company runs 21 of its own plants and operates five others, ranging from 0.5 megawatts (MW) to 179 MW. These use technologies from combined cycle gas turbines generating heat and power to gas engines, solar farms, hydroelectric, wind turbines, and even tiny (0.5 MW) landfill gas plants.

The Budapest Business Journal sat down with Domonkos Kovács, deputy chief executive, M&A Capital Markets, to discover more about the company.

BBJ: Looking at your portfolio of assets and operations, one is immediately struck by the broad spectrum of activities spread across a wide range of power and other utilities. This involves a huge variety of primary energy sources, gas, wind, solar, etcetera, plus energy trading. How do you manage all these operations? It looks like an engineers’ playground and an accountants’ nightmare! But you made a profit last year, so you must be doing something right.

Domonkos Kovács: I prefer to group our activities into three major areas. These are the major distinction lines, in my view, and the technology is not that important. Obviously, it’s important, but from a management point of view, it’s not as challenging as one might think.

Number one, and I would call this the backbone business line, is energy production and energy production management, a heavily IT-driven regulatory control center that manages the operations of all of our power plants that provide power to the open market.

Within power management, there is a sub-segment, and that is the subsidized power production. There it is fairly easy because these weather-dependent power plants are technically not that difficult. Production-wise, they are quite complex, but we use them only for electricity production, requiring operation and maintenance type services.

Part of these services are produced by the actual producer of the wind farm, solar panel, or hydro-turbine. What is more challenging, maybe, is that we had to work out that these units could be controlled and managed far from the actual place of production, and that needs some IT background.

Domonkos Kovács

BBJ: But that’s doable?

DK: That’s absolutely doable. The non-subsidized part, to me, is the more exciting because that works on the open market, and there they do lots of things, but their key focus area is the so-called balancing power market and the capacity market.

And why is that? We have gas-fired power plants with which we can assist the Hungarian transmission system operator in balancing [supply and demand] on the electricity network. As there are a growing number of users, who cannot [accurately] predict their production, especially with renewables, the balancing need for the whole power system is increasing. And there we’ve found a good, fairly high-margin market.

But it also needs very strong, computerized control management and a constant optimization process. The guys need to figure out if it’s now better to produce electricity for the baseload or, let’s say, turn it off or provide capacity Mavir, the Hungarian system transmission operator.

It’s a fairly complex thing, but apart from that, the underlying power plants, from a technological point of view – and probably our engineers will kill me for saying this – are not that complex. For example, in the case of renewables, their operation and maintenance requirements are not that complex.

There are two other complementary business segments. One is energy services. Here, we have the operations and maintenance services. They work in-house (i.e., for our power-plants), but they also sell their skills to third parties, to clients [with power-plants] like MOL-Petrokemia, BorsodChem, and Heineken.

In addition, they can also do power-plant development at an EPC [Engineering, Procurement, and Construction] level, that’s the main contractor. We manage the entire process, so if we get the mandate, we can set up whole power plants; we’ve done some natural gas plants, and we can do solar plants.

BBJ: And wind?

DK: Unfortunately, here in Hungary, from a regulatory point of view, wind is not really supported. From an economic point of view, wind is not worth it. Many obstacles in different legal regulations make it extremely expensive and difficult to erect wind power plants. Let’s say that’s a policy issue; we’re happy with solar as well.

And the third business segment is retail trading in electricity and natural gas. This is a very useful, separate business unit because it can see and understand what our potential clients want from service providers because it is right there on the market. It knows the price and service quality expectations. This is a good tool to gather market information from clients.

BBJ: You can see if a company needs so much power, you can offer to build a unit?

DK: Absolutely. Also, naturally, this unit can help us in buying and selling more electricity. They can rely on our production, but they also buy electricity. So that can help our purchasing.

BBJ: And in balancing your demand?

DK: Exactly. In particular, for example, we are fairly big gas consumers with our gas-fired power plants and need to buy natural gas, but if it’s completed with the purchases of our trading arm, then the overall purchase size can increase, so that gives us an economic scale advantage. In itself, energy trading is profitable. Margin-wise, it’s the lowest margin; it’s somewhere between 3-5%, it depends.

BBJ: But it’s not just for the margin profit?

DK: Yeah, it has other advantages, I would say. You can increase your volume purchases with it, you can gather market information, so that’s also very good. This year has been extremely profitable for us in energy production and production management because on the balancing power market, prices have just skyrocketed.

Probably this was in line with overall energy price increases, but also, this was part of our strategy. It’s a bit later than one would have wanted, but the renewable revolution has started, even in Hungary. There are a growing number of solar power plants, which will all increase volatility, and we make money on the volatility with our balancing capabilities.

Alteo Fact Box

Total Revenues 2020: HUF 32.9 billion.

Profit after tax 2020: HUF 590 million.

Share price: Alteo closed on October 4 at HUF 1,415 per share, up from HUF 772 one year ago, a gain of 86.5% over 12 months.

Market Capitalisation: HUF 27.4 billion.

Number of shares: 19,386,274

Main shareholder: 63.88% Wallis Asset Management Zrt. and its subsidiaries

Free Float: 36.7%

Number of employees end 2020: 278

Source: bse.hu and 2020 company report.

This article was first published in the Budapest Business Journal print issue of October 8, 2021.

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