Latvenergo JSC is an active market player. This is why the state should provide the company an opportunity to earn and grow. At the same time, the company’s record-high profits could have been predicted in due time and used to reduce the electricity transmission tariff’s growth, bank analysts say.
Citadele Bank economist Mārtiņš Āboliņš says Latvenergo is not the only state-owned company in Latvia that pays dividends from profits to the state budget every year. This is a practice employed in Latvia and the rights of the state as a shareholder even though there have been concerns about the negative impact on investments that may result from regular withdrawals from state-owned enterprises in the long term.
On top of that,
Latvenergo’s profits were used for other purposes in the past.
This includes the reduction of mandatory procurement component (OIK) payments.
Reducing tariffs directly is difficult because the electricity price is dictated by the market, and Latvenergo is not the only electricity trader in Latvia, says Āboliņš. Latvenergo is also active across the entire Baltic region. A portion of this company’s profits comes from exports.
At the same time, the state as a shareholder can operate the company’s profits as it sees fit. In other European countries it is often used to reduce end tariffs for households and companies. In this regard, Āboliņš the state can use Latvenergo’s profits to reduce electricity transmission tariffs or to support a wider range of protected consumers.
Nevertheless, Āboliņš stresses this is a political and budget-related decision, because dividends are budget revenue. The company’s management, officials or the regulator cannot make this decision on their own.
This is why the growth of electricity transmission tariffs in light of Latvenergo’s record-high profits is most likely not a simple matter of miscommunication. The economist believes this indicates a lack of strategic vision in the energy sector. He adds the growth of tariffs cannot be viewed separately from results of Latvenergo’s financial operations.
By predicting the growth of Latvenergo’s profits, it was politically possible to help lower the growth of costs using this company’s profits. However, neither officials nor the regulator decide the policy, says Āboliņš.
As a result, in the past several years
Latvia has had one of the biggest electricity price surges for households in Europe.
SEB Bank economist Dainis Gašpuitis stresses: what the state as a shareholder does with dividends is adequate. However, budget creation demands clear outlooks as well. At times it causes a non-constructive discussion in regards to use of other planned revenue.
“Criticism in this context may arise from a situation where manipulations are being carried out on the part of the State, which would provide opportunities for the company to make excess profits or force it to do so. But this is done under conditions of monopoly. Currently Latvenergo is active, it has competitors and the state needs to give the company opportunities to earn and grow,” says Gašpuitis.
From a general viewpoint the state needs an energy policy to promote competition and market development. The state needs to provide competitive tariffs and quality, says Gašpuitis.
He admits recent years have revealed many failures and shortcomings in the energy sector not only in Latvia. This is why it is necessary for the new government to push these topics forward.
High excess profits or price increases always cause a resonance in society. Gašpuitis believes the state needs to get involved, because there are lasting structural shortcomings in the sector. Mixing in short-term fluctuations is more likely to have negative consequences, as the politicians’ ability to influence them is very limited. This only increases uncertainty.
“Support for residents needs to be linked to the social policy with respect to general support volume and other factors. Each sector has its own objective, and if they are not mixed up, it is possible to achieve greater efficiency,” adds Gašpuitis.
As previously reported, in the first half-year of 2023 the turnover of Latvenergo was EUR 1.163 billion, which is 56.3% more when compared with the same period of 2022.
The company’s profits went up 56.8%, reaching EUR 222.519 million, according to information reported by Latvenergo to Nadsaq Riga.
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