Interviews

Martin Pacovský: Markets are hypersensitive to information

Published: 28. 9. 2022
Author: Karel Černý
Photo: Photo archives of Martin Pacovský
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Electricity and gas prices are sky rocketing, going through daily price swings, and many experts agree that this coming winter will be difficult for the industry and households alike. This was the backdrop against which I spoke with the Chairman of the Pražská Plynárenská Board of Directors.

How is the chairman of Pražská Plynárenská doing at a time when the gas and electricity markets are nearly impossible to predict?

I feel that overall it had a positive impact on not just mine but also company morale as well as our cohesiveness. When Russia started the war in Ukraine earlier this year and the first price swings started manifesting, things were very uncertain. But the uncertainty has now become so stable that it almost feels like certainty instead. We have a sort of certainty in uncertainty, and we have pretty much learned to treat it as an everyday occurrence. Of course, we are watching the price swings and whether Nord Stream is open or closed but that happens so often nowadays that it doesn't even surprise us anymore. Even the markets have become a little jaded. A great help came from the City of Prague as it owns stock in the company and has provided us with six billion in funding, which helped us stabilize financially. So, we treat the price swings almost as a ritual now but we are no longer forced to deal with existential issues. We are, of course, also preparing for the worst-case scenario – that gas will be shut off altogether. All of Europe is preparing for that. But because our tanks are full, we are technically ready for that possibility.

So the coming winter should be okay?

You know, it is not exactly a question of whether there will or will not be physical gas. I think there will be. The issue is that it might be so expensive that the industry will not be able to afford it and households might be in trouble even if it will somehow be subsidized by the government. We as a supplier do have the gas and will be ready to supply it. But the prices are up in the air.

How long of a period do you usually stockpile for?

We normally have stockpiles for about three to five years. So the year 2023 is closed, as is a large part of 2024, and a bit of 2025. Naturally, we are not buying at the current prices you see on exchanges. Even though certain weather fluctuations do force us to buy at exchanges from time to time. Our price is basically an average of historical purchase prices. This means that the current price levels on exchanges will eventually "flow" to the consumers as well.

How is it possible that the price of electricity comes in at 1000 EUR per MWh one day and then almost half that the following day? Is this still normal market behavior?

I personally feel that the markets are currently hypersensitive to any new information. The high electricity prices are determined by various factors, unfortunately. One of them is the on/off pipeline switch in Russia which is constantly being flipped. Another one is the fact that half the French nuclear power plants are down. And add to that a rather dry season. This means that expenses are high while there is also a need to produce large amounts of gas to replace the output of the French power plants. People might think that they are no concern of ours, but we are dealing with a certain kind of connectivity here, an interconnected network throughout Europe. When we are having gas issues, German suppliers help us out even though their supplies might also be dwindling. We have a sort of mutual solidarity. But back now to the markets being highly sensitive. There was news about the French not being able to get their power plants up and running by winter, which caused immediate price swings. Or take gas, it was 320 EUR one week and 250 the next based solely on the news that some of it would be decoupled and supplied to gas-powered plants. The markets are simply highly susceptible to any kind of information. And electricity is doing even worse since it cannot be stored. Balancing out supply and demand is much more complex there.

Europe is in talks about implementing a price ceiling...

The devil is in the detail in this case. Implementing a price ceiling is one thing. But prices of what, and for whom? Until I see the inner workings of this plan, it feels more like a waiting game to me. But it is for sure the kind of news that moves the market.

Is it at all possible to make do without Russian gas? And if so, what is the time horizon?

It is highly unlikely during this heating season. The only chance is that we have a very mild winter and are very economical, the weather will play a major role. It would still be painful, but doable. But on a two- to three-year horizon, I am quite confident that we can make do.

What about gas from countries of the Persian Gulf? There were negotiations with Qatar...

That is definitely an option. There are two primary LNG sources. One is the United States and the other is Qatar, AKA the Middle East. LNG is not that difficult to transport and the limitations are not so much in the volume as they are in the capacity of various ports. As soon as a few new regasification units are up and running, I feel that the general hysteria will dissipate as well.

And if we made a deal like that, how long would it take to get things going?

We are limited by the regasification units I mentioned, but their numbers are growing quite rapidly. We have made inquiries regarding regasification capacity, CEZ Group already has some slots filled up, and other big suppliers and traders have some on offer too. So, I feel like it will not take too long if we are talking about lower volume. The Germans are planning to build four more in the next six months, and I believe yet more will follow. I feel that we could have quite a lot of them within the next year or so.

You were the director of the renewables division at CEZ Group. Isn't the Green Deal getting kind of pummeled with everything that's going on?

We are, let's say, part of the green energy fan club. There is one massive upside to it, that it incurs zero variable expenses. The downside on the other hand is that pretty much none of it works during the winter, so you need to have backup fossil capacity. Germany greatly benefits from having wind turbines in the North Sea with a very high capacity factor, so they produce pretty much non-stop. But they have no way of transporting the energy to the south of their country. So things are complicated and require a lot of long-term planning. I still feel that every roof in Czechia, if not in perpetual shade, should have solar panels installed.

Are you not going against your company by saying that? The more solar panels there are, the less gas people will buy, and the less they will need you...

It might seem that way at first, but we plan to sell them those solar panels and help them with fitting and maintenance. And we are also planning to make central heating more green by using high-volume heat pumps, for instance. So, we are changing the way our products are structured. The demand for gas will naturally decline over time but we will have other services to offer. We have been expanding in terms of biomethane, so we will have an alternative to natural gas, there have even been talks about hydrogen... And I am certain that once this whole situation with Russian gas settles down, that being the moment Europe finds alternative LNG suppliers, gas will be with us for a while yet. It is a medium with a sprawling network all over Prague and if the supply is steady, it represents an ideal compromise between carbon emissions and heating power and reliability.


“The demand for gas will naturally decline over time but we will have other services to offer,” says Martin Pacovský.

Martin Pacovský (49) is the chairman of the Pražská Plynárenská Board of Directors.

He graduated from the Prague University of Economics and Business and earned his MBA from the  Rochester Institute of Technology.

He worked as a risk manager for the Inven Capital VC fund, specializing in clean technology.

He has been the chairman of the Pražská Plynárenská Board of Directors since January 2021. It is not his first time in an energy company, he worked for CEZ Group for many years.

Pacovský is the co-owner of two microbreweries located in Jarošov and Znojmo.

He is married and has two children.

Breweries

Martin Pacovský formerly spent 15 years working as a high-ranking executive at CEZ Group. He later left and started two breweries with a friend of his. He said that he just needed a change. Did he get some rest there? "To be quite frank, I did," he says without missing a beat. "It is exactly my kind of business, and I also enjoy the artisanal side of things. I have an immense amount of respect for people who can brew truly good beer. It is not at all about this strict, technocratic approach – mix A and B and you get good beer. It is much more a matter of emotions. Compared to that, the energy industry is much more impersonal. I got back into the energy whirlwind because I just felt like it. Pražská Plynárenská is an amazing company and I have a vision for moving it forward into a modern era of energy.

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