Several positive developments have taken place in Romania’s energy sector in the past two years.
Some progress has been made in terms of developing a modern legislative and regulatory framework, following transposition into national law of the EU’s third energy package for gas and electricity markets. Greater autonomy for the regulator and the allocation of more resources to it were also important steps forward. Furthermore, the transposition of the Energy Efficiency Directive represented an important first step towards development and implementation of measures needed to support increased energy efficiency in all sectors of the economy. Romania also started the implementation of the deregulation timetable for electricity and gas prices following the agreements concluded with the IMF, the EC and the World Bank.
In the oil and gas sector, operators pursued significant exploration and production investment programs that resulted in the identification of potential new reserves in the Black Sea and onshore, as well as successfully offset the decline of production from mature onshore fields. In the electricity production sector, Romania has succeeded in attracting significant investments in renewable energy, leading to an increase of installed capacity from about 24 MW in 2009 to around 4,155 MW in 2014. Some smaller investments, still insignificant compared to needs, have been attracted in Combined Heat and Power (CHP) and in other conventional thermal generation (mainly in environmental compliance).
Finally, the success of IPOs of some state-owned companies (Romgaz, Electrica and Nuclearelectrica) has paved the way for more initiatives to attract much needed private capital into the energy sector.
However, a series of outstanding unsolved issues has hindered the growth of the energy sector and has decreased its attractiveness to investors in a context where the need for investments is massive both in the short and long term (several tens of billions of Euros). Consequently, it is of utmost importance for the authorities to give a clear signal to the market with a well thought-through and stable energy strategy as well as to propose a roadmap with clear milestones to implement it.
Liberalisation and respect for free market principles are the key to attracting investors and ensuring that Romania’s economy continues to grow and remains competitive.
While the Romanian energy market has seen some progress towards liberalisation, market development and liquidity continue to be undermined by several issues.
In the gas market, the deregulation of prices for non-household customers became effective in January 2015. However, the government’s decision to delay price deregulation for the residential sector for a further 2 ½ years may damage investors’ confidence in the predictability of the market’s legislative framework. The delay in gas price liberalisation for household consumers does not solve the issue of gas affordability, but merely postpones the implementation of long term sustainable solutions such as direct financial support for clearly defined vulnerable consumers and improvements in energy efficiency.
The way in which price deregulation and liberalisation is implemented is crucially important. In order to extract the full value of price deregulation and market liberalisation for investors and for consumers, the wholesale market that is today at a very early stage of development must be significantly improved. This means that domestic gas should be distributed to the wholesale market and that the wholesale centralised platforms should be liquid in terms of volumes and flexible in terms of instruments (combination of long, medium and short-term contracts). Besides the lack of a functioning wholesale market, the absence of effective market tools (notably a modern network code, metering and balancing regime) and the absence of any meaningful progress to link Romania’s gas market with others in the EU and the region also represent significant barriers to the development of a functioning, competitive market that would attract more investors. The authorities must also implement adequate measures to ensure that the market remains competitive and that the costs associated with security of supply are fairly distributed among suppliers and customers.
In the electricity market, liquidity has improved as a result of higher outputs committed by state-owned producers to Opcom’s trading platforms and due to the entry of private companies into the generation sector. However, there is still a need to further expand the types of available instruments and contracts (including derivatives) that can be used to improve flexibility and to address existing operational difficulties for electricity suppliers and generators (in particular from the renewable energy sector and industrial cogeneration facilities), while maintaining transparency.
Finally, implementation of a cost-effective scheme to mitigate the effects of higher energy prices on consumers that can least afford them remains impossible as long as no progress is made on a definition of vulnerable consumers. To address consumer protection through regulated prices is inefficient, detrimental to the security of supply and an impediment to any energy efficiency measures. It could therefore have negative long-term consequences for Romania’s economy.
While the need for a transition phase is understandable and necessary, the government should restore the confidence of private investors in a credible transition process designed to achieve full market liberalisation. This means that the pace of gradual moves towards complete price deregulation needs to be maintained. It also means that the government and the regulator should focus on the immediate implementation of market instruments and conditions to ensure that, well in advance of the deregulation deadline, the wholesale market is functioning well, and has adequate liquidity and instruments to guarantee the secure supply of all customers as well as to support the formation of an objective and transparent market value for gas and electricity. These measures should include:
All measures described above should be adopted and implemented in a coordinated manner, through regular consultation with all stakeholders, and adoption of a roadmap to be followed and regularly monitored.
The modernisation of the energy production, transmission and distribution infrastructure is crucial to increase the efficiency of the system and ensure security of supply for consumers. The conventional power generation capacity needs to be refreshed as soon as possible to avoid potential blackouts in the medium term. The program for retirement of obsolete capacities should be transparent, to allow investors to assess the opportunities for private investment in conventional power generation in Romania. Serious restructuring and downsizing is necessary for power generators using uncompetitive technologies, as a better method for stimulating the economy, rather than price subsidies for social reasons which perpetuate competition distortions. In oil and gas production, significant additional investments are needed to maintain the current level of production from the existing wells, and potentially, to develop new hydrocarbon resources in the Black Sea. In the gas and electricity networks, significant further investments by private and state-owned distribution and transmission companies need to be carried out to increase the reliability of networks which have been, in some cases, neglected for decades. Romania has significant gas storage potential but investments are needed to increase the flexibility of the storage facilities to cope with the fluctuation of demand in the winter season. While several energy projects are in progress (most in early stages of development) and there are significant planned investments in transmission and distribution networks, there are numerous visible obstacles on their path to fruition.
Attracting investments from existing or new investors requires sound and intelligent privatisation methods, including direct sales with strategic investors, and regulation if projects are to become successful. Energy projects have very long life cycles, often spanning several decades, and require large upfront investments. The frequent and often rushed changes in regulation, with little or no meaningful consultation of stakeholders, create a volatile environment which may hinder long term commitments from private investors.
Investments in new production capacities to replace some obsolete or mature assets and modernising transmission and distribution networks for all types of energy should be a priority for Romania and the authorities should bear it in mind when issuing and modifying regulations that could affect the trust of investors in the Romanian legislative framework.
Romania needs to create the correct incentives to encourage private investors to allocate resources to the development of energy infrastructure. We recommend continuing IPOs in the energy sector which promote transparency and corporate governance standards and which attract investments. Having balanced and responsible regulatory institutions to strengthen measured and predictable Government policies is the best way to ensure this process is effective. State institutions also need to support gas and electricity network operators in their efforts to finance network rehabilitation and development projects and to attract European funds available for projects meant to improve regional security of supply through energy market integration.
The regulatory authorities need to become champions of good-faith, as well as of reliable and investment-attracting regulation. They should be a source of guidance for investors and a coordinator of all market participants.
Regulatory commitments should be trustworthy, while transparency between the regulator and operators needs to be consolidated, all in the interest of unlocking the potential of the energy market. Innovative and modern regulatory methodologies need to be adopted where possible, as international best practice models become available for large investment projects such as financing schemes for capital intensive generation or efficiency and quality incentives in transmission and distribution networks.
The renewable energy sector developed in Romania as a result of the country’s potential in wind, hydro, biomass and solar energy and of the RES support scheme defined in 2012. Thus, significant investments were carried out, worth 6 billion EUR, notably in the wind and solar power sectors. Due to these developments, Romania is, on the one hand, benefiting from significant electricity generation with low marginal costs and, on the other hand, is on the way to meeting its obligations set out in the 2020 targets for renewable energy.
The approval of Law no. 220-139 by Parliament in 2012 has been welcomed by the energy sector as a very positive sign of support from the state authorities for the development of the renewable energy sector. However, the significant amendments made to the long-awaited support mechanism only a few months after its adoption sent a negative signal to the market. While the intervention of the Romanian authorities to modify the RES support mechanism was welcome from the point of view of controlling the development of capacities and of overcompensation of certain technologies, the modification of the scheme without a well thought-through impact assessment has badly affected the assets already in operation. In particular, the downward revision of the RES quota led to a significant excess of green certificate supply in the market and to a sudden decrease of the green certificate price to the lowest value defined by the law. Consequently, a significant share of green certificates may remain unsold for years to come and may expose renewable energy producers to insolvency or bankruptcy.
Investments in the energy sector need reliable and stable legislation which allows investors to predict long term profits. While investors understand that the support mechanism must be affordable to consumers, they also expect that investments already made should be protected against retroactive legislative changes. Consequently, positive signals should be given by the Romanian authorities to investors in renewable energy, so that the value of their past investments is protected. In the short term, an increase of the RES annual quota is required, in order not to harm existing capacities while maintaining the final consumer’s bill at a reasonable level. In the medium term, development towards a new support mechanism is necessary to correct the deficiencies of the green certificate market and restore the trust of renewable energy producers in Romanian government policies.
Integration into a well-functioning, interconnected and competitive European internal energy market is a pre-requisite to achieve the goals of sustainability, competitiveness and security of energy supply, in the most cost-effective way. Romania should capitalise on its strategic position in the SEE region and proactively develop its import and export potential. Effective and accelerated integration into the European market would increase the security of supply and would also generate higher revenues for the state budget by increasing the competitiveness of the Romanian energy sector.
Electricity transmission connections and the capacities of the system to supply surrounding countries should be enhanced and their development should be accelerated, alongside full market coupling.
The electricity day-ahead market coupling between Romania, Hungary, Slovakia and the Czech Republic represents a positive development in terms of integration into the European Market. However, in order for this mechanism to fully accomplish its objectives, the Romanian electricity market should develop trading instruments similar to those which are in place within other EU countries, including bilateral negotiated contracts.
Connection of the national gas transmission system to those of neighbouring countries requires investments to overcome the current technical limitations of the cross-border pipelines, namely to increase system operating pressure and completion of reverse flows with Hungary and Ukraine, and to complete the construction of the much delayed Romanian-Bulgarian interconnector. The development, on Romanian territory, of the Bulgaria-Romania-Hungary-Austria gas transmission corridor to ensure the flow of gas from alternative sources to Central Europe and as well as the connection of the national gas transmission system to the international transit lines crossing Romania should be completed. A further extension of the Iasi-Ungheni pipeline is needed to reach Moldova’s main demand centre in Chisinau and allow this interconnector to be used to its full potential as well as the development of the national transmission system for the intake of gas from the shore of the Black Sea. On the gas market, progress on the implementation of European network codes needs to be a priority, to ensure that Romania’s economy can fully benefit from market integration.
Every year energy companies are ranked in the top 10 annual contributors to the state budget. In spite of the sector’s already large contribution authorities have taken a noticeable interest in raising even more revenue in taxes from energy companies. In February 2013, the government introduced a “windfall tax” of 60% applied on the revenues of gas production companies allegedly as a result of gradual price deregulation and a 0.5% tax on sales of crude oil and minerals extracted. These taxes were introduced without a comprehensive assessment of their economic impact. These taxes were also accompanied by a so-called “tax on natural monopolies”, affecting gas and electricity transmission and distribution companies. These taxes were initially made applicable until the end of 2014 but they have been extended for one more year through last-minute legislative changes. The retail fuel sector was also affected in 2014 by an additional increase in excise duties of EUR 0.07/litre of gasoil and gasoline. Moreover, the energy sector as a whole has been subjected to the new tax applied on the gross book value of special constructions, which generated considerable criticism from all affected sectors in the economy, from energy to telecommunications and agriculture. The Government has announced plans to implement a new fiscal regime for the oil and gas upstream operators starting from 1 January 2016.
The energy industry is a key sector that needs fiscal stability, predictability and fiscal transparency as investments involve high risks and require a long term approach. Increasing the taxation burden for already fair and transparent contributors to balance the state budget is unfair and unsustainable and will only decrease investment in the Romanian energy sector. The FIC has repeatedly emphasised that fiscal instability and increased taxation distort the energy market and jeopardise much-needed investments in the sector. Legislative predictability, fiscal stability, operational attractiveness and coherent policies to incentivise investments are key factors to ensure the competitiveness of the energy sector in Romania and facilitate the development of a long-term energy strategy. Moreover, the FIC emphasises that changes in tax legislation should be made only after a careful impact assessment and only after thorough consultations with relevant stakeholders. Finally, the FIC reinforces its recommendation to the authorities to improve the tax collection rate and tackle tax evasion, as an effective way to ensure additional resources for the state budget, and ultimately as pre-requisites for sustainable economic growth.
Romania could capitalise on its energy resources more efficiently than in the past by addressing a set of issues which includes old assets, low (often subsidized) energy prices, outdated building stock, reckless consumer behaviour and an inefficient regulatory framework. The potential for energy savings is immense in the industrial and residential sectors, as well as in the inefficient heating sector. Particular attention must be given to the building stock, since about 45% of final energy consumption takes place in residential and non-residential buildings.
Romania transposed the provisions of the Energy Efficiency Directive (EED) into national legislation by Law no. 121/2014 and opted to implement alternative measures to decrease primary energy consumption by 19% (the equivalent of 10 million tons of oil equivalent [toe] by 2020). The Law provides for the implementation of a wide range of policy instruments in the next few years: setting-up an energy efficiency investment fund, adopting standards and implementing best available technologies to improve energy efficiency in the industrial sector, energy audits by large enterprises coupled with training of energy auditors, promotion of Energy Service Companies (ESCOs) and energy management systems, implementation of energy efficiency education campaigns etc. The government has also presented a draft of the National Action Plan for Energy Efficiency which underlines that energy efficiency policies should particularly target the sectors with the highest potential for saving energy consumption: the residential and public buildings sectors, the energy transformation, transport and distribution sectors, the heating sector, energy-intensive industries as well as public transportation.
The FIC supports the implementation of policies to achieve targets on energy efficiency while minimising the impact on energy prices and not affecting the functioning of energy markets and also supports the improvement of Romanian legislation on energy efficiency. The FIC believes that available national and European support schemes and funds (EU funds, revenues from ETS allowances, cogeneration contribution and small central and local state budget funds) should be centralised to set-up the dedicated Fund for energy efficiency investments in the sectors with the highest saving potential. As a grassroots approach, integrated information and education campaigns should be carried out to raise consumers’ awareness of energy efficiency.
Two particular sectors need urgent and realistic action. In district heating, investments have been scarce and energy losses put at risk the whole system whilst increasing artificially the cost of heat for final consumers. Although it is unlikely that the entire district heating systems could be made efficient, some, in particular those located in large cities, may have better prospects provided that investments come. To increase efficiency significantly in heat generation, new investments are needed in production capacities based on high efficiency cogeneration as well as other low-carbon technologies such as renewable energy sources (biomass, biogas, geothermal heat) and waste-to-energy projects. In the building sector, the potential for energy savings is large, even though the costs are also estimated to be significant. Particular attention should be paid to timely implementation of the EED (annual renovation of 3% of the space in public buildings) and of the Energy Efficiency of Buildings Directive (EPBD), in relation to which Romania faces delays and unclear milestones to reach the 2020 targets.