Several positive developments have taken place in Romania’s energy sector in the past two years.
The government has resumed work on the country’s energy strategy, by proposing a draft text, after an ambitious consultation effort with various stakeholders. Whilst the text could be improved by providing a long-term development vision corroborated with a realistic prognosis of the likely development of consumption and by a more careful assessment of choices, it nevertheless provides a good starting point.
Romania has also made some progress with liberalisation of the electricity and gas markets. Industrial and commercial customers are supplied with gas and electricity at market prices, fostering competition between energy companies to provide the best deals for customers.
In the oil and gas sector, operators have pursued lower exploration and production investment programs, due to the international crude price crisis and also due to a difficult fiscal regime at a time which was already difficult for the industry. In other EU member states, the fiscal burden has been reduced in order to ease the pressure on upstream operators and to ensure that drilling activity continues, hence stimulating the provision of jobs and tax revenue, including from parallel industries. As a direct consequence, no major discoveries of oil and gas were reported during this two year period. Production from mature fields has continued to decline, while the reserves replacement ratio was far too low, and so reserves declined at a steady rate, with no significant prospects of a reverse in this trend.
In the electricity production sector, Romania has succeeded in attracting significant investments in renewable energy, leading to an increase in installed capacity from about 24 MW in 2009 to around 4800 MW in 2016. 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).
The additional increase in excise duties of EUR 0.07/litre of gasoil and gasoline introduced in 2014 was eliminated on 1 January 2017, together with the special tax applied on the gross book value of special constructions, which had a particularly negative impact on important economic sectors, including energy.
The success of the listings of some state-owned companies (Nuclearelectrica, Romgaz and Electrica) has paved the way for more initiatives to attract much needed private capital into the energy sector.
Extra financing, better corporate governance, transparency and professional management will mean that these new listed companies within the energy sector will become more efficient and profitable. Ultimately the key beneficiaries will be every shareholder, including the Government, minority institutional shareholders, as well as individual retail investors.
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.
In oil and gas production, significant additional investments are needed to arrest decline and maintain the current level of production from existing wells. New investments are needed in exploration and development in frontier onshore projects in order to improve the reserves replacement ratio to a sustainable level 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.
Source: FIC
Romania has significant gas storage capacities 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 significant investments are planned in transmission and distribution networks, there are numerous visible obstacles on their path to fruition.
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 this in mind when issuing and modifying regulations that could affect the trust of investors in the Romanian legislative framework.
Given the high capital investment required, long project cycles and associated risks, a modern and predictable regulatory framework is necessary for both the continuation of investment by existing investors and to attract new ones for future energy projects. A modern legal and regulatory framework for energy projects should include the granting of land access, flexible access to data and information, in line with European standards as well as simplification of approval procedures related to concession agreements.
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 new investments. 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.
Regulatory commitments should be trustworthy, while transparency between the regulator and operators needs to be consolidated, 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.
Liberalisation, respect for free market principles and fair competition rules among market players are key to attracting investors and ensuring that Romania’s economy and energy sector continue to grow and remain competitive.
A process of liberalisation and deregulation of prices in the gas and electricity markets is currently taking place. In the gas market, wholesale prices have been completely deregulated with effect from 1 April 2017. However, retail gas prices for households will continue to be regulated until 2021. In the electricity sector, wholesale and retail electricity prices are expected to be fully deregulated by the end of 2017. Synchronisation of retail price deregulation between the electricity and gas markets would reduce the risk of an uneven playing field between energy suppliers who compete for the same household consumer pools.
In the electricity sector, liberalisation was smoother, as end users (especially those from the industrial and commercial sectors) are benefiting from intense competition both upstream and downstream. However, as the deadline for full electricity price deregulation approaches, the Regulatory Authority has yet to clarify the policy framework for the functioning of the universal service and the selection method for the supplier(s) of last resort. Liquidity in the wholesale market has significantly increased in the last few years, although trading instruments have remained rigid and are not adequate for meeting the needs of market players, including the requirements of final customers. The developments observed in the last few years (including during the recent winter) on the wholesale market prove that the market requires more flexible trading instruments (such as centralised flexible contracts and bilaterally negotiated contracts) that will better fit the needs of market actors or customers, while maintaining good liquidity in the wholesale centralised markets.
In the gas sector, the partial liberalisation of gas prices creates more uncertainty for some market players. Gas customers have fewer choices than electricity customers as the wholesale gas market remains illiquid, although the position has slightly improved in 2017 compared to previous years. This situation impedes competition in the retail sector. Moreover, the decision to maintain regulated retail gas prices until 2021, in the context of a liberalised but illiquid wholesale market, and in the absence of a clear, fair and transparent regulatory framework for the regulated market, raises significant regulatory risks for gas suppliers operating in this market sector in relation to the proper and timely recognition of the cost of gas sourcing. Furthermore, an improved gas storage policy is required to ensure the balance of supply and demand at times of peak consumption. The recognition of gas prices in heating tariffs is also critical for maintaining the economic competitiveness of heat producers supplying households connected to centralised district heating networks.
The liberalisation of the energy markets must continue with the complete phasing out of regulated prices and implementation of functional market designs that will foster fair competition between energy companies. In particular, it is important that end consumers do not pay higher prices as a result of inefficient market designs and lack of adequate market liquidity or instruments. For these reasons, the Foreign Investors Council recommends:
The renewable energy sector developed in Romania as a result of the country’s potential in wind, hydro, biomass and solar energy and because of the RES support scheme started in 2012. Consequently, important investments have been carried out, worth 7 billion EUR, notably in the wind and solar power sectors. Due to these developments, Romania benefits from significant electricity generation capacity with low marginal costs and is also on the way to meeting its obligations set out in the 2020 targets for renewable energy.
The approval of Law 220-139 by Parliament in 2012 was welcomed by the energy sector as a positive sign of support from the state authorities for the development of the renewable energy sector. Unfortunately, the adopted scheme did not have an impact study and led to increases in the bills of final consumers. This increase was partly mitigated by the support scheme given to energy intensive consumer industries. 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 surplus of green certificate supply on the market and to a sudden decrease in the price of a green certificate to the lowest value defined by the Law. Consequently, a significant share of green certificates has remained unsold for the past and for the years to come and this exposes 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. Consequently, the FIC considers that recent efforts by the Romanian authorities to identify a balanced approach between the interests of RES investors and of customers are encouraging. However, these must be finalised by the approval of the necessary legislation.
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 South-Eastern European region and proactively enhance its energy interconnection infrastructure. 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.
Although in the last two years, some progress has been made on increasing the power interconnection capacity, Romania faces delays in reaching the EU 2020 power interconnection target (10% of installed capacity).
As regards natural gas infrastructure, the FIC welcomes the success of the national gas transmission company Transgaz in attracting in 2016 European financing of EUR 179 million required for the construction of the Romanian section of the Bulgaria – Romania – Hungary – Austria pipeline. Another positive development has been the completion of the Romania – Bulgaria gas interconnector in 2016, although further steps are required in order for the interconnector to become fully operational.
Electricity transmission connections and the capacities of the system to supply surrounding countries should be enhanced and development should be accelerated, alongside full market coupling. In this respect, several power interconnection projects that are currently in the early stages of design and approval should be completed.
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 cross-border pipelines, i.e. to increase system operating pressure and completion of reverse flows with Hungary and Ukraine as well as further investments in increasing the operating pressure on the Romanian-Bulgarian interconnector. The Romanian portion of the Bulgaria-Romania-Hungary-Austria gas transmission corridor, which will 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 as a priority. 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 in Romania of the required infrastructure for the offtake gas from the Black Sea shore. 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 among the main contributors to the state budget. In spite of the sector’s already large contribution, the 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. Furthermore, a so-called “tax on natural monopolies” was levied on gas and electricity transmission and distribution volumes, despite these activities being regulated businesses. These “temporary” taxes were introduced without a comprehensive assessment of their economic impact and their temporary character was extended long beyond their initially intended period of application.
These taxes were initially made applicable until the end of 2014 but they have been extended year after year through last-minute legislative changes, without any consideration of the changes to market prospects since the time of their introduction, leading to gas market distortions between different supply sources. Their application over an extended period of time has placed a heavy tax burden on energy companies and consumers and as a result investments have been delayed and the costs for final consumers have increased unnecessarily.
The new Government has announced plans to implement a new fiscal regime for oil and gas upstream operators starting 2018.
The energy industry is a key sector that needs fiscal stability, predictability and fiscal transparency and coherent policies to incentivize investments, which are key factors to ensure the competitiveness of the energy sector in Romania and facilitate the development of a long-term energy strategy. Investments in the energy industry involve high risks and require long term planning. The FIC shall continue to emphasized that fiscal instability and increased taxation distort the energy market and jeopardize much-needed investments in the sector. Moreover, the FIC emphasizes that any changes in tax legislation should be made only after a careful impact assessment and thorough consultations with relevant stakeholders.
The new fiscal framework for oil & gas should aim at balancing state’s interest to secure the energy independence long term and to ensure a steady income to the state budget with that of investors who need competitive taxation to continue exiting upstream projects and develop new ones. The main points to be taken into consideration are: the stability regime for existing concession agreements, challenges posed by the domestic production profile (ex. mature and fragmented fields, low productivity, need of high cost and risk investments to increase recovery factor of existing fields and to develop new resources), best international practice and economic theory.
Romania could capitalise on its energy resources more efficiently than in the past by addressing a set of issues which include old assets, low (often subsidised) energy prices, outdated building stock, wasteful consumer behaviour, poor promotion of product standards and labelling, insufficient financing of energy efficiency measures 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 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.
However, Law 160/2016 has introduced an obligation for energy audits on 50% of the energy consumption boundary, de facto steering away from the initial option expressed by Romania to adopt alternative measures, thus discouraging the adoption of more comprehensive options, such as the implementation of management systems which produce long term, sustainable change in the organisational culture.
The FIC supports the implementation of policies to achieve targets on energy efficiency while minimising the impact on energy prices and maintaining the smooth functioning of energy markets and also supports the improvement of Romanian legislation on energy efficiency.
Lack of financing of energy efficiency projects is the main hurdle for development of the sector. The FIC believes that available national and European support schemes and funds (EU funds, revenues from ETS allowances, cogeneration contributions and small central and local state budget funds) should be centralised to set up of the proposed dedicated fund for energy efficiency investments in the sectors with a proven potential for savings and implementation capacity. This fund has been de facto abandoned even though it is mentioned in relevant national legislation. Best performers could be incentivised to further reduce energy intensity by cutting the long payback periods for new and efficient technologies. To tap into the significant saving potential, the FIC recommends that funding should abide by the technological neutrality principle, allowing organisations to invest in solutions that are best suited for their operations. Moreover, innovative financing mechanisms need to be put in place and promoted, such as: energy performance contracting schemes (EPCs) offered by Energy Service Companies (ESCOs) and green bonds.
Raising the awareness of end-users (e.g., via digital tools), and gathering and communicating the relevant data (e.g., through smart meters) could play an important role in Romania reaching the EU energy efficiency target. Measuring the consumption of end users, and quantifying what they could realistically save are the first steps in raising their awareness.
In parallel, avoided greenhouse gas emissions should be promoted as an indicator in order to prioritize energy efficiency measures, as this indicator makes it possible to assess the wider impacts of energy efficiency policies on overall energy and climate strategy.
Energy standards and labels, such as those promoted by the Ecodesign and Energy Labelling Directives, have proven to be successful tools to reduce energy consumption. Further progress is possible, for instance, via even more relevant, up-to date and easily understandable energy information, such as annual operational costs in euros and average energy costs per kWh.
Two particular sectors need urgent and realistic action. Investments in district heating have been low, except for several private investors, and energy losses put at risk the whole system whilst increasing artificially the cost of heat for final consumers. Although it is unlikely that all district heating systems could be made efficient, some, in particular those located in large cities, may have better prospects provided that investments are made. 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 in reaching the 2020 targets.
While it has been neglected until now within European energy policy, the district heating sector has recently gained considerable attention at EU level, with the Clean Energy for all Europeans package, published by the Commission on 30 November last year, placing significant emphasis on the sector. This paradigm shift will not only influence the sector’s shape within the Member States but is also an opportunity for the Romanian authorities to seize the momentum and to adopt a comprehensive approach in order to rethink its district heating policies by taking into account the specific characteristics of this sector in Romania.
In the context of increased EU focus on district heating, the FIC emphasises that in Romania, this sector has reached a critical point where it is barely functional and in some major cities it is constantly on the verge of systemic collapse:
The district heating strategy should be fully embedded in the European and Romanian energy policy framework, including the Romanian Energy Strategy in order to ensure coherence and predictability for investors. The strategy should present a credible plan to identify investment needs as well as to propose optimal solutions and financing sources in order to upgrade the existing district heating systems.
The strategy should aim at ensuring technological neutrality of public policy in heat markets, stimulating solutions which are efficient from a technological and economic point of view.
The strategy should review the subsidies mechanism to avoid waste of resources and gradually switch to a sustainable system. Subsidies should be limited to vulnerable consumers thus enabling the authorities to tackle the problem of energy poverty.
Different financing mechanisms should be identified and made consistent whilst taking into account the nature of the investment projects.
For old and less efficient plants, grandfathering rules should apply until 2023 as provided by current legislation. A new support scheme incentivising investments in new cogeneration units and new technologies should be designed.
The use of renewable energy sources, heat recovery resulting from industrial processes, as well as waste to energy projects, should be encouraged in district heating networks.
District heating policy should be aligned with waste management policy and incentivise resource efficiency.
New investments should be designed and implemented based solely on an integrated vision, i.e. by observing the entire chain, from production units to network refurbishment and insulation of buildings.
Reduction of heat demand through thermal rehabilitation of buildings should be defined as one of the main axes of the Romanian Energy roadmap.
The strategy should aim to offer a long-term plan to help the non-urban population have access to efficient and modern heating solutions.
District heating and cogeneration should be eligible for funding under the Modernisation Fund and Innovation Fund, with access supervised by the Ministry of Development, which should assure advice and support in accessing financing programs, and monitoring of implementation.