Energy

In the past few years, the Romanian energy sector has been marked by several developments that have had a significant impact on the sector and its future development. 

Following the approval of the ambitious EU energy package in 2018-2019, Romania submitted its first National Energy and Climate Plan (NECP) to the European Commissions (EC). In the assessment document of Romania’s NECP, the EC evaluated the targets assumed by Romania as “unambitious” in relation to the RES target of 30.7% and as “low” and “very low” in relation to the energy efficiency targets (32.3 Mtoe and 25.7 Mtoe of primary and final consumption, respectively).

Recently, a first draft of Romania’s Energy Strategy 2020 – 2030 was published, with a perspective for 2050, and with a focus on big investments (almost 3 billion euros) in new electricity production capacity with reduced CO2 emissions, diversifying the production mix of single-fuel producers. 

The Strategy includes mandatory investments in renewable energy and hydrogen for all major producers, increasing the production of electricity based on gas as a substitute for coal, increasing the resilience of the National Energy System (SEN), improving efficiency, opening energy markets (including to prosumers), increasing interconnectivity with neighbouring countries, as well as following the directions given by the Green Deal.

After re-regulating wholesale (in the case of the gas sector) and retail prices (the gas and electricity sectors) in 2019, the government approved new changes to the Energy Law in 2020, which led to progress in the deregulation of energy markets. In the gas sector, natural gas prices for households and heat producers were deregulated as from 1 July 2020, simultaneously with the removal of the cap price of 68 lei/MWh for domestic gas traded on the wholesale market. To stimulate the development of the wholesale gas market, a gas release programme was adopted, starting from 1 July 2020, and operating until the end of 2022, to replace the former gas market trading obligation, a change which was welcomed by companies, though some adjustments are still needed.

The legislation increased the special taxation applied to the gas sector by the introduction of a new windfall profit tax, this time for gas suppliers, alongside the older windfall profit tax for gas producers. The new legislation also set plans to liberalise the gas storage market by phasing out the requirement for gas suppliers to store gas as reserves for peak consumption periods. The new legislation also increases the obligations of gas and electricity distribution companies in relation to the connection of final consumers and it increases drastically the penalties for misconduct by energy companies, even for minor misdemeanours.

In the electricity sector, regulated retail prices were removed in January 2021. Besides the removal of regulated end-user prices, the new amendments to the Energy Law increased the burden on electricity distribution companies in relation to the connection of new customers. The ban on directly negotiated electricity contracts between producers and suppliers remained in place, with the exception of contracts signed by small electricity generation companies from renewable energy sources and new renewable energy production units to be installed after 2020.

In early 2020, the European Commission made commitments offered by Romanian gas TSO Transgaz legally binding under EU antitrust rules, with Transgaz pledging to make significant firm capacities for natural gas exports from Romania to neighbouring Member States available to the market, in particular Hungary and Bulgaria, as well as committing to ensure that its tariff proposals to the Romanian national energy regulator will not discriminate between export and domestic tariffs and that it will refrain from using any other means of hindering exports. In November 2020, Transgaz announced that the Romanian section of the BRUA gas pipeline project (Phase 1) has been completed.

The Romanian government also approved legislation that attempts to set the framework for investments for the titleholders of petroleum agreements in offshore fields. The offshore law was enacted in 2018, and set quite detrimental conditions for prospective investments in offshore gas fields. These included a windfall tax on gas produced from offshore fields, the lack of a stable legal framework and the requirement for offshore producers to conclude contracts for at least 50% of delivered gas to be distributed to the centralised markets in Romania.

Because of the unfavourable legislation, new investments (mostly upstream gas and electricity production) have been scarce and many have been postponed. There is clearly a deadlock in terms of major  investments in the newly discovered offshore gas fields in the Black Sea, with major investors announcing a postponement of investment decisions until the specific legislation is clarified. In the electricity generation sector, the lack of investments, both in conventional and renewable energy sources, makes the Romanian power sector non-competitive at a regional level, and the country was a net importer of electricity in 2019 and 2020.

The attractiveness of investments in regulated businesses (transport and distribution of gas and electricity) has also decreased as a result of the lower regulated return (6.39% for all regulated network activities) approved by the energy regulator in 2020. Investment programmes in the maintenance and safe operation of networks are jeopardised by the increased capex obligation to meet the legal requirements to connect final customers, regardless of the economics of such investments, as well as low long-term remuneration for allocated capex.

In terms of upstream, Romania must take advantage of the clean energy resources it owns. The legislation that has delayed investments in offshore gas must be urgently fixed, in order to make these resources available by the middle of this decade. The longer this is postponed, the less attractive these investments will become, bearing in mind the EU objective of carbon neutrality in the long run. Romania’s significant onshore gas reserves are decreasing and therefore it is crucial to complement such reserves with offshore reserves from the Black Sea. These resources must be used because they represent a significant asset for Romania and, for the moment, natural gas is a paramount energy source to ensure energy transition, while the costs of other cleaner technologies must become more accessible to the benefit of end consumers. In the short and medium term, natural gas can also decrease greenhouse gas emissions, in particular in power generation, as it will gradually displace coal and lignite fired power generation, as the environmental costs of these increase. Natural gas (during the transition period) and green gas (biogas, bio-methane, hydrogen) will remain part of the energy mix of the European Union.

In the renewable energy sector, after four years of substantial oversupply of the market with green certificates, the law has been changed to better address this issue. Moreover, for the first time, the regulatory framework for small prosumers has been adopted to increase the attractiveness of small, decentralised electricity production.

The development of renewables must be a priority to achieve the target of 30.7% of total energy consumption by 2030, pledged at EU level. A clear roadmap and legislation to stimulate the development of required additional capacities to meet the new target must be developed soon, and the barriers should be removed to the development of renewable energy (high grid connection costs, very high balancing costs, inflexible trading instruments, etc). In the same time, the progress registered in terms of decentralized renewables (such as the “Casa Verde program”), the installation of charging stations for electric vehicles, the Rabla+ program and the declared intentions of several municipalities to acquire electric buses are important steps.

This progress should be further enhanced through investments in accelerating the green mobility infrastructure and deployment of photovoltaics for industrial and residential buildings.

Romania must abandon the populistic approach that has been taken towards the energy sector in the last few years and must urgently set the pre-requisites for attracting much-needed investments to revamp the sector.  The FIC emphasizes that energy projects have especially 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 hinders long-term commitments from private investors. The Romanian energy sector is developing, albeit not quickly enough. The Romanian authorities must ensure a stable legislative framework which provides certainty for investors. Changes to the framework must be made only following comprehensive consultation of all stakeholders involved, with due consideration of comments made and with impact studies on the proposed changes. Only by ensuring stable legislation can the Romanian authorities attract the necessary long-term investment to tackle the remaining structural problems in the sector, such as the rapidly ageing infrastructure.

In the Romanian gas and power markets, free competition based on a level playing field between market participants is key to attracting investors and ensuring that Romania’s economy and its energy sector continue to grow and become internationally competitive. Market based price formation supports trade, investment and efficient resource allocation and utilisation, thereby allowing local production to compete with international supplies and facilitating the sustainable development of a cost efficient and competitive energy industry in Romania. Unrestricted import, export and trade allows producers and wholesalers to leverage the benefits of an open market, thereby supporting supply and demand efficiency and increasing security of supply in Romania.

Since 1 January 2021, end-consumers have been free to choose between electricity supply under the universal service regime, from a supplier of last resort (SoLR) of their choice or a competitive contract with any supplier on the market. Prices for end-consumers supplied under the universal service regime are fully market-based, hence freely and competitively set by SoLRs.  

Nonetheless, the measures adopted by Parliament soon after the liberalisation of the gas market (i.e. the new tax on gas suppliers’ profit and the restrictions on the formation of otherwise free retail prices for household consumers), are incompatible with the principles of the liberalised market, which they risk undermining. For example, the amendments to the Energy Law (adopted and implemented through Law 290/2020 before the end of 2020) had a negative impact on gas and electricity Distribution System Operators (DSOs) by creating additional obligations to connect customers. The passing of Law 290/2020 demonstrated the lack of predictability of legislation during electoral periods, which is harmful to the economy. The fact that the measures were not accompanied by an impact analysis continues to affect investors’ confidence at a time when the partnership between the state and the private sector is crucial to jointly contribute to the economic recovery after the pandemic and to meet the Green Deal objectives.

The liquidity of the wholesale market has significantly increased in the last few years, although trading instruments have remained rigid and are not entirely adequate to meet the needs of market players, including the requirements of final customers. The developments observed in the last few years on the wholesale market prove that it requires more flexible trading instruments that will better fit the needs of market actors or customers, while maintaining good liquidity in the centralised markets. Moreover, under EU Regulation 943/2019 on the internal market in electricity, directly applicable in Romania as from 1 January 2020, market participants must have the possibility to bilaterally negotiate electricity supply contracts. Romania has still not revoked national legislation which runs counter to this EU Regulation.

The FIC supports the interconnection of the Romanian national gas and power transmission systems with those in neighbouring countries; this will increase security of supply for Romanian consumers, increase competition, attract trading in the Romanian gas and power markets and support the development of Romanian gas resources through the access of investors to a larger market.

Significant investments are needed in gas and electricity distribution networks to increase their reliability and to adapt them to the new objectives of the energy transition. The recently enacted legislation placed additional pressure on electricity and gas DSOs by increasing penalties, setting tighter deadlines for connections and requiring DSOs to connect, at their own expense, non-household customers located up to 2,500 meters from the network, regardless of economic efficiency. 

The Government issued an Emergency Ordinance to give financial support to the municipalities applying for gas grid connections, but few applications were filed until the end of 2020. Distribution System Operators (DSOs) or Transmission System Operators (TSOs) were not eligible for this funding. Moreover, the rate of return for gas and electricity distribution was reduced from 6.9% to 6.39 and 1pp for new investments, hence reducing incentives to invest in the operation and modernisation of distribution assets. This will have a negative impact on the security of gas and electricity supplies to end consumers. 

The so-called “tax on natural monopolies” levied on gas and electricity transmission and distribution companies, despite their activities being regulated businesses, has not been abolished.  In the gas storage sector, the authorities changed the tariff regulation framework in 2018 from a revenue cap to a cost-plus formula. The change in the regulation means that the accurate recognition of storage costs has become fundamental for the functioning of the sector. Moreover, the switch of access to gas storage from regulated to negotiated, beginning from the next storage year, calls for the adoption of fair, non-discriminatory rules to underpin the new storage access regime. 

The overall EU targets will transform the way the gas and electricity networks are used. 

In the electricity sector, the higher demand from electric vehicles and the increased production of electricity from renewable energy sources will lead to an increased level of digitalisation and flexibility. Consequently, emerging technologies need to be planned into the standards and designs for the distribution system.

The regulatory and legal framework should incentivise this, also making full use of EU funds, to boost digitalisation and flexibility in the networks. This will facilitate achievement of  the targets set by the Green Deal as well as decarbonisation targets, in which power infrastructure will play a crucial role.

In the gas sector, gas networks will have to accommodate today’s need to connect an increasingly high number of new customers with the need to make new networks fit to meet long-term decarbonisation targets. Hydrogen and bio-methane, along with other renewable energy sources, will play important roles in decarbonising heating and cooling, as well as in transportation and industrial consumption in the long term. Romania should adopt a long-term plan to retrofit the existing gas infrastructure to accommodate these new renewable energy gases.

The positive news is that the 2021-2027 programming period brings a set of financing opportunities for the energy sector, including the modernisation of networks.

In terms of the regulatory environment for the oil and petroleum products sector (both for distribution and storage), during the analysed period, two sensitive topics have either not been addressed by the authorities in a decisive manner (the establishment of a Central Stockholding Entity under Law no. 85/2018) or have been addressed in a deficient way, with a negative impact on a relevant market (the license for wholesale activities for companies which do not operate a physical storage facility).

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. Since 2013, the government has levied several direct or indirect taxes on energy companies, which have remained in place, even though initially they were intended to be temporary:

• A “windfall tax” of 60%/80% applied on the revenues of gas production companies allegedly as a result of gradual price deregulation. 
• A 0.5% tax on sales of crude oil and extracted minerals. 

• A so-called “tax on natural monopolies” on gas and electricity transmission and distribution volumes, despite these activities being regulated businesses. 
• A 90% tax on the so-called ‘extraordinary’ supplementary revenues obtained after retail gas price deregulation for the residential sector, if the commodity price invoiced to final residential consumers is higher than 68 lei/MWh.
• The retrospective elimination of pass through of royalties for gas infrastructure concession contracts since 2020.
   

Not only did these supposedly temporary taxes become permanent, they were also introduced without a comprehensive assessment of their economic impact. Moreover, their application over an extended period has placed a heavy tax burden on energy companies and consumers and, as a result, investments have been delayed or may not be made and the costs for final consumers have increased unnecessarily.  

Furthermore, not only have these taxes been made permanent, but their calculation base was arbitrarily set in the case of some. For instance, the mineral resources agency changed the gas reference price to be used for the purposes of calculating royalties in 2018 and linked it to the Austrian gas market price (CEGH), which is not in line with the principles for determination of the basis for various taxes in Romania nor with international practice. Since this new reference price was significantly higher than the market prices earned in Romania during certain periods, this led to an artificial increase in the royalties that are payable for gas production in Romania. 

The renewable energy sector has developed because of the country’s potential in wind, hydro, biomass and solar energy and the implementation of a support scheme which started in 2008. By the end of 2020, Romania had about 5 GW (excluding large hydro) of renewable energy production capacity which supports the country’s ambition for 24% of gross final energy consumption to come from renewable sources. However, the development of renewable energy capacities has been accompanied by retrospective legislative changes that have been imposed over the years and which have led to diminishing new investment and a difficult financial position for operational units.

However, since 2018, the government has approved several measures which are leading to improvements in the green certificate market, mostly because of a rise of the annual quota of green certificates, the implementation of a sustainable timetable for deferred green certificates and the extension of the availability of certificates.

In order to support the goal of achieving a climate neutral Europe by 2050, as set out in the European Green Deal, Romania has prepared the National Energy & Climate Plan (NECP) for 2021-2030 in which it has proposed a new target for 30.7% of gross final energy consumption to come from renewable sources. Though the European Commission assessed the commitment as "Unambitious", and called for a minimum 34% level, the target pledged by the Romanian government for 2030 is nonetheless a significant increase compared to the 2020 target of 24%. According to the NECP, the target for 2030 means that Romania must develop about + 6 GW of new wind and solar capacity and have almost 10 GW of wind and solar capacity by 2030. 
 

The expansion of renewable energy capacity can be supported through various mechanisms. The government has announced its intention to develop a Contract-for-Difference support mechanism for low carbon technologies and has made some minor steps forward towards implementing it. Romania can also obtain significant financing from the European Union in order to achieve its new target through investment programs such as the Modernisation Fund, the Just Transition Fund and the National Recovery and Resilience Plan.

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 has failed to meet the EU 2020 power interconnection target (10% of installed capacity).

Since 1 January 2021, Romania has also been aligned with the new EU Internal Market rules on electricity Market Design, and, in particular on the balancing market, following the implementation of the 15’ settlement interval and of the single balancing price.

In terms of natural gas infrastructure, the FIC welcomes the success of the national gas transmission company Transgaz in developing and enhancing the gas interconnectors with Hungary and Bulgaria. Further positive developments include the approx. 750 million Euro investment decisions that Transgaz has committed to in the next few years, the completion of the Romanian section of the Bulgaria – Romania – Hungary – Austria (BRUA) pipeline and of the required infrastructure for the offtake of gas from the Black Sea shore, as well as the completion of the interconnection with Moldova. 

Romania should 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, and there is considerable scope for efficiency improvements in the 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. 

In terms of the energy efficiency of buildings, in 2020 Romania updated Law 372/2005 to transpose the 2018 Energy Efficiency of Buildings Directive. Progress has also been made on the Building Renovation Strategy and the Integrated Energy and Climate Change Plan. It will be difficult for Romania to both substantially increase its renovation rate and also to apply some of the provisions of the Directive, like the one requiring that every building designed starting from 2021 should be an nZEB (Nearly Zero Energy Building).

Lack of financing for 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 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. 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. 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. 

Two particular sectors need urgent 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. 

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.