Energy Transition

Europe is facing an unprecedented energy crisis, with 3 main challenges to be tackled quickly: reinforcing energy security, accelerating the energy transition and improving cost competitiveness in international competition. The main priority is to identify those balanced measures and tools for viable and sustainable solutions that support all actors, reduce cost pressure and protect vulnerable consumers. At the same time, large investments in the energy system are needed in order to ensure energy security and independence in the future, and the FIC considers that efficient coordination and cooperation between public authorities and private investors is necessary. This in turn requires a well-structured medium-term strategy, giving a clear definition of the duties of each party and ensuring the rights of each stakeholder.

A vital criterion for large investors remains stability, predictability, and transparency of legislation. This criterion has not been met in Romania recently in view of the numerous changes to legislation in the energy sector mostly adopted during 2022 through emergency ordinances without the necessary time for consultations with the parties involved (GEO 27/2022, GEO 119/2022, GEO 153/2022, GEO 186/2022). Although important market players are making major efforts to adapt to new regulations, compliance and implementation are becoming increasingly burdensome given the tight deadlines, multiple changes over the past year and imperfections in the legislation, and thus the functioning of the market is affected.

European perspective- new legislative framework

The disruption to energy supply caused by the war in neighbouring Ukraine redefined and elevated the topic of energy security from national to EU level. In the short term, EU policy was focused on reducing natural gas supplies from Russia, and on finding alternative suppliers of either piped natural gas or LNG, as well as reducing demand for natural gas.

As a consequence of the ongoing armed conflict, storage availability was put high on the EU agenda. In a coordinated response, EU policy makers agreed to take emergency action to ensure that all the available natural gas storage systems in the EU would be filled to at least 80% capacity before 1 November 2022 and to 90% before 1 November 2023. Romania managed to fulfill its obligation on time. According to the Regulation this obligation will come to an end at the end of 2025 leaving a significant period of gas phase-out uncovered.

The list of coordinated EU level measures continued with the adoption of a regulation on a voluntary reduction of demand for natural gas by 15% last winter. The regulation foresaw the possibility for the Council to trigger a ‘Union alert’ on security of supply, in which case the gas demand reduction would become mandatory.

Gas demand aggregation and joint purchasing, as well as an acceleration of discussions with reliable partners to secure long-term supply contracts were additional steps taken at EU level. The regulation tasks the Agency for the Cooperation of Energy Regulators (ACER) to develop a new complementary price benchmark which will provide for stable and predictable pricing for LNG transactions. The new benchmark is available starting on 31 March 2023.

Thanks to the provisional agreement reached in December in the Council of the EU on REPowerEU, member states will be able to add a new chapter to their national recovery and resilience plans (RRPs) under NextGenerationEU, in order to finance key investments and reforms which will help achieve the REPowerEU objectives of strengthening the strategic autonomy of the EU by diversifying energy supplies and boosting the independence and security of the EU’s energy supply.

National perspective - legislative framework – aspects with elevated effects on security of supply

Stemming from the fact that in the electricity sector Romania is integrated into European power coupling mechanisms as sizeable market which can have an impact on the region and that in the gas sector Romania is also part of an interconnected market, all regulatory measures should take into account the risks to security of gas and electricity supplies in Europe.

Although the above-mentioned EU level measures conferred a certain degree of predictability and efficiency on policies in the field of natural gas and electricity, throughout 2022 energy companies operating on the Romanian market (gas and electricity) faced a high degree of regulatory uncertainty with considerable negative effects on their businesses, as several of the initiatives came into effect without proper consultation with the industry.

GAS

Infrastructure related aspects: although the Gas Interconnector GreeceBulgaria (IGB) ensured a valuable new supply route, when consideration is given as to how to cover the missing amount, it should be borne in mind that the two countries from which Romania can get additional amounts (Hungary and Bulgaria) are both net importers of gas, with a much greater need for imports i.e. they are more vulnerable than Romania. In accordance with Art. 13 of Regulation (EU) 2017/1938 concerning measures to safeguard the security of gas supply, Romania should conclude intergovernmental agreements on solidarity measures to guarantee the security of gas supply with Bulgaria and Hungary, since Romania is directly connected with these countries.

Since 2021, there has been a noticeable increase in imports via Bulgaria, correlated in 2022 with considerable export flows towards Hungary. It can be assumed that Romania is now a key transit country for westbound volumes coming from Southern Europe.

Liquefied natural gas (LNG) imported to Europe through LNG terminals is a source of diversification that contributes to competition in the gas market and the security of supply. Efficiently operating infrastructure and removing congestion are essential to allowing missing gas volumes to be replaced by increased LNG and non-Russian pipeline gas imports. However, Turkey’s ban on LNG tankers crossing the Bosphorus means that even if Romania were to have an LNG regasification terminal, it could only receive tankers originating from another Black Sea port: On 19 October 2022 Romania’s Romgaz and Azerbaijan’s Socar signed a memorandum of understanding to explore the opportunity of jointly developing such a project, the viability of which still needs to be confirmed by the feasibility studies and further developments in the region. For now, Romania can at most receive via pipeline the regasified LNG initially shipped to other nearby countries.

Applicable national legislative framework related aspects:

The FIC has repeatedly drawn attention to the major risk generated by the lack of a private investment flow in conditions where the state alone cannot ensure the level of investment required for the modernization and transformation of this sector.

• Although we recognize the challenges of the current energy crisis, we remain advocates of a legislative framework that ensures free and fair market conditions as well as for proportional, targeted and balanced interventions, correlated with European regulations. These are the right principles to address efficiently the double challenge of alleviating market price pressure and ensuring long term security of energy supply

• Through GEO 186/2022, Romania became the only country with already existing supplementary taxation to introduce also the solidarity contribution mechanism provided by Regulation (EU)1854/2022. This took place in spite of an existing legislative framework which already includes measures that contribute to the accessibility of energy prices and already imposes additional contributions aimed at mitigating the exceptional price developments on the energy markets for the benefit of the state. The excessive burden of a quite restrictive existing framework together with the new measures introduced under the Regulation, including the very high solidarity contribution of 60% will have considerable negative effects on the investment plans of the companies concerned.
• The terms of applicability at national level of Regulation EU 2022/2576 still remain to be clarified as Member States are supposed to require domestic undertakings to use the service provider to aggregate demand for volumes of gas equivalent to 15% of their respective gas storage filling obligations for 2023 (around 13.5 billion cubic metres for the EU as a whole).

Electricity:
Infrastructure related aspects:

The FIC underlines the importance of stable and efficient framework conditions, the removal of regulatory and technical barriers, while maintaining a stable and secure energy system, the exchange of best practices, and measures aiming to reduce the cost of capital.

Applicable national legislative framework related aspects:

The recently adopted legislative measures both in gas and electricity which set obligations for gas and electricity producers requiring priority supply to certain categories of market participants at regulated prices has an impact on cross- border trading and flows, undermining price and investment signals.

• GEO 153/2022 – The functioning of the centralised acquisition mechanism (MACEE) needs to be improved, starting with the overburdensome financial guarantee requirements. Secondly, there is a need for MACEE to take into account the situation of producers not delivering their forecast volumes due to specific technical circumstances beyond their control; thirdly, the centralised acquisition mechanism (MACEE) should not unduly impede cross-border trading flows in the coupled European market in line with the provisions of Regulation (EU) 2019/943 and Directive (EU) 2019/944 (over-taxation of suppliers and traders issue); fourthly there is a need for MACEE to take into account the situation of consumers that hold suppliers’ licenses and acknowledge their whole consumption.
• GEO 27/2022 and its subsequent amendment through the approval law (Law 206/2022) and its further modification through GEO 119/2022 (approved by Law 357/2022) introduced a very generous support scheme for the majority of consumers, aiming to make energy prices more affordable, but it did so at the cost of potentially endangering security of supply, due to the financial burden exerted on suppliers. While helpful from a consumer perspective, it also cautioned potential investors about poor market conditions in Romania. Setting a price ceiling of 1300 lei/MWh, up to which the state recognises suppliers’ energy purchase expenses is one impactful example of a market adverse measure. This came in the context of the European Commission recommending to national governments that their support schemes should not affect the financial liquidity of supply companies, which should be otherwise compensated if they are forced to sell electricity at prices below costs (Recital 49, Regulation 2022/1854).

• The method of calculating the contribution to the Energy Transition Fund owed by electricity and natural gas producing entities, aggregated electricity producing entities, electricity and natural gas traders, electricity and natural gas suppliers and independent electricity aggregators for their trading activity is excessive, considering that a number of justified costs related to trading activity are not recognised (e.g.: transmission costs, capacity booking, storage costs, market access costs and other logistics costs or tariffs required to bring electricity or natural gas to the delivery point in Romania, financing costs and operational costs related to these operations, credit lines, bank guarantees, etc.). At the same time, electricity producers are also required to pay a contribution to the Energy Transition Fund for electricity production activity; thus, this category is doubly overtaxed, considering that trading activity is an intrinsic part of the necessary electricity production activity, to cover the risk of non-production of electricity as a result of intermittency, or unforeseen technical unavailability.
• Constant legislative changes made in an untransparent manner and in fairly quick succession, often to correct initial design errors, have caused losses to companies in the energy sector, both financially and in terms of public perception. We strongly believe that this could have been avoided if the government had taken an approach based on openness and constructive dialogue with the sector.

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.

To overcome these retrospective legislation changes, 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.

Furthermore, the European Green Deal assumes that Hydrogen will play a key role in the future decarbonated European Energy System. Several strategic documents lay out the foundation for the deployment of a hydrogen economy, but the most important documents to date are the Energy System Integration Strategy and the Hydrogen Strategy. Their purpose is to turn hydrogen, especially renewable hydrogen, into a viable solution for the transport and the power generation sector among others. It is important to note that the emergence of the green hydrogen economy is particularly energy intensive.

With the publication of the REPowerEU plan in May 2022, the European Commission complemented the implementation of the EU hydrogen strategy to further increase European ambitions for renewable hydrogen as an important energy carrier to move away from Russia's fossil fuel imports. The Commission outlined a ‘hydrogen accelerator’ concept to scale up the deployment of renewable hydrogen, which will contribute to accelerating the energy transition and decarbonising the EU’s energy system.

In the proposed revision of RED II, Member States must require fuel suppliers to provide at least 14% of the energy consumed in road and rail transport by 2030 in the form of renewable energy for which it takes account of Renewable Fuels of Non-Biological origin (RFNBOs) when used directly as a fuel or as an intermediate for the production of conventional fuels. Moreover, the RED III proposal stresses that benchmarks should be established to incentivise industry to switch to renewable energy production processes and to use hydrogen from renewable sources.

Moreover, it is necessary that Romania plans carefully and implements the RePowerEU Roadmap towards 2030. Investments in the energy sector need reliable, stable and predictable public policy and legislation that allows investors to foresee a long-term economic plan. It is recommended that Romania invests in renewable energy not only to meet its commitments at EU level, but also to maintain the competitiveness of the power and industrial energy-intensive sector. In 2019 and 2020, Romania became a net importer of electricity, which is a sign that the domestic infrastructure is no longer economically competitive or technologically fit to meet internal demand. Conventional generation units are old and face significant environmental issues and costs, as about 7 GW of coal and gas fired assets must renew their environmental permits during 2020-2028.

The two major crises Europe is facing today - climate change and Russia’s invasion of Ukraine - have a huge impact on the energy system. In this difficult context, keeping the balance between the cornerstones of the energy trilemma - sustainability, security of supply and affordability – has become a challenge and a responsibility for all stakeholders.

The transition from fossil fuels to clean energy to address climate change involves an important socio-economic dimension which has to be properly assessed and tackled during the entire process.

Transitioning away from fossil fuels will affect workers in related sectors and the economic activity in the communities from the surrounding areas, but can also create new jobs,leading to a net increase in local employment if appropriate resources and policies are put in place to protect workers and communities, address unintended consequences and capitalise on new economic opportunities.

A just transition for all to a climate neutral economy is crucial and the European Union has developed the Just Transition Fund as a key tool to support this transition. This support will be based on the development strategy defined in the Territorial Just Transition Plan (TJTP).

In Romania, six counties are considered the most affected by the energy transition Gorj, Hunedoara (which still has active coal mining) Dolj, Galaţi, Mureş and Prahova (which have carbon-intensive industries, such as steel, cement and fertilisers, as well as coal power used for heating).

Following the adoption by Romania of its TJPTs, the European Commission approved €2.14 billion in funding for Romania from the Just Transition Fund to support workers affected by the ongoing energy transition in finding new qualifications and new jobs. Small and medium-sized businesses (SMEs) and, in specific cases, large companies will also receive support to create jobs and diversify the economy in the fossil fuel production and carbon-intensive regions.

The challenge of the energy transition is reinforced by the high volatility of energy prices. The risk that a wide range of consumers, whether SMEs, large industrial entities or households may no longer be able to pay their energy bills has become a distinct possibility.

Thus, the authorities should identify and implement sustainable measures to ensure the protection of vulnerable consumers, as well as the continuance of economic activity.

Romanian authorities’ plan to address the problem of rising prices through capping them is a significant step. Still, while the government’s approach offered short term-support to consumers and helped mitigate the macroeconomic impact of the crisis, at the same time it created very difficult market conditions especially for suppliers and to a certain extent, also distributors and producers. It should be highlighted that market interventions in the form of price setting constitute a fundamentally distortive measure. At the same time, from a public finance perspective, the sustainability of the approach also raises some questions.

Therefore, there is room for improvement and the business environment is ready to work alongside the Romanian authorities to identify the best measures to ensure the protection of vulnerable consumers, facilitate the implementation of activities to promote energy efficiency, support the continuity and resilience of the business sector and preserve Romania's competitiveness in terms of investments.

According the to the European Commission’s recommendation, the updated version of the National Energy and Climate Plan should reflect better the socio-economic impacts of the energy transition and include a clear, specific, attainable, measurable and time-bound objective for reducing energy poverty, affordability being one of the priorities of the EU. Considering the current rise in energy prices, all Member States are encouraged to set an objective of reducing energy poverty.

Energy transition does not only mean changing the energy mix. The climate emergency requires a paradigm shift in the energy model, a fundamental change in the way energy is produced and consumed.

During the last century, the energy industry’s business model was more focused on how to produce energy and customers were simply energy consumers with the system only operating one way, from production to consumption. As energy costs continue to rise and due to technological progress, consumers can reduce and control their energy use. Residential and industrial customers can now become prosumers and take control of their energy production and consumption thanks to smart grid modernisation and other technological progress. It is a new interdependent model which dramatically changes the relationship between utilities and their customers. Customers are a new player in the energy system.

In Romania, the number of prosumers is constantly increasing. In order to be a successful story for both sides, the Romanian authorities should put in place clear, transparent and predictable regulatory and legislative rules to ensure the sustainable development of prosumer energy over the long term. Challenges such as competition distortion or increasing costs to the grid connection should be properly addressed, as solutions can be found through partnerships between prosumers, other energy producers and companies working in the field of energy transmission and distribution.

The benefits of prosumer energy can also represent an important element of various policies aiming to balance the energy grid (by reducing peak loads), reduce energy poverty and protect socially vulnerable groups, as well as to strengthen regional economic development.

Mapping of the available financing instruments

In line with sustainability policies in general, numerous funding opportunities exist to support renewable energy, decarbonisation, as well as efforts to compensate entities affected by the (sometimes sudden) shift away from fossil fuels. At the EU level, these include:

• Connecting Europe Facility (CEF), a co-funding initiative promoting growth, jobs and competitiveness through infrastructure investment at European level. It can dispense up to €33.7 billion in 2021-2027 and is divided into three distinct instruments:
• CEF-T (transport), with a total budget of €25.81 billion, also contributing to the implementation of the Trans-European Transport Network (TEN-T) framework.
• CEF-E (energy), with a total budget of €5.84 billion, also including PCI (Projects of Common Interest) in the Trans-European Networks for Energy (TEN-E) framework.
• CEF Digital, with a total budget of €2,065 billion.

The general maximum co-funding rate for the CEF is 50% of the project capital expenditure (CAPEX).

Horizon Europe, the EU’s key funding program for research and innovation, running in 2021-2027. With a budget of €95.5 billion, the program has 3 “Pillars”, dedicated to Excellent Science (Pillar I), global challenges and European industrial competitiveness (Pillar II) and Innovative Europe (Pillar III).

The LIFE Program, focusing on environmental action to mitigate climate change, has a budget of €5.4 billion for 2021-2027 and aims to support projects in four areas: nature and biodiversity, the circular economy and quality of life, climate change mitigation and adaptation and clean energy transition.

The Innovation Fund, rewarding disruptive low-carbon technologies, could grant up to €38 billion of support over 2020-2030 in the form of grants, with an expected average of €1.5bn/year, though the actual sums depend on the price of carbon, as the EU ETS provides its revenue.

The main Romanian national financing mechanisms for energy-related projects are:

• The National Recovery and Resilience Plan (NRRP), with a total energy-related budget of €1.7bn.
• The Just Transition Fund, the key tool to support areas most affected by the transition towards climate neutrality (coal mining regions, de-industrialized areas etc.), forming part of the Cohesion Policy 2021-2027, as the first pillar of the Just Transition Mechanism, in the context of the European Green Deal, which aims to achieve EU climate-neutrality by 2050. Total funds at EU level are up to €19.2 bn. The national programme is called the Just Transition Programme. It addresses only 6 eligible counties in Romania: Gorj, Hunedoara, Prahova, Dolj, Galati and Mures.

• The Modernisation Fund, a dedicated mechanism for low-income countries, up to 2030, with yearly project calls, and a total estimated budget for Romania of €15bn; It is structured into 8 Key programmes: Renewable energy, Replacing coal and balancing the network, Energy infrastructure, Green Hydrogen, High-efficiency cogeneration and modernisation of district heating networks, Nuclear Energy, Energy efficiency in industrial installations included in the EU-ETS, and Biofuels.
• CfD (Contracts for Difference) mechanisms, which provide a stable, predictable energy price, and for which the first round of tenders in Romania, for wind and solar PV projects are expected in 2023 (1.5 GW), followed by a second round in 2025 (2 GW);
• Sustainable Development Operational Program (PODD), with a total allocation of €5.2 bn structured into 4 Priorities: Investments in the water and waste water sector, protecting the environment through biodiversity conservation, ensuring air quality and remediation of contaminated sites, promoting adaption to climate change and risk management, promotion of energy efficiency, smart energy systems and grids and reducing gas emissions.
• Large Infrastructure Operational Program (POIM) through 4 Priority Axes out of 10 that the programme has in total. Priority Axis no. 6,7,8 and 10 with an approximate allocation of €1.3 bn.