Emergency Government Ordinance (EGO) 74/2020 should be a major step forward in improving the legislative framework of renewables and allowing this industry to pick up again. But is it enough?
The ban on directly-negotiated power purchase agreements (PPAs) came in 2012 in the context of highly politicized discussions about directly-negotiated PPAs concluded by state-owned generators with well positioned traders in unfavorable conditions for the generators. Introduced to avoid discrimination in the market, the ban was general and, as such, negatively affected the development of renewable projects by damaging their bankability.
EGO 74/2020, however, does not overturn the general ban. Rather, it extends exceptions to it to include energy production capacities commissioned after 1 June 2020. The permissibility of directly-negotiated PPAs applies to any new generation capacity – not just renewables – but will primarily benefit clean energy facilities because that type of investment in the Romanian power sector has prevailed in the past 10 years and should continue to do so.
EGO 74/2020 keeps the ban on directly-negotiated PPAs for existing generation capacities, creating two legal regimes for the sale of power by generators, depending on commissioning date – until or after 1 June. The consequences of such a legislative approach should be carefully analyzed from two perspectives: possible distortion of free competition between generators; and compliance with EU Regulation 943/2019 on the internal market for electricity.
On free competition, comparing a generator which commissioned capacity before 1 June to one which will commission capacity after that date would indicate the latter seems in a better competitive position, as it may freely secure a long-term, directly-negotiated PPA. This apparent competitive advantage, if deemed thus, results exclusively from the change of the legal framework. It is not clear if this effect has been considered or analyzed by the government.
On the question of EU energy law, regulation 943/2019 requires member states, regulatory authorities and system and market operators to ensure markets are managed in accordance with principles including “long-term electricity supply contracts shall be negotiable over the counter” – the wide definition of “supply contracts” includes PPAs and the reference to “over the counter” indicates directly-negotiated deals. There is no distinction between existing and new generation capacities. Furthermore, the Romanian regulatory authority, the ANRE, issued Order 236/2019 at the end of last year, which anticipated a general lifting of the ban on directly-negotiated PPAs by expressly allowing electricity transactions to be performed on “non-regulated markets” – piete nereglementate, in Romanian. The ANRE has also prepared a draft order which defines “long-term electricity supply contracts” referred to by the EU legislation as contracts with more than a one-year delivery period, again without distinction between existing and new capacities. EGO 74/2020, therefore, appears to introduce a restriction on the applicability of EU regulation 943/2019 on the matter of freely-negotiated PPAs, which is neither provided by the EU rule nor anticipated by the ANRE’s secondary legislation for implementing the EU regulation.
It is also noteworthy that EU regulation 943/2019 is directly applicable in member states as of its entry into force on 1 January 2020, and should prevail over domestic legislation. However, the ANRE has avoided taking a firm stance on whether directly-negotiated PPAs were allowed from January 1. That is, essentially, because of the express ban enshrined in the Romanian Energy Law, and on the ground that EU regulation 943/2019 does not provide what should be the minimum duration of PPAs to be defined as “long term supply contracts” subject to free negotiation as per the EU regulation – an aspect the ANRE sought to clarify in its aforementioned draft order.
As detailed above, EGO 74/2020 has only partially lifted the ban on directly-negotiated PPAs and it remains to be whether parliament will fully align Romanian Energy Law to EU regulation 943/2019 on the matter using parliamentary procedure for approval of the ordinance. In Romania, any emergency ordinance passed by the government must be discussed and either approved, amended or rejected by the parliament.
There is also a previous bill amending the Romanian Energy Law that was launched in 2019 and approved by the senate, which continues to regulate an express ban on directly-negotiated PPAs – hopefully, this too can be corrected by the end of the legislative process through the Chamber of Deputies.
A new support scheme for renewables?
Since directly-negotiated PPAs represent a major bankability factor, lifting of the ban for new generation capacities should help them secure project financing easier. This is, therefore, a much-awaited correction of the regulatory framework.
Despite the positive step, there is no state-sponsored support scheme available in Romania for renewables: the previous green certificates scheme closed at the end of 2016. As a result, the installation of new renewable generation capacities has almost stopped since 2017.
It has been suggested some renewable sources, such as solar and, to a lesser extent, wind, could be profitable without a state-sponsored support scheme. That remains a speculative assessment, however, as it may vary depending on market, technology and, ultimately, project specifics.
In countries with shifting regulations, such as Romania, renewables still appear to need a support scheme, including in the context of mandatory EU targets with respect to renewable energy. The Romanian government is willing to adopt an ambitious target of 30.7% of renewable power in the total energy mix for 2030 – compared to 24% this year – which should translate into a need to install close to 7 GW of renewables by 2030, out of which almost 6 GW will come from wind and solar, as per the current draft National Energy and Climate Plan for 2021-2030. A new support scheme would be vital to attract the required investment for achieving those targets.
The Romanian state appears willing to prepare and implement, in the next two years, a contracts for difference (CfD) support mechanism for which it recently launched an advisory selection process through the European Bank for Reconstruction and Development (EBRD). In principle, a CfD mechanism guarantees a strike price for each generator, depending on project costs. The generator sells at market price but there will be a positive or negative financial adjustment operated by a central counter-party and related to the difference between the strike price and reference market price. Realistically, and given the estimated duration of the preparation process for such a new support scheme is two years, the earliest date such a CfD mechanism could become operational is likely 2022. Nevertheless, this is more good news for investors, who could already start planning or securing projects.
Why prioritize renewables?
There were opposing views in Romania with respect to renewables and shifting attitudes, fluctuating from generous support to a reserved approach or even open criticism, because of grid integration problems or the social costs involved with the previous green certificates support scheme. One thing is certain, however: decarbonization is the strategic direction to which Romania and the EU is heading under the recent European Green Deal and renewables are instrumental to achieving the very ambitious decarbonization targets set by EU.
Renewables could also compensate for the additional electricity output needed due to foreseeable rises in consumption, on one hand, and likely operational shortcomings and eventual decommissioning of old, outdated conventional energy generation capacities, combined with a lack of replacement or new such investments. Thus, it is quite possible no new conventional – including nuclear – capacities will be commissioned by 2030. Certain capacities accounted for in the statistics of total capacity installed nationwide may also no longer be operational. According to statements by ANRE officials on mid-2019, of the 24 GW of installed energy generation capacity in Romania at that time, around 8 GW were no longer operational. The ANRE last year started assessing actual operating capacity at country level and withdrawing generation licenses for capacities which are no longer operational. As a result, according to ANRE data, there are currently around 20,661 MW of installed energy generation capacity in Romania, a figure which may reduce further in the months ahead. That indicates a potential systemic deficit of generation capacities on the Romanian market may arise sooner rather than later. Romania was already a net importer of electricity in 2019.
Accelerated technological advancement entails a progressive decrease of renewable energy project costs and the planned CfD support mechanism should provide investors and generators with certainty and price security and stability, while protecting at the same time consumers from excessive electricity price rises – to the extent amounts refunded by generators should be re-distributed to consumers.
Renewables might be a win-win for everyone – policymakers, investors and consumers alike.
