A Rocking Boat: Legislation and Regulatory Bodies

12 August 2019

Several pieces of legislation structure the functioning of the Romanian energy market in its various sectors, along with the respective secondary regulatory packages. All of them, however, underwent repeated and often abrupt changes by means of governmental decisions and emergency ordinances over the past few years. This has regrettably created a perception of unpredictability and mistrust in the Romanian regulatory environment.

 


 

One of the most controversial and disruptive pieces of legislation in the energy industry has been the notorious GEO 114/2018, which upended many of the norms and processes of the sector and brought uncertainty and discontent upon businesses and investors.

On the electricity and gas markets, GEO 114/2018 drastically curtailed several dimensions of the progressing market liberalization.

From April 1, 2019 to February 28,2022, a price cap of RON 68/MWh (€10.5/MWh) was set on domestically produced natural gas. For electricity, ANRE is to regulate the end price for household customers during March 1st, 2019 and February 28th, 2022. All holders of an ANRE license in the gas, electricity and thermal sectors are to pay a monetary contribution of 2% of turnover from the activities covered by the license.

In response to the outcry from the industry, the government has partially rescinded the emergency ordinance by means of GEO 19/2019, through which some of the most onerous provisions have been relaxed – such as limiting the gas price cap only to the volumes for household consumers, while allowing competitive prices for the industry and services. 

However, GEO 19/2019 has introduced new elements, such as the exemption of coal-fired power plants from the 2% monetary obligation, which is discriminatory and distorting with respect to the workings of the competitive market. In hindsight, it is instructive to find the reasons why such a piece of legislation was deemed necessary in the first place. One way to rationalize it is to read it as a device meant to protect the final energy consumers from market volatility and raising prices.

As underlined by ANRE’s Vice President Zoltan Nagy-Bege, “Because there is little competition locally among producers (Romania is dominated by two big producers which hold 95% of the market) it was easy for their prices to follow the trend of imports. All these elements combined led to a situation in which the gas price effectively doubled from RON 64/MWh (approx. €13.5) to RON 130/MWh (approx. €27.5) in Decem- ber 2018. GEO 114/2018 came as a response to this drastic price increase which made it difficult for vulnerable consumers to cover their energy costs.”

Meanwhile, he also points out that ”There is already an infringement against Romania at the European Commission so it is uncertain whether this measure can be maintained for the full three-year period. It is therefore essential that we implement all the necessary market mechanisms as soon as possible.” In any event, the industry’s reaction to GEO 114/2018 has been unambiguous. Andrew Costin, President of the Petroleum Club of Romania, did not mince words: ”[...] there are many laws that are passed through Emergency Ordinances that seem to be drafted to specific interests, and that spill over into other sectors. It is an ad-hoc legislation and because the impact is not properly assessed, the legislation across these sectors becomes incoherent, leading to an unstable and unpredictable fiscal medium for the energy industry. [...] GEO 114/2018 is a great example for this”.

“Other countries in the region pose challenges as well, but they seem to hold an advantage in terms of legislative stability. As an investor you want to be able to plan ahead for at least five years and that does not seem feasible in Romania at this point, where more than 200 fiscal changes are made on a yearly basis.” Johannes BECKER, Partner, TPA Group

 

Key Pieces of Legislation that Shape Romania’s Energy Market

 

 

The exploration and production of oil & natural gas is regulated by the Oil Law No. 238/2004. The law defines the framework of petroleum agreements, the types of petroleum operations, the royalties to be paid by the oil & gas producers. For the offshore production, the terms have been modified by means of Offshore Law No. 256/2018, which introduced a new fiscal regime by adding, next to the royalties, a progressive tax on the ”supplementary revenue” resulting from the deregulation of the natural gas price.

For any activity of power generation and thermal energy produced by cogeneration, as well as trading, transport, distribution and supply of electricity and natural gas, the master document is Law No. 123/2012. This has also undergone repeated changes, with the latest one having occurred in 2019. In particular, Law 123/2012 provides for the centralized market obligations (CMO) for both electricity & natural gas.

The public support for renewable energy sources has taken place by means of Law No. 220/2008, which put in place the tradable green certificates (GCs) system. The support scheme stopped taking in new RES capacities at the end of 2016. The government is currently considering contracts for difference, an instrument for de-risking investment in low carbon emissions energy sources, to incentivize investment in new nuclear plants and utility-scale RES capacities. Law No. 184/2018 brought the concept of prosumer. The law specifies that prosumers that own RES capacities of no more than 27 kW can inject in the grid the electricity produced in excess, at the average price of OPCOM's Day- Ahead Market in the previous year.

Stability and predictability of the energy sector’s regulatory framework looms large as a principle in the National Energy Strategy 2019-2030. Although not officially committed to by the Romanian Government, the document outlines the country’s policy priorities, keeping in mind its EU energy-climate obligations. For instance, it lists four investment ”objectives of national interest”: two new nuclear reactors in Cernavoda, the pumped storage hydro-power plant at Tarnita Lapustesti, another hydro-power complex on the Danube, and a new lignite-fired power plant at Rovinari.

The draft National Energy-Climate Plan (NECP) for 2021- 2030 is mandatory under the new EU Directive on Energy Governance. The final form of NECP is due at the end of 2019, after extensive consultations with stakeholders, the neighboring member states and the European Commission. While basically aligned with the energy strategy, the draft NECP is more detailed and extensive in its coverage of Romania’s energy and climate commitment for 2030. Nonetheless, its ambition level has been widely assessed as underwhelming, especially with regard to the RES and energy efficiency targets. In response to the draft NECP, the Commission has already proposed a considerably higher RES target for Romania: 34%, as opposed to the 27.9% advanced in the NECP paper.

“In order to have a balanced regulatory environment, and generally if we want to establish adequate parameters for the energy industry, we need to pay more attention to the dialogue between industry members and public authorities. The principle of transparency should be more valued, because it would decrease the level of contests and litigations that we are seeing presently.” Mihai G. Popa, Corporate Legal Department Director, E.ON Romania

 

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