The burden must be heavier for industrial users that pay same surcharge per MWh but lower electricity prices. The rise in surcharge last year, to 15% for residential users, already prompted vocal comments from energy-intensive industries. Higher electricity bills pushed into losses Alro aluminium smelter and made Mechel abandon its Romanian steel plants. ArcelorMittal also accused excessive green energy support. For now, households use electricity for heating only marginally and their electricity bills are within the supportability region. The natural gas and district heating prices are still low* and this prevented social tensions as those that overthrew the government in Sofia over this winter. The industry is government’s main concern now.
Tensions between industrial energy consumers and renewable energy producers are growing tenser and the market regulator, possibly helped by the government, have to balance the books. The long term objective is securing a substantial share of energy from renewable sources and developing vibrant national industry.
The answer to this problem is:
i. wisely negotiate the support mechanism with investors and
ii. accelerate integration of regional day-ahead electricity markets such as to grasp the benefits of a larger market and reduce the cost of volatile renewable generation.
Steps toward the latter target were taken earlier this year when Romania discussed regional integration with the CZ-SK-HU CEE market, at the same time with Poland. Giving access to off-shore renewable energy producers to the nations support schemas might diminish the pressure on end-consumers by bringing the price of a tradable green certificate down quicker and more sustainable than initially envisaged. The renewable energy support systems are designed across whole Europe and this is not necessarily a sign of government’s financial constraints -- as suggested by renewable energy associations, but a sign of the maturity reached by renewable energy markets that are continuously optimised to reach both goals: industrial development and sustainable renewable energy development.
Adjusting regulations might not necessarily mean regulatory instability – provided investors and consumers are involved in the re-designing process. The case of Bulgaria is also relevant in this circumstance – after the regulators cut the feed-in tariffs and introduced last year supplementary connection fees for renewable energy producers, thus prompting their appeal to the EC. Not only that the move annoyed investors, but it failed to secure government’s popular support as problems were caused mainly by lack of negotiations.
* natural gas price compared to the import price or the market prices in Europe – though there is no global benchmark for the natural gas prices and the retail price in US is well below the price in Europe.
Defining the problem
The renewable energy support scheme -- best known as law 220/2008, is poised to see radical transformations in the coming future. The co-generation mechanism will also come into focus for a more detailed re-calculation of the bonuses paid to generators per MWh -- but the co-generation support system is flexible enough and allows annual adjustments without legal complications. None of these changes should however worry investors, as long as the spirit of the law is preserved and fine-tuning is pursued in good faith. The question is – which is the spirit of the law? In brief: guaranteeing profit margins to investors, in line with the sovereign risk and the cost of the capital, so that investors undertake renewable energy projects – which projects are supposedly needed by Romania in order to meet the renewable energy targets under the European Directives: namely 24% of total energy consumption being derived from renewable resources, up from 17.8% in 2005.
This was the basic deal between state and investors. The rest, including the number of certificates per MWh, the maximal price of a certificate, are details hence negotiable, as long as the investors get their promised returns. A multitude of creative legal constructions can be designed within the existing constraints. Based on Art 22 of law 220/2008, the market regulator can fully replace the support system with a feed-in tariff system or whatever other system in case investors fail to meet the required quota of renewable energy. On a different level of negotiations, the agreed levels of profitability [IRR] can be fine-tuned in case the market regulator establishes that the sovereign risk decreased from the time when the internal rate of returns [IRR] were set. But this will probably prompt even more lawsuits and appeals to the European Commission.
Even if they might not be visible at first sight, the authorities still have plenty of options to alter the support systems in order to reach the perfect balance between green energy and economically and socially supportable costs. Other countries facing similar problems did it already. Judging from authorities’ slow and inappropriate past conduct in the past however, thorough evaluation of the existing legal and commercial options will not necessarily be pursued. One inappropriate option would be cutting the support without prior negotiations with investors, in an attempt to capture voters’ support. But the worst option would be doing nothing and adjust marginally the subsidies poured into investors’ pockets after a superficial [thus susceptible of corruption] bargain based on no detailed analysis.
Investors may rightfully request regulatory stability, given the capital-intensive and long-term nature of the energy and low-carbon infrastructure. But when the support paid by consumers to guarantee producers’ internal rate of return of 10% or over1 exceeds 20% of the price of electricity itself2, pushing the consumers from profit to loss sometimes, it is the time for more refinement in the balancing between the benefits and costs of renewable energy. And for re-thinking the very logic and purposes of the support schemes. Both the support schemes for co-generation and renewable energy can be optimised in terms of costs while maintaining the basic principles that encouraged investors to develop projects.
Existing legislation
Romania response to European Directive 2009/28 was the National Action Plan for Renewable Energy Resources [PNAER] and the two subsequent instruments: the renewable electricity support schema [law 220/2008] and the co-generation support mechanism [HG 219/2007 and HG 1215/2009 – not as famous as law 220, but also bearing visible results on this year’s electricity bills]. From the very beginning, it should be mentioned that the targets are set in terms of consumption and not production. In other words Romania can produce zero E-RES [electricity from renewable resources] and still meet the desired targets by importing electricity generated abroad from renewable resources. Furthermore, it is notable that the targets are defined in terms of energy – and not electricity; in other words Romania can produce and import zero renewable electricity and still meet the targets by increasing the use of renewables in transportation or heating/cooling. These are extreme scenarios, yet a good exercise in setting the terms of the problem and preparing for more flexibility in optimising the support system.
It is also good to start any analysis of existing legislation and of possible amendments bearing in mind some principles that were never openly stated:
i. green energy is costly and
ii. there are ways to encourage green energy production3 others than the quota [or tradable green certificates] system. These facts are not often mentioned in the regulators’ or investors’ rhetoric.
Are renewable energy generators overcompensated?
Romania's power market regulator ANRE was supposed to complete in March the annual evaluation of the renewable energy support scheme and recommend reduction of the number of tradable certificates awarded to power producers. The new allocations would be effective as of January 2014 - and this could spur investments in the sector this year since under the law investors receive the same number of certificates per MWh as at the moment of commissioning during the whole allocation period. Solar power producers will be particularly affected by the weaker support starting as of 2014, when they will receive most likely less than four certificates per MWh delivered to the power grid compared to six certificates now. ANRE has actually recommended last year reducing the number of certificates given to solar power producers from six to five and to wind power producers from three to 2.6, but the government preferred to postpone the correction, Nagy-Bege said.
ANRE should have completed the overcompensation calculations in December 2012, according to Art. 13 of the Methodology published by ANRE in the Official Journal 147/march 6 2012. The only public and formal recommendation of ANRE however surfaced under the form of a template for the overcompensation calculations, published as part of the said overcompensation methodology and uploaded on ANRE website. The template included the calculations to be applicable starting January 2013. The number of TGCs would have been reduced from 2 to 1.77 for new wind energy equipment but no change in the number of TGCs for photovoltaic power is proposed. The calculations also included factual mistakes4, witnessing that it was only a template rather a formal recommendation to be enforced as of 2013. Nonetheless, the template for overcompensation assessment is valuable in several regards: it confirms that i. the reduction of TGCs per MWh is applicable only for projects commissioned in the future and ii. it confirms that even if actual IRR of projects commissioned in the past fall behind the benchmark [guaranteed] level, the number of TGCs cannot be increased.
Another way to assess the overcompensation is to compare the bonuses with the support given to investors in other EU countries. Not many EU states choose quota systems, though. Bulgaria incentives renewable electricity production under a feed-in tariffs system. The neighbouring country has already trimmed down the feed-in tariffs last year and furthermore introduced connection fees for wind farm prompting investors’ protests. Currently, the wind-power producers are being paid EUR 68-76 per MWh5 depending on their size as of July 2012 from EUR 88-98 before while the photovoltaic producers get EUR 120-121 per MWh from EUR 248 before (prices are net of VAT).
Government believes yes and plans to trim down support
Romania's government however said that it wants to reduce significantly the number and the maximum value of tradable green certificates given to renewable energy producers per MWh of power delivered, according to a draft bill quoted by Ziarul Financiar. The number of TGC would decrease from 2 to 1.5 or 1 for wind power; from 3 to 1.4 for micro hydropower plants; from 6 to 3.5 for photovoltaic power; and from 2 to 1.6 for biomass. At the same time, the maximum value of one TGC, tradable on the specific exchange, would decrease from EUR 55 [indexed] to EUR 30. The minimum value of one TGC would remain at EUR 27 [indexed]. Energy minister Constantin Nita admitted, speaking at a conference organised by ZF daily, that indeed the government would amend the law on renewable energy support. Romania cannot sacrifice its industry for the sake of renewable energy industry, Nita explained. He added that the end-consumers paid EUR 500mn, through the green certificates system, to renewable energy producers last year alone. Large industrial consumers such as aluminium producer Alro or steel maker ArcelorMittal Galati paid alone EUR 47mn and EUR 43mn respectively.
Amending the number of TGCs for each technology is possible under current law, but cutting the maximum value of one TGC requires the amendment of the law which is obviously more complicated and will prompt protest of investors that have already commissioned generation facilities. As long as the amendments maintain the internal rates of return [IRR] guaranteed for each category of technology, they are acceptable and will probably be cleared by the national courts and the EC. A more difficult amendment would be cutting the guaranteed IRRs. renewable energy support law 220/2008 stipulates a mechanism for correcting deviations from the IRRs guaranteed by the law for each category of renewable power - broadly between 10-12%. By adjusting the maximum value of one TGC, the government would have the power to correct overcompensation of projects already commissioned in the past.
Other possible was to reduce cost of renewable energy – regional market integration
Opening the renewable energy market to offshore producers is a possible way of reducing the renewable support budget by bringing down the price of a TGC sooner and more sustainably. Wind-farm plants in Bulgaria would be able to choose between the national feed-in tariffs or exporting their output to Romania. The EU third energy package actually aims at a common electricity market so the move would be in line with the market development. Another positive effect of market synchronisation would be decreasing the volatility of the day-ahead prices on a larger electricity market. Steps have been done earlier this year toward Romania’s synchronisation with thee CEE day-ahead market [CZ-SK-HU], which is equally desirable. Nonetheless, further extension toward Bulgaria and particularly Turkey – a region with huge natural potential for renewable energy and having access to hydrocarbons from MENA, would bring additional benefits.
Find the full report in the attached pdf document
