Watch out for Energy Watchdog!

Watch out for Energy Watchdog!

2011 and especially 2012 were special. The drought affected the production of large hydro power plants. Moreover, Hidroelectrica entered insolvency and couldn’t respect some of its contracts.


Q: How do you comment on energy prices in 2012 and what are your expectations for this year?

Zoltan Nagy - Bege: 2011 and especially 2012 were special. The drought affected the production of large hydro power plants. Moreover, Hidroelectrica entered insolvency and couldn’t respect some of its contracts. Romania depends a lot on these large hydro power plants, both because they provide relatively cheap energy and because they are used to balance the country’s electricity system.


In 2010, the country produced 33% of its energy consumption from Hidroelectrica’s large hydro power plants, which was a record within in the last 20 years. The percentage decreased to 22% in 2012, which was reflected in the energy price. In a certain measure, the decrease of hydro-based energy included in Romania’s energy basket was replaced by wind power energy. At the end of last year, the total wind power  capacities amounted to over 1,500 MW. However, most part of Hidroelectrica’s production within the energy basket was replaced by energy provided by the large coal power plants, which is more expensive.


It is difficult to come back to the level recorded in 2010, but we can be close to normality. Reservoirs are almost full due to snow melting and many hydro power plants produce to full capacity. Even the wind-power energy can be considered cheap, although its production cost can be seen in consumer’s final bill. Wind power producers, which receive two green certificates that are sold for a total of EUR 80 to EUR 100, can afford to sell electricity with EUR 25 to EUR 30, instead of a market medium price of EUR 40 to EUR 45.


This can balance the market to a certain extent. We have higher expectations for 2013. Prices within the first four months of the year were below the medium of 2012. However, we need to consider that summer will lower water levels in lakes and winds will slow down, which will lower hydro and wind power production. These expectations can already be seen in the energy market, where the short-term contracts have smaller prices, while longer-term contracts, due towards the end of the year, have higher prices.


I expect that, overall, energy prices will be lower this year compared to 2012, but not at the same level as in the first part of the year. This is due mostly to Hidroelectrica’s comeback, to wind production and also to solar production, which will generate approximately 500 MW by the end of the year, compared to only 20MW at the end of 2012.


Q: Why has the ANRE decided to decrease the number of green certificates given to renewable energy producers and how has the market reacted to it?

Zoltan Nagy - Bege: I don’t think that ANRE’s decision has surprised the market, because it has been known since 2011 that we will periodically analyze the support scheme for different technologies, to see  whether they are overcompensated or not. Overcompensation implies that the IRR (internal rate of return) of a certain technology is 10% percent higher than the one approved by the commission, which ranges between 10% and 12% for the main technologies.


We made a first analysis last year, for 2011. We noticed overcompensation for solar and hydro energies. We proposed then a decrease from 6 to 5 certificates for solar energy and from 3 to 2.6 certificates for hydro. However, in the end, we didn’t make any changes because that analysis was based only on the last two months of 2011.


We made a second analysis for 2012, which was published in March this year. It showed there is overcompensation for solar, hydro and wind power energies. Our proposal is to cut from 2 certificates to 1.5 for wind, from 3 certificates to 2.3 for hydro, and from 6 certificates to 3 for solar energy. We proposed the government to apply this reduction for projects that will be functional starting with January 1, 2014.


The European Commission decided to apply any reduction for future projects only and not retroactive, for already existing projects.


Regarding the certificate cut, we need to mention that the necessary investment for the production of 1MW based on photo-voltaic sources has decreased from EUR 3.5mn to less than EUR 1.5mn, even if we include the protection tax for panels imported from China. So it was normal to reduce the compensation scheme.


Investors expected our decision and we tried to announce it in advance, nine months before it is due.



Q: The Energy Ministry has decided to suspend a certain number of green certificates for already existing green energy projects and to those that will be finalized by the end of the year. How do you comment on this decision?

Zoltan Nagy - Bege: The market was surprised by the decision of the Energy Ministry to suspend 1 out of 2 certificates for wind energy, 1 out of 3 for hydro and 2 out of 6 for solar energy for a certain period. The decision will be applied to already existing projects and to those that will be finalized by yearend, which is totally different to the group of projects ANRE is addressing.


It lowers incomes for the entire market, even retroactively. If we analyze this decision, we could say the Energy Ministry is right. We need to temper energy prices because we have only one and a half years until the liberalization of electricity prices. Practically, by the end of this year, large industrial consumers will no longer benefit from regulated contracts. They will be forced to enter the free market and buy electricity. The same will be valid for households by the end of 2014.


The Ministry’s draft project was issued at the end of 2012. It was probably also the result of the pressures put by companies such as Alro and ArcelorMittal, which have thousands of employees and are large energy consumers. The Ministry tried to obtain a decrease of the final energy price. For the moment, the contribution to the support scheme for every MWh is of RON 53, no matter what type of consumer you are. Households pay RON 53 for every MWh consumed, which counts for 10% to 12% of the total price of the MWh. The large consumer pays also RON 53, but it could represent even 30% to 40% of its energy bill.


The ministry’s project allows consumers of more than 150,000 MWh to contribute less to the energy support scheme. The problem is that the other consumers, households included, will have to pay for what large consumers are exempted from.


On the other hand, if the Ministry takes 2 to 3 million certificates out of the market, as the project proposes, the amount paid for every MWh consumed will be less than RON 53.


Once the project is enforced, renewable producers will receive lower incomes. This could lead to higher prices for the energy they produce and for the certificates they will sell into the market. Overall, what we win on one side, we could lose on the other and the price for renewable energy could increase by a few dozen percent.


Q: What effects will the Energy Ministry’s draft project produce into the market?


Zoltan Nagy - Bege: In my view, if this emergency ordinance had been approved in January this year, the losses it implied would have been much lower than the ones resulted from the four-and-a-half month delay. This uncertainty and lack of stability has warded off many investors. We will probably continue to feel insecure until the end of the year or until the European Commission expresses its position with respect to this project.


From my personal experience, it takes the European Commission four to six months or even more to express its opinion on an issue. If this uncertainty persists, it could jeopardize the objectives set for 2020 regarding renewable energy production. If we ward off investors and we don’t manage to install the necessary plants to produce 24% of Romania’s energy consumption from renewable sources by 2020, than the price we will pay will be very high.


The number of foreign investors coming to us has lowered significantly since the ministry’s announcement. The investors that saw the support scheme, analyzed Romania’s country risk, its investment climate, and decided to buy or build renewable energy facilities, suddenly felt that the country’s risk is too high and decided to back off and give up some investments.


This trend has started in January. The first version of the law was to lower the maximum price of the certificate, which scared both banks and investors. In the end, the ministry gave up this idea.   


When the news regarding this draft project started to spread, banks refused to sign any financing agreements or credit lines for renewable energy developments. Only those projects which already had financing and, maybe, had more to lose if stopped, have continued since January. Very few new projects have obtained financing since the end of the year.


This uncertainty is the worst thing that could have happened because there is no consensus between the Energy Ministry and the Parliament. I’ve heard several Parliamentarians saying: “Let the ministry give any ordinance it wants, because in the end it comes to us and we will change it.” That’s not what investors want to hear, because they cannot count on any decision taken by the government.


This blockage continues to exist. There are still some developers which build smaller projects that can be completed by the end of the year. If the uncertainty persists for three more than three months, newly-financed projects will have no chance to be completed in 2013.


Nevertheless, I think that a few hundred MW of renewable energy projects will be finalized this year.



Q: How many requests for renewable energy projects has the ANRE received?


Zoltan Nagy - Bege: More than 17,000 MW of all types of renewable energy projects have obtained grid connection permits, of which over 15,000 MW are wind projects. I think that less than 20% of these capacities will be actually built.


The second stage is to obtain the setting up permit, issued by the ANRE, which is more relevant because it requires proof of the necessary financing. We issued such permits for around 2,000 MW of renewable energy. This is the last permit required before starting construction works and those who receive it have big chances to finalize it.


Another important indicator is the license issued for energy production. We issued licenses for around 2500 MW. This number is huge if we compare it to 2010, when we had 14 MW of wind power plants. Now we have more than 2,000 MW installed. The growth is spectacular.


If we relate to the country’s energy consumption and its balancing capacities for the transmission system, we are close to reaching the system’s limits. The wind power plants have a fluctuating production, which leads to some imbalances within the system. These imbalances need to be covered.


When the wind blows, production of wind power plants is high and it needs to be included into the system because it has priority in front of other types of energy. As consumption is relatively stable, it means that other capacities need to be stopped. When the wind stops, we need to restart other production capacities.


Q: Considering the large demand for renewable energy production, does Transelectrica face problems regarding its transmission grid?


Zoltan Nagy - Bege: We approved this year a methodology to calculate the maximum amount of wind power production that can balanced compared to our consumption and energy production capacities. In other words, we analyzed the maximum number of wind generated MW that Romania can support, so that its energy security system is not affected. This number is close to 3,000 MW, but it’s a dynamic figure that changes with consumption and with the new balancing capacities that enter the system.  


Many people understood that 3,000 MW is Romania’s maximum capacity for wind power production and that the country will not issue additional connection permits. This is not true. We have currently issued permits for 17,000 MW. We will continue to issue them. However, based on this methodology, Transelectrica can include in these permits a comment that it has the right to stop even the wind power plants in case consumption lowers and it has no other viable alternatives. Those investors who assume this risk continue their investments, while those who don’t leave. 


One of the great advantages of the renewable energy projects is that they contributed to strengthening Transelectrica’s grid. About 5% of the total investments in green energy, which amount to EUR 3bn to EUR 4bn for wind power plants, were connection-related costs.


On a local level, we have problems regarding the limited capacity of electricity lines. It is the case of Dobrogea, because it produces a huge amount of energy that needs to be either used or evacuated. But overall, at country level, we don’t have problems regarding electricity lines. The limit comes with consumption.



Q: Trade unions and employers’ associations warn that the industry will collapse unless the government removes the tax on renewable energy. What’s your view on this issue?


Zoltan Nagy - Bege: This is a false problem. As I said, the contribution to the renewable energy support scheme for every MWh is of RON 53. Overall, energy costs have decreased from last year’s RON 60 or RON 90, depending on the market we are considering. It is clear that companies benefitted much more from this tax than if we eliminated it.


It is true, though, that competitiveness of certain industries has decreased because of the compensation schemes for renewable or cogeneration energies. We can see similar problems in all countries that use compensation schemes to support renewable energy, such as Germany, Spain or Italy. Companies in these countries also complain such strategies have led to higher energy costs, which decreased their competitiveness.


One solution would be to stimulate the energy markets, to have more flexible and liquid energy trading platforms.  The other would be to merge some functional energy markets within the EU. The Czech Republic, Slovakia and Hungary already have a common platform for certain energy markets. Once the three countries merged their markets, it was clear that the energy price decreased.


Romania and Poland have expressed their intentions to join this common market. We have already had discussions in this respect and the only restriction is to find the right technical solution.


Q: Some energy experts said that 2013 could see the end of the wind energy bubble, in a similar way as 2008 marked the end of the real estate bubble. Do you agree with this?


Zoltan Nagy - Bege: No, I don’t agree with this. Maybe, for certain types of energies, such as wind power plants, we get closer to the system’s limits. However, I expect to have around 3,000 MW to 3,500 MW of wind-generated energy.


Q: How ready is Romania for a total liberalization of gas exports?


Zoltan Nagy - Bege: Technically and legally, we are ready. From the consumer’s perspective, it is very difficult. The liberalization calendar states that Romania has to gradually increase the price of its internal production of gas. The result of the liberalization will be a spectacular increase of gas price.


We already have a price difference between the gas price industrial consumers pay, compared to the price paid by individuals. This is not a normal situation. It is not normal that companies, which are large, stable consumers of energy, pay more than individuals. This was a political decision that favors the domestic consumer.


The increase of gas price is inevitable and we need to prepare for it through social programs. I refer mainly to that tax approved by the government, to overtax the gas producers’ profits, following gas price increases. Ideally, the sums collected should be redirected towards vulnerable consumers.


The gas price will increase from USD 160 for 1,000 cubic meters to USD 450, which will translate into a 50% increase in the final consumer’s bill.



Q: Looking at Romania’s future, which of the many forms of power generation do you think will prevail in 10, 20 or even 50 years from now? Why?


Zoltan Nagy - Bege: The ideal energy mix assures the best energy prices, as long as the national system is safe. We cannot rely only on nuclear and wind energy. We need to have balancing capacities such as gas, coal and large hydro power plants. We can develop renewable capacities up to a certain point.


If we can rely only on the current energy production capacities, we don’t have great development perspectives. But I’ve heard there are advanced discussions for the hydro power plant at Tarnita-Lapustesti, which would be very important for the country’s energy security. It would have 1,000 MW, which could balance 2,000 MW wind power capacities.


Coal power plants generate a huge social problem. It is clear that the Romania’s energy system needs these plants in certain moments, when otherwise it would collapse during peak loads. Other countries have completed investments in modern and efficient coal power plants. Investors knock at our doors with such intentions, but it’s up to us to provide them a stable climate. There is room on the market for them, as we have old coal power plants, which are technologically outdated.


I expect Romania’s energy mix to be made, from now in 10 years, of 40% to 50% renewable energy, 15 percent nuclear and the rest would be based on fossil fuel. It depends a lot if we succeed to bring back to life the industry, which is a large energy consumer.