Investing in the renewable energy in Romania

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Experts at Dentons Bucharest prepared an overview of the renewable energy in Romania, including general information on the electricity sector, national strategies, and opportunities for the companies to invest in the country's renewable energy projects.

Overview of the energy market structure

In a nutshell, the Romanian electricity market can be summarized as follows. Producers use various sources to generate electricity (e.g. fossil fuels and low carbon sources). The  vast majority of electricity producers are state owned. The electricity is then injected into the national  grid. Transelectrica is the sole transmission system operator, and it is charged with maintaining a  constant balance between electricity production and national consumption. Transelectrica is a joint stock company, where the majority stake is owned by the Romanian state. 

Electricity distributors operate local distribution grids and they transport the electricity to final consumers.  There are currently eight distribution operators in Romania—five of these have been privatized by the  Romanian state. 

In turn, the suppliers acquire electricity from the producers or from other suppliers, which they sell to the  final consumers on the basis of supply agreements, which are concluded both on the retail and  wholesale markets. 

Summarizing from the above, the participants in the electricity market are: 

  • Producers 
  • Distributors 
  • Transelectrica 
  • Suppliers 
  • The administrator of the electricity market (“OPCOM”). 

Thus, the energy market is the underlying structure where electricity and associated services are traded  between the above participants. All of these participants are licensed by the Romanian Energy  Regulatory Authority (“ANRE”) and follow distinct guidelines in this respect. 

Transactions with electricity are performed on the wholesale market operated by OPCOM, in a manner  that is cumulatively transparent, public, centralized, and nondiscriminatory. Further details are described in section IV below, “Conclusion of PPAs.” 

Participation in any component of the electricity market is subject to registration and to the applicable  technical and legal regulations in force. 

National Energy Strategy 

On October 4, 2021 the Romanian government approved the National Plan in the Field of Energy and  Climate Change (“PNIESC”).  

In line with the “EU Fit for 55” package, the PNIESC is to detail the reforms and policies aimed at  achieving decarbonation of the energy system by promoting investments in renewable energy sources  and technologies and energy efficiency, which facilitate the green transition. 

The European Commission has recommended that renewable energy represent 34 percent of the  energy mix by 2030. The Romanian government’s target for this is set at 30.7 percent by 2030, which corresponds to a commissioning of an additional renewable capacity of 7GW. As a side note, in 2020,  renewable energy represented 16 percent of the energy mix.  

This objective can be achieved by:  

  • Reinforcing the grid to allow the connection of new capacity as well as of new storage capacity Developing and operating more storage facilities 
  • Use of technologies of the future, mainly hydrogen 
  • Implementing a “smart grid” system 
  • Developing the existing grid infrastructure with a positive impact on improving access of  renewable energy to the grid. 

From a financial perspective, it is intended that the Romanian authorities use funds available through  the Romanian National Recovery and Resilience Plan (“PNRR”), which has recently been approved by  the EU. In addition, income deriving from EU-ETS mechanisms and EU structural funds are also  designed to boost the development and commissioning of renewable energy projects. 

As regards energy efficiency, Romania intends to reduce the consumption of electricity and to  encourage the use of renewable sources in relevant sectors, such as heating, cooling, transport, etc. As  such, Romania aims to reach by 2030 a primary consumption of electricity of 32.3 Mtoe and a final  consumption of 25.7 Mtoe, with energy savings of 45.1 percent for the primary consumption and of 40,4  percent for the final energy consumption. 

Available support schemes in Romania 

Renewable energy projects commissioned by December 31, 2016 have benefitted from a support  scheme based on green certificates. Through this mechanism, energy producers were certified by  ANRE, and each month they would receive green certificates (“GCs”), i.e. a tradable commodity, issued  in accordance with the source used (e.g. solar, wind, biomass, hydro) for the energy produced and  delivered into the grid. 

As a matter of fact, before 2013, a producer of electricity from a solar source would receive six GCs for  each megawatt of energy delivered into the grid. Thanks to this generous support scheme, investments  in renewable energy projects increased unexpectedly, mostly in the wind and solar sectors. 

Currently, for renewable energy projects commissioned until December 31, 2016, a number of GC is  granted as follows: 

  • 1,5 GCs until 2017 and 0,75GC starting with 2018 for each 1 MW delivered into the grid by wind  power plants 
  • 2,3 GCs for each 1 MW delivered into the grid if the plants are new or 2 GCs for each MW  delivered into the grid if the plants are refurbished, by hydro power plants with a total installed  power of at least 10 MW 
  • 2 GCs for each 1MW delivered into the grid by geothermal, biomass, biogas and bioliquids  power plants 
  • 3 GCs for each 1 MW delivered into the grid by solar power plants 
  • 1 GC for each 1 MW delivered into the grid by waste fermentation gas power plants. 

Under an amendment to Law 220/2008 on the promotion of electricity from renewable sources (“Law  220”), the trading of green certificates was suspended for certain technologies between July 1, 2013 and March 31, 2017, while for solar the suspension remained in place until December 31, 2020, as  follows:

  • By one green certificate for wind power plants 
  • By one green certificate for hydro with a total installed power of at least 10 MW
  • By two GCs for solar power plants 

As of January 1, 2021, the abovementioned suspended green certificates cannot be traded. 

Recovery of the suspended green certificates for wind and hydro of at least 10 MW is taking place  between 1 January 2018 and 31 December 2025. In respect of solar technology, the suspended green  certificates may be recovered between 1 January 2021 and 31 December 2030. 

How does the incentive scheme work? 

As per the provisions of Law 220, Energy suppliers and certain producers must acquire green certificates  every year that equal the value of the mandatory quota for acquiring green certificates established by  ANRE for the respective year, multiplied by the total number of MW. 

For 2020, the mandatory GCs quota is the value of 0.45061 green certificates per MWh and the  mandatory estimated annual quota for green certificates acquisition for 2021 was established at the  value of 0.4505 GCs per MWh. 

Duration of support scheme 

The support mechanism applies to renewable power plants that were accredited by ANRE by 31  December 2016 as follows: 

  • 15 years for power plants using new equipment 
  • 10 years for refurbished hydropower plants with installed power up to 10MW 
  • Seven years for wind farms using second-hand equipment, if installed in isolated areas or if  commissioned before entering into force of the Renewable Law 
  • Three years for hydropower plants that have not been refurbished, with installed power up to  10MW. 

The market for green certificates 

Green certificates can be traded only on the centralized markets operated by OPCOM in a transparent  and non-discriminatory manner between operators that have to acquire green certificates. The  centralized markets operated by OPCOM are: 

  • The centralized anonymous spot market for green certificates 
  • The green certificates centralized term market 
  • The centralized market for electricity from renewable energy sources supported by green  certificates, where electricity produced from renewable sources and the corresponding GCs are  traded together. 

Only producers are allowed to sell green certificates, and one green certificate can form the object of a  single transaction.

As per the provisions of Law 220, until 2032, the minimum price per green certificate is €29.40 and the  maximum price is €35, calculated in lei, at the average exchange rate established by the National Bank  of Romania for the last month of the previous year. 

Projects put into operation after 31 December 2016 do not qualify for any support scheme, meaning that  these renewable energy producers are only able to sell their electricity on OPCOM markets. 

As a consequence, a new support scheme has to be put in place. The completion and subsequent enactment of the support scheme based on a “contract for  difference” (“CfD”). 

The most important advantage of the CfD support scheme is the safeguard granted to electricity producers from wholesale price volatility. The mechanism guarantees a strike  price and tops up payments when the wholesale price falls below this amount, and vice  versa. 

The connection between the approval of a CfD support scheme and new investments in  the renewable energy sector has been emphasized in the section of the PNRR dedicated  to the green transition. 

The Romanian Government approved the memorandum on CfDs, but for state aid  purposes the finalized proposal will need to be approved by the European Commission.  

The CfD support scheme is expected to be applicable in 24 months and should apply to  the following: 

  • New constructions using nuclear technology 
  • Technology for the use of renewable resources 
  • Carbon capture and storage and carbon capture and utilization technology for  fossil fuel-based electricity generation capacity, when they become commercially  viable. 

Conclusion of PPAs 

As mentioned in section I above, power producers can only conclude power purchase agreements  (PPAs) using the OPCOM markets in a manner that is cumulatively transparent, public, centralized, and  non-discriminatory. The following are exceptions to this rule: 

  • Participants that combine various production sources can conclude off-market bilateral  agreements with the owners of the respective energy facilities. 
  • Producers and/or public authorities holding renewable generation facilities with installed powers  of at least 3MW/producer may conclude negotiated PPAs with the suppliers of final consumers  regarding the sale of electricity and/or green certificates. 

The wholesale market operated by OPCOM has the following components: 

  • A day-ahead market 
  • An intraday market 
  • A market with double-continuous negotiation for electricity contracts (PC–OTC) 
  • A centralized market of bilateral contracts with an extended-auction mechanism (CMBC)  by way of: (i) extended auction (PCCB–LE), (ii) continuous negotiation (PCCB NC), or (iii)  fuel processing agreements (PCCB–PC)
  • A market for large consumers (PMC) 
  • A centralized market for universal service (PCSU) 
  • A centralized market for granting electricity contracts for long-term deliveries (PCTL). 

Thus, Romanian power producers cannot conclude PPAs off the market e.g. as a result of a direct  negotiation process with a freely chosen buyer. In addition, the producers must sell the electricity on  OPCOM markets to any interested supplier, trader or final consumer (registered on the market) available  to purchase it under market conditions and at the prevailing market price at the respective time.  

Notably, even if PPAs can be concluded on short, medium or long term, in practice electricity off-takers  seem reluctant to acquire electricity on the long term. Thus, the absence of long-term PPAs has affected  investments targeted in renewable capacities, as the banks became reluctant to finance them in the  absence of long-term agreements guaranteeing stability in the revenues stream. 

Expected evolution for concluding PPAs 

In order to remove unjustified barriers, The Romanian Government issued Emergency Government  Ordinance no. 74/2020 (“GEO 74/2020”). 

GEO 74/2020 states that, by way of exception to the above rules, power producers are allowed to  conclude bilateral PPAs outside OPCOM centralized markets, at negotiated prices, only in relation to  the electricity produced by capacities commissioned after June 1, 2020.  

Even if GEO 74/2020 produces legal effects as of its publication date in the Official Journal (mid 2020),  it must still be approved by the Romanian Parliament and as such become a law. Market participants  are expecting this change, as the stability of long-term PPAs is crucial for their bankability, since new  renewable energy projects have difficulties accessing funding for their development. 

Investment appeal 

Romania has attractive, long-term growth prospects and is actively seeking to attract foreign investment. It has had the fastest-growing economy in CEE during the last five years, and the government’s programs are intended to put the economy on a path toward sustainable growth. 

To this extent, even though the Romanian economy was impacted by the COVID-19 pandemic, it shrunk  by only 3.9 percent, below that registered in the eurozone (-6.6 percent). Moreover, in the first trimester  of 2021 the economy grew by 2.8 percent over the last trimester of 2020 in the last quarter of 2020; the labor  market had a stable trend, with an employment rate of more than 70 percent, while the jobless rate  reached 5 percent. 

According to the forecast of the National Commission of Strategy and Prognosis, a complete return of  economic activity is expected, with an estimated GDP advance of 5 percent, followed by an average  rate of 4.9 percent until 2024. 

Offshore wind 

This kind of economic growth leads to higher future demand for electricity and higher electricity prices.  From this perspective, Romania is the second-largest national gas producer in the EU, while the Black  Sea initiatives and developments could expand the use of energy resources. 

Due to its significant renewable offshore potential, Romania has initiated a draft law on necessary  measures to carry out operations for the exploitation of offshore wind energy (the “Draft Law”). The Draft  Law is currently under parliamentary procedure in the Chamber of Deputies. According to the provisions  therein, licenses for carrying out offshore wind projects will be granted by the Ministry for Economy, 

Energy and Business Environment (“MEEMA”) on the basis of a tender procedure or on the basis of a  direct licensing procedure, applicable to entities that can prove the financial and technical capabilities  to develop a specific project. 

Offshore wind projects established in accordance with the direct licensing procedure and after the  connection to the grid has taken place, are entitled to a premium amounting to a maximum of €0.025 per KWh on top of the electricity market price, capped to a maximum value of €0.060 per KWh. The  premium will also be reduced if the market price for electricity exceeds €0.035 per KWh. 

In addition to the premium, compensation of €0.020/ KWh will be paid for the balancing of costs, for a  period of 20 years from the respective project’s connection to the grid. 

Development of renewable energy projects 

The development of renewable energy sources in Romania was encouraged by Law 220. Following the  first wave of renewable developments, Romania currently has installed capacities in wind energy of  3,000 MW and in photovoltaic energy of approximately 1,400 MW. The country has reached its target  ensuring that 24 percent of energy consumption is from energy from renewable sources.  

Since December 31, 2016, the green certificate support scheme has not been available for new projects,  meaning that the interest in developing new renewable facilities has declined somewhat.  

For 2030, Romania has proposed an ambitious plan to reach a quota of 30.7 percent of consumption  from renewable energy. Achieving this new target corresponds to commissioning an additional capacity  of 7GW of renewables into the grid. 

There are signs indicating an increase in wind and photovoltaic projects through greenfield investments  and the replacement of existing large-scale generation assets as well as facilities incentivizing  prosumers (i.e. generators that consume what they produce). Consequently, support schemes and state  aid will have to be implemented. 

The PNRR provides for the need to implement reforms to increase the development of renewable  energy projects, with an estimated allocated budget of €200 million, to be spent on: 

  • A revision of Romania’s electricity market framework 
  • An update of the transport grid development plan in order to integrate the new renewable  capacities 
  • Measures to replace coal from the energy mix by 2032 
  • Funding for new renewable energy projects. 

In addition, within the scope of a larger reform measure (Digitalization and transition to RES), funding from  the Modernization Fund and Just Transition Fund (in respect of six counties in Romania) will also be  available. 

Development of new technologies 

Romania intends to develop pilot projects using technologies of the future—gas/hydrogen together with  innovative storage solutions and green hydrogen in order to reduce green gas emissions. Romania  signed the Hydrogen Initiative in 2018, thereby undertaking to continue research and innovation in using  hydrogen as an electricity source. 

As an important step in ensuring the green transition, Romania intends to develop a national strategy  for hydrogen on the basis of which the legislation required for the investments in this field would be  adopted. According to the PNRR the end of 2021 should see the first preliminary assessments of this strategy, based on which the authorities will take into account the implementation of pilot projects to  promote the use of hydrogen in electricity production and in the industrial sector. 

The main challenges of investors when entering the market 

Development of the renewable energy sector is at the heart of the accelerated green transition. This stage brings with it many investment opportunities in replacing old generation facilities and implementing new technologies with a view to creating a sustainable energy market with affordable costs. 

As mentioned above, Romania has set a very ambitious goal to ensure a share of 30.7 percent of  renewable energy in the energy mix by 2030.  

Currently, one of the most significant challenges is the length of the authorization procedure, notably  the connection to the grid (which can take considerable time, especially in the Dobrogea and Moldova  areas where the grid is congested). Full permitting of a project can take some 24 months.  

The status of the grid—especially in the Dobrogea area where the network does not allow for connection  to the grid without prior reinforcement works—is an aspect to be taken into account. However, various  reinforcement works are in progress, and the need for a modernized grid has been stated in the PNRR. Various funds will be made available on this basis. 

In addition, even if the Romanian government has adopted GEO 74/2020 in order to eliminate unjustified  barriers in the conclusion of bilateral PPAs outside OPCOM markets, this normative act is still in the  parliamentary procedure. Together with resolving the PPA issue, further investments require a support  scheme for renewable energy projects commissioned after January 1, 2017. To this extent, the  Romanian government adopted a memorandum regarding contracts for a difference support scheme  but the specific mechanism has yet to be established. Subsequently, the approval of the European  Commission for state aid purposes will still be required.

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