GC rumours rattle Romania

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Energy in East Europe GC rumours rattle Romania Investors in Romania’s booming renewable energy sector fear that the recently elected centre-left coalition government is set to make unexpected cuts to the country’s lucrative green certificate system, bringing investment to a shuddering halt.

While investment in wind has already seen close to 2 GW installed since the inception of the original GC support system in 2009, industry sources claim the planned amendments would be most damaging for PV solar, biogas and biomass, which are in the embryonic stages of development.

While no official statement has been issued, imminent amendments to the law on renewable energy support have been rumoured for several weeks and gained credence late last month when the country’s delegate minister of energy, Constantin Nita, admitted as much at a Bucharest energy conference.

Romania cannot sacrifice its industry for the sake of renewable energy, he said. “We haven’t made a decision yet but we will make one, and we will change the law because we can’t destroy our local industry, which generates thousands of jobs,” Nita said.

The country has an EU-fixed target to producing 24% of its electricity from renewable sources by 2020 but Nita said that even with the proposed changes to its subsidy system would not prevent from achieving its targets.

“Romania won’t have any problems in reaching its target for green energy by 2020 as we already have 1,700 megawatts under development this year, which will bring us very close to the maximum capacity that our power grid can support,” Nita said. The nation won’t need EU approval to make subsidy changes, he said, citing earlier moves by other member states to cut aid.

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Romania has raised electricity prices 10% this year, with renewable energy subsidies accounting for about 4% of the increase, according to Nita, who pointed out that end-users paid about €500 million through the GC system to renewable energy producers last year alone. The total cost of renewables to consumers this year is a “price too big for Romanians”, he said. Changes will be made in July or at the beginning of next year, Nita added.

While investors had been expecting reductions in the number of GCs allocated for the various forms of renewables as of January 1, 2014, it is the rumours of reductions in the prices of GCs and retroactive reductions for operating capacity that are causing most concern.

The plan to rein in support for renewables follows similar moves across the continent most notably in Spain, Italy, Bulgaria and the Czech Republic, as governments seek to curb power price hikes for households and businesses.

Pressure from two of Romania’s largest industrial consumers – aluminium producer Alro Slatina and steel maker ArcelorMittal Galati – may have played a part in the government’s move to amend the renewable support scheme.

“We are extremely worried with the explosive rise in energy costs due to subsidies paid for the green energy production and the gas price liberalization,” ArcelorMittal said February 22. “Steel making is an intensely power consuming process and companies in this sector, such as ArcelorMittal Galati, need fair and predictable prices to be able to compete on export markets and to keep their activities in Romania.”

Nita said that Alro Slatina and ArcelorMittal Galati paid €47 million and €43 million respectively as a result of the GCs system. (continued on page 2)

Issue 260 / March 8, 2013 Analysis Bulgaria drives through tariff cuts 4 Kosovo’s first wind farm takes shape 6 Polish wind: conditions set fair?

7 Poland proposes new hydrocarbons taxes 8 Albania defends CEZ license action 9 Stream to fuel Albania’s gas plant 10 Demand in the doldrums 11

News Renewable license for Verba Cascade EPBiH restarts upgraded Tuzla 6 Elcor leads PV expansion CEZ eyes joint bid for Alpiq assets UOHS confirms Areva’s exclusion OTE joins price coupling initiative Talk of a regional gas market E.ON, WHE to study UGC project Opposition to shale gas intensifies LitPol Link seeks consultant URE studies reserve capacity support Tauron seeks to revise RES contracts PKN diversifies gas supplies PKN takes over ExxonMobil’s acreage RWE to pursue wind expansion Tauron signs $752m coal supply deal January power demand rises1.6% PKN steps up Wierzbica Repsol farms in to Petrom blocks State gencos sell 2013 output TSO unveils capex plans to 2015 Grid connection issues at Tariverde Novatek raises reserves TGK-11 expands Tomskaya TPP-1 EPS sets up end-user supply unit Four discos attract investor’ interest Trio vie for Hamitabat CCGT plant Siemens to equip Cengiz CCGT plant New licenses for 259.5 MW Gazprom awarded LNG licence Gas discovery at Catalca license Peker power for RWE Ukraine fails cross-border rules Renewable capacity growth in 2012 Ekotechnik plans 160 MW PV Activ Solar builds in Mykolaiv Engineer sought for wind project Gas output rises in January

15 15 16 16 17 17 18 19 19 20 20 21 21 22 22 22 22 23 23 23 24 24 24 25 25 25 26 26 27 27 27 27 28 28 28 29 29 29

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Analysis

GC rumours rattle Romania ...from page 1

Big bills Following the events last month in neighbouring Bulgaria, Romania’s government is likely also concerned about the rising electricity bills of households due to the combined effects of market liberalization and renewable energy subsidies.

According to a draft government ordinance, leaked to some industry players, Romania’s government wants to reduce the number and maximum value of tradable green certificates issued.

The number of certificates awarded 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 PV solar; and from 2 to 1.6 for biomass.

At the same time, the maximum value of one certificate, which is indexed annually to Eurozone inflation, would decline from its current ceiling of €55 to €30, though the minimum value of one certificate would remain at €27, according to the draft bill.

“These are just rumours but if there is smoke there is generally fire somewhere,” Christoph Kapp, chief executive of NEK Umwelttechnik, a Swiss windfocused engineering company, told Platts March 4. “I think the support system the government introduced is too high for what the country can afford,” Kapp said. “Wind producers currently receive €140-150 per MWh, by far the highest tariff in Europe, while the general population is among the poorest in the EU and electricity bills are rising. My own employees tell me their electricity bills are really high. This is the reason why the government is thinking of cutting the subsidy scheme now.”

Mark Crandall, chief executive of Continental Wind Partners, which developed the 600-MW FantaneleCogealac wind project before selling it to CEZ, said change might not be radical.

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“I think most industry professionals believe that the Romanian legislation will ultimately change, but not as quickly or as profoundly as the Minister of Energy’s comments might suggest,” he told Platts March 4. “Our view is that he [the Minister of Energy] is not controlling the process alone and that there are plenty of other voices in the government who are generally more moderate. Personally I think they will make any changes in January, but there is pressure because of the solar build to make changes to the legislation in July.”

Sledgehammer “We are concerned that this is another example of the government trying to kill a fly with a sledgehammer,” said Bryan Jardine, managing partner at the Bucharest office of law firm Wolf Theiss.

“Rather than letting things work themselves out through adjustment mechanisms contained in the law, they want to simply modify an organic law, which was approved by parliament in a consultation process with the European Commission lasting almost three years, through a government ordinance which is basically being introduced at a ministerial level without any objective rationale or dialogue.”

For a period Romania was perceived as the one shining light in the region for renewables, Jardine said, “and in our minds if the government proceeds with this it will really shoot itself in the foot. Moreover, such action reinforces a perception that well-considered and deliberated legislation in Romania can be changed overnight by simple ministerial fiat.”

Jardine accepted that the GCs system needed to be amended given that the cost of PV technology has fallen significantly since the system was first introduced and finally approved last July, but said that a self-regulating overcompensation mechanism already exists within the law to prevent investors from receiving higher than agreed internal rates of revenue.

Energy in East Europe Editor Martin Burdett Martin_Burdett@platts.com +33-950-420-079 Editorial Director, EMEA Power Sarah Cottle Editorial Director, Global Power Larry Foster Director, Design & Production Dominic Pilgrim

Issue 260 / March 8, 2013 ISSN: 1479-2982

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Energy in East Europe / Issue 260 / March 8, 2013

Analysis

“I understand the rationale of the calculus that they may be running but the PV sector in Romania is at an extremely incipient stage – we currently have 88 MW of installed PV at the end of February and even with all the new projects that are supposed to come online we are looking at only around 200 MW. So, if you compare it to wind with over 2,000 MW installed in Romania or Germany with over 25,000 MW of solar, it is not a concern that seems justified by the facts,” he said.

“Even if there is an overcompensation situation because the price of components of PV solar has come down significantly, the whole purpose of the subsidy is to stimulate investment into the sector and the law thereafter has self-regulating mechanisms if a situation of drastic overcompensation is determined to exist.”

Jardine said there was considerable concern that measures may be applied retroactively. “Most players in the industry were anticipating Romania would reduce the number of green certificates in January 2014 for PV solar from six to four based on internal analysis and looking at the approved IRRs and that is why we have seen such significant interest in getting projects built and connected this year before the reductions took effect”.

“But what is troubling, and what I understand from the draft, is that these reductions could be interpreted as applying retroactively, which would be extremely problematic and arguably unconstitutional. It is similar to what was done in Bulgaria with the imposition of a grid access fee. Hence, the combination of a reduction of number of certificates, coupled with a possible reduction of the price of the GCs and the fact that even projects that are already connected may not be grandfathered would represent a kind of “triple whammy” for sector investors,” he said.

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Industry sources said that amending the number of GCs for each technology would be possible under the current law, but cutting the maximum value of these certificates would requires the amendment of the law itself, which would be more complicated and would almost certainly prompt action from investors that have already operating capacity.

“As long as the amendments maintain the internal rates of return guaranteed for each category of technology, they are acceptable and will probably be cleared by the national courts and the European Commission,” a source said.

“A more difficult amendment would be cutting the guaranteed IRRs. The overcompensation correction mechanism however applies only to future investments meaning that once an investment project was commissioned under a specific number of GCs per MWh, this number cannot be changed. Only the new projects will be subject to the new number of GCs. By adjusting the maximum value of one GC, the government would have the power to correct overcompensation of projects already commissioned in the past,” he said.

Robert Cruceru, Executive Director of the Romanian Photovoltaic Solar Association, said that the current rumoured changes would just add to investor uncertainty. “Continuous changes to the legal framework since the European Commission approved the system in October 2011 have made investors, banks and other interested parties cautious and have resulted in timid development of technologies like solar, biomass and biogas,” he said in comments sent to Platts.

“To this end, I consider that any change to the support scheme outside the procedure already established by the legal provisions in force will have an extreme negative impact on the future development of the renewables market in Romania and, further, will impact adjacent sectors in Romania where investors may consider business opportunities,” he added.

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“Even if solar PV is largely undeveloped in Romania and far away from its potential, a change before January 1, 2014 will affect the solar PV sector and to a similar extent the whole renewable market in Romania, which will not be given the chance to develop all the various technologies in a balanced and sustainable manner.”

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IRR quandary

“In the view of rumours regarding future adjustments of the green certificates support scheme, investors face a serious dilemma regarding the predictability of a support scheme, which has been previously approved by the European Commission, and which was supposed to apply unaltered for a period of fifteen years,” he stated .

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Energy in East Europe / Issue 260 / March 8, 2013