Weekly Briefing, Vol. 21, No. 2 (RO), September 2019
On the edge of sanctions following infringement procedures in energy
The energy market is confronted with several difficulties after the entering into force of the Government Emergency Ordinance (GEO) 114/2018, which capped the gas prices and imposed several restrictions on the market. Romania risks sanctions following the infringement procedures triggered by the European Commission in these two cases. In addition, Romania saw a surge in the electricity price in August and September, while the imports of electricity during the summer were significant as compared to the last year. Two companies in energy announced they started the procedure for selling their businesses, therefore further important changes on the energy market are expected.
The end of August brought a surge in the electricity price in Romania. The price of electricity exceeded the winter levels in January 2017, December 2018 and January 2019 on the stock market, reaching 123 euro / MWh. The price was almost double as compared to that in the Czech Republic and Slovakia (67 euro / MWh), countries with which Romania is connected by price. This situation firstly registered in one of the days of August, but it was repeated in September. Electricity prices beat historical records, being three times larger than those on the markets with which Romania’s market is connected. For the hourly segments between 12 – 13, the price in Romania was 158 euro / MWh, while in Hungary was between 59 – 55 euros / MWh, while in Slovakia and the Czech Republic oscillated between 44 – 41.7 euro / MWh, according to the stock exchange operator of the electricity and natural gas market in Romania (OPCOM) data. The prices exploded not only on the electricity market, but also on the gas market, being double than the ones on the external stock exchanges.
Besides the fundamental causes explaining this situation which lie in the construction of the energy market, there are some negative consequences flowing from controversial GEO 114/2018 adopted at the end of December, which caused harsh reactions of the business environment. The previsions of GEO 144 restricted, among others, the capping of the regulated profits of the producers and the price of gas for the population. In addition, new causes were added to the previous ones and lead to the surge of prices in September: the controlled stop of Unit 1 of the Cernavoda Nuclear Power Plant, in order to remedy some leaks in the primary circuit and the decrease of the hydroelectric production of electricity, as a result of the requirements to increase the storage in the accumulation lakes.
The unfavourable situation on the gas and electricity market had perpetuated during this year and got worse during the summer. For the gas market, GEO 114 imposed the capping of the price for gas delivered by producers under the regulated regime, until February 2022. Therefore, the final prices for domestic consumers are to be regulated in the next three years, even if the market has already been liberalized. The capping for consumers under the regulated regime leads to higher prices on the free market. Therefore, a negative effect could be the increase in prices for non-domestic consumers and throughout the economy. Moreover, when prices on international markets are lower, imports also increase. This is how Romania got to import a lot even during the summer, when, usually, such imports were insignificant. According to the latest data of the National Energy Regulatory Authority (NERA), Romania imported 38% more electricity in the first five months of this year, compared to the same period of 2018. The phenomenon continued in the summer months, in which Romania was usually an exporter of electricity. According to the Minister of Energy, the reasons for such high imports this summer were the cheap price for the imported gases and the low consumption. In addition, the winter gas storage started earlier than in previous years, therefore there should be no reasons for concerns. The Government decided to increase compulsory stocks for winter gas by 10% and to increase the water supply in the accumulation lakes by 25%, as compared to last year.
In addition, GEO 114 imposes on the Romanian producers the obligation to give priority to sales on the domestic market. The European Commission was not satisfied with the explanations of the Romanian authorities regarding these restrictions imposed on the gas market and warned with an infringement procedure, as according to the Commission, such regulations create barriers to the free movement of goods within the EU single market. On September 27, the European Commission could send Romania to the European court of Justice because of these restrictions and could impose sanctions for each day of non-compliance with European norms. That would be the second infringement procedure, as the European Commission initiated a new infringement procedure after the adoption of the GEO 114, due to the imposition of a limit price for the gases sold for the domestic consumption and for the thermal energy producers. In a document sent to the Foreign Affairs Ministry, the European Commission fears that the market will be distorted in the medium and long term, and the disadvantages for consumers will far outweigh the short-term advantages for Romanian suppliers and customers, while many major investments could be affected. For example, some of the main investors in the Black Sea natural gas production project (Exxon, OMV Petrom, Black Sea Oil and Gas) postponed their final investment decision in November 2018.
Since the adoption of GEO 114, the energy market players requested the repeal of these articles before they take effect, in order not to create chaos on the market. While the ordinance was approved in December, the provisions regarding the energy and gas market came into force in April and May respectively. However, no measures were taken until then. At present, after a few months since their entry into force, the negative effects began to appear. The government has been warned on several occasions that the main negative effects will be the massive increase in imports and the increase in energy and gas prices supplied to the industry, which is already happening.
At the beginning of September, in order to avoid EU sanctions and the distorted situation on the market, the deputies in the Parliament decided to eliminate these articles. A final vote is still waiting to be delivered by the members of the Chamber of Deputies.
Although welcomed, these new changes of the law increase the uncertainty in a period in which prices are quite high. This is why specialists consider that a transition period is required, which should be no longer than the end of the winter. The reluctance in changing the ordinance was given by the strong lobby of companies who bought from the producers at the regulated price and therefore had a very advantageous situation. They stipulated that gas prices would increase significantly for domestic consumers if the articles on GEO 114 would be suddenly abrogated.
In addition, some companies in the energy field announced that they are analysing the sale of their businesses in the distribution and supply of electricity in Romania. The assets of the Italian company Enel are expected to be valued at approximately one billion euros, while the company announced that it started the procedure to leave the Romanian market because it would no longer produce the desired yields. It seems that this move is part of an annual review of the company’s global operations, in order to purchase firms which could provide higher returns. In recent years, the Italian group Enel has made large investments in the networks in Latin American.
The Czech CEZ Group, which entered the Romanian energy market in 2005 once with the acquisition of a distribution company, has launched a market test on the process of transferring assets from Romania. In Romania, CEZ aims to sell seven companies and keep those with activities in the field of modern energy services and trading. CEZ Group in Romania is one of the main integrated utility leaders, having one of the largest distribution companies (with 1.4 million customer portfolio) and holding Europe’s largest onshore wind farm. The process of transferring assets from Romania is carried out in accordance with the new strategy of the parent company, which provides for the gradual transfer of assets from Bulgaria, Romania, Turkey and partially from Poland.
ExxonMobil has expressed its intention to renounce to the Black Sea oil license. The company is interested in larger and profitable investments in other countries, where the legislation is friendlier to the business environment. However, an official announcement was not yet made. On the other hand, Ingka Group, the company that owns most of the IKEA franchise system, bought an 80% stake in seven wind entities in south-eastern Romania, from Vestas Wind Systems. The purchased wind farms could produce the energy needed for 65 IKEA stores or 150,000 households in Romania.
Following these first two announcements, a draft order of NERA put into public debate provides that all energy companies may be required to notify the agency, at least 12 months in advance, of an intention to make legal status changes. Here are included any operations such as mergers / divisions / transformations, or other operations, after which the value of the existing share capital is reduced, in a tranche or as a whole, by at least 5%.
The tensed situation in the energy field in Europe, doubled by the domestic turbulences, such as the changes of the legislation, the consequences of the deputies vote which further triggers other waves in the market and the EU decision on imposing sanction signal that the energy market is not stable yet and new evolutions are expected on the short and medium term.