How Can Romania Meet European Requirements in the Field of Energy?

Article excerpt

An Assessment of the current situation

Absence of transparency in trading, over-the-counter contracts follow a political rather than a commercial logic. We are talking here about the so-called "contracts with the smart guys", whereby rent-seeking suppliers or industrial consumers benefit from cheap energy from state-owned companies. In order to minimize this predatory behaviour, the Ministry of Economy mandated that state companies must sell transparently, on OPCOM, to whichever supplier offers more (Order no. 445/2009). An exemption to this order was issued later for the largest state-owned producer of electricity, namely Hidroelectrica. Even so, obliging producers to use OPCOM for selling power does not ensure their competitive behaviour.

An exemplary proof is the highly publicized event in December 2010, when Hidroelectrica accepted the purchase offer from Romania's largest steel company and sold electricity at 138 RON/ MWh, when the average market price was 160 RON/ MWh.

Apart from bilateral contracts below, market price, outside or inside OPCOM, the power sector still displays regulated end-user tariffs, which are set very low in the regulated sector of the market (accounting for 47% of all retail electricity traded). For this reason, providers are using cross-subsidies to recover their costs, charging industrial consumers more. One of the latest European Commission infringement procedures, dating June 2009, was related exactly to these regulated tariffs, which the Romanian government could not justify as a public service obligation.

Because of regulated end-user tariffs and wholesale contracts below market average, distribution system operators claim they cannot undertake necessary investment in the network. A brief calculation shows that Romania needs up to 15-20 billion EUR of investments in the distribution network alone in the next 20 years.

On top of all these aspects, one should not forget the artificial life support given to inefficient and polluting power plants, mostly for social protection reasons. The best known case is Termoelectrica, which has accumulated losses of 2.5 billion RON by the end of 2009. In addition, the European Commission also pointed out, in an action against Romania filed in June 2010 other damaging practices in the power sector: lack of transparency of transmission system operator Transelectrica and lack of interconnection capacity, mainly due to the missing intraday congestion management procedures.

Investors and international financial institutions accuse Romania of lack of predictability in the elaboration and implementation of reforms aimed at restructuring the power generation sector. The story of national champions (allegedly one at first, two afterwards) dragged endlessly since 2008, with government decisions successfully challenged in court and with endless waves of criticism coming from the private sector and the academia that the government is trying to save the bankrupt coal industry at the expense of hydro power, the latter being, for better or worse, profitable.

The point of this policy brief is not to discuss whether creating two national power generation mammoths would have been a good idea (although we believe it wouldn't have been). We are only pointing out that the government has not been capable, for four years now, to implement a sound restructuring of the mostly state-owned power generation sector.

In the case of natural gas, distortions are even more serious than in the power sector. First and foremost, the regulator is indirectly setting the price for domestic production (which accounts for approximately 70% of our consumption), at a level three times lower than the market price. In addition, it imposes quantitative restrictions, through the so-called "basket mechanism", an arrangement, claims the government, meant to offer access to all consumers to cheap domestic gas.

Because of a lack of definition for the "vulnerable consumer", the main beneficiaries of this generous government subsidy are not poor senior citizens (entitled, according to European law, to adequate protection), but large industrial consumers (80% of national consumption is industrial consumption). …