Romania’s energy price conundrum

Investments are needed in the energy sector, but keeping regulated prices could act as a deterrent for large companies that would otherwise consider putting money into Romania’s energy infrastructure, say experts. At the same time, the EU is trying to create a common energy market that will push up the local cost of energy. Will the economy be able to cope with increased prices?

Ovidiu Posirca

“Romania has to transpose European directives 72 and 73 from 2009, which stipulate among other things the independence of the energy regulator, ANRE, which should establish and approve tariffs based on proposals from energy transporters and distributors,” says Alexandru Lupea, partner, audit services, and group leader for energy, industry, mining and utilities at accountancy firm PwC Romania.

Lupea says that investments of around EUR 10 billion are needed in the gas and electricity sectors in the next five to ten years, while a transparent pricing policy that reflects real generation and distribution costs, ensuring a decent profitability level at the same time, would attract investors.

Deregulation by half
Romania had agreed to deregulate prices in electricity and gas from 2013 for industrial buyers and 2015 for households, but the ongoing financial crisis has forced the authorities to have these dates put back. President Traian Basescu negotiated a rescheduling of price liberalization with the troika (the IMF, European Commission and World Bank).

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The government says the average price of natural gas in Romania was 68 percent of the EU-27 average for industrial consumers at end-2011 and 50 percent for household consumers. For electricity the average price was 78 percent of the EU average for industry and 61 percent for domestic consumers.

“If we deregulated energy prices tomorrow, I would have difficulties in my paying my energy bills, although my housing and car are provided by the Presidency,” said the head of state, following talks with the troika. “I wanted to present to the finance technocrats a technical reality: what wage would Romanians have to earn to pay gas at market levels, for things to become flexible,” he added.

The presidential negotiations with the troika proved partially successful, as electricity prices for the industry will be deregulated from this year, while households received a two-year delay from 2015 to 2017. For gas, the situation is still uncertain and the next IMF missions scheduled for April will shed some light in this area.

“Half of the electricity market is currently regulated and this keeps down the price to a point that some companies run a loss. Low electricity prices are also a cover to keep bankrupt producers online,” says Alexandra Paun, junior analyst at Candole consultancy.
Romania may have some of the lowest energy prices in Europe but more effort needs to be put into preventing energy waste. “To compensate for the negative effects of adopting energy prices to EU values, energy efficiency programs should be encouraged, by granting a fiscal stimulus to consumers that invest in efficiency or use EU funds for this objective,” says Lupea.

Right voltage for electricity
Romania has mixed energy sources, including nuclear and hydro, allowing more generating flexibility in the national energy system. Renewable generating capacities have sprung up in Romania in the last five years, mainly in wind, where CEZ, Enel and Electrica are operating or plan to open wind farms. These are the most important players in Romania’s electricity market.

Installed wind capacity jumped from 11 MW in 2008 to 982 MW at present, and a generous governmental scheme that grants tradable green certificates for output from clean sources should attract further investments. Other clean sources include 380MW in small-hydro plants, 25 MW for biomass and 1 MW in solar. Last week, wind parks in Dobrogea reached a maximum output of 1,000 MW due to the snowy weather, but in summer this falls by half. However, Romania is still generating more than half of its electricity from carbon-intensive sources such as coal and hydrocarbons.

Octavian Lohan, general director of grid operator Translectrica, says that around EUR 500 million is needed for the development of ten lines of 400KV by 2022. The grid operator has started developing capacities that will allow electricity exports to a regional market that will be set up by 2015.

The PwC partner says that big investments are required to upgrade large coal-generating capacities, and for building new gas and nuclear capacities. Further investment is needed to interconnect Romania to the European energy system, but grid capacity has to be increased to accommodate renewable sources that “stress” the grid.
Paun says that once electricity prices start to increase, a share of the regulated market, starting with energy used by large industrial producers, will be sold on the energy market OPCOM.

Gas for a profit
The supply of natural gas for industrial consumers came in equal measure from domestic sources and imports last month, while households and thermal energy producers received 92 percent domestic gas and 8 percent from imports.

Lupea says almost one third of Romania’s gas consumption comes from imports originating in Russia, at three times the cost from domestic sources. However, the ANRE set up a natural gas basket for consumers, which uses 70 percent natural gas from domestic sources, and 30 percent from imports, the final price paid by consumers representing the weighted average of the two.

The PwC partner says the authorities provided support for industrial sectors with high energy consumption, including the chemicals sector, which received cheaper gas from domestic sources, a move that helped the industry remain in shape despite the economic downturn. However, gas suppliers and distributors had to import expensive gas to supply households and the extra costs have not been taken into account by the ANRE, resulting in losses for companies. At present, the gas market includes companies such as E.On, GDF Suez, Petrom and Romgaz. “Liberalizing gas prices would provide an incentive for companies to invest in production, storage and distribution facilities,” says Paun.

Privatization panacea
Romania agreed in the letter of intent signed with the troika under a EUR 5 billion stand-by program to privatize several state-owned enterprises (SOEs), mainly in the energy and transportation sector, assign private managers to state companies and deregulate energy prices to attract private investments.

Mark Gitenstein, US ambassador in Romania, said recently in a speech that Romania has 760 SOEs, with a value of 11 percent of GDP, and the floating of these companies on the capital market could improve Romania’s growth prospects.

It will be a busy season for the Bucharest Stock Exchange as the government wants to organize IPOs (initial public offerings) for Hidroelectrica, the largest hydro generator; Nuclearelectrica, the sole nuclear generator; and Romgaz, the largest gas producer in Romania, plus SPOs (secondary public offerings) for OMV Petrom, the oil and gas producer; Transelectrica, the grid operator; and Transgaz, the natural gas transporter.

However, the lack of a liberalization schedule may impact these listings, and the government could receive a lower price for the listed shares.“The calendar for price deregulation is crucial for evaluating energy companies, and the state can gain more by clarifying this aspect before public offerings,” says Lupea.

Paun predicts the listing of SOEs, even minority stakes, will have a positive impact, encouraging transparency and making it more difficult to hide the misuse of funds.

ovidiu.posirca@business-review.ro