EY Study: Eastern Europe is stepping up a gear in the drive for “net zero”. Romania is leading the way in terms of renewable energy

Mihai-Alexandru Cristea 13/10/2021 | 16:44

Renewable electricity generation is predicted to expand this year at its fastest rate since the 1970s according to the 58th edition of Renewable Energy Country Attractiveness Index (RECAI). But spending on grid infrastructure must also increase markedly if variable resources are to be integrated effectively and sustainability goals are to be met. Rapidly approaching emissions deadlines pose difficulties for economies still dependent on coal-fired power, such as many Eastern Europe nations.

 

The EU’s increasing ambition in respect of renewable energy is putting economies across the continent under pressure to step up their transition. While Western Europe still has a long way to go, it nonetheless has an advantage over many of the EU’s more recently added Member States from Eastern Europe, where particular challenges and geopolitical influences are at play.

Many countries and regions – from the Baltics to Romania and the Balkans – face a broad range of challenges, including updating legacy infrastructure and reducing energy dependency on Russia.

Common themes include the need to move swiftly on building renewable capital, and the potential financial backing from the EU and its institutions, designed to help with the transition. Further, the markets are highly diverse, and politics and geography are key. The further north in the region, the stronger the argument for wind power, while, in the south, it is solar power farms that are more evident – for example, across acres of Romania and Hungary.

The countries and regions that joined the EU in the first wave of post-Soviet accessions in 2004 (the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia) have relatively developed capital markets, but several have a long way to go in building renewable energy infrastructure.

Those experiencing the most advanced stages of transition – Poland, for example – are often where new ideas, both in terms of renewables technology and the capital market instruments that support them, can be tried out, according to Grzegorz Zielinski, Head of Energy Europe at the European Bank for Reconstruction and Development (EBRD).

As an example, he cites the green bond issued last year by Poland’s TAURON Polska Energia. It raised €324m (US$383m) to support decommissioning of the company’s coal-fired facilities and the build-out of its solar and wind power capacity, with the EBRD taking almost a quarter of the issuance.

With a Lithuanian bond issue being the first green bond raised by a power utility, and a floating offshore wind platform being financed in Albania, Eastern Europe is clearly a site of innovation and change.

This appetite for change will be very necessary in years to come, as the EU targets for carbon emissions abatement become more ambitious – and the need for them more pressing. While many of Western Europe’s economies have well-developed green energy infrastructure, Eastern Europe has much further to go along this path. Poland and Hungary are the only two to make it into the RECAI top 40, compared with 13 regions from Western Europe.

Of the Eastern European states, Romania is leading the way in terms of renewable energy, with significant hydropower generation helping it reach its 2020 renewables target (24% of production) several years ahead of schedule.

In 2020, the EU target for cutting greenhouse gas emissions by 2030 was raised from 40% to 55% of 1990 levels. Although this ambition may be essential for keeping climate change within manageable limits, it will pose significant difficulties for economies such as Poland, currently largely dependent on coal-fired power.

The EU’s ambition, however, is supported by the Green New Deal, to help countries and regions build the necessary infrastructure. The European Commission has created a Just Transition Fund of nearly €17.5b (US$20.7b) to support economic diversification in the coal- and carbon-intensive regions most affected by decarbonization, and to help retrain the workforce whose main industry is falling rapidly into obsolescence.

With support from the EU and national governments, these Eastern Europe markets are already showing they are able to find innovative and ambitious routes to their destination. Distribution networks are being upgraded, technology is being developed and financial instruments are being designed as each country navigates its particular economic, social and political obstacles to a green future.

 

Mihai Drăghici, Director, Consulting, EY România – An overview of Romania`s energy sector

The Romanian Government announced in 2020 that the country reached the EU renewable target of 24% of total energy consumption from renewable sources and the 2030 target was set at 30,7%. In order to reach the 2030 target an additional 7 GW in Renewable Energy Sources are estimated.

As per the National Energy and Climate plan, Romania’s greenhouse gas emissions are expected to be reduced by at least 50% compared to 1990’s levels by 2030, mainly due to a significant reduction in the industrial activity, increase in energy efficiency and compliance to more restrictive environmental standards. Both the renewables and the emissions 2030 targets are expected to be increased in line with the EU Fit for 55 packages.

The electricity generation in 2020 was still heavily reliant on fossil fuels (36%) followed by hydropower (28%) and nuclear (20%). Wind and solar contributed by approx. 16% to the energy mix. The last decade brought significant structural changes in the energy sector – while coal’s share halved in the reference timeframe, renewables filled in most of the gap, following the accelerated development during 2010-2015, and natural gas experienced a sustained growth from 11% to 18% as the energy transition fuel.

The Romanian energy market faced in 2021 a sharp increase in electricity prices. The monthly average Day Ahead Market price in August exceeded 110 EUR/MWh and continued to grow in September and October (date of writing this report) with peak prices close to 250 EUR/MWh. Green Deal targets, old generation capacity and limited interconnections with other countries being frequently mentioned as main factors for increase of electricity price.

In order to support the Green Deal transition and uphold the decarbonization of the energy sector, the European Commission set up several funding mechanism, such as: Recovery and Resilience Plan (EUR 29.2 bn), Just Transition Mechanism – where Romania is one of the top beneficiaries along with Germany and Poland – and Modernization Plan.

 

As per the Recovery and Resilience Plan sealed with European Commission, Romania also committed to:

  • adopt the Decarbonization Law by Q2 2022 for phasing out its entire 4.59 GW coal-fired power plants by the end of 2032;
  • adopt a new Energy Law by Q2 2023 to implement the Contracts for Difference (CfD), Establish renewables Power Purchase Agreements (PPAs), simplify the licensing and permitting procedures for renewables investments and implement Demand Side Response in the balancing market;
  • Sign 3.5 GW in Contracts for Difference (CfD) in additional installed capacity from renewable sources to promote the production of electricity by Q2 2025.

 

Under the umbrella of the three Ds principle (decarbonization, digitalization and decentralization), the Romanian business sector is open to grasp the waves of change, with multinationals energy companies looking to implement the sustainability agenda in their core business strategy and looking for investment opportunities in renewables in order to support the Green Deal Agenda.

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