Article by Iulian Harpa, Managing Partner, HIM Public Affairs
The energy sector, related to the production processes, transport and distribution, which is the basis of all industries, directly employs around 1,6 million people in the EU and generates 250 mld. € for the economy secor, which corresponds to 4% of the added value of the EU’s non-financial economy.
Electricity demand increased as the electricity market began to recover from the impact of the pandemic situation, and this fact can be seen in the significant rise in prices. From the energy perspective, the European Commission’s long-term goal is to make Europe the first climate-neutral continent, by 2050.
Thus, based on the package proposed by the European Commission named ‘Fit for 55’, all EU Member States should ensure that by 2030, the level of greenhouse gas emissions will be reduced by 55% compared to the level recorded in 1990. Specifically, for Romania the initially proposed target of 30.7% should rise to 38%, if we will assume the proposal of the European Commission, after the negotiations.
Romania in Europe
Currently, in Romania, the share of renewables is 24%, which places us above the European average, far above the neighboring countries and even above the USA which holds a percentage of 20%. Thus, Romania, in the short term, is in a leading position globally and this, normally, can allow us to allocate a reasonable time frame to define the correct energy objectives and a medium and long term strategy!
A pertinent question is whether – in this window of opportunity it is a priority to immediately invest in technologies and new solutions (green gases: biogas, biomethane, hydrogen, etc.) with the related infrastructure (charging stations for electric cars and large subsidies for electric cars)? Is this the real need of the national energy system? A short-term alternative could be to stop the enthusiasm, naturally besides, in front of environmentally friendly alternatives, and to understand the real need of the industry, which would allow us to stop being net energy importers and become competititve in a single European market, for long-term. More exactly, to scan the situation correctly, a SWOT analysis of the energy system, which will allow us to understand the strengths, but also the challenges. Why do I say this? There has been talk in Romania, and in some places there is still talking about the fact that we can be a regional gas hub! Unfortunately, it didn’t work out for us and we easily notice how the network of strategic pipelines already in operation bypasses us without exception: Nord Stream I and II, TurkStream, the supply of Hungary via Bulgaria and Serbia, etc. We hope that the ambitious BRUA project completed by Transgaz will reach its initial goal as soon as possible and that we will take advantage of the only strategic pipeline that can connect us with Europe.
We didn’t succeed with the gas hub, but do we succeed with the hydrogen hub? For several months, we have been talking more and more about a new opportunity to become a regional hydrogen hub and we are doing this without having a minimum of infrastructure or human resources ready to develop strategic projects at national level.
I have been and I am a supporter of green projects, which will certainly be the future of European industry, but I believe that the urgent need is to invest in efficient short-term production capacities that will allow us to stop importing energy, to balance the supply and demand, implicitly, to offer us the predictability of stock quotes.
Romanian energy market
The energy market liberalization on July 1, 2020 for gas and January 1, 2021 for electricity, was a small first step of Romania towards a single European market, a desideratum that, normally, we cannot ignore.
The liberalization of energy market for gas and electricity has been a postponed and contested process, but regardless of the long-term turbulences in the energy market, any fair competition between suppliers, can only lead to greater transparency and competitive prices.
It’s obvious that the process of electricity market liberalization wasn’t perfectly implemented in Romania, although we should have had some lessons learned from the liberalization of the gas market 6 months before! However, I would like to understand correctly the endogenous and exogenous factors that can influence the prices evolution. Let’s remember that the gas market and the liberalization process were massively influenced by Ordinance 114 and, somehow, the competitive market survived the brutal intervention of the state.
Currently, as we cross the 4th wave of the pandemic period, international markets are massively affected by the lack of predictability and fluctuation of supply and demand. In this global context, it would be premature and even time-serving to challenge the liberalization of the Romanian market, as long as this is a natural step towards the European single market, which offers transparency and stimulates competition for the benefit of the final consumer.
I hope that the liberalization of the energy market will reach maturity, but for this it’s essential not to intervene brutally again, with obligations to apply capped prices and, thus, to return to the last years.
Why is the energy expensive?
We all feel that energy has become enormously expensive and that is why I think it is appropriate to try to understand together what generated this abnormality, or ‘perfect storm’ as defined by the Americans at CNBC:
– The recovery of economy after the lock-down period led to an accelerated increase in consumption, much faster than expected and this unbalanced the supply-demand ratio;
– Gas deposits were discovered and, implicitly, during all this time an attempt was made to fill the capacities in the perspective of a severe winter knocking at the door;
– Increasing pollution penalties for energy producers using coal-fired power plants, according to EU rules. Thus, the CO2 certificate, which is found in the price of the final consumer, was quoted at 20 EURO last year and is now quoted at around 55 EURO, with doubling trends for the next year;
– Indirect gas supply – bypassing Ukraine – has made the supply process longer and more difficult for Romania.
How do the authorities manage the increase in energy prices?
Lately, we have witnessed a continuous flow of news, on all media channels, about the evolution of energy prices and how we can effectively manage this phenomenon of sustained price growth.
Analyzing the energy market, we identified several initiatives of the authorities, in the natural desire to manage price increases, and unfortunately, almost entirely are defensive actions that are constantly trying retroactive corrections.
– A potential state intervention in the economy by capping prices and/or the supplier’s contribution to support compensation. I have always considered that production is the essence of the industry and, without defending suppliers, I believe that we can identify solutions in line with a liberalized market, rather than adopting a copy-paste approach of Ordinance 114!
– Instead of technical, documented analyzes, there is a rush to identify culprits and this, of course, retroactively: suppliers, distributors and/or companies with majority state capital. The process of liberalization and subsequent monitoring of the energy market should have involved a functioning system of internal controls, ensuring that such slippages are avoided in real time;
– Does the rescue come from other states foreign projects of other states?! We continue to report and depend on external projects, which may eventually have a positive impact. For example, the Nord Stream 2 gas pipeline, which is already completed, and the Russian gas deliveries will start from October 1 to Western Europe on the route Russia – Germany. Thus, the transport capacity will be doubled, from 55 billion m3 per year (equivalent to 26,000 households, domestic consumption for 15 years or 50% of the volume of gas that can be extracted from the offshore field) to 110 billion m3.
– We are not able to extract gas from the Black Sea since 2012, and in the meantime, the import of energy in summer is 10%, and gas 20%. And this, given that it has been clear for several years that domestic production does not cover demand; in the last 2 years we are net importers of energy.
– Another approach that doesn’t always help is to relate exclusively to the internal market and the internal context. Romania already has connected energy infrastructure and spot markets with Germany, Austria, Poland, the Czech Republic, Hungary and Slovakia. We can’t ignore the fact that prices are almost similar in Europe, nor that this “perfect storm” impacts all markets, globally.
– Last but not least, it was voted to set up a Parliamentary Committee to analyze the increase in energy and gas prices. Again, defensive reactions, which we hope will come, even if late, at least based on a technical impact analysis! We miss the chance to ensure a correct management, with well-defined levers that offer a correct control of the liberalization process and real-time monitoring of the energy market.
The governing regulators that should intervene in the market are ANRE (National Energy Regulatory Authority), Consumer Protection (ANPC) and the Competition Council (CC). There are probably some ongoing investigations from the perspective of ANPC and CC, but in the meantime ANRE intervened in the market, applying successive fines based on the 10,000 complaints submitted by final consumers in the first 6 months of the year.
We understand that the distribution operators did not comply with the legislation on meter reading in time, so the adjustments were made on top of the price and from this resulted the abnormalyties with incredibly large invoices and difficult to justify them. Personally, I believe that these meter readings were never made in the maximum regulated time, but now, in the context of these price increases, they have brought to light this anomaly.
Statistically, approximative 2.2 million home consumers have negotiated and changed their contracts, out of a total of about 4 million subscribers! From the perspective of energy market liberalization, I believe that those who have opted for contracts in the competitive market, with a fixed price for 12 months, will benefit from a competitive price. In addition to some organizational dysfunctions penalized by ANRE, competitive price offers have already been launched in the market, offered by Electrica Furnizare and Hidroelectrica.
The presentation of the energy market in a global, European and national context helps to obtain a correct understanding and from here we can try to identify some directions that can generate positive inputs.
– Good collaboration and efficient communication between ANRE, CC and ANPC regulators regarding potential abuses of suppliers. For example, honoring agreed contracts for a period of 6 months or one year, at a fixed price;
– It would be very beneficial to delimit the responsibilities between the Ministry of Energy and ANRE, in order to ensure traceability and to clearly highlight the initiatives of each entity;
– Identify a predictable way of working, in real time, for notification, fine and possibly the cancellation of the supply license, for players who abuse the economic situation and the lack of information of the final consumer.
– Along with large consumers, both vulnerable consumers and SMEs should benefit from grants to avoid short-term price increases and manage already high inflation;
– An information campaign on the benefits of the market liberalization and consumption efficiency process would bring substantial short-term advantages.
– Translating European legislation into primary and secondary legislation would highlight optimal solutions for protecting the vulnerable consumer and the business environment (see bilateral contracts) without resorting to brutal solutions, capping and solidarity fees.
– Investments in new production capacities – to stop the net importer trend in the last 2 years, stimulating foreign direct investments and respecting the investment plans of state-owned companies that can influence the sector horizontally and vertically.
– As a good practice, it is recommended that the Ministries respect the segregation of tasks regarding the approval of working procedures versus the management of companies with majority state shareholders.
– A legislative predictability that unfortunately is not shown on the horizon and in the absence of which any strategic investor cannot assume the decision to invest in Romania.
– In the positive scenario, we will be able to burn the Black Sea gas in 2026, but this without having a roadmap and without knowing under what conditions Romgaz can take over Exxon’s participation. The deposit is estimated at about 200 billion m3 but can reach 400 billion m3. The project is stopped because of unfriendly tax legislation with few investors, able to invest in such projects.
Pollution, global impact
It is important to note that the European Union has accelerated the process of reducing pollution and so we can use gas as a transit resource for a short period of time.
Gas and nuclear projects will be excluded from funding through so-called ‘green bonds’ to support ‘sustainable’ climate and environmental investment projects, which seeks to fund the post-COVID recovery tool named ‘Next Generation EU’, with an allocated budget of 80 billion EURO.
Unique Romanian project
I stop here with the article but not before I greet another unique initiative from a great Romanian manager: Gheorghe Hagi. I greet the initiative of the football club he governs, which aims to achieve climate neutrality by 2030!
It’s the first football club in the world to propose such a desideratum and can be an example of a global approach, for energy companies and for all of us.
Source: ENERGY INDUSTRY REVIEW