Markets, technology & geopolitics
International energy markets have undergone a complex transition that involves technological, climate, geopolitical, and economic factors. Each of these factors exerts a direct influence on European and national energy markets. Romania must adapt to the confluence of these factors and the resulting uncertainty that they create in international markets. Also, geopolitical developments influence even well established strategic partnerships in ways that have a considerable influence on energy security, investments, commerce, and technology.
Energy security is defined as the capacity of a state to insure the nation’s energy supply without interruptions and at accessible prices. Currently, the EU imports around 53% of the energy it consumes. This dependence on energy imports involves crude oil (90%), natural gas (66%), coal and related solid fuels (42%), and nuclear materials (40%). The EU is the biggest energy importer in the world at an annual cost of approximately 400 billion EUR. The greatest vulnerability arises from the complete dependence of six EU members on Russian natural gas and the additional three members that import Russian gas to cover more than a third of their total energy consumption.
Romania has an energy security risk lower than the OECD average and significantly lower than its neighbours. However, current international energy markets are quite volatile, and the evolution of technologies may have disruptive effects on decisions about energy sources. Climate and environment policies focused on reducing greenhouse gas emissions and that target clean energies also influence consumption patterns and the investment policies. For instance, an abrupt decrease in the price of crude oil produced a significant effect on electric and natural gas prices that led to a reduction in the ability of other energy producers to invest in projects of strategic importance. This price decrease also affected the profitability of RES investments.
The EU is an important financer of green energy projects and the interconnection of energy markets. Many such financing packages are granted to projects that effect and are developed by at least two member states. Via Connecting Europe Facility, Romania already benefits from significant European funding for two major projects: First, a 179 mil EUR grant for the first stage of BRUA, the construction of a gas pipeline of 528 km that involves Bulgaria, Romania, Hungary, and Austria (BRUA) and that is essential for the energy security of the Southeast and Central Europe. The pipeline provides access to Caspian Sea gas (and in the future, Black Sea gas) by Europe. Second, a financing agreement of 19 mil EUR was signed in November 2017 between INEA (The Innovation and Networks Executive Agency) and the NEXT-E Group, which consists of electricity providers, oil and gas companies, and vehicle producers. The purpose of this financing is to allow the establish a network of charging stations for electric cars across the TEN-T.
Energy consumption and vulnerabilities
The imbalance between the demand for energy within the nation (and EU as a whole) and access to affordable energy is the main energy security risk. Over recent years, there has been a decrease in energy consumption coupled with high energy production, which explains the current electricity production over capacity in the region. However, without investment in expanded capacity, after 2025 there will be a production deficit. Experts anticipate that Romania’s internal energy consumption will raise, even though the tendency is to decouple economic growth from energy consumption. The increased interdependence of energy markets will put competitive pressure on Romanian electricity producers and their inefficient assets, such as those that have reached their normal life span. It is difficult to coordinate the regional market with the neighbouring countries because only Bulgaria, Hungary, and Romania observe the environmental rules imposed by the EU governing energy production. This factor imposes considerable constraints on the electricity producers. Therefore, the domestic production of hydrocarbon and coal-based electricity will likely diminish. Currently, Romania’s day-ahead electricity market is coupled with those of Hungary’s, Slovakia’s, and the Czech Republic’s similar electricity markets. Currently, Romania is a net exporter of electricity.
As far as natural gas is concerned, the interconnections with neighbouring countries diminish the supply security risks. However, a lack of investment in transportation networks and the low pressure in the over-sized pipelines prevent Romania from being in line with EU standards, and that could make Romania an, economic, financial, and technological outlier circumvented by energy flows. Because of this, in the medium and long term, the implementation of bi-directional (reverse) flow interconnectors and regional LNG terminals will provide alternative sources of gas for Romania.
Experts also predict that the use of traditional fuels (crude oil, gas, coal, and nuclear energy) will remain a part of the energy mix in Romania. Hydro-electricity will remain the backbone of the national energy system along with a small contribution from renewables. The on-shore and Black Sea off-shore gas reserves will provide for internal demand, while coal, in the medium and long run, will be under pressure from the cost of greenhouse gas emissions. Biomass will become central for heating dwellings in the country side, and co-generation will continue to play a key role, with investments planned in the modernisation and re-fitting of centralised heat supply systems, new power plants, and energy efficiency projects.
Electricity production, transmission, and electricity markets
Romania has a diversified mix of sources for its electricity. Around 43% comes from renewable sources (29% hydro, 10% wind, 2.6 %solar, 0.7% biomass) and around 57% comes from conventional sources (24.5% coal, 17.5% nuclear, 15% gas).
The main strategic investment priority is the need to update the nation’s electricity production capital because most if is more than 30 years old. Most of the existing production facilities have reached their normal life span, and most of them are inefficient or ecologically inadequate. Addressing these issues will require investments of up to 7-14 billion EUR until 2030. Although the gas-powered power plants will be the priority, coal-based power plants also play a role to insure the stability of the national energy system, but they will have to be replaced after 2015. The new lignite facilities will need to have high efficiency and reduced GGE.
Hydro-electricity is essential to balance the system. Therefore, modernizing and maintaining the current hydro-power units, together with small pumping units, will be required until 2030, at which time investment in a big reverse pumping station will become the dominant priority.
As to renewables, the support scheme of green certificates ended on 31 December 2016. Any new RES capacities will need to develop without support schemes. As such, the determining factor for the profitability of such projects will be access to low cost capital financing. If these projects receive adequate support, the use of biogas and waste will increase and will be used in CHP units. Over the last five years, approximately 3000 MW of wind capacity has been installed, which is considered the maximum bearable capacity to use and still insure the dependable functioning of the national energy system in its current configuration. Because of its unpredictability, wind capacity requires a reconfiguration of the market to target peak units. The approximately 1300 MW of installed photovoltaic capacity is less difficult to balance in the market than the wind units.
Nuclear energy is a strategic option for Romania. Units 3 and 4 at Cernavoda represent by far the biggest potential energy project in the coming years. It will reduce the needed capacity in the region by providing 3000 MW. The Energy Strategy plans to grant state aid for this project (similar to the one approved by the EC for Great Britain). This project also requires strengthening the transportation network.
Transelectrica, the national transmission and balancing company, aims to attract investments for the development of the network in the northeast of the country and for increasing the cross-border interconnection capacity. Given developments in the RES market, the balancing market becomes essential. The most active producers most likely to respond to balancing requests are the hydroelectrical units and the gas-fired units. The balancing of a regional market requires sufficient interconnection capacity.
Along with the development of intelligent networks, spot prices will influence the consumption patterns by an improved regulation of consumption and with the support of automatized systems and efficient public lighting. Beginning in 2014, the day-ahead market in Romania is coupled with the similar markets in the Czech Republic, Hungary, and Slovakia, and this market set a regional electricity price. Although Romania is an electricity exporter, to have competitive prices in the long run the domestic production of electricity should not be burdened by various taxes and levies such as the tariff on the injection of the electricity in the network, a tax on the water machines in hydropower units or those used for cooling the coal-based units, which only exist in Romania and not in the neighbouring countries. The market for dispatchable electricity production and the balancing market are both extremely concentrated, while the day-ahead and the bilateral contracts market are not concentrated. Although at present Romania has one of the lowest prices in Europe for electricity, it is expected that the price will rise in the future to an average of 65-85 EUR/MWh, depending on the capital costs necessary for upgrading production units, the price of fuels, costs of modernizing the transport and distribution infrastructure, and the costs of certificates for GGE.
New areas of development in the electricity sector
A regional hub for production of spare parts for electric cars and RES technologies
Planners envisage that Romania will produce batteries, heat pumps, materials for energy-efficient buildings, technologies for managing intelligent networks and the energy consumption on the assumption that Romania will become the main regional user of these technologies.
The development of intelligent distribution and transportation networks
Intelligent networks allow control in real time and two-way communication between producers and consumers to optimize energy production and consumption. The interaction between electricity networks, the internet, and communication networks will expand and lead to efficiency and flexibility gains. The new technologies need to insure the protection of personal data and increase security against cyber-attacks.
Promoting electric and hybrid vehicles
The Romanian government is supporting the development of charging infrastructure and the electro-mobility and energy efficiency markets. While these investments are not small, Romania is well positioned to produce electric vehicles, charging units, batteries, and components. Various energy efficiency projects for new and existing buildings also represent a strategic aim.
For example, until 2020 there is a commitment to install 222 charging stations with 50kW and 30 with up to 350 kW on the main European and Trans-European transportation corridors.
The plug-in hybrid and electric vehicles market in Romania is at the the incipient stage, but it’s rapidly developing. BMW doubled its sales of the (electric) BMW i3 between 2016 and 2017. This is the largest CEF (Connecting Europe Facility) grant for electric vehicles, and it aims to increase the interoperability to the West and to complete the connected network in addition to ULTRA E and FAST E.
NEXT E partners are E.On, MOL, PETROL (Slovenia and Croatia), Hrvatska Elektroprivreda Croatia, NISSAN, and BMW.
Clients We’ve Advised:
ANRE (National Energy Regulator)
We provided legal advice about concessions in the electricity sector. Our work included drafting secondary legislation in the energy (electricity and heat) sector (in particular, concessions and licenses), assisting in the process of selecting legal personnel for ANRE, and organizing seminars for ANRE about legal issues of interest.
We advised The E.ON GROUP about all electricity distribution and supply related matters and:
- Wind & other renewable energy projects:
- CHP (co-generation projects)
- Public lighting
- Conventional energy projects
- Nuclear: Support throughout the Cernavoda bid procedure
- We worked with EBRD representatives for Romania about issues of major interest such as the regulatory framework, relations with political circles, ministers, and government officials regarding tariffs policy, (non-) payment of state debts; and analyzing the potential for future joint business
- We advised about issues concerned with electro-mobility and energy efficiency projects
ACUE (Association of Companies in the Energy Utility Sector)
We assisted throughout the set-up and functioning of the “common action” group meant to identify common objectives and strategies for the companies in the oil and gas sector.
We helped with the rehabilitation work of hydropower units, IPO preparation, negotiations between the Romanian State and the Serbian Government for the clarification of the schedule of works to be undertaken by both parties on the hydropower plant Portile de Fier.
We advised Hidroelectrica in dealings with the energy regulator (ANRE) that sought the immediate interruption of energy export operations. The decision of the Romanian Energy Regulator held by the court to be against Romanian and EU Regulations that govern the common market and the unrestricted trade. As a result, Hidroelectrica was allowed to establish trading entities in Hungary and Serbia.
Oil and Gas production, infrastructure, and markets
With a tradition of over 150 years in the exploitation of crude oil and natural gas, Romania is the sole significant hydrocarbons producer in Southeast Europe. However, the reserves have constantly diminished over the years, and the average annual production declined by more than 2% over the last five years. At the current rate of exploitation, certified oil reserves will be depleted in around 12-15 years. Therefore, Romania a has adopted a strategic priority to increase investments intended to increase the degree of recovery of existing oil fields, and in the long run, to develop projects for the exploration of resources below 3000m and complex geologic onshore projects along with deep water (below 1000m ) off-shore projects.
The extreme and abrupt decrease in the price of oil starting in 2014, when the production of crude oil from non-conventional sources was launched in the US, discouraged oil exploration and exploitation investments. The domestic production of crude oil covers approximately 40% of demand.
Romania produces more refined petroleum than internal the demand for petroleum products requires. Romania has followed the European trend of reduced competitiveness in this sector caused by the relatively high price of energy in the EU compared non-European competitors and the costs imposed by steps taken to reduce greenhouse gases. As such, Romania has imported crude oil, mainly from Kazakhstan, Russia, Azerbaijan, Irak, and Turkmenistan, but it continues to be a net exporter of petroleum products.
Natural gas representss approximately 30% of internal energy consumption because the domestic availability of this resource and because its use has a minor impact on the environment. Natural gas also can balance RES-produced energy based upon the flexibility of gas-fired generation units. The extraction, transportation, underground storage, and distribution network covers the whole nation, and it has the potential to interconnect the Romanian National Transportation System with the central European system and the Caspian sea resources via the south gas corridors.
Domestic natural gas production routinely provides more than 90% of internal consumption. However, in 2016, because of the low oil prices, the long-term gas import prices have reached lower levels than the those of domestic producers. Natural gas producers will have to attempt to remain competitive with import sources.
Transmission, storage, distribution, and the gas market
The recently discovered resources in the Black Sea require the construction of reverse flow interconnectors. The most important one connection is with BRUA (Bulgaria-Romania-Hungary-Austria), which is included in a list of projects of common interest for the EU. Another priority is to insure transport capacity towards the Republic of Moldova.
Also, Romania must invest in the modernisation and modernization of its national gas transport, storage, and distribution networks to allow operation at high pressures, to reduce network losses, and to increase operation flexibility. The National Transportation System is underutilised because it was built in 1960 and its dimensions are no longer consistent with current standards.
Romania needs a system that can deliver triple the amount used for current consumption. Because of these limits, network charges are the highest in Europe, which is reflected in consumer bills. Because of these technical limits, high pressure transmission has to adapt to the operating level of neighbouring countries to allow reverse flow.
Completing these upgrades will create a competitive gas market, which does not currently exist. To aid in creating a competitive market, a Network Code is under preparation by the Regulatory Authority. It intends to allow the reservation of capacity at exit and entry points in the NTS. Significant investments in IT will be required to allow cross-border transactions (SCADA compatible with neighbouring countries) as well as to develop transaction platforms for the day-ahead and intra-day markets, which are being carried out at the moment from a Hungarian platform.
At present, most of the the domestic gas is produced by two main players, which creates a vulnerability and leads to close supply markets, even though legislation requires that most of the gas is traded by suppliers and producers on OPCOM, the Romanian electricity and gas stock exchange.
The gas market is currently extremely concentrated on the production and import segments. Romgaz and OMV Petrom cover around 95% of the domestic production while the first three importers cover around 95% of imports. On the competitive supply market, there are numerous suppliers, but the first three companies have a market share of around 65%.
We advised a major German liquid gas company (Linde AG) about a gas concession agreement with Romanian authorities. Our work included the negotiation of a concession contract with Romanian officials. Later, we advised Linde about all corporate issues, including the establishment of a liquid gas factory in Romania with a Romanian joint venture partner.
We advised Wintershall AG, a subsidiary of BASF, on gas related upstream (gas exploration and exploitation concession, JOA, Farm Out Agreement) and downstream activities (gas distribution concessions with various municipalities, international gas supply agreements), underground storage (in relation to the construction respectively acquisition of an underground gas storage), and gas pipeline construction projects.
We advised the Gazprom Group about gas interconnection issues, the application of European Regulations on regulated access, and their correct transpositions under Romanian law, Energy Community legislation, and the practice of the European Courts regarding transparency issues in the energy sector and security of supply. The advice also included an analysis of secondary legislation of ANRE, regulations issued by ACER, and the restructuring and unbundling processes. We advised about competition issues on the Romanian and international gas markets and other regulatory issues.
We advised AGIP about the conformity of petrol station agreements in Romania.
We advised Ruhrgas AG and EON AG about all gas distribution and supply related issues (as part of the privatization and post privatization process).