How can Romania meet European requirements in the field of energy?

• Author: Murafa, Corina
• Position: POLICY BRIEF - Report

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). To top it all, between June 2009 and October 2010, temporary measures allowed industrial consumers to consume exclusively domestically produced gas, which exerted a high upward pressure on domestic reserves.

There are clear indicators that the natural gas market is not functioning competitively, namely lack of liquidity and high concentration indices in all segments of the market. In wholesale production there is a clear oligopoly (Romgaz and Petrom), and this upstream concentration is reflected in the retail segment, with concentration indices two to three times higher than normal values.

Last but not least, despite the obligation to take part in the common market in the field of natural as the only pipe linking Romania to Western markets (the Szeged --Arad pipeline) does not allow reversible flow, meaning it is physically impossible to export gas to Hungary. In addition, one of the most recent infringement procedures of the European Commission is accusing transmission system operator Transgaz of not respecting the requirements in the Second Energy Package and not offering firm and interruptible third party access.

As a general structural deficiency of the Romanian energy market, which impacts both the natural gas and the power sector, one needs to mention the regulator's lack of independence. In an informal letter addressed to the Romanian government, dating as well from October 2010, the Commission was flagging the gradual capturing of the regulator by political interests. A step in this direction has been the dissolution of its budgetary independence through Law 329/ 2009 and Government Decision 1428/2009.

In the Romanian context, we need to bear in mind the following structural flaws: lack of regulator independence, very low regulated end-user prices, cross subsidies, high concentration indices in all segments of the market, lack of investment in the distribution network, in storage and in diversification of supply, lack of transparency of transmission system operators, lack of interconnection capacity and unjustified protection for industrial consumers. In the electricity sector, we are also dealing with bilateral contracts below market average which follow a political, rather than a commercial logic, and also with lack of transaction transparency. In the gas sector, both quantity and price caps meets, in the form of the "gas basket" and the way the regulator is indirectly setting the price for domestic gas. The European Commission is very much aware of these flaws, and our government has received numerous infringement procedures

Where Do We Need to Go?

Other Member States are not champions of energy market liberalization and of moving towards a truly European energy common market either. However, we are not talking here in most cases of structural problems as serious as Romania's --lack of regulator independence, cheap energy sold by state-owned enterprises to...