Eurelectric: Romanian energy price Ordinance threatens sector sustainability

On 29 October 2021, Romania adopted the Ordinance 118/2021 on urgent measures to manage the effects of rising energy bills. The Ordinance immediately came into force on 1 November. The text contains a number of welcomed measures to alleviate the burden of the current rise in energy prices on end-consumer bills, such as direct financial support to customers and a reduction of taxes and levies, which are compatible with EU rules and recommendations

However, the text also poses a serious threat to the sustainability of the Romanian electricity sector and, indirectly, the functioning of the European wholesale electricity market. The Ordinance causes suppliers to grant compensation to clients and bear part of customers’ electricity consumption costs. Moreover, energy prices in invoices are being capped, while the mechanisms for subsequently reimbursing suppliers from public sources are neither clearly defined nor operational. These consequences are the result of different measures impacting power generation, power distribution and electricity supply.

Particularly, in the field of power generation, a windfall tax of 80% over the revenues of generators that exceed the amount of 450 RON/MWh (app. 90 EUR/MWh) has been instated. The most worrying part is that CO2 emitting power generators have been exempted from this obligation, leaving the burden on the shoulders of carbon-neutral and low-carbon power generators. With this tax, the clawback mechanism modifies the relative costs of different technologies and directly interferes with market dynamics:

renewable, hydro and nuclear generators subject to the clawback and normally providing low-cost electricity may reduce production
the missing energy will be replaced by coal and gas generators, which are not subject to the clawback but provide comparatively more expensive electricity – or by imports.
With cheap volumes disappearing from the merit order and being replaced by more expensive bids (from Romania or neighbouring countries), the marginal spot price of electricity risks rising even higher. As a result, rather than stabilising prices, the clawback mechanism risks exacerbating price spikes in Romania and the wider region to the detriment of consumers.

This measure risks jeopardising the goals of the Green Deal and Fit for 55 package by weakening investors’ confidence and rights, with a huge impact on must-needed renewable energy investment, as well as undermining the functioning of EU’s Internal Electricity Market.