New Energy Act in Romania Briefing by Schoenherr

Last minute change inserted in the new Romanian Energy Act 123/2012

by Raluca Dirjan and Monica Cojocaru (Schoenherr Energy team)

Bucharest, July 20th, 2012

This briefing looks at the potential impact on electricity trading of the new law on electricity and gas markets published in the Romanian Official Gazette on 16 July 2012. The new energy law entered into force on Thursday, 19 July 2012 (the Energy Act 2012).

I. Background:

The Energy Act 2012 follows as an obligation of the EU member states to align their national legislation with the latest Directives and Regulations on electricity and Gas (generically known as the Third Energy Package). Generally the aim of the Third Energy Package is to complete the internal energy market in Europe by having a fully harmonized legislation for electricity and gas markets across EU 27 member states. The concept of the internal energy market revolves around 5 main pillars:

- Full liberalization of the electricity (and gas) markets in all EU countries,

- Restructuring of the transmission and distribution services (ie: unbundling),

- Consumer protection,

- Supporting energy produced from renewable sources

- Ensuring security of supply.

The Energy Act 2012 develops on these 5 main pillars.

In the past 3 to 5 years there has been an increasing pressure with regard to the historic long-term power purchase agreements that had been entered into by the state owned (hydro and fossil fuels) generators with various private entities. The perception is that such agreements are drying up the liquidity on the market, and there is an increased need of more transparency on the transactions on the electricity wholesale market.

II. The impact of the Energy Act 2012 on electricity trading

The Romanian electricity market has two components: regulated and competitive market. The market then further breaks down into wholesale and retail markets.

On the regulated market the prices are fixed (as approved by the National Regulatory Authority) whilst on the competitive market the prices are based on the bargaining powers of the parties and the demand-supply balance. On the wholesale market the electricity is bought with the intention of being further traded on the market, as opposed to consumed (ie: retail market).

Under what will become as of Thursday (19 July 2012) the old energy act (ie: Law 13/2007 – Energy Act 2007) trading on the competitive wholesale market could be done either by entering into a bilateral negotiated contract with another market player (ie a power purchase agreement PPA) or by selling the capacities on the spot market organised by OPCOM (ie: the Romanian market operator).

The Energy Act 2012 (article 23) could be construed in the sense that there is only one option left to sell (trade) electricity on the wholesale competitive market, namely on the power exchange, ie banning outright the bilateral negotiated contracts (PPAs).

Article 23 Functioning of the competitive market

(1) Trading in electricity on the competitive market is done in a transparent, public, centralised and non-discriminatory manner.

(….)

(4) On the retail competitive market suppliers sell electricity to the final customers based on bilateral contracts, at negotiated prices or based on standard offers.

These two provisions would seem to indicate that the option to trade electricity based on bilateral negotiated contracts (PPAs) is available only for suppliers (furnizori) on the retail competitive market, whereas on the wholesale competitive market trading will need to be done publicly and centralised, ie: via a power exchange platform.

Further under article 28 lit c) of the Energy Act 2012 all producers (regardless of the fuel base or technology) are bound to offer their entire output on the competitive market publicly and without any discrimination.

Article 28 Generators’ obligations

Generators are bound mainly by the following duties:
(…)
(c) to offer their entire output on the competitive market publicly and without any discrimination.

This provision could well be construed that generators can only sell their capacities on the power exchange.

The initial opinions/interpretation in the Romanian market are divided between those who believe the provisions mentioned above restrict electricity trading on the wholesale market to the power exchange and those who argue that this restriction was not the true intention of the legislator and believe that such ‘regulatory gap’ will be fixed once the secondary legislation will be adopted.

In an effort to clarify this matter we have been actively discussing with various domestic and European authorities and stakeholders.

According to initial feed-back from domestic sources it seems the Romanian legislator’s intention was to impose a limitation on the state owned companies in further entering into long-term power purchase agreements with various market players, and in this process of ‘cleaning-up’ the market the private sector (such as the RES developers, financiers etc) has intentionally not been included under a separate category/regime (in order to avoid creating any discrepancies between the public and private entities active on the energy market).

We are currently in contact with the Directorate General for Energy and will follow up with an update to this briefing once we hear from them as well.

From a legal perspective, should the effect brought about by the Energy Act 2012 be the banning of the power purchase agreements and bilateral negotiated agreements, this would clearly not be consistent with the following principles:

· the EU principle (clearly and expressly set forth in the Electricity Directive) of respecting the contractual freedom with regard to long-term contracts provided they are in line with the EU legislation.

· the Romanian Civil Code principle which provides the contractual freedom of the parties, as long as they are in line with the legislation and the public interest.

From a business perspective, we see this as a competitive disadvantage for the energy private sector as Romania would be (as per our knowledge and research) the only member state where electricity would be mandatory traded only on the power exchange without an option for the market participants to enter into bilateral negotiated agreements.

From a project financing perspective, the pros and cons of financing ‘merchant power plants’ (ie: power plants that sell their output directly onto the market without entering into PPAs) will have to be considered.

The secondary legislation is due to be issued by the National Regulatory Authority (ANRE) within the next 6 months. There have been precedents were by way of secondary legislation the primary legislation has been ‘fine tuned’, however from a legal perspective there should be consistency between the primary and secondary legislation.