Context 

1. Liberalization of the Romanian electricity and gas market and the energy crisis

 On one hand, the liberalization of the Romanian electricity market started on 1^st of January 2021 (elimination of regulated prices, possibility to change the supplier and benefit from the competitive prices) and was completed  by the 1^st of July 2021 (consumers which did not sign a new contract until this date, started to pay a price established by the supplier – “universal price” – which is typically higher than the price on the competitive market).

On the other hand, the liberalization of the Romanian gas market was done in several steps:

• full market liberalization on 1^st of July 2007,
• first regulated price elimination (for non-households) on 1^st of January 2015,
• first regulated price elimination (for households) on 1^st of April 2017 and
• second regulated price elimination (for households) on 1^st of July 2020.

In parallel, the energy crisis was beginning to have an impact all over Europe, starting with the effects of the lockdowns during the COVID 19 Pandemic, very low wind in 2021, especially in Germany[1] and Austria, continuing with the shut-down of nuclear plants in Germany[2] and culminating with Russia’s invasion on Ukraine on the 24^th of February 2022 (only several hours after the test of 48h independency from Russian gas was started).

Under these circumstances, as the security of electricity supply was highly endangered, Europe’s decision makers had to retreat and adapt energy strategies (which were previously focused on the transition to green energy) to new market conditions, as well as to the need to protect the population and economies from the adverse effects of rising energy prices and disruptions in supply chains. Europe considered it is best to quickly respond, taking the risk that this response was not always carefully planned and implemented.

The European measures very especially aimed:

• to obtain independency from Russian fossil fuels (in fact, warmer winter helped reduce electricity consumption and no real alternative to the Russian gas was found, as some countries like Germany[3] and Austria[4] are still relying on its import),
• to help households and small businesses pay their increasing bills, introducing specific mechanisms for this purpose, starting from price caps for the most affected consumers, reduction of consumption taxes, direct financial support, etc. and
• simplified procedures to encourage the rise of the energy from renewable sources.

2. Timeline of the most important decisions at EU level

The timeline below illustrates the evolution of the decisions on European level related to energy prices and security of supply, since the crisis started in 2021. For extended explanation and access to each adopted document, please see Timeline – Energy prices and security of supply – Consilium (europa.eu).

Timeline for 2021:

• September:
  • Energy ministers call on Commission to analyze energy price surge.
• October:
  • Environment ministers stress the need for coordinated approach.
  • EU leaders tackle energy price surge.
  • Energy Council addresses rising energy prices.
• November:
  • Eurogroup discusses energy prices.
• December:
  • EU ministers address energy price surge.
  • European Council discusses energy price hike.

Timeline for 2022:

• February:
  • EU leaders call for emergency measures on energy (contingency measures to address the energy market situation).
  • Energy ministers discuss energy market situation following Ukraine crisis and discussions related to options for limiting the impact of energy prices on households and industries begin.
• March:
  • EU leaders agree on how to reduce energy dependencies – EU leaders asked the Commission to put forward a plan to ensure security of supply and affordable energy prices by the end of March 2022 and expressed their intention to discuss options for addressing the impact of increased energy prices on citizens and businesses, especially vulnerable citizens and SMEs.
• May:
  • Energy ministers hold extraordinary meeting to discuss gas supply following Gazprom’s delivery suspension.
  • Member states agree on negotiating mandate for gas storage proposal.
  • Gas storage: Council and Parliament reach a provisional agreement.
  • EU leaders agree on oil ban and priorities to strengthen the EU’s energy independence.
• June:
  • European Council urges efforts to secure energy supply at affordable prices – invitation to the Commission to explore with international partners ways in which to curb rising energy prices, including the feasibility of introducing temporary price caps where appropriate.
  • Council adopts regulation on gas storage
  • Energy ministers welcome REPowerEU plan
  • G7 leaders commit to immediate action to secure energy supply and reduce prices
• July: Member states commit to reducing gas demand by 15% next winter.
• August: Council adopts regulation on reducing gas demand by 15%
• September:
  • Ministers discuss options to mitigate energy prices and review progress on winter preparedness.
  • Council agrees on emergency measures to reduce energy prices.
• October:
  • Council formally adopts emergency measures to reduce energy prices.
  • EU leaders discuss measures to reduce energy demand, ensure security of supply and guarantee affordable prices.
  • EU leaders reach a deal on energy.
• November:
  • Eurogroup discusses high energy prices.
  • Council wants to accelerate procedures for granting permits for renewable energy projects.
  • Council agrees on content of new measures to address the energy crisis.
• December:
  • Russian oil: EU agrees on level of price cap.
  • Energy ministers discuss market mechanism for gas prices.
  • Provisional agreement reached on REPowerEU.
  • European Council: more EU coordination is key to face coming winters.
  • Council agrees on market mechanism to limit excessive gas prices.

Timeline for 2023:

• March:
  • Member states agree to extend voluntary 15% gas demand reduction target.
  • Council formally adopts 15% gas demand reduction target.
  • Council reaches agreement on parts of electricity market reform.

      GEO no. 27/ 2022 and the mechanism of the capped prices 

1. Entering into force and amendments

 GEO no. 27/ 2022 was published in the Official Gazette on 18.03.2022. It was subsequently amended by the following normative acts, in the order of their issuance:

• Law no. 206/ 2022 for approving GEO no. 27/ 2022, published in the Official Gazette on 08.07.2022.
• GEO no. 42/ 2022, published in the Official Gazette on 08.04.2022.
• GEO no. 119/ 2022, published in the Official Gazette on 01.09.2022.
• GEO no. 153/ 2022, published in the Official Gazette on 11.11.2022.
• Law no. 357/ 2022 for approving GEO no. 119/ 2022, published in the Official Gazette on 13.12.2022.
• no. 192/ 2022, published in the Official Gazette on 28.12.2022.
• Law no. 206/ 2023 for approving GEO no. 153/ 2022, published in the Official Gazette on 07.07.2023.
• GEO 90/ 2023, published in the Official Gazette on 27.10.2023.

 The frequent and inconsistent amendments created chaos on the Romanian energy market, as the producers and suppliers had to rapidly adapt to the constant changes and some of them, i.e. the provisions of the Law no. 357/ 2022, were applied retroactively, infringing basic legal principles, that only the more favorable criminal law is retroactive. As the liberalization of the energy market had as scope also to allow the smaller producers and suppliers to enter the market, the energy crises and the chaotic ever changing Romanian legislation made it hard for them to survive.

2. Declared purpose of the capping mechanism as per the substantiation notes (Rom. note de fundamentare)

The GEO 27/ 2022 on measures applicable to end consumers io the electricity and natural gas market was initially issued for the period between 1^st of April 2022 and 31^st of March 2023, with the following main reasoning:

(i)        the support scheme established by GEO 118/ 2021 from 1^st of November 2021 for households, SMEs and other categories of end customers of electricity and natural gas, to support them in              the context of the steep increase in prices, was ending on 31st of March 2022 (this mechanism showed both a compensation and a minimum reference price, while the suppliers received                    reimbursements from the Romanian State);

(ii)       the general context, with difficulties arising from business interruption, falling turnover, rising prices for raw materials or difficulties in obtaining it, difficulties in the transportation              system, could all lead potentially to blocking economic activities, possibly up to national level;

(iii)      the geopolitical context and the possibility of gaps in gas supply make it necessary to take  measures to ensure energy security at national level and security of electricity supply and             natural gas to end customers, mainly for the next winter period;

(iv)      the situation is of the general public’s interest and constitute an extraordinary situation, the  regulation of which cannot be postponed, given the effect that increased electricity and                      natural gas prices have on the daily lives and activities of all consumers.

3. Main provisions of GEO 27/ 2022 and the capping mechanism

     A. Capped prices for electricity suppliers

 The basis of the capped prices introduced in GEO 27/ 2022 is the exception from the provisions of art. 80 par. (2) of the Law no. 123/ 2012, which states that “the protection of energy poor and vulnerable household customers shall be achieved through social policy or any other legal means other than public interventions in electricity supply pricing.” Thus, the whole system introduced by GEO 27/ 2022 is an exception from the free competition, as the suppliers have no longer the freedom to establish themselves the electricity supply prices for their customers. Specific and strict conditions to introduce such exceptions were overruled by the energy crisis at the European level. The capped prices adopted starting with 1^st of April 2022 are currently prolonged until 31^st of March 2025.

The final capped price invoiced by the electricity suppliers, which includes all taxes (VAT, DSO, TSO, cogeneration, tax on energy) is:

1. a) of maximum 0,68 lei / kWh, for consumption between 1 January 2023 and 31 March 2025 for the following categories of customers: households with consumption between 0 and 100 kWh inclusive and some exceptions for consumption above 100kWh because of special vulnerable cases;
2. b) maximum 0,80 lei/kWh, for consumption between 1 January 2023 and 31 March 2025 for the following categories of customers: household consumers with consumption between 100,01 and 255 kWh;
3. c) maximum 1 lei/kWh, VAT included, for 85% of the SME’s as well as for the consumption of other categories established in the law
4. d) maximum 1,3 lei/kWh, VAT included, for consumption between 1 January 2023 and 31 March 2025 for the following categories of customers: household consumers with consumption over 255 kWh and non-household consumers.

      B. Capped prices for natural gas suppliers

The basis of the capped prices introduced in GEO 27/ 2022 is the exception from the provisions of art. 180 par. (1) of the Law no. 123/ 2012, which states that “in case of a major imbalance between supply and demand and/or an obvious malfunction of the natural gas market, the Government, at ANRE’s proposal and with the approval of the Competition Council, may decide to limit the excessive increase of prices/tariffs or their blocking for a determined period of maximum 6 months, which may be successively extended for periods of up to 3 months,  for as long as the circumstances giving rise to the decision persist, by: (a) fixing an upper price limit, b) limitation of income from regulated activity.”

The regulation introduced by GEO 27/ 2022 is an exception, as the initial period was 1 year and then extended.

The final capped price invoiced by the gas suppliers is:

1. a) maximum 0.31 lei/kWh, VAT included, for households;
2. b) maximum 0.37 lei/kWh, VAT included, for non-household consumers with below 50.000 MWh annual consumption.

Capped sale price at RON 150/MWh for natural gas producers carrying out both onshore and/or offshore extraction activities, and natural gas sales activities when they sell the domestic production:

(i)  to suppliers of heat producers or directly to heat producers only for the quantity of natural gas used to produce heat in cogeneration power plants and in heat plants for domestic consumption;

(ii) to suppliers of households, in order to meet the consumption needs of household consumers from current production and from underground gas storage facilities.

      C. Capping mechanism

 According to the present version of GEO 27/ 2022 in force, art. 2 par. (4), the final electricity/ natural gas invoiced price by suppliers is the lowest value between:

(a) the maximum final price referred to in art. 1 par. (1); (1) and/or (2);

(b) the contract price;

(c) the final price calculated in accordance with art. 5 and 6.

      D. Reimbursement of price differences (“compensations”)

 The positive difference between the weighted average purchase price and the weighted average active energy selling price (multiplied with the quantity of electricity/ natural gas invoiced to end costumers), will be compensated to suppliers from the state budget. Currently significant delays are registered, which puts pressure especially on the small suppliers, unable to “finance” the Romanian Government until the time the differences are recovered and to bear on their shoulders the energy crisis.

In praxis, there are also examples when there is no reimbursement, as the difference between the weighted average purchase price and the weighted average active energy selling price is negative, meaning that the selling price is higher than the purchase price.

Example of a case when there is NO reimbursement:

If:

(a) the maximum final price referred to in art. 1 par. (1); (1) and/or (2) is of 1,300 RON/ MWh (out of which the price for the active energy is 735,339 RON/ MWh) for a non – household consumer;

(b) the contract price is 732 RON/ MWh;

(c) the final price calculated in accordance with art. 5 and 6 is 562,23 RON/ MWh (composed of 489,23 RON/ MWh plus 73 RON/ MWh – supply component),

the supplier will have to invoice the lowest price of 562,23 RON/ MWh. As the weighted average purchase price is 489,23 RON/ MWh, meaning it is lower than the selling price, no reimbursement will take place.

Example of calculation of the weighted average purchase price for September 2023:

For the sake of clarifications, if a supplier is purchasing energy from the centralized electricity purchase mechanism organized on OPCOM (MACEE) at 450 RON/ MWh, from DAM at 512,07 RON/ MWh and from IDM at 505,61 RON/ MWh (both being the average prices for September 2023 from the monthly OPCOM report), the weighted average purchase price will be 489,23 RON/ MWh. The selling price of electricity to the end customer will be 489,23 RON/ MWh plus 73 RON/ MWh (supply component maximum value set by law).

The compensation to the electricity suppliers is paid from the Energy Transition Fund.

      E. The contribution to the Energy Transition Fund

Starting with 1^st of September 2022, for (i) electricity producers, (ii) aggregated electricity producing entities, (iii) traders, (iv) suppliers carrying out trading activity and (v) aggregators trading electricity and/or natural gas on the wholesale market, the 80% tax on additional revenues is replaced with a contribution to the Energy Transition Fund, which will be used to pay compensation to electricity suppliers and which is currently determined according to the formula in the annexes 6, 6.1 and 6.2.

The contribution to the Energy Transition Fund is determined as follows:

• for electricity producers: contribution to the Energy Transition Fund (also known as windfall tax) = the total quantity delivered in one month multiplied with the price difference between the weighted average sale price and reference price (RON 450); all revenues (DAM, IDM, etc.) are included in the windfall tax calculation, and only expenses with imbalances (max. 5%), financial hedge expenses and expenses with CO2 certificates can be deducted from the tax base (no longer the expense with the electricity purchase);
• for electricity and gas traders, suppliers performing trading activities and aggregators: contribution to the Energy Transition Fund = the total delivered quantities multiplied with the difference between the monthly average sale price and the monthly average acquisition price and multiplied by 1,02 (2%);
• for export or intra-community electricity sales: contribution to the Energy Transition Fund = the total quantity delivered multiplied with the difference between the DAM price in the day before the transaction and the acquisition price of the electricity and multiplied by 100%.

The contribution to the Energy Transition Fund does not apply to electricity generation facilities commissioned after 1^st of September 2022 and to those companies providing public heat services that produce electricity through cogeneration. If this exception had not existed, I consider that for the E-RES capacities under development, this would have been a showstopper.

The contribution to the Energy Transition Fund must be declared and paid to the state budget by the 25th of the month following that for which it is due. Failure to comply with the obligations to calculate, declare and pay the additional income tax constitutes a contravention and is sanctioned with a fine ranging from RON 100,000 to RON 400,000.

      F. Obligations of non-resident entities licensed in Romania and carrying out transactions on the Romanian energy market

As of 1^st of September 2022, non-resident entities carrying out transactions on the energy market in Romania are required each month to calculate, declare and pay the contribution to the Energy Transition Fund directly or to appoint a fiscal representative to fulfil their obligations.

The representative must be established in Romania and is jointly liable with the non-resident entities licensed in Romania for the declaration and payment of the contribution to the Energy Transition Fund.

The non-resident entities carrying out transactions on the energy market in Romania must submit a cash collateral or a bank guarantee in the amount of EUR 1,000,000.

Failure to comply with the above obligations can result in the suspension of the right of the non-resident entities to operate on the Romanian market.

       Major amendments to GEO 27/ 2022, with focus on GEO 153/ 2022 (based on the Council Regulation 2022/ 1854) 

      A. Context

 As listed under point II.1, GEO 27/ 2022 underwent consecutive amendments, one of which was GEO 153/ 2022, which makes reference in its preamble to the provisions of Regulation (UE) 2022/1.854 of the Council of 6 October 2022.

As the rising energy prices were taking a toll on EU consumers (families and companies), the EU coordinated measures to alleviate consumers from the increased costs. The Council Regulation 2022/ 1854 includes three emergency measures: (i) reducing electricity use, (ii) capping revenues of electricity producers and (iii) securing a solidarity contribution from fossil fuel businesses.

The reduction of electricity consumption was expected to have a positive effect on the EU electricity prices and therefore on consumers’ energy bills. The EU countries agreed to reduce the overall use of electricity by at least 5% during peak hours, to cut demand for gas used in power generation and hence help lower prices.  The new rules allowed the Member States to collect funds from the surplus profits of the energy sector and redistribute these profits to the most vulnerable people and companies in the EU, providing direct support by capped prices.

The main change introduced under GEO 153/2022 was aimed at regulating the centralized electricity purchase mechanism on the energy market.

    B. The centralized electricity purchase mechanism (MACEE)

 The centralized electricity purchase mechanism requires OPCOM, as sole acquirer, to purchase electricity from producers and to sell it to suppliers, TSO and DSO. The purchase mechanism shall be valid between 1 January 2023 and 31 March 2025, but it currently faces an abrupt closing, as it represents a restriction to the export of electricity, which is forbidden when it cannot be justified, according to art. 35 and 36 from the Treaty for the Functioning of the European Union. The European Commission already sent Romania a letter of formal notice, opening thus the infringement procedure[5].

 As of the enforcement of GEO 153/2022, producers may sell the electricity produced only under the conditions set out in the purchase mechanism, with the exclusion of, for example, the renewable (in general) wind and solar electricity producers. OPCOM organizes an annual acquisition procedure, as well as an additional monthly acquisition procedure for the quantities of electricity that are to be delivered in the following month. The calendar is established by OPCOM and published on its own website. Under the purchase mechanism, OPCOM:

• purchases electricity from producers at a price of RON 450/MWh, and
• sells the purchased electricity to suppliers submitting requests at a price of RON 450/MWh.

The contribution to/from the Energy Transition Fund for the electricity sold under the purchase mechanism shall be paid as follows:

(i) if the contribution is higher than the monthly value of the CO2 allowances for the electricity sold under the purchase mechanism, producers shall pay the difference between the contribution and value and (ii) if it is lower, producers shall receive the difference between the value and the contribution.

Noncompliance with the obligations set out under the purchase mechanism may result in fines ranging between 1% and 5% of the annual turnover generated in the financial year preceding the sanction.

      Effects of the capped prices in the energy market. The near future.

1. Effects of the capped prices in the energy market

 Negative effects:

• The competition in the retail market for electricity and gas almost vanished and the clients are not stimulated anymore to change suppliers.
• Reduced investments in the new E-RES capacities because of the lack of market predictability.
• Suppliers have financed the subsidizing scheme.
• Energetic efficiency is not encouraged, as the consumers have capped prices, and the difference comes from the budget.

Positive effects:

• Stability of prices for the final consumer, which results in smaller value invoices.
• Reduction of inflation, as the rise of energy prices has a significative impact on the inflation.
• Although initially discussed, the GCs scheme was not touched.
• Supply is regulated 73 lei/ MWh and 12 lei/ MWh for gas.

2. The near future

On 3rd of November 2023, the Ministry of Energy announced the founding of the Honorary Energy Council, which brings together leading Romanian energy specialists to contribute to the development of strategies, public policies and government programs that can make Romania a leader in energy field.

The Council will answer the most important questions for the Romanian energy system: What are the future energy trends? How can we achieve the transition to clean energy in a fair and equitable way? How do we turn Romania into a net provider of energy security in the region? What should Romania’s national energy strategy look like?

The Council is an independent, honorary and advisory body. It supports the development of strategies, public policies and government programs that can transform Romania into a pillar of innovation and regional energy security. Its members are appointed by order of the Minister of Energy and are some of the most successful Romanian energy professionals, from the country and the diaspora, with nationally and globally recognized achievements.

In this way, the Ministry of Energy is expanding the knowledge and experience base to which it has access, building a mechanism through which it can benefit from the views and analysis of energy experts outside the government system. At the same time, wider consultation ensures a more transparent and accountable decision-making process that considers the views of the academic, social and private sectors.

The first item on the Honorary Council’s agenda is Romania’s new Energy Strategy. The body will have a consultative role in shaping this strategic document, which is due for adoption in the first part of 2024.

 

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In essence, the implementation of capped pricing in the energy sector offers a temporary solution to an immediate challenge. While it seems to confer advantages to consumers, by providing price stability and inflation control, it simultaneously triggers long term consequences, like highly diminished market competition, from which the recovery will not be easy. Furthermore, it serves as an impediment to investments in renewable energy, places financial strain upon energy suppliers, and discourages responsible energy consumption. Also, addressing energy efficiency requires not only financial investments from both public authorities and industry stakeholders but also a fundamental shift in consumer behavior.

 With two major ongoing conflicts, which have deep historical and religious roots, the imperative to diversify energy production towards renewable resources and promote decentralized investments gains increasing prominence.

The prevailing geopolitical landscape, both globally and within Europe, is marked by significant concerns related to energy security, the imperative of mitigating climate change, and the quest for energy independence. This will undoubtedly shape the trajectory of the energy policy.

[1] Wind-generated electricity in Germany slumps to new low in 2021 | Windpower Monthly

[2] Germany closes half its remaining nuclear power plants – DW – 12/31/2021

[3] How will Germany end its reliance on Russian gas imports? | World Economic Forum (weforum.org)

[4] Austria’s OMV to continue imports of Russian gas (offshore-technology.com)

[5] April infringements package: key decisions on energy (europa.eu)