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The Romanian Saga of Directly Negotiated PPAs

The Romanian Saga of Directly Negotiated PPAs

Romania
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Between around 2001-2011, certain private electricity suppliers (the “smart guys”, as they were called by the press) entered into long-term (10-15 years) bilateral power purchase agreements (“PPAs”) with state-owned producers (amongst which, notably Hidroelectrica) under quite unfavorable conditions for the latter.  Basically, the “smart guys” used to buy electricity from the state-owned producers at very low prices while making large profits by re-selling this cheap electricity at much higher market prices. Such PPAs were directly negotiated between the parties outside an organized market (the whole process and the contract itself being a private and confidential matter) and many of them were loss making for the selling state-owned producers (for instance, Hidroelectrica filed for insolvency and unilaterally terminated all such contracts eventually).

At the same time, starting from around 2008 - 2009 investments in renewable projects boomed due to a generous state-sponsored incentives system and available debt financing, usually based on the available long-term PPAs directly negotiated by the producers and off-take suppliers (a major bankability factor).

In this context, the Romanian authorities’ solution to curb the abuse of directly negotiated PPAs with the state-owned producers was, surprisingly, a general ban on all directly negotiated PPAs, which has been applicable since the enactment of the current electricity and gas law no. 123/2012 (the “Energy Law”). Although possibly justified by the concern of avoiding any discrimination between the market participants, this general ban has primarily affected exactly the renewable electricity producers, who needed predictable, long-term PPAs the most. Thus, art. 23 (1) of the Energy Law requires that all electricity transactions be carried out in a transparent, public and centralized manner (basically on the centralized markets operated by the authorized market operator, Opcom). Since 2014 an exception to this rule was made only for the small renewable electricity producers (maximum 3 MW), which can conclude directly negotiated PPAs under certain conditions.  

Even though Opcom has meanwhile launched several successful trading platforms, such platforms accommodate contracts with a maximum 1 (one) year term usually and/or are otherwise unfit for long-term contracts (mainly due to firm prices/quantities requirements, competitive auction mechanisms, unavailability of the regulated option to conclude the contract before the operational phase etc.). As a result, long-term PPAs have practically vanished from the market and so has the project financing for green field investments.

Recent developments

As of 1 January 2020, the new Regulation (EU) 2019/943 on internal electricity market (the “Electricity Market Regulation” or the “Regulation”) has entered into force. According to art. 3 of the Electricity Market Regulation, Member States, regulatory authorities, transmission system operators, distribution system operators, market operators and delegated operators shall ensure that markets are operated in accordance with a number of principles amongst which “long-term electricity supply contracts shall be negotiable over the counter” (point (o) of article 3). Already, art. 15, point 8 of Directive (EU) 2018/2001 on the promotion of the use of energy from renewable sources obliged the Member States to assess and “remove unjustified barriers to, and facilitate the uptake of long-term renewables power purchase agreements” whereas “renewables power purchase agreements” are defined by the same directive as contracts under which a buyer “agrees to purchase renewable electricity directly from an electricity producer”.

At the beginning of December 2019, the Romanian energy regulatory authority (ANRE) issued a draft Order meant to implement some adjustments to the Romanian domestic legislation in order to timely comply with the Electricity Market Regulation, especially as regards the formation of the price on the wholesale electricity market (the “Draft Order”). Art. 6 (2) (c) of the initial version of the Draft Order provided that “the participants to the market can conclude bilateral negotiated contracts with a delivery period exceeding 1 year” as an exception from the rule imposing the conclusion of transactions in a transparent, public, organized and non-discriminatory manner. Although not expressly, it seems this wording referred to directly negotiated PPAs outside centralized/organized markets. Also, the Draft Order contained provisions allowing for the conclusion of PPAs even before a power plant become operational, which was meant to support the project financing of new generation capacities based on long term PPAs secured in the early stage of the project.

On 17 December 2019, a public consultation meeting organized by ANRE with the stakeholders showed divergent opinions on and interpretations of the proposed art. 6 (2) (c) of the Draft Order: some stakeholders welcomed it, some others criticized it as being inopportune, contrary to the Energy Law, or not even expressly required by the Electricity Market Regulation. As regards this latter opinion, it was argued that (i) art. 3 (o) of the Regulation literally refers to contracts that are “negotiable over the counter” (Romanian version of the Regulation: “negociabile pe pietele extrabursiere”), which would not be the same as transactions directly negotiated between the parties outside any kind of regulated market, and (ii) moreover, there is an existing centralized Opcom market for the “over-the-counter” electricity transactions (PC-OTC) approved under ANRE Order no. 49/2013, so that the requirements of art. 3 (o) of the Regulation on long-term electricity supply contracts would already be met. Following the public consultation, ANRE substantially amended the Draft Order and finally enacted it as Order no. 236/2019, which entered into force as of 1 January 2020 (“Order 236/2019”).

Unlike the Draft Order, Order 236/2019 no longer provides the general requirement that all electricity transactions take place in a transparent, public, organized and non-discriminatory manner and includes the “non-regulated markets” (Romanian language: “piete nereglementate”) amongst the markets on which electricity can be traded. This wording could be read as a reference to directly negotiated PPAs outside a regulated/organized market intended to be allowed by ANRE, which would contradict the express ban in art. 21 (1) of the Energy Law. Alternatively, the wording could have been intended by ANRE just as a replication in the secondary legislation of the “negotiable over the counter” concept used in art 3 (o) of the Electricity Market Regulation and in the definition of the ”electricity markets” given by Directive (EU) 2019/944 on common rules for the internal electricity market; indeed, the entire article of Order 236/2019 containing the reference to “non-regulated markets” seems to replicate the broad definition of “electricity markets” in the mentioned directive. If that is the case, copy-pasting the provisions of primary legislation in the secondary legislation without detailing/implementing them does not seem very helpful, and the fact that the Romanian terminology of the Regulation differs from that of Order 236/2019 enacted in order to ensure compliance with the Regulation (i.e., “piete extrabursiere” in the Regulation versus piete nereglementate” in Order 236/2019) may generate some confusion (and a “lost in translation” sort of feeling).

Also, Order 236/2019 no longer contains the provision in the Draft Order expressly allowing for PPAs to be concluded before the completion / licensing of the power plant.

Possible interpretations and what could / should happen next

Thus, there are three layers of legislation regulating the matter of directly negotiated PPAs in a rather unclear or uncorrelated manner at best, i.e., the Electricity Market Regulation, the Energy Law and Order 236/2019.

One thing is clear: the Electricity Market Regulation is directly applicable in Romania according to art. 288 of the Treaty on the Functioning of the European Union and it creates rights that can be claimed directly before the national courts (it does not need transposition as EU directives do). However, the Regulation enunciates in its article 3 a set of principles and the implementation of such principles might require certain positive actions to be taken by the Member States.

But what if the domestic law contains a contrary provision such as, allegedly, art. 23 (1) of the Energy Law: does such provisions need to be formally amended to comply with the Regulation and what happens until then? The Court of Justice of the European Union (“CJEU”) has clearly stated that since the provisions of the EU regulations “are directly applicable in the legal system of every Member State and Community law has priority over national law, these provisions give rise, on the part of those concerned, to rights which the national authorities must respect and safeguard and as a result of which all contrary provisions of internal law are rendered inapplicable to them” (judgment pronounced in case no. 167/73). Furthermore, in the same judgment, the CJEU held that repealing a contrary domestic provision could be mandatory to ensure legal certainty and avoid “an ambiguous state of affairs by maintaining, as regards those subject to the law who are concerned, a state of uncertainty as to the possibilities available to them of relying on Community law”.

Therefore, article 3 (o) of the Regulation is undisputedly applicable in Romania and any existing contrary provisions in the Romanian legislation (e.g., Energy Law) are to be deemed suspended from effect by the entry into force of the Regulation as of as of 1 January 2020; also, any such contrary provisions should be formally repealed/amended by the competent Romanian bodies. Regardless, it is obvious that ANRE could not amend the Energy Law itself, but only the Parliament should ultimately do it.

The key aspect here is the actual meaning of art. 3 (o) of the Electricity Market Regulation: does it envisage (i.e., recognize as valid) directly negotiated PPAs outside centralized/organized/regulated markets administered by a market operator or not? In this respect, two concepts used therein are essential: (i)electricity supply contracts” - the type of transactions envisaged by this legal provision and (ii)negotiable over the counter” - the way such transactions are permitted.

As regards point (i) above, the concept of “electricity supply contracts” used in the Regulation has the broad meaning defined in the Directive (EU) 2019/944; hence, it covers all electricity sales, including those from a producer to a wholesale reseller but it excludes the “electricity derivatives” broadly defined by the Directive (EU) 2014/65 on markets in financial instruments essentially as options, futures, swaps, forwards or other derivatives. This is an important detail because sometimes even PPAs with physical delivery may be designed as complex products with a finance purpose involved (hedging, for example), so they could potentially qualify as electricity derivatives, which would bring them out of the scope of art. 3 (o) of the Regulation. In respect of derivatives, Regulation (EU) 2012/648 on OTC derivatives, central counterparties and trade repositories was meant to strengthen regulation of OTC derivatives transactions by imposing certain restrictive regulatory requirements.

As regards point (ii) above, the “over the counter” concept is used in the Regulation as opposed / complementary to “exchanges” and it does not cover the derivatives (which, as mentioned, may be subject to certain regulated market type of rules). Hence, it seems reasonable to consider the common meaning of “over the counter” as being negotiable between the parties directly, in an informal venue, without a central counterparty or intermediaries necessarily involved. Most likely, the centralized PC-OTC market operated by Opcom would not fit into this meaning of “over the counter” concept in the Regulation (assuming this would be the prevailing interpretation). Regardless, the existing PC-OTC platform does not allow long-term contracts anyway (the contracts concluded on the PC-OTC market may have a maximum 1 year term), as required by article 3 (o) of the Regulation.

Considering all the above, the possibility of directly negotiated PPAs should be further clarified from a regulatory perspective beyond any doubts by ANRE and the Romanian Parliament (the authority ultimately competent to approve the amendment of the Energy Law). At least this would the legitimate expectation of the stakeholders, given the importance of the matter. Also, as mentioned, the amendment of domestic legislation contrary to EU regulations appears mandatory as per the CJEU practice.

Just to complicate things even further, there is a current bill for the amendment of the Energy Law already voted by the Romanian Senate and sent to the Chamber of Deputies for final review and future adoption. This bill in its current form expressly provides that “bilateral contracts directly negotiated are forbidden”, regulating instead ANRE’s right to approve specific transactional products meant to offer the type of flexibility sought by long-term PPAs, such as power output variation or price formula - based adjustments. It remains to be seen if this ban will be kept in the final form of the bill to be approved by the Chamber of Deputies.

ANRE instead seems to be in favor of directly negotiated PPAs; however, given that these were not permitted by the Energy Law, ANRE also explored the alternative of adapting the centralized markets rules to meet the need for flexibility of long-term PPAs (for renewables in particular). In this respect, ANRE launched in 2018 two draft regulations for public consultation - one regarding the centralized market for long-term electricity contracts (more than a 1 year period) and one regarding products to ensure the flexibility of long-term bilateral electricity contracts, but both such regulations have been shelved meanwhile and have, so far, not been enacted.

By Cosmin Stavaru, Partner, Bondoc si Asociatii

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