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Romania Opens up the Possibility for Negotiated Power Purchase Agreements

Romania Opens up the Possibility for Negotiated Power Purchase Agreements

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The Romanian Government has recently brought important amendments to the energy regulatory framework by way of the new Government Emergency Ordinance no. 74/2020, effective May 19, 2020. According to the new regulations, new energy producing facilities, both renewable and conventional, commissioned after June 1, 2020, would be allowed to sell their output outside the current centralized energy market, at negotiated prices, with the observance of competitive rules. The amendment is intended as an exception to the general principle set out by Energy Law no. 123/2012 that transactions with electricity are carried out on the competitive market, in a transparent, public, centralized, and non-discriminatory manner.

The changes have been anticipated following the issuance of the Regulation (EU) no. 943/2019 regarding Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity and Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June on common rules for the internal market for electricity and amending Directive 2012/27/EU. The European enactments introduce the concept of over-the-counter market and the entitlement of market participants to enter into long-term electricity supply contracts negotiable over the counter, subject to compliance with Union competition law, as well as other long-term hedging products tradable on exchanges in a transparent manner in order to ensure protection against price volatility risks and mitigate uncertainty on future returns on investment.

A first step was taken with the issuance of ANRE Order no. 236/2019 approving rules for the elimination or reduction of the impact of measures or policies which may restrict the price formation on wholesale electricity market. However, in order to permit a complete harmonization with European regulations, amending Energy Law no. 123/2012 was necessary, and this was performed through the GEO 74/2020. Although the amendments of GEO 74/2020 are still at the level of principle, they open up significant opportunities for new investments in the Romanian energy sector by introducing the ability of participants to enter into predictable bilateral power purchase agreements (PPAs) that would ensure the bankability of new energy projects.

While this measure has been welcomed by major market participants, one can notice drawbacks. For instance, as the intention is meant to incentivize future/upcoming investments, it does not support existing operational production facilities, which will be bound to continue trading their power output solely on the centralized market, without being able to resort to long-term PPAs. From this perspective, GEO 74/2020 introduces a separation – if not a discrimination – between production facilities commissioned prior to and after June 1, 2020. Considering that the arguments for the issuance of GEO 74/2020 included the necessity to act fast in the context of the COVID-19 outbreak and address the short-term economic contraction associated thereto, one may question if GEO 74/2020 can meet this objective as long as all energy producers operational as of June 1, 2020 are excluded from its application. Historically, the restriction of trading outside the centralized energy market was a hallmark of the Energy Law in its original stage. While the restriction was implemented as a protection mechanism for new investors and was a source of guaranteed income, the measure may be viewed as anachronistic and no longer justifiable from an economic standpoint.

Despite the limitations mentioned above, the Romanian energy sector, declared as strategically important at a national level by Romanian Energy Strategy for the 2018-2030 period, will still constitute one of the most investment-enticing sectors for the medium and long term in the wake of the measures enacted by GEO 74/2020. While there is still room (and need) for secondary regulations, it is expected that interest in developing new production capabilities will increase. The Romanian energy regulator – ANRE – must issue implementation norms within 30 days from the Government Emergency Ordinance becoming effective, detailing the specific conditions in which PPAs may be entered into. In mid-June 2020, the upper chamber of the Romanian Parliament (the Senate) repealed the provisions of GEO 74/2020 regarding PPAs, while introducing the possibility for developers of energy projects to enter into contracts for the sale of the power output, even in advance of obtaining the energy production license. The rationale for the rejection is not fully apparent. GEO 74/2020 has now been passed on for further analysis and debate to the lower chamber of the Romanian Parliament (the Chamber of Deputies), which will have the decisive say on this matter.

By Bryan Jardine, Managing Partner, and Flaviu Nanu, Counsel, Wolf Theiss Romania

This Article was originally published in Issue 7.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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