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Romania’s approach to energy transition: too little, too slow

 

 

Romania is a late and unwilling implementer of energy transition. The state-owned energy companies have largely missed out on the renewable energy boom (2011-2015) and are showing interest only now, when faced with imminent disappearance from the market and when the EU legislation is forcing them to make a choice: restructure or die. The main locomotive for Romania’s energy transition is EU energy policy, specifically the Green Deal and the multiple funding opportunities available for decarbonization projects. The EU’s ambitious and transformative climate agenda is the only thing propelling Romania and its energy sector into the future, ready or not.

 

 

Current energy market overview

Romania’s energy balance for 2022 shows a contraction of 4.5 TWh (7.7%) of domestic electricity consumption in 2022 (53.9 TWh) compared to 2021 (58.4 TWh). It also shows an increase of both electricity imports (7 TWh in 2022 vs 6 TWh in 2021) as well as exports (up by 2 TWh in 2022).

 

Romania energy balance for 2021 & 2022 (in TWh)

 

 

Physical cross-border flows (in GWh)

2022 vs 2021

Source: Transelectrica, Annual report 2022

 

Physical imports of electricity have increased most of all from Bulgaria (by 1,322 GWh, totaling 3,652 GWh – the highest from all neighbors) while exports have increased substantially to Moldova (+2,051 GWh from zero the previous year) and to Serbia (+589 GWh reaching 1,968 GWh in 2022).

Romania had the good fortune to inherit a rather diversified energy mix from the communist regime. This positive start made Romania rather complacent during the next 3 decades that followed, with very little in terms of greenfield investments in energy infrastructure (with a few notable exceptions).

 

Generation capacity (net, by source, 2023, in MW)

Nuclear	1,300
Fossil Hard coal	176
Wind Onshore	2,957
Fossil Brown coal/Lignite	2,497
Hydro Run-of-river and poundage	2,780
Hydro Water Reservoir	3,356
Solar	1,185
Fossil Gas	1,988
Biomass	118
Total capacity	16,357

Source: ENTSO-E

 

 

Installed capacity, gross, 18,652 MW, 2022

Source: Transelectrica, Annual report 2022

 

The next two graphs, taken at a distance of exactly one week between them (the first on April 11 and the second on April 18, 2023), show that the predominant electricity source is now hydro (33-47%). Notice also the different consumption profiles – for a normal week day (9,051 MW used on April 11) versus a holiday (6,560 MW on April 18, last day of the Orthodox Easter vacation) – a difference of 28%! When it’s windy, wind farms can account for almost 30% of electricity production (on April 11), but when the wind doesn’t blow its contribution can fall by an order of magnitude (to as low as 3%, see data for April 18). Nuclear has a steady contribution in the range of 1.3-1.4 GW while coal contributes about 1 GW (the rest of coal-fired capacity was retired or put in “conservation”).

 

Total electricity production (9,051 MW) on April 11, 2023 (at 9:28 am)

Source: Transelectrica, 2023

 

Total electricity production (6,560 MW) on April 18, 2023 (at 16:39 pm)

Source: Transelectrica, 2023

 

 

Market structure (pre-crisis)

Source: Transelectrica, general presentation, 2020

 

For all intents and purposes, by now Romania should have been an energy-sufficient country, since it does have all the premises to be autonomous in energy: good hydro reserves (6,645 MW installed hydro capacity, 3 GW of onshore wind capacity, 1.4 GW installed solar capacity – data for 2021), good prospects in gas production (new gas discoveries both offshore and onshore), an existing nuclear power plant (1.4 GW gross installed capacity) with plans to add two more nuclear reactors and build a first-of-a-kind power plant based on SMR technology (at Doiceşti). So, what explains Romania’s failure so far to achieve full energy independence and to become an energy security provider in the region? There are at least two key reasons:

• First, an inability to monetize Romania’s advantages in the energy sector. The Black Sea gas, a discovery made in 2012, is not put into production to this day, 11 years later. Although, it looks like the 2 companies involved (OMV Petrom and Romgaz) are preparing to take the FID this year. Another example concerns unit 3 and 4 of Cernavodã NPP and the inability to move the project forward since 2007, so a 16-year delay. The format changed 2 times already. First there was an SPV with several companies as shareholders, but the Romanian state insisted to have majority stake, then the 2008 crisis hit and investors lost interest. The second attempt was to revive the project through cooperation with China. This dragged for 7 years (2013-2020), when the cooperation with the Chinese on nuclear was officially buried. Now, the third attempt is to do the project with Western (American) funding. This shows how slow Romania is in acting in its own interest, especially in the case of big, strategic projects.
• Second, a pervasive nationalistic mindset in energy policy & policymakers circles: instead of embracing a free market thinking upon its accession into the EU (in 2007), Romania has very often pursued a different course. Time and again, Romania said one thing in Brussels (i.e.: agreed to measures and reforms) and did another thing at home (i.e.: deliberately putting brakes on market liberalization processes (that were delayed, postponed, contested internally at almost every step since 2012). The market liberalization process which started in 2007 can be described in retrospect as “one step forward, two steps back”. Finally, it was completed in July 2020 (full market liberalization for natural gas – which was the last sector to achieve it).

 

Fast forward to the energy crisis (fall 2021 & 2022): the knee-jerk reaction of the Romanian government was to re-regulate the market in response to the price hikes occurring in the “free” market. So, the free market miracle did not last long, as the Romanian government has enacted a set of protection measures that effectively re-regulated the market until the end of March 2025.

Now, the majority of Romanian consumers live under a glass dome (regulated prices, for virtually all consumers) until the end of March 2025. So, one can conclude that price liberalization had a short life in Romania. At the first signs of trouble (especially, under the exceptional circumstances of 2022) the Romanian authorities de facto re-regulated the market. The European Commission allowed it on account of extraordinary market circumstances, essentially giving a free pass to member states to deal as they see fit to in order to best protect the consumers. Against the backdrop of far more generous energy subsidies granted by European countries with deeper pockets (Germany’s €200 billion “energy shield”, UK’s £150 billion, or France’s €75 billion), Romania’s subsidies and brutal market intervention do not seem so shocking any more.

 

Country strategy towards energy transition

Romania’s road to energy transition is thorny. The government does not want to commit to too ambitious green targets, for fear of penalties in case of failure to achieve them. So, if one looks at current energy policy documents, the level of ambition is quite modest. However, Romania’s National Energy and Climate Plan (NECP) is up for update this year, which means we shall most likely see a review of national targets and objectives in line with the Fit for 55 and REPowerEU packages which will translate into an accelerated energy transition.

The tools that the country intends to use in this process are:

• Coal phase-out
• Hydrogen phase-in
• RES scale-up
• Nuclear

 

Coal phase-out

Romania was a late adopter of coal phase-out, with serious steps towards abandoning coal in power generation taken only in 2021, at the very last minute, when Complexul Energetic Oltenia (main coal mining and coal-fired power producer) was facing bankruptcy and the Romanian state was prevented by EU state-aid legislation to come to the rescue of the company, as it has done so many times in the previous three decades. The final aid package (€251 million loan) was approved in 2020 on condition that the company adopts a decarbonization plan and closes down its remaining coal-fired power generation assets (a shut-down calendar was agreed and the government even committed to make this into law – the Law on decarbonization of 2022).

This is one of the most significant developments in power generation in this decade. Initially entirely coal-based (all 3,240 MW), Complexul Energetic Oltenia (CEO) is to reduce its coal-fired generation to 1,980 MW by 2025 and add 1,400 MW of natural gas capacity and 300 MW of solar capacity by 2030 – a decarbonization of 54% of its generation assets in just 10 years.

 

Forecast (of 2020) for installed power (in MW) at Complexul Energetic Oltenia (2020-2030)

Source: CE Oltenia Development and Decarbonisation Plan for 2020-2030

 

The bulk of the current coal capacity will be replaced by natural gas and renewables (solar PV). The company’s initial plans were to build PV parks totaling 300 MW at Rovinari, Turceni, and Isalnita. In 2022, however, the company received funding for 8 PV parks (735 MW) from the Modernization Fund.

 

Hydrogen phase-in

In Romania (as elsewhere in Europe), hydrogen has been used so far exclusively in industry, mainly as feedstock in oil refining and fertilizer. Romania produced and consumed 223,000 tonnes in 2020 (Fuel Cells & Hydrogen Observatory), all of it grey hydrogen (without carbon capture). Romania’s annual production of hydrogen is in the range of 200,000-230,000 tonnes. However, despite having a tradition in hydrogen production and use, Romania did not hurry to embrace the more modern hydrogen utilization options (in transport, heat and power generation, as storage for electricity). Regionally, Romania is the last country to be drafting a hydrogen strategy (Poland, Hungary, Czech Republic, Slovakia, Croatia, even Ukraine – all have adopted National Hydrogen Strategies ahead of Romania which has started drafting such a document only in late 2022 and only because it is a requirement under the National Recovery and Resilience Plan, NRRP).

Romania’s interest in green hydrogen is driven by EU energy policy. It was Brussels’ suggestion, not Bucharest’s desire, to include funding for new green hydrogen production capacities in Romania’s NRRP, i.e. building at least 100 MW green hydrogen electrolyzers, that would produce at least 10,000 tonnes of hydrogen / year from renewable sources.

As a country with unsolved development issues, Romania will most likely choose a moderate speed for deploying clean hydrogen. As an oil and gas producer, Romania is poised to be interested in blue hydrogen production (from natural gas with carbon capture). As a country with nuclear energy, Romania is likely to have an interest for pink hydrogen (using electricity produced from nuclear). Green hydrogen production will be driven exclusively by available European funding and the industry’s interest for decarbonization projects.

In terms of new uses for hydrogen, Romania cannot scatter its attention and efforts on all possible uses. So, it has chosen industry and transport as priority fields for green hydrogen application. The details of this vision (framework, numbers, targets) will be publicly available once the draft Hydrogen Strategy will be put into public consultation later this year. One thing is clear though: although a latecomer to the party, Romania’s bad timing might actually work in its favor this time, since it can benefit from the extra knowledge of countries that have already gone through this policy planning exercise.

 

RES scale-up

Romania added some 5 GW of new renewable capacity at a cost of €8 billion between 2011-2020. Under its current NECP, Romania aims to install an additional 6.9 GW to achieve a target of 30.7% for RES in final energy consumption by 2030. This target includes onshore wind and solar, but no offshore RES projects. The EU responded to Russia’s aggression in 2022 with a multidimensional package which doubles down on the transition to clean energy. Therefore, it is quite possible that the review of Romania’s NECP (due to take place in 2023) will bring at least a doubling of the new RES capacity: 14 GW of new RES installed by 2030 in lieu of the current 6.9 GW target.

At the moment, Romania’s wind capacity is situated exclusively onshore. However, the Black Sea is considered to hold significant potential for offshore wind. According to the World Bank, the offshore wind potential in the Romanian Black Sea segment is 76 GW, of which 22 GW for fixed turbines and 54 GW for floating turbines. State-owned hydro producer Hidroelectrica announced in 2020 plans to build 300-500 MW of offshore wind projects. However, Russia’s subsequent hot war against Ukraine made the Black Sea (an area with active military operations) unattractive for the moment.

When it comes to RES, Romania has a huge pre-existent advantage in renewables where hydro is king (largest installed capacity with 6.4 GW). This advantage in hydro capacities pre-dates the European push for renewables and the 2008 Renewable Energy Directive. As of now, hydro power accounts for 30% (17 TWh) of electricity produced in Romania, making hydro the largest contributor in the energy mix. See table below.

 

Monthly coverage of the system load, by fuel type (2021)

Source: Hidroelectrica Annual Report, 2021

 

It’s worth mentioning that wherever the decision is up to the Romanian state, the funding available is tailored in such a way as to benefit primarily the state-owned companies. The state is a significant player (80% of the energy sector) and whenever it has decision making power, it channels most of the funding to its own companies to the detriment of the private companies. Thus, a key feature of Romania’s energy transition is that there is little level playing field and more discretionary allocation of capital that favor SOEs, especially in state-run funding programs.

By comparison, Romania has been less preoccupied to improve the lot of the smaller consumer. Romania’s default policy is to subsidize the energy price instead of making micro-investments and encouraging self-production. From the beginning (in 2008), RES deployment in Romania was focused on utility-scale projects (both wind and solar), with almost no attention for residential use (i.e.: rooftop solar deployment). The prosumers are a recent phenomenon in Romania. At the start of 2020, the country had only 271 prosumers. However, Romania ended the year 2022 with 40,000 prosumers (423 MW installed), of which half (20,000) added between August and December 2022. The overwhelming majority of prosumers (99%) use solar and 96% are individuals, not companies. In fact, these 423 MW are the only new additions to Romania RES installed capacity so far.

 

Key takeaways and challenges

Potential challenges associated with energy transition process include the deterioration of state-owned companies’ ability to manage and see through complex projects over the finish line. Romanians have been complacent during the last 3 post-communist decades, as they have enjoyed the fruits of energy supply diversification efforts of the communist regime. The current Romanian government apparatus and the politically appointed management of state-owned enterprises (SOEs) have proven to fall short of their communist predecessors in terms of project management ability for large infrastructure projects. State-owned energy companies resist reform and modernization efforts and prefer to live on government bail-outs as long as they can. Only when it was no longer an option (ex: EU state-aid rules limited how much a government can keep on life-support loss-making enterprises), did the Romanian government start restructuring or the SOEs (for example, Complexul Energetic Oltenia, the largest coal-fired electricity producer) started thinking seriously about “energy transition”.

State-owned companies (SOEs) have made few large investments in energy in the past 20 years, SOEs have largely missed the RES window of 2008-2016 and are interested in renewables only now, when the EU is pressing Romania hard to green our infrastructure. It is puzzling that with 80% of the energy sector in Romania being state-owned, in the past 3 decades, the most important investments in energy infrastructure were not made by SOEs, but by private companies (mostly in RES). The only new gas-fired power plant built in Romania is OMV Petrom’s 860 MW CCGT at Brazi, put in operation in 2012, which remains to date the largest greenfield investment in the country. State-owned Romgaz is trying to finish a new CCGT at Iernut (430 MW) without success since 2013. Romgaz’s Iernut project (at half the capacity of OMV’s Brazi) should have been ready in 2020, we are in 2023, and the date for completion has been pushed to 2024. This tells us that the Romanian state has lost its knowledge of project management/ implementation for large infrastructure projects. And it proves difficult for state-owned companies to get back in the saddle (building big infrastructure projects), after such a long pause.

Another challenge comes from the experience of the past 2 years which show that liberalization can be rolled back (market re-regulation in extraordinary circumstances, which we had in 2022, with its effects – subsidized gas and electricity prices for consumers – in place until March 2025). In practice, the Romanian government has legal tools through which it can intervene into the market. For instance, the state has preemptive rights to buy the Black Sea gas production, at the lowest price, to replenish its state reserves. The state has the right to impose a subsidized price or re-regulate the market (when it so wishes) for a certain period of time – which it has already done in fall 2021 and 2022. The subsidized energy price is valid in Romania until the end of March 2025, so it does not affect the sale of gas from Neptune Deep (which will start production in 2026-2027). However, it did create a precedent for state intervention into the market, which means it can happen again in the future.

A third challenge to energy transition could be the slow roll-out of RES projects due to Romania’s weak administrative capacity. Oftentimes, when the state organizes competitive calls for projects, it gives a very short period (1-2 months) to applicants to write the proposal. This has an impact on the quality of projects that are submitted. On the other hand, the evaluation process, can last more than a year and frequently experiences delays. This can jeopardize Romania’s ambitions in RES.

A quick assessment of Romania’s middle of the road state of affairs in this process of energy transition indicates that Romania is likely to go with the low hanging fruits (RES, heat pumps) as well as use traditional solutions (nuclear and natural gas). Romania is very much risk averse and unlikely to opt for high-risk options (such as CCUS or developing a policy on strategic minerals or on home-grown production and supply chains for critical raw materials). Investor interest in Romania, by any measure, was and is not short. Officially, Romania will play it safe. It will count on the industry to drive decarbonization, on the EU to provide the financing, and it will impose some mandates for hydrogen use in transport. However, the biggest changes will happen as a result of EU policy shaping national policy (coal phase-out), of generous funding from the EU (especially for RES), or of strong support from a strategic partner (like the USA in the case of SMR technology).

 

 

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NOTE: This Policy Paper was written for the Institute of Central Europe (ICE) based in Lublin (Poland) and was published in the Institutes’ Policy Papers series: “Central and North Europe’s road to energy transition: outlook in selected countries“, IEŚ Policy Papers 4/2023, ISBN:978-83-67678-07-0.