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Recent changes to the Renewable Energy Support Scheme in Romania – Is This so Bad?

The support scheme for renewable energy in Romania, in force since 2011, was expected to be revised periodically to prevent overcompensation in new projects in this field. Recent changes are contained in Government Emergency Ordinance 57/2013 (the “GEO”) and also in some other measures. The GEO should be approved by a law, whether amended or not, but no decision is expected to be taken until after the summer.

What has not changed

It should first be understood what has not changed, given the volume of comments in the media about proposed changes to the support scheme in recent months.

Although the energy regulator ANRE reported in March 2013 that current allocation levels of green certificates per MWh did lead to overcompensation of some (but not all) of the supported methods of renewable energy generation, there has been no reduction of the number of green certificates per MWh allocated for new projects.

The GEO is to introduce a new procedure for the adjustment of such allocation levels. The timetable for such procedures and discussions with a member of the supervisory board of ANRE suggest that no changes to allocation levels will be made before 31 December 2013 at the earliest, and possibly not until 31 March 2014. It is also expected that any recommendations by ANRE for reductions in levels of support will normally specify a date on which such proposed adjustment will take effect (if approved by the Government).

It had also been proposed in the draft of the GEO to give large consumers of energy a partial exemption from the obligation to purchase green certificates in proportion to the amount of energy purchased, which would have reduced the demand for green certificates in the market. The form of the GEO as published however makes any such actions conditional upon obtaining EU approval. Given that the European Commission is already investigating whether similar provisions in Germany constitute unlawful state aid, it is perhaps doubtful whether EU would ever be open to give easily such consent.

Change to the support scheme (decided or only proposed?)

Hold-over of green certificates

Turning to what the GEO is intended to change with effect from 1 July 2013, the main point is probably the “holding over” of various numbers of green certificates allocated to wind, solar and small hydro producers. The GEO envisages that the held-over green certificates will be recovered in stages during the period commencing on 1 April 2017 for solar and small hydro producers and on 1 January 2018 for wind producers. In each case recovery of the held-over green certificates is to be completed by 31 December 2020. The details of when producers will receive the held-over green certificates are to be established by ANRE.

These measures are to apply to existing projects and as such should be distinguished from the adjustment of levels of green certificates allocated to new projects, as described above.

We understand from discussions with a senior representative of ANRE that ANRE would not expect that projects will be subject to both the proposed holding-over of green certificates and also any reduction in green certificates allocated to new projects, as described above, but the current wording of the GEO is ambiguous on this point. Discussion of proposed amendments and clarifications by the Parliament has now been postponed until after the summer, so it appears unlikely that there will be any definitive clarification of this point for the next couple of months. Investors in new projects may however take some comfort from the reported attitude of ANRE, given the role of ANRE as the initiator of any proposals to reduce allocation levels for new projects. It is indeed difficult to see how there could be a logical argument that overcompensation exists at a time when the current allocations of green certificates are subject to partial hold-over.

The hold-over mechanism was not previously envisaged by Romanian renewable energy legislation and consequently was not approved by the EU when the support scheme was reviewed as state aid.

Further, Romania is a party to the Energy Charter Treaty and to various bilateral treaties on the protection of investments. Even if held-over green certificates are eventually issued, the recipients will have lost the present benefit of receiving cash from the sale of those green certificates at the time that they were originally expected to have been issued. Further, the market price achievable on the eventual sale of the held-over green certificates may be less than if they had been sold in the normal course. The GEO makes no mention of compensation for losses, so it may be argued that the hold-over of green certificates for existing projects breaches the legitimate expectations of investors in those projects and therefore the requirement for such investors to be treated in a fair and equitable manner.

We would expect that any action against Romania for breaches of such treaty obligations relating to protection of investments would primarily be of interest to larger investors in existing projects. Such investors would need to prove that the holding-over of green certificates has caused loss. There are expectations that the price of green certificates will rise, at least in the short term, due to the reduction in the overall volume of available green certificates and also to the prohibition of bilateral off-market contracts for the sale and purchase of green certificates.

It should therefore quickly become apparent after 1 July 2013 whether Transelectrica will start to apply the holding-over of green certificates, notwithstanding the absence of EU approval for these measures, and also what will be the effect of this on the price of electricity as well as on the price of green certificates. Given that bilateral off-market power purchase agreements have already been prohibited for some time, the energy market may also allow producers that are not “locked in” to contractual electricity prices to look for increased market prices for energy to compensate, at least in part, for any reduced income from the sale of green certificates. At least for now, it is hard to estimate what effect the holding-over of green certificates will actually have on the income of renewable energy producers.

Limits on accreditation for green certificates

Another important change is that accreditation for green certificates will be given only to the extent that there is capacity in the Romanian annual plan for renewable energy for the particular technology concerned. New projects which are completed in one year may therefore not be accredited for green certificates as soon as they are commissioned. However this does not appear to shorten the total period during which such projects will benefit from the allocation of green certificates.

Whilst this may represent primarily a matter of timing and cashflow, there may be a risk that the level of allocated support for new projects will be reduced during the period between the commissioning of the project and the date when it receives accreditation.

The GEO also contains no provisions for dealing with a situation where a project is covered by only part of the available capacity in the national plan for that year.

These issues may be addressed by ANRE in practice but we believe that a more prudent approach may be to develop smaller, separate, projects, rather than one large single project. This should reduce the chances of projects being denied accreditation on the grounds of exhaustion of the relevant allowance in the annual plan.

We also expect to see investors show more interest in the types of supported renewable energy technology which have been less developed than wind, solar and micro-hydro, particularly since only wind, solar and micro-hydro technologies are affected by the hold-over of green certificates. Levels of support for technologies such as biogas and biomass have not been cut or suspended and indeed such technologies will also benefit if the prices of green certificates and of energy rise, as has been suggested may be the effect of the GEO.

Trading of green certificates

Green certificates have previously been tradable on the OPCOM market and also off-market under bilateral agreements. The GEO will restrict such trading to the OPCOM market, on which only registered renewable energy producers and energy suppliers may participate.

Although ANRE is to re-calculate the annual quota of green certificates to be purchased by energy suppliers for 2013, we suspect that the measures will make it harder for energy suppliers to secure the number of green certificates that they need to purchase to avoid being penalised, since the security of long-term bilateral agreements will no longer be available. If so, the prices achieved by green certificates which are traded on the OPCOM market may be expected to rise as energy suppliers compete to secure their quotas of green certificates. In the absence of the security of having bilateral contracts signed in advance of the deadline for suppliers to acquire the required green certificates, we would certainly expect green certificate prices to rise on the OPCOM market as the deadline approaches in each year.

Positive imbalances of power produced

All dispatchable projects will no longer receive green certificates in respect of energy which is delivered into the grid in excess of what had been predicted and notified to Transelectrica. Further, an ANRE order has set the threshold for qualification as dispatchable more than 5MWh for wind and solar projects. Building smaller, non-dispatchable projects should avoid this risk.

Agricultural land

There are two separate restrictions on the use of agricultural land for renewable energy projects.

First, the GEO specifically excludes from the support scheme any solar projects which are constructed on land which had agricultural permitted use on 1 July 2013, i.e. even if the permitted use of the land is subsequently changed for the solar project. There have been reports that this deadline may be extended to 1 January 2014 but in any case, it is understood that many planned solar projects will have met the deadline of 1 July 2013.

Second, another Government Emergency Ordinance, 34/2013, imposes a general requirement from 1 July 2013 that the declared amount of pasture land should be maintained. There are exceptions for renewable energy projects, but these require such projects to be classified as being of local or national importance and also require an equivalent quantity of land to replace the land used for the project as pasture land.

Financial guarantees for approval of connection of renewable energy projects to the grid

Grid operators are now to be authorised to require applicants for permits to connect renewable energy projects to the grid to provide a financial guarantee. The form of such guarantee is to be prescribed by ANRE but this is presumably to give some assurance that the project will be built and the connection made. It is notable that no such guarantees are to be required for non-renewable sources and this may well raise competition and market distortion objections to this measure.

Conclusion:

Uncertainty and hasty legislation are always unwelcome and the GEO both contains provisions which are interpretable and introduces measures which may be easily challengeable. It is also at least unwelcome that Parliament will not complete its review of the GEO until after the parliamentary holiday. As explained above, there are however reasons to think that the income of renewable energy producers in general may not suffer as much as had first been feared.

There are also reasons to consider that smaller projects of up to 5MW will be preferred for development and that producers using biogas or biomass may even find that the market becomes more attractive for them.

The effect on the market should be evident quite quickly and we suspect that investors in new projects who are prepared to accept the risks of doing business in markets such as Romania may be able to do some good deals, particularly where the financing of projects is not over-dependent on short-term income from green certificates. The removal of the more speculative proposed projects may also make it easier to get serious projects built and connected to the grid. Even as grid parity gets closer, we suspect that investors who move now will have better chances to benefit from the support scheme than those who wait in the hope of getting more certainty.

Whether the GEO will necessarily lead to substantially lower electricity prices for Romanian consumers is another matter altogether.