​Renewable energy: Romania and legislative instability

The Romanian business environment is currently in turmoil due to the recent series of legislative acts amending Romanian law in the field of energy, specifically renewable energy. This is keeping investors far from Romania and has driven already established investors away.

The most recent legislative amendment, nominally in force since July 1, 2013, in the form originally adopted by the Government, the Emergency Ordinance 57/2013 (“EGO 57”), has not been discussed in the Parliament which postponed discussing it to September 2013. However, like many earlier laws in this field, many of the recently enacted provisions will not be enforceable, at least until they receive a proper approval from the European Commission. Although coming down hard on renewable energy obtained from certain energy sources such as wind, solar and hydro , the new legislation, when enforceable, could bring about an advantage for biomass, bioliquids, biogas and waste fermentation. This is especially true, considering Romania’s great resources and capacity for biomass.

Background

Romania has implemented a support system for the production of energy from renewable energy sources based on green certificates awarded monthly to electricity producers based on (i) the types of facilities used, (ii) the sources of energy engaged, and (iii) the actual production from the respective month. This support scheme had received the approval of the European Commission in July 2011 under the State Aid Case SA.33134. Any amendment to the approved support scheme also has to be put before and approved by the European Commission, in order to avoid constituting illegal State Aid under Article 108 of the Treaty Regarding the Functioning of the European Union.

The list of laws in this field that have been enacted but were not enforced, or at least did were not enforced immediately after passage, begins in 2008 with the famous Law 220/2008. This law deals with the establishment of a support system for the production of energy from renewable energy sources which, although passed and nominally in force in October 2008, was only enforceable after October 2011. This is due to the fact that the law was passed before the support scheme gained approval of the European Commission. The approval was only obtained in 2011 and all the relevant supporting legislation was enacted from then on. Law 220/2008 was later amended in July 2012 by Law 134/2012, approving and amending the Government Emergency Ordinance 88/2011, the act responsible for the actual enforcement of Law 220/2008. With the enactment of Law 134/2012, it seems the Romanian Legislature failed to learn from its previous mistakes. Law 134/2012 is still not enforceable even today, one year later, due to the fact that most of the measures provided thereunder have not been approved by or even put before the European Commission.

The Most Recent Amendments

The most important amendments brought about by EGO 57 concern (i) the suspension of granting a certain number of green certificates until 2017, (ii) the possibility for the Romanian Government to change the support scheme at any point in the calendar year, and (iii) a maximum of electricity certified by the green certificate support scheme per annum.

In addition to the amendments above, EGO 57 contains many other amendments affecting different sources of electricity or different aspects of the business. It provides that the electricity generated by photovoltaic power plants located on plots of land which, were in the agricultural circuit as of July 1, 2013 shall not qualify for green certificates. This provision is redundant in light of the relevant construction and urbanism laws in Romania, which stipulate that photovoltaic power plants can only be erected on buildable land, which should be intra murros and rededicated from the agricultural circuit. Therefore, theoretically, there should be no photovoltaic power plants located on agricultural land. It is true, however, that cases of photovoltaic plants on agricultural land exist in Romania, mostly due to the incompetence of local authorities, an inconsistent interpretation of the construction and urbanism law or local influence. However, there are other remedies to this situation which are more efficient than continuously amending the legislation in the field of energy.

The most controversial amendment has been the postponement from July 1, 2013 to March 31, 2017 of granting a number of green certificates for every megawatt hour (“MWh”) produced and delivered by the electricity producers from the following renewable sources: (i) one green certificate for new hydro-electric power plants, with a maximum capacity of 10 MW; (ii) one green certificate for wind power plants; and (iii) two green certificates for solar power plants. EGO 57 does not mention how these green certificates will be recovered by producers after 2017. It only says that the process will start on April 1, 2017 for solar plants and hydroelectric power plants and on January 1, 2018 for wind plants and will last until December 31, 2020. The recovery method is not provided, but shall be established by the National Regulatory Authority in the Field of Energy (“ANRE”). The solution chosen by the Romanian Government of postponing granting these green certificates appears to be a desperate stop-gap crisis measure that has not been fully considered. Its intention is to alleviate the burden of the green certificates prices on consumers, specifically on big industrial companies. However, this is solely a stop-gap measure that seems to merely shift this burden into the future. If the consumers and industrial companies cannot cope with the green certificates system now, what guarantee is there that they will be able to cope with it later and to a greater extent?

Nonetheless, the sudden postponement has done damage to the industry, as the producers will no longer be able to fulfill their financing commitments, profit and income estimates have completely shifted, and new investors are already looking elsewhere to more stable legislations. However, as the electricity produced from refurbished hydroelectric power plants and biomass is not affected by the postponement, this provision clearly incentivizes entry into this domain. The first exception is most likely targeted at offering Hidroelectrica SA an advantage so that it can sell its micro hydroelectric power plants, and the second exception could bring about a welcome development of biomass exploitation in Romania.

Significantly, Law 220/2008, as further amended, provides that: (i) electricity produced in new hydroelectric plants with a maximum capacity of 10 MW is entitled to 3 green certificates per MWh; (ii) electricity produced in refurbished hydroelectric plants with a maximum capacity of 10 MW is entitled to 2 green certificates per MWh; (iii) electricity produced in hydroelectric power plants with maximum capacity of 10MW that are not new and not refurbished is entitled to one green certificate for each 2 MWh produced; (iv) electricity produced in wind plants benefits from 2 green certificates per MWh until 2017 and one green certificate per MWh starting in 2018; (v) electricity from geothermal sources, biomass, bioliquids and biogas is entitled to two 2 certificates per MWh produced; (vi) electricity produced from waste fermentation gas and mud fermentation gas from the water treatment plants is entitled to one green certificate for each MWh produced; and (vii) electricity from solar sources is entitled to 6 green certificates per MWh produced.

EGO 57 provides for the ability of Romanian authorities, subject to the approval of the European Commission, to exempt a certain percentage of electricity supplied to certain final consumers from the application of the green certificates support scheme, meaning that these consumers will not have to pay for the green certificates applicable to the exempted quantity of electricity. This provision allows the Romanian Government to submit for the approval of the European Commission exemptions regarding big industrial consumers in order to lower the price they pay for electricity. It remains to be seen whether any such submission will be successful.

Another controversial provision under EGO 57, applicable since July 1, 2013, deals with trading green certificates. Under this law trading green certificates is allowed only to electricity producers and suppliers, prohibiting middlemen, and only on the centralized markets managed by the commercial operator of the electricity market. This means that any private green certificates purchase agreements concluded after July 1, 2013 are null and void and that any such agreements where the purchasers are not electricity suppliers are useless.

Grid operators are now entitled to request financial guarantees for issuing technical grid connection approvals. The amount of the financial guarantees and their method of use will be established ANRE. This provision aims at diminishing the number of technical grid connection approvals obtained for speculative purposes by so-called investors that do not actually intend to develop a power plant or do not have the resources to do so.

The Government shall establish by an annual Government Decision the level of the total annual values of the capacities installed in renewable generation power plants each year. The accreditation by ANRE of power units/plants benefiting of the green certificates support system will be limited to these levels. This measure will slow investment in the field. There is no procedure by which the Government is to establish the yearly maximum level, except that it must consider the updated data of the National Renewable Energy Action Plan. Therefore, at this point, this provision seems to create discretionary power in the Government to decide the capacity to be accredited. Any producers unable to receive the accreditation during one year will have to wait until the next year.

Finally, the most controversial provision of EGO 57 is the Government ability to change the support scheme for newly accredited electricity producers anytime during a certain year, rather than at the beginning of the next year as previously provided by the legislation. ANRE monitors on a half-yearly basis the producers benefiting from the promotion system by green certificates and drafts and publishes on their own webpage a half-yearly monitoring report within 90 days of the end of the monitored period. If the parameters specific to each technology for producing electricity significantly differ from the ones considered in the computation performed for the authorization of the support system provided by Law 220/2008, ANRE proposes measures to reduce the number of green certificates for the respective technologies that should adjust the internal rates of return down to the values considered in the authorization of the support scheme to the Government within of 30 days of publishing the monitoring report,. The measures of reducing the number of green certificates will be approved by way of a Government Decision within 60 days of the communication from ANRE and will apply to the power plants/units held by producers of electricity from renewable energy sources, accredited by ANRE after the effective date of this Government Decision.

A Time for Biomass

It is worth mentioning that, in addition to the green certificates mentioned above, for electricity produced in high efficiency cogeneration plants that use geothermal sources, biomass, bioliquids, biogas, waste fermentation gas or mud fermentation gas from the water treatment plants one extra green certificate for MWh is granted. ANRE certifies the plants as having a high efficiency. Additionally, Law 134/2012 provides for one extra green certificate for biomass originating from energetic crops and forest waste. This last provision, as mentioned above, will only become applicable upon the approval of the European Commission. However, once it does, it will mean that electricity from biomass could obtain up to 4 green certificates per MWh which could be a great incentive to investors.

Biomass producers that are able to identify close by sawmills and furniture factories will have a great advantage in producing electricity using forest/wood waste effectively. Moreover, producers that identify customers for their thermal energy resulting from cogeneration plants will be able to benefit even more: they will achieve an income from selling the thermal energy, the electricity as well as the 3 or 4 green certificates they receive per MWh depending on the energy source they use. Therefore, using wood waste seems to be a great solution for small and mid-sized communities located inland near forest areas.

In order for electricity producers to benefit from the green certificates support scheme for using energetic crops or wood/forest waste, their sources need to be certified by obtaining origin certificates. Origin certificates for wood/forest waste (branches, exploitation waste, round wood, sawdust, wood chipping, etc.) are issued by the central public authority in charge with forests. The procedure for obtaining such origin certificates is provided by the Procedure issued by the Ministry of the Environment and Forests on May 3, 2012, published in the Official Gazette of Romania no. 360/28.05.2012.

Origin certificates for biomass deriving from agriculture and related industries, used as fuel or as raw material for the production of electricity are issued by Ministry of Agriculture and Rural Development. The procedure for obtaining such origin certificates is provided by the Procedure issued by the Ministry of Agriculture and Rural Development on May 3, 2012, published in the Official Gazette of Romania no. 162/12.03.2012.

Therefore, producers of electricity from biomass have a slightly more burdensome and must identify precise locations and opportunities for their investments, however, the results should be worth the extra effort since Romania has great biomass resources and large areas of agricultural land suitable for energetic cultures.

Conclusion

EGO 57 certainly provides for a lot of changes that materially affect this field of industry and it was allowed to enter into force in this form. There are hopes that the Parliament will significantly amend EGO 57 as it does not agree with many of the changes enacted by the Government, however, in the meantime, some of these are in force and will be applied. For example, since there is already a lawful monitoring report drawn by ANRE for the year 2012, the Government could already amend the support scheme effective immediately and not wait until January 1, 2014. Therefore, it is understandable that, in this legislative uncertainty, investors are either declining to enter Romania or actively pulling their investments. However, this is not absolute and, looking closer, there are many opportunities for profitable investments in this industry which could be exploited.