During its 30 March 2017 meeting, the Romanian government adopted Government Emergency Ordinance no. 24/2017 (the “GEO”), which amends Law no. 220/2008 establishing the system for the promotion of power generation from renewable energy sources (“RES”) and amending other legislative acts.
Timeframe for the adoption of the GEO
The adoption of the GEO has been something of a saga, which started on 26 October 2016 with the publication by the Ministry of Energy on its website of a draft ordinance that included the amendments that the government intended to bring to the green certificate (“GC”) support scheme. The following month, on 17 November 2016, a revised version following the suggestions received during the consultation period was made available on the ministry’s website, and this was most likely the version sent to the European Commission in order to obtain clearance, as the matter involved State aid. Notification was necessary in order to comply with the standstill obligation set under Article 108(3) of the Treaty on the Functioning of the European Union (“TFEU”).
The Commission adopted, on 16 December 2016, decision no. C(2016) 8865 not to raise objections to the notified aid. The decision also noted that the Commission had received three submissions from third parties, representing big industrial energy consumers and renewable energy producers, respectively, concerning the amendments notified by the Romanian authorities.
The new government that took office in early January 2017 published an amended version of the draft ordinance on 16 February 2017, this version being further modified before the enactment of the GEO at the end of March 2017. The government had to enact the GEO before 1 April 2017, as this was the start of the reinsertion period of some of the GCs previously suspended from trading.
Changes brought by the GEO to the GC support scheme
In its notification to the European Commission, the government noted that the intended amendments to the GC scheme had the objective of bringing more stability and transparency to the scheme. In practice, a change was necessary due to the unexpected adverse effects of the previous amendments brought to the scheme throughout 2013 and 2014. The previous amendments led to serious concerns regarding the financial viability of many RES electricity producers and a great number of market players warned about imminent bankruptcy unless changes were brought to the support scheme.
The main amendments brought to the GC support scheme are as follows:
- an increased validity period of GCs – the initial validity period of GCs under the support scheme was 16 months and subsequently reduced to only 12 months. As per these latest amendments, GCs issued following the entry into force of the GEO and the GCs suspended from trading starting with 1 July 2013 will be valid and available for trading until 31 March 2032. This amendment is expected to have a positive effect on producers of electricity from RES, as it should reduce the number of GCs likely to remain unsold. Until now, this was one of the major problems of the system, to the detriment of producers, as many GCs remained unsold due to high numbers available on the market and their eventual expiration, because of their limited period of validity;
- extension of the suspension period and recovery of suspended GCs – first, the GEO extends the suspension of GCs for solar technology until 31 December 2024 (as compared to 31 March 2017 under the previous version of the scheme). These GCs will be reinserted during a period of 6 years, starting 1 January 2025 until 31 December 2030, in equal monthly instalments (as compared to 3 years under the previous version of the scheme). On the other hand, the suspension period for wind and hydro producers is not changed but the reinsertion period is extended to 8 years, starting 1 January 2018 until 31 December 2025 (as compared to 3 years under the previous version of the scheme);
- a new way of calculating the GC acquisition quota – this is intended as a means of attaining a fair distribution of the burden held by end-consumers. Thus, the GEO introduced the “static annual quota of GCs” which is defined as the total quantity of GCs estimated to be issued until the end of the support scheme in 2031 (also including the GCs suspended from trading between 2013 and 2014) divided by the number of years left until the end of the scheme. Starting with 2018 this static annual quota will be calculated by the Energy Regulatory Authority (“ANRE”) every two years and communicated to the government by 30 June. The government will approve the calculations through a government decision not later than 60 days after having received the communication from ANRE. For the remainder of 2017, the GEO contains specific transitional provisions on the matter. As a general rule, during the month of December of each year, ANRE will set the estimated GC compulsory acquisition quota for the following year, taking into account the static annual quota of GCs described above and the estimated final consumption of electricity, without exceeding a medium impact on end-consumer invoices of EUR 11.1/MWh. The GCs estimated acquisition quota will then be corrected by ANRE by 1 March of the following year on the basis of the static annual quota of GCs and of the final consumption of electricity effectively recorded during the previous year, without exceeding the medium impact of EUR 11.1/MWh on end-consumer invoices;
- updated cut-off values for trading GCs – the GEO introduces new value limits for trading GCs, of EUR 29.4 and EUR 35, respectively. The previous cut-off values adopted in February 2017 were of EUR 29.4 and EUR 60. These new cut-off trading values will be fixed until the end of the support scheme and no longer annually indexed with inflation by ANRE as before. Moreover, starting with 2018, the penalty for market players not acquiring the compulsory amount of GCs each year will be lowered to EUR 70/GC (from EUR 120/GC). Although the GEO appears to introduce an important change with regard to the maximum trading value for GCs that considerably affects the earnings of RES electricity producers, this amendment is of little practical relevance. Until now, due to the abundance of GCs available on the market, GCs were rarely traded above the minimum value set by the law, so the maximum trading threshold had only a theoretical value;
- new rules regarding the bookkeeping of GCs – GCs will be registered in the accounts of beneficiaries only upon their trading and no longer upon issuance. The same treatment will apply to GCs previously suspended from trading that will be sold under the terms of the GEO. These measures are intended to prevent cash flow difficulties for electricity producers as they will no longer have to pay the capital gain tax for the GCs received before actually trading them;
- new trading rules for GCs and a new centralised market for electricity – the GEO introduces a new centralised market for trading GCs, permitting both spot and forward transactions and ensuring anonymity of the parties involved. In addition, producers and suppliers are forbidden from entering into additional acts to currently applicable bilateral contracts for the sale of GCs in order not to circumvent the new trading rules.
Violating these rules will be sanctioned with a fine between 1% and 5% of the turnover achieved during the year preceding the sanctioning decision. In case of newly established companies, the fine will range between RON 10,000 and RON 1,000,000 (approx. EUR 2,222 to EUR 222,222). At the same time, repeated transactions of GCs are henceforth prohibited (i.e. as a general rule, only one transaction per GC is allowed) as a measure against market speculation.
The GEO also introduces a new centralised market for electricity from RES benefitting from the GC support scheme. The new centralised and anonymous market will ensure the sale of electricity together with the corresponding quota of GCs for the electricity quantities sold in an endeavour to make the bundled output more attractive.
The new centralised markets above will be operated by the Romanian Power Exchange (“OPCOM”) and are intended to kick-off 1 September 2017.
Differences between the amendments notified to the Commission and the GEO version enacted by the government
There are a series of differences between what the Romanian authorities have enacted and the version of the amendments to the GC scheme that the European Commission approved in December 2016. For instance, the definition of GCs has been redrafted. The changes have been introduced in order to reinforce the new principle introduced by the GEO that GCs are not financial instruments. Another difference is given by the updated timeframe for setting up the new centralised markets, which has been pushed back from 1 July 2017 to 1 September 2017.
The final version of the GEO also establishes sanctioning limits for newly established companies not abiding by the rules of trading GCs exclusively on the new centralised markets, not provided in the initial version. These limits are set between RON 10,000 and RON 1,000,000 (approx. EUR 2,222 to EUR 222,222), as described above. In addition, a transitory mechanism for calculating the compulsory acquisition quota for GCs for the remainder of 2017 has been introduced, as the initial project had been intended to enter into force before the end of 2016.
Overall, the most important amendments notified to the Commission are kept in the final text of the GEO. As such, the degree of uncertainty as to whether the later amendments brought to the GEO would have required a new clearance from the EU body before being enacted into Romanian legislation should be limited.
Nonetheless, there have been cases where the Romanian authorities have been in breach of the standstill obligation laid down in Article 108(3) TFEU, with regard to the GC support scheme. For example, several amendments to the scheme have been put into effect between 2013 and 2014 and only afterwards notified to the Commission, being approved post-factum in 2015.
Closing thoughts on the updated support scheme
The amendments brought to the Romanian GC support scheme appear to somehow reach a middle ground between the interests of renewable energy investors and the burden transferred to end-consumers in their monthly electricity invoices. Also, based on the internal rate of return estimations provided by the Romanian authorities to the Commission (that the Commission considered plausible), these changes should correct, to a certain extent, market imbalances while avoiding bankruptcies in the sector.
As such, the estimated rate of return for the lifetime of the projects under the support scheme following these latest amendments, depending on the year of accreditation (i.e. between 2011 and 2016) will range between 2.4% and 3.5% for wind, 5.3% and 8.3% for hydro, 4.4% and 5.6% for biomass and between 4.8% and 7.9% for solar technology.
Despite the estimations above, taking into account that the GC support scheme was only open until 31 December 2016, significant new investments in the renewables sector in Romania are unlikely to occur in the next period.
In addition, one of the challenges that the authorities will face in the future is related to the current exemption from acquiring GCs that energy intensive users benefit from. There is a seven-year gap between the end of the GC support period (i.e. 2031) and the end date of the State aid scheme for energy intensive users (i.e. 2024)—a gap also highlighted by third-party comments received by the Commission before issuing its December 2016 decision. Therefore, the government will need to analyse by 2024 the opportunity of extending the exemption for energy intensive users and this could also trigger further changes to the GC support scheme.
We had anticipated the changes to the GC support scheme in one of our previous legal updates, from December 2016. Please access the update here for more details about the context of adopting the GEO and regarding previous amendments brought to the support scheme.