This insight looks at the amendments brought by Romania's new law on electricity and gas markets (the Romanian Energy Act 2012) on electricity trading and power purchase agreements (PPAs). The Romanian Energy Act 2012 was published in the country's Official Gazette on Monday, July 16and entered into force on Thursday, July 19. Some of the new provisions can be construed as limiting the option of the producers and wholesale traders to selling/trading electricity only on the power exchange (currently operated by OPCOM – the Romanian electricity market operator), banning outright PPAs and bilaterally negotiated contracts.
Background
The Energy Act 2012 follows as an obligation of the EU member states to align their national legislation with the latest Directives and Regulations on electricity and gas (generically known as the Third Energy Package). Generally. the aim of the Third Energy Package is to finalise the internal energy market in Europe by ensuring fully harmonized legislation for electricity and gas markets across the EU's 27 member states. The concept of the internal energy market revolves around five main pillars:
- Full liberalization of the electricity (and gas) markets in all EU countries,
- Restructuring of the transmission and distribution services (ie: unbundling),
- Consumer protection,
- Supporting energy produced from renewable sources
- Ensuring security of supply.
The Energy Act 2012 develops on the principles mentioned above.
In the past 3-5 years, increasing criticism has arisen regarding the historically long-term power purchase agreements that the state-owned hydro and fossil fuels generators had entered into with various private entities. The perception is that such agreements are drying up the liquidity on the market without any real benefit to the final costumer. In addition, there is an increased need of greater transparency regarding the transactions on the electricity wholesale market.
The impact of the Energy Act 2012 on electricity trading
The Romanian electricity market has two components: a regulated and a competitive market. The electricity market then further breaks down into wholesale and retail segments.
On the regulated market, the prices are fixed (as approved by the National Regulatory Authority), whilst on the competitive market the prices are based on the bargaining powers of the parties and the demand-supply balance. On the wholesale market, the electricity is bought with the intention of being further traded on the market, as opposed to consumed (ie: retail market).
Under what is as of last Thursday (July 19) the old energy act (ie: Law 13/2007 – Energy Act 2007), trading on the competitive wholesale market could be done either by entering into a bilateral negotiated contract with another market player or by selling the capacities on the power exchange operated by OPCOM.
The Energy Act 2012 (article 23) could be construed in the sense that there is only one option left to sell (trade) electricity on the wholesale competitive market, namely on the power exchange, ie banning outright any bilaterally negotiated contracts (PPAs).
Article 23 Functioning of the competitive market
(1) Trading in electricity on the competitive market is done in a transparent, public, centralised and non-discriminatory manner.
(....)
(4) On the retail competitive market suppliers sell electricity to the final customers based on bilateral contracts, at negotiated prices or based on standard offers.
These two provisions would seem to indicate that the option to trade electricity based on bilaterally negotiated contracts is available only for suppliers (furnizori) on the retail competitive market, whereas trading on the wholesale competitive market will need to be done publicly and centralised, ie: via a power exchange platform.
Further under article 28 lit c) of the Energy Act 2012, all producers (regardless of the fuel base or technology) are bound to offer their entire output on the competitive market publicly and without any discrimination.
Article 28 Generators' obligations
Generators are bound mainly by the following duties:
(...)
(c) to offer their entire output on the competitive market publicly and without any discrimination.
This provision could well be construed as meaning that generators can only sell their capacities on the power exchange.
The initial opinions/interpretation in the Romanian market are divided between those who believe the provisions mentioned above restrict electricity trading on the wholesale market to the power exchange and those who argue that this restriction was not the true intention of the legislator and believe that such 'regulatory gap' will be fixed once the secondary legislation is adopted.
From a legal perspective, should the effect brought about by the Energy Act 2012 be the banning of the power purchase agreements and bilaterally negotiated agreements, this would clearly not be consistent with the following principles:
- the EU principle (clearly and expressly set forth in the Electricity Directive) of respecting the contractual freedom with regard to long-term contracts provided they are in line with EU legislation.
- the Romanian Civil Code principle, which provides the contractual freedom of the parties, as long as they are in line with the legislation and the public interest.
From a business perspective, we see this as a competitive disadvantage for the private energy sector, as Romania would be (as per our knowledge and research) the only EU member state in which electricity would mandatorily be traded only on a power exchange without an option for the market participants to enter into bilaterally negotiated agreements.
From a project financing perspective, the pros and cons of financing 'merchant power plants' (ie: power plants that sell their output directly on the market without entering into PPAs) will need to be considered.
The secondary legislation is due to be issued by Romania's National Regulatory Authority (ANRE) within the next six months. There have been precedents in which the primary legislation has been 'fine tuned' by way of secondary legislation; however, from a legal perspective, the primary and secondary legislation should be consistent.
In the meantime, we anticipate that the market will continue to react vividly to these changes. So far, we know of one business association (the American Chamber of Commerce in Romania) which has taken a (written) position against having such amendments brought to the regime of trading electricity in Romania. Their follow-up meeting on this topic is scheduled for July 26.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
