March 2022 – The European Commission published, on 8 March 2022, its REPowerEU Communication addressed to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions on Joint European Action for more affordable, secure and sustainable energy (the "Communication").
Context and aim of the Communication
The Communication outlines the need for a REPowerEU plan meant to address the EU's need for energy independence, given the current geo-political context. The Commission declares itself ready to implement the plan by this summer, in cooperation with the Member States.
Against this background, the Communication highlights the upmost importance of a rapid clean energy transition aimed at alleviating the EU's energy dependency on Russian fossil fuels (gas, oil and coal), to be able to provide households and companies alike with affordable, secure and clean energy.
In this respect, the Communication includes a series of temporary measures tackling rising energy prices together with some very ambitious targets in the short to medium term (with an aim of cutting EU demand for Russian gas by two-thirds by the end of 2022 and phasing out any further dependence on Russian fossil fuels before 2030). The latter would be ensured through the REPowerEU plan to be developed by the Commission following key pillars set forth in the Communication.
The Communication therefore hints to an EU long-term energy strategy primarily based on renewables (both wind and solar) together with an increased focus on renewable gas (biomethane and hydrogen), while also speeding up heat pump deployment as an alternative heating technology for households. In the short to medium term, EU-based oil and gas exploration may also see a boost, alongside nuclear generation, including the option of commissioning small modular reactors ("SMRs") for Member States considering such a route (including Romania). Regarding nuclear and gas, we also note the Commission's option in early February 2022 to add certain nuclear and gas activities as transitional activities under the EU Taxonomy, as a transitional step to climate neutrality.
Measures reducing the burden of extremely high energy prices
The Communication considers two main options to address the current high energy price emergency. This could be done through (i) mitigating retail energy prices and supporting heavily exposed companies, and (ii) ensuring the necessary gas storage for next winter.
In terms of mitigating retail prices, the Commission generally envisages the following measures to be considered together with the Member States:
- the possibility of introducing price regulation and transfer mechanisms to protect consumers and the economy – EU law allows the introduction of temporary and proportional schemes for regulated prices to ensure affordable transparent energy prices and costs for consumers (generally households and micro-enterprises);
- providing relief under existing State aid rules and frameworks – e.g.: under the Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty; the EU Emissions Trading System ("ETS") State aid Guidelines; and according to State aid rules allowing for investment aid in sustainable energy for the agricultural sector;
- including temporary tax measures on windfall profits and using the increasing ETS revenues to finance the emergency measures – the Communication also includes further guidance on how infra-marginal profit fiscal measures should be applied (e.g., not go beyond 30 June 2022, not distinguish between generation technologies, not apply retroactively and only claw back a share of profits actually made, etc.).
As regards the measures aimed at ensuring sufficient gas storage for next winter, these would entail the following steps:
- ensuring an adequate level of storage by requiring EU storage infrastructures to be filled to at least 90% capacity by 1 October each year – this could be incentivised by the Commission increasing the rebate level to 100%. Gas storage would further be designated as critical infrastructure and ownership risks for gas infrastructure would also be introduced;
- national regulatory authorities would need to certify that storage infrastructure owned by third-country persons does not endanger the security of supply and to ensure the refilling of storage for next winter;
- Member States should also conclude without delay solidarity arrangements, as per the EU Gas Security Supply Regulation;
- the Commission potentially coordinating refilling operations – e.g., through joint procurement, collecting orders and matching supplies.
Key pillars to eliminating EU energy dependence on Russia
The Communication further develops on the proposed REPowerEU plan meant to eliminate the EU's dependence on Russian fossil fuels based on two key pillars:
- diversifying gas supplies, with a focus on
non-Russian natural gas and more renewable gas, through:
- LNG diversification;
- gas pipeline import diversification;
- boosting biomethane production – doubling the objective of the EU's 'Fit for 55' for biomethane is envisaged;
- boosting hydrogen production and imports – the plan is to increase by four times the hydrogen quantities previously foreseen under 'Fit for 55'. Also, new cross-border gas infrastructure would need to be hydrogen-compatible.
- reducing faster the dependence on fossil fuels
by boosting energy efficiency gains, increasing the share of
renewables and addressing infrastructure bottleneck, such as:
- accelerating the roll-out of solar rooftop systems;
- heat pump roll-out: front-loading and doubling previously anticipated deployment accompanied by measures to increase building renovation and district heating system modernisation;
- deploying additional wind, solar and green hydrogen capacities;
- decarbonising the industry by accelerating the deployment of innovative hydrogen-based solutions and cost-competitive renewable electricity;
- fast-track permitting for renewable energy projects – Member States should consider the planning, construction and operation of such generation capacities as in the overriding public interest and in the interest of public safety and grant them the most favourable planning and permitting conditions available;
- EU-wide energy saving (e.g., by turning down the thermostat for building heating by 1°C).
Instruments and action further considered by the Commission
In furtherance of the objectives set out in the Communication and considering the emergency measures and key pillars above, the Commission also envisages concrete steps in the very near future and shared a precise timeline for drawing up some of the relevant instruments under the REPowerEU plan, including the following:
- to start consulting Member States shortly on
the needs for and scope of a new, self-standing, Temporary Crisis
State Aid Framework to address the economic impact of the Ukraine
crisis – the Commission further announced that it already
sent to Member States on 10 March 2022 a draft proposal for such a
State aid framework, particularly allowing Member States to grant:
- temporary liquidity support to companies affected by the crisis; and
- aid for additional costs due to exceptionally high gas and electricity prices.
Such aid would not be available to sanctioned and Russian-controlled entities.
- by April 2022 – come up with a legislative proposal requiring underground gas storage across the EU to be filled to at least 90% capacity by 1 October each year. Such proposal would further include a mechanism ensuring a fair allocation of security of supply cost;
- in May 2022 – present a recommendation on fast-permitting for renewable energy projects, addressing related administrative bottlenecks;
- in June 2022 – issue a communication on solar energy with the aim of helping to unlock solar energy's potential as a major renewable energy source in the EU. The EU's solar strategy will also include a European Solar Rooftops Initiative, identifying barriers and proposing measures meant to accelerate roll-out so that the public can benefit from rooftop solar energy;
- still in 2022 – agree with the European Investment Bank Group on the suitable financing mechanisms to promote the development of power purchase agreements ("PPAs") in Europe – including ensuring better access for new off-takers such as SMEs to PPAs;
- further develop the regulatory framework to promote a European market for hydrogen and support the development of an integrated gas and hydrogen infrastructure, hydrogen storage facilities and port infrastructure;
- further develop the value chain for solar, wind and heat pumps and further channel private investment;
- set up an EU-wide scheme for carbon contracts for difference;
- propose in the Commission's upcoming nature restoration law proposal that Member States should consider limited and clearly defined areas as particularly suitable ('go-to' areas) for renewable energy projects, while avoiding as much as possible environmentally valuable areas; and
- provide guidance on the need for regulatory sandboxes to enable the testing of innovative technologies, products or services advancing the coexistence of renewable deployment and environmental protection – focusing on defining the timeframe, territory and regulatory supervision.
Romanian background to the Communication
In terms of reducing the burden of energy prices, Romania had already capped retail electricity and gas prices through Government Emergency Ordinance no. 118/2021 for the 1 November 2021–31 March 2022 period ("GEO 118/2021"). GEO 118/2021 came to supplement Law no. 226/2021, which already aimed at subsidising the energy expenses of vulnerable consumers.
The energy price caps framework has seen multiple amendments since the enactment of GEO 118/2021 and currently provides for the following caps for households:
- a final invoiced electricity price of no more than RON 0.8/kWh (approx. EUR 0.16/kWh) and
- a final invoiced gas price of no more than RON 0.31/kWh (approx. EUR 0.06/kWh);
The above caps include the price of electricity and gas, respectively, together with VAT and related costs (e.g., distribution, transmission, excises, etc.). GEO 118/2021 further includes maximum consumption limits together with the applicable mechanism for compensating electricity and gas suppliers from the state budget. For non-households, some slightly higher price caps also generally apply until 31 March 2022.
The Government is also analysing the option of further extending the mechanisms for reducing electricity and gas prices for an additional year, until 31 March 2023. In this respect, additional options such as capping the price applied by gas producers to households' gas suppliers or prohibiting State-owned electricity producers from concluding forward electricity contracts with delivery during the 2023-2024 period are considered and may be enacted in the near future.
As regards taxes on windfall profits, Romania introduced, through Law no. 259/2021, a windfall tax for the 1 November 2021–31 March 2022 period, whereby additional revenues generated by electricity producers as a result from the difference between the monthly average electricity sales price and RON 450/MWh (approx. EUR 91/MWh) is taxed at a rate of 80%. The special taxation is not applicable to electricity generation based on fossil fuels. Such provisions may, however, be revisited by the authorities in the near future, considering the guidance included in the Communication and following market feedback as to their potential disruption for new renewable energy generation capacities. In this respect, according to a draft law considered by the government, the application of the windfall tax could be extended until 31 March 2023 but would not apply to generation capacities commissioned after the (potential) entry into force of the new law.
With respect to gas storage obligations, no such provisions are currently in force in Romania, as previously applicable minimum storage obligations for gas suppliers were repealed back in December 2020. However, implementing the gas storage measures envisaged by the Commission could be streamlined by the national energy regulator's and market participants' past experience with such legal obligations. Moreover, there are signs that the government may be considering to introduce minimum gas storage obligations in the near future (suppliers may be required to ensure by 31 October 2022 minimum stocks in storage of at least 30% of their clients' portfolio consumption).
In terms of increasing local gas production, a new offshore gas law is expected in the near term, meant to incentivise new investment in extracting hydrocarbons from the Black Sea. Moreover, there have been discussions in past years about the launch of the 11th tendering round for petroleum blocks in Romania.
The Romanian government has also recently enacted Government Emergency Ordinance no. 143/2021 ("GEO 143/2021"), transposing the Internal Market in Electricity Directive and amending the local energy framework in material ways, fostering new investments in renewables, in line with the Communication. Amendments brought by GEO 143/2021 include:
- lifting the ban of bilateral PPAs, therefore making local renewable projects easier to finance;
- amending the prosumer status (allowing for installed capacities of up to 400 kW) and their related compensation rights – several support schemes for small photovoltaic systems have also been operational during the past couple of years and help to further boost the installation of solar systems for private consumption; and
- supplementing the permitting rules for hydrogen-related activities.
Moreover, to further encourage the commissioning of power generation capacities from green energy sources:
- under the National Recovery and Resilience Plan financing, drafts of several support schemes were published for public consultation in mid-February, aimed at support for the construction of new wind and solar farms and green hydrogen production capacities – the call for projects is expected by the end of March 2022;
- the government is also in the process of adopting the institutional and financial framework for handling the local financing available under the EU Modernisation Fund, with a draft ordinance published on 9 March 2022 in this respect;
- the government has also been preparing, together with external consultants, the introduction of a contracts for difference support mechanism in the near term for renewables and nuclear production, as well as carbon capture and electricity storage technologies.
Not least, we also note the authorities' announced interest in both the refurbishment and potential enlargement of the currently operational Cernavoda Nuclear Power Plant in Romania, but also with regard to the commissioning of SMRs.
In addition to further highlighting the EU's pathway to a clean energy transition, as per the broader European Green Deal and 'Fit for 55' package, the Communication is also an unequivocal position paper as to the EU's willingness to do whatever necessary and in its power to free itself as soon as possible from its dependence on Russian fossil fuels.
Particularly for Romania, the measures announced by the Commission, together with the EU financing available and the measures further redesigning the local regulatory market, may represent a golden opportunity for a fast-paced clean energy transition, while benefitting from the country's vast natural gas resources and nuclear energy tradition and know-how in the process.
Kinstellar is a law firm with offices in eleven jurisdictions and over 350 local and international lawyers. Kinstellar acts as trusted legal counsel to leading investors across Emerging Europe and Central Asia.
In Romania, Kinstellar has a well-seasoned and growing energy and regulatory team, headed by Partner Iustinian Captariu, who is also taking up a growing role in leading the firm-wide energy practice. The team further includes experienced lawyers such as Managing AssociatesCatalin Graure and Catalin Dinu and Associates Ioana Criste, Claudia Urda and Dana S?rbu.
The team regularly advises on a wide area of energy and natural resources projects. Some of the highlights include assistance on nuclear related projects (refurbishment of reactor 1 at Cernavoda and potential development of reactors 3 & 4), renewables (both wind and solar, currently working on renewable energy projects totalling more than 1,200 MW), oil & gas (having completed in 2021 the largest onshore oil & gas transaction in Romania in recent years), as well as on e-mobility and charging stations matters.
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