A huge energy crisis has affected the entire globe and especially the European Union. With the initial motivations being the unprecedented slowdown in energy consumption during the first pandemic wave, followed by a solid and unexpected recovery, fully seasoned with the unpredictability of the next pandemic waves and fully manipulated by the Russian Federation, the European energy market has simply exploded. We have helplessly witnessed increases of 4-5 times in the case of natural gas and 2-3 times in electricity, trying to find explanations and identify response measures for consumer protection.
As if the situation created in the second half of 2021 were not enough, we have been witnessing since the beginning of this year the unfolding of a bloody and unjust aggression against Ukraine, throwing an excess of stress on energy systems.
In the face of these events, the governments of the member states rushed to assess the economic impact and limit the increase in inflation and the impact on vulnerable consumers. The measures taken were presented in a wide range, from offering vouchers, to capping, to regulating producer prices, etc. In vain, precise instructions were expected from the European Commission and I think it was predictable, given the different situation of the Member States in relation to: dependence on imported gas, the percentage of gas-based electricity production, the degree of energy independence, the mix of resources, the consumer’s bearability capacity, etc.
Of course, such a serious situation has created many topics of debate and even opposition, among which I would mention the discussions about the limitations of the European market model (market design), the sustained policy of recent decades in relation to increasing the percentage of renewable energy and supporting related investments, the mechanisms for manipulating the price of CO2 certificates, the need for a common policy in the field of gas storage, and much more.
I will briefly resume the stages through which Romania understood to react to this crisis, but I will focus more closely on what I consider most relevant at the moment, on the consequences and impact that this situation and the response measures will have on the energy industry, on consumers and last but not least, on the national economy in the medium term.
I would like to point out from the beginning that any option of action would have been chosen, it would still have disappointed one or the other, and in the given situation there is no perfect solution, but only an optimal one. Far from being optimal, the government’s first version, modified by Parliament in an even more unfortunate way, managed to meet several disadvantages. It designed an extremely complicated mechanism and at times impossible to apply, in a complex of measures aimed at both compensating some consumers and capping prices at the supplier, over which a curious system of over-taxing the incomes of some producers was applied, except somewhat explainable, but extremely unfortunate in terms of image, those who produce from fossil sources.
Of course, this scheme malfunctioned, because it neglected key elements in the value chain of the industry, such as distributors and the energy carrier, put renewable producers at extreme risk, and made it virtually impossible to pay compensation and capping to suppliers.
From the beginning, the government assumed the need for changes, based on the experience of applying the scheme for the first months. Thus, at the beginning of the year, GEO 3/2022 appeared, which somewhat improved the mechanism in places, but made other errors that caused other damages mainly to electricity and gas suppliers, whose costs were not recognized.
Starting with April 1st, not being a hoax, a new emergency ordinance came into force, which represents a significant evolution compared to the first two attempts and which wants to act for a period of one year. This can also be improved, resulting from intense consultations between the government and industry, it expects its turn to be … or not… discussed in Parliament. There is a good chance that an improved version will come out of the approval in Parliament, to the extent that the industry through its representatives will be consulted in good faith.
It should be noted that especially in the case of Romania, the energy price crisis should be a zero-sum game, which makes it easier for the government to bear. I say this because mostly, what is lost by capping prices is gained by producers whose primary resources have not changed their value, the vast majority of them being producers with majority state capital. The over-taxation scheme should ensure a large part of the money that the government has to return to suppliers as a result of the price cap. However, there is, on the one hand, a delay between the time of recording the increased revenues, respectively the application of the surcharge and the moment of returning the amounts to the supplier, which creates a cash flow problem for the state budget, and there is also a difference that can be significant between revenues and expenses, given by imported energy, by the increase in production costs due to direct or indirect effects.
The medium-term impact of the application of this scheme will be felt at the level of several levels. I would start with the operational level of the energy distribution and transmission segment, where the lack of coverage by compensation from the budget of the difference between the value of the energy purchased for technical losses and the value recognized by tariff, will determine a precarious financial situation of this segment that will determine a reduction in investments, an increased risk of insolvency, an enormous pressure on the increase of tariffs for the period of the following years, which will lead to the supply in the medium and long term of maintaining high prices, especially for electricity.
Next, I will refer to the segment of energy suppliers, where the effects of this legislation will reduce the pressure on the identification of cheap energy sources, will blur the competitiveness of the sector and to the extent that the settlements from the budget will not be made in time, will increase the need for financing to a limit at which it could become uneconomic. At the same time, it generates a tendency to reduce the number of customers and not to re-contract with customers whose contract expires, leaving them in a market that will increase the volume of compensations from the state budget.
In the specific case of gas producers, the price cap represents a re-regulation of the market, with known risks and pressure on producers’ budgets.
However, important effects will appear at the level of consumers and I want to emphasize the most important ones, from the multitude of implications. First of all, it must be very clear that those household consumers who consume electricity more than 300kwh/month (I estimate that about 1 million fall here), will not benefit from any protection offered by this ordinance and will be subject to market prices. That is why it is very important for each consumer to evaluate their consumption well and to ensure that they fall within these limits. In the case of natural gas consumers, the limit is much more generous (50000 MWh/year), which includes all household consumers and most industrial consumers.
A curious feature of this legislation is that it fully protects non-household consumers (except for large electricity consumers), setting a total ceiling of 1 ron per kwh of electricity. Whether you have an office or a small factory, you benefit from this capping, a mistake from my perspective. Such measures discourage investments in energy efficiency and even if the price is high, they encourage inefficient consumption that will create weakness in the medium and long term.
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