Fury as Romanian ministers seek to pass gas price caps, tax

LONDON (ICIS)–Romanian energy companies have lashed out at government proposals which could reverse the liberalisation process in the electricity and natural gas sectors.

If adopted, the move would have a long-lasting harmful effect on investments and wipe out the electricity and natural gas markets at the stroke of a pen, traders said.

Following a draft ordinance announced on Tuesday evening, which includes proposals that affect all areas of the economy, reference indices on the Romanian stock exchange BVB plummeted to their lowest levels since 2011, with banks leading losses by nearly 19% and energy companies by 11%.

The move sparked widespread alarm, with leading private companies noting that, if approved, the ordinance would endanger Romania’s economic development.

The Romanian president Klaus Iohannis urged the government to scrap the ordinance to avoid throwing the “economy into chaos.”

Proposal

Under the draft ordinance which could be approved as early as Thursday, the government proposes to artificially reduce the price of natural gas from the current market levels to Nei Lei 68.00/MWh for producers and suppliers. The January ‘19 gas contract is currently estimated by ICIS at New Lei 120.00/MWh.

The price would then be capped at that level for a period of three years starting from 1 April 2019 to 28 February 2022, effectively wiping out any trading activity on the exchanges or bilaterally.

Furthermore, throughout this period, the regulator ANRE will be tasked to establish a formula whereby industrial and commercial consumers would be buying a mixture of Romanian and imported gas, even though the latter has been historically more expensive than domestic production, triggering fears that the move would lead to widespread corrupt practices.

3% tax

Electricity and gas companies would also have to pay an extra 3% annual turnover tax to ANRE, which companies say would wipe out any margins eked out by traders and suppliers.

Gas traders said capping gas prices was illegal both under Romanian and EU laws.

Under the Romanian gas and electricity law 123 of 2012 and amended this year, the government can cap prices for no more than six months if there are major dysfunctionalities in the market.

These include two instances, namely, major imbalances between demand and supply or problems related to the operation of the gas market. Neither applies under current circumstances.

Under EU law, the capping of prices is in breach of the Union’s free market principles and if adopted, could lead to a major infringement case against Romania.

Power market impact

On the electricity market, the draft ordinance proposes that the household segment, which had been deregulated, would be reversed to the regulated tariff. Furthermore, the 3% tax to ANRE is likely to be detrimental for the free market.

“It’s a disaster. Bye bye free market. The 3% tax is more than the margin made by traders and suppliers. It’s a desperate attempt by the government to bring money to the budget,” an electricity trader said.

Another electricity trader said few companies would be able to operate under current conditions.

“If you slap a 3% tax on a company whose profit margin is 4%, that company will be wiped out,” he said.

“The [Romanian] calendar year 2019 trades at €60.00/MWh, the tax alone is €1.80/MWh. Every time you trade something, the first €1.80/MWh goes out to ANRE. Good luck trading like this,” he added.

Court cases

Speaking to ICIS, Dumitru Chisalita, a Romanian-based analyst said, if approved, the ordinance would unleash a wave of court cases from companies who would most likely win considering that the law itself bans the capping of prices if the two exceptions are not fulfilled.

However, he noted that 90% of the gas for delivery next year had already been sold, which means that companies were unlikely to be immediately affected by the measure.

He said the government was prepared to ride out the wave of discontent as long as ultimately they could raise a windfall tax on production from the current 60% to as much as 90% on any profit exceeding a certain threshold.

A producer echoed the view, but explained that the windfall tax was not included in the ordinance, and added that the government may try to pass it through behind closed doors.

“Currently producers have been paying a 60% tax on profit above New Lei 47.00/MWh. Nowadays, the government is looking to apply a tax indexed to the Baumgarten [VTP hub index] to increase their revenue. There had been talks that this tax would be in addition to the royalties that producers already pay and which are indexed to Baumgarten,” he added.

Companies agree that if passed, the windfall tax combined with the price cap and the extra ANRE tax would completely deter further investments and would set the Romanian gas market back to a centralised model.

“Currently there are 150 gas fields in operation. Of these 100 are small and operated by small to medium-size companies, which had been able to make a profit under current conditions.

“If the new proposals are brought in, these operators will simply close down the fields and Romania would have to ramp up its Russian imports,” Chisalita said.

He added that, if enacted, Russia would be given free rein to charge high prices for exported gas.