EFET urges EU to act amid Romania gas price cap bid

Source: Heren

2019/02/22

LONDON (ICIS)--The European Federation of Energy Traders (EFET) has called on the EU to take urgent action to review a “discriminating” ordinance by the Romanian government that could be enforced on 1 April.

The ordinance, EFET said, could have a “long-lasting damaging” effect on the functioning of the Romanian and regional electricity and gas markets if implemented.

Free trade breach

In a letter sent to the European Commission on Friday and seen by ICIS, EFET noted that the latest requirements introduced by the Romanian government without consultation last December would:

• Lead to the capping of domestic gas prices below current market levels for a period of three years starting in April

• Order suppliers to sell gas to certain categories of consumers

• Introduce a mandatory import quota to create a basket of domestic-imported gas.

In this respect, the requirements would be a breach of the EU’s principles of free trade and free movement of goods and in conflict with the EU’s energy directives and network codes, EFET said.

“The ordinance constitutes another severe government intervention into the Romanian gas market, essentially abandoning the concept of a competitive market framework allowing national and international producers, suppliers, importers and traders to compete in supplying Romanian consumers,” the EFET letter said. “The ordinance de-facto re-introduces a centralised planning economy for gas supplies to Romanian consumers.”

State funds?

The Brussels-heaquartered federation has also called on the commission to examine the Romanian’s government’s proposals to increase an annual tax on companies’ turnover by 2,000% to 2%, which would be collected to fund the activity of national regulator ANRE.

EFET said, separately to the letter, that the use of emergency measures to enact an increase of such magnitude left no doubt as to the government’s ultimate purpose: to collect funds and redirect them towards the state budget. This measure would turn ANRE into an instrument of fiscal policy, which would be a clear violation of EU legislation.

EFET added: “The application of excessive turnover-based fees on electricity wholesale trading acts as a disincentive to liquidity, sends wrong market signals, distorts energy markets and acts as a barrier to cross-border trade.”

EFET also urged the commission to investigate Romania’s offshore law 256 of 2018 and the so-called centralized market obligation included in the electricity and natural gas law 123 of 2018.

Wide impact: EFET analysis

Producers would be hit on three accounts:

• Firstly, they would not be allowed to sell above the New Lei 68.00/MWh (around €14.00/MWh) price cap for a period of three years, which means their revenues would decline as their sale prices would be well below current market values.

• Secondly, EFET noted, producers’ freedom to sell gas production and ability to export would be constrained because of a required priority sale obligation that would guarantee the sale of gas to households. In this context, EFET showed, producers would be prevented from competing with sales to end-consumers downstream of the producer or supplier delivery point as they may not charge prices above New Lei 68.00/MWh.

• Furthermore, if the government introduces a mandatory import quota for suppliers, Romanian produced gas would be struggling to compete, as imports would be exempt from the price cap. The measures would disincentivise producers from storing gas, looking instead to deliver gas upstream of entry points into the transmission system, EFET said. Such a scenario would jeopardise the concept of a virtual trading point. Moreover, producers would be unable to pass on the 2% costs in their sales.

• Suppliers would have their margins somewhat protected because they would be provided with a purchase power guarantee for supplies from domestic producers. This means, EFET noted, they would be free to determine sale prices to non-regulated consumers and when exporting gas.

However, they would be required to import comparatively more expensive gas, which could be sourced in Bulgaria, Hungary or Russia. Meanwhile, they may be prevented from exporting volumes in order to comply with the supply basket requirement.

• EFET noted that traders or suppliers with a trading business will be able to buy gas at the capped price but may struggle to resell gas to Romanian suppliers at higher prices because suppliers have the alternative to buy gas at the capped prices from domestic producers. As a result, traders are unlikely to be able to pass through the 2% turnover contribution in their sales prices.


• Network users, EFET points out, are likely to have limited incentives to balance their daily gas portfolios as market prices are de-facto fixed at New Lei 68/MWh. They will see their transportation tariff increase as the TSO will pass through the 2% turnover contribution due under its own license.


• Consumers that may be able to purchase gas from domestic producers will be able to do so at a capped price, therefore below market prices. However, it is as yet unknown how much they could buy from domestic producers and how much they would be required to source from imports.

Further, EFET expects the ordinance to lead to a retreat of many market participants from the gas market, preventing consumers from choosing from a larger pool of offers and thus leading to market concentration.

EFET noted that implementing and monitoring compliance with a supply basket requirement would be difficult and subject to potential manipulation.

Furthermore, EFET argued, industrial consumers in Romania will likely enjoy gas prices significantly below those available to competing industries in other EU member states. This would constitute undue state aid.

Discriminating rules

EFET further stressed three important points.

Firstly, it noted that foreign producers and importers would be exempt of the capped price requirement and therefore would enjoy an advantage over domestic producers. In this context, EFET also pointed to an earlier regulation passed by the government, which exempts foreign producers and exporters to Romania from an obligation to sell half of their production on centralised markets. This requirement applies only to locally-active producers and suppliers.

Secondly, EFET noted that the price cap would strongly discourage companies from balancing their daily gas portfolios.

Thirdly, wholesale trading in the Romanian gas market would stop because the wholesale price level is de-facto fixed at a constant price and hence the buying and reselling of gas will be economically unattractive. A 2% turnover tax paid to ANRE would saddle companies with additional costs, further disincentivising trading.

This, EFET said, would wipe out progress made in reforming the Romanian gas market to become more liquid and competitive. Market liquidity and competition in the Romanian market can be expected to be at an even lower lever, or non-existant, in 2022, when the price cap provisions of the ordinance expire, than in 2018.

Long-lasting damage

In a critical comment section, the EFET letter concluded that, apart from reversing the reform process in the Romanian market, the ordinance deters investment and possible exports, reduces gas production in the country, weakens its economic activity and employment, and makes the country dependent on imports from foreign/non-EU producers.

“The ordinance discriminates [against] Romanian producers [in favour of] foreign producers, who can sell gas to Romanian suppliers at market-based prices.”

EFET acknowledged the fact that the ordinance intends to cap gas prices and introduce sales obligations for a limited period of time, until February 2022.

However, it explained that it contains significant ambiguities that make it difficult to implement and interact with other regulations in the market.

“More generally, the erratic introduction of ever new legislation which deeply intervenes into the business of private companies and the lack of any consultation or dialogue with impacted stakeholders displays a deep distrust [held by] the Romanian government into market functioning and into the ability of markets to find more cost-efficient solutions than government-controlled activities.

This in itself creates a strong potential for companies not to start or continue to do business in Romania,” the letter said.

The letter concluded: “The ordinance constitutes a major market interference that EFET perceives as unacceptable under the EU acquis.

“We believe that the changes will bring no benefits neither to Romanian consumers nor the economy, and we fail to understand the underlying reason for such changes that forego all the progress made thus far in terms of gas market development.

“If no remedial actions are taken soon by the relevant authorities, we believe that the Romanian gas market will be damaged quickly and for years to come.“