The Intelligent Energy Association has published an open letter to the Romanian government, sounding the alarm that it needs to think now and act accordingly to avert a potential disaster after March 31, 2025, when the cap subsidy scheme expires.

This scheme applies to natural gas and electricity, symbiotically linked to each other.

A bit of history

On October 4, 2021, before any storm in the European energy market, the Romanian government published OG 118. Of course, the development of this energy subsidy scheme began to be discussed from August 2021, that is, 6 months before the Russian aggression in Ukraine, the trigger for the growth of European prices At that time, the hands of Virgil Popescu and Dumitru Chirica firmly held the Romanian energy industry. Prices in Romania were already high, and decision-makers expected a significant increase that the population could not sustain. The reason for this was a much higher demand than the supply of production.

If we look at the evolution of electricity consumption since 2010 and look carefully at the data between 2019 and 2023, we will notice that the pandemic that started in 2020 did not affect the national economy because consumption was growing until 2021, the second year of the pandemic . In fact, in 2021 it was the highest annual electricity consumption since 2010.

2021 was the year with the largest amount of imported electricity at 4.02 TW, and since 2018 we have turned from an exporting country to a net importing country of electricity. The interpretation is this: the economy has grown and many safeties, especially coal and gas, have gone out of production.

Reduction of industrial production

Consequently, the national economy developed, and many companies could afford to pay a little more for energy. Until 2021! Starting from the spring of 2021, the prices of gas and electricity began to rise in the two free markets (in my opinion, unjustifiably, artificially, by manipulating a few large suppliers), because there was a demand for energy carriers, in particular for industry. Since these markets are not protected by the system of ensuring the completion of transactions, as it should be in the so-called commodity exchanges, there has been an asymptotic increase in prices. And here we are in August 2021, with decision-makers scared of a potential economic downturn and people taking to the streets as winter approaches, i.e. peak consumption.

An official told me that a team of experts (how many) from two national energy organizations had designed a capping mechanism based on the theory of a single buyer in the market. One day, another ceiling formula appeared out of nowhere (in a stick or an envelope) and the decision makers used the magic formula: “sign or we’ll find someone else to sign.”

Also on the website of the Intelligent Energy Association, you can find a diplomatically written explanation of the actions of the decision-makers at the time, which concludes that today’s gas price is a consequence of yesterday’s decisions, and today translates as “a fool throws a stone and 100 wise men who are trying to get him.”

Starting from February 22, 2022, with the attack on Ukraine by the Russian Federation, the energy markets went crazy, the prices in Romania were the highest during this time, higher than in Europe. Then there is a reduction in consumption by almost 15%. Economic data supports this annual decline in industrial production starting in 2022.

Because the INS publishes data with a long delay, we have removed the available industry figures, which are up to June 2022.

The data collected shows a downward trend for the missing period from July 2022 to December 2023.

But also on the BRM gas exchange, active suppliers and transactions fell by 75%, which shows how disastrous this ceiling is for the buyer.

Chasing money

At the time I (and not only) believed that a cap with subsidies to the producer rather than the consumer would have benefits such as upgrading the production fleet with new technology, with much better yields and much lower emissions. But surely someone had to earn more… I expected that before the second price increase, due to the storm in the European market, the money went to suppliers and to renewable capacities. The press and decision makers have confirmed that they have made incredible gains in 2021.

After the price increase in the European markets, the profits were transferred to the producers. Since the main producers are state-owned, it seems that the state was the biggest beneficiary in the months when prices on the European market were high.

Everything is simple with gas: we have several players on the European market. In the case of Romania, we have two producers, Romgaz and OMV – Petrom and some small producers and some importers. The latter are insignificant. So effectively we don’t have a market because with two producers owning over 96% of the production market and the rest of the “players” being suppliers, we conclude that the same CH4 molecule ends up in furnaces, stoves or individual energy. factories, SACET power stations or used in industry, it passes through several companies that successively sell it (at a profit, of course) on what can be called a “market”.

Professor Dumitru Chisăliță calculated in his latest book that the state receives more than 70% of the price of the consumed MW from gas and provided some explanations and suggestions.

In electricity, everything is more complicated, because we have several producers with different types of fuel.

The production of consumed energy belongs to 90% of the capacities owned by the state. That is, 25.92% of the bill goes to the state. 30% of the distribution belongs to the Romanian state (via Electrica), so 10.3% of the bill goes to the state, the carrier (Transelectrica) is a state monopoly, so the state takes 8.7% of the bill plus an excise tax of 0.76% (why do we have to pay excise on energy carriers, because we do not smoke and do not drink electricity or natural gas?), cogeneration tariff 1.24% and VAT 19%. Overall: the Romanian state collects 69.14% of electricity bills.

Today, prices are significantly lower than those recorded in January 2022, at the height of the crisis. Mr. Nicolae Codreanu, a respected specialist in national energy, made a graph with the change of average prices on the market the next day, similar to the evolution of other electricity markets.

If we look at the bilateral OPCOM futures markets, we can see that compared to January 2023, the January 2024 price is 41.5% lower and the January 2025 price is 65% lower.

Mr. Nicolae Codreanu also prepared a graph comparing electricity prices in the EU, from which we learn that we are in the first third of countries with high prices.

It should be noted that Romania is connected to two European markets: Greece-Bulgaria-Romania and Romania-Hungary-Austria-Slovakia-Czech Republic-Germany-Denmark, which should represent a geostrategic advantage, but it seems not to be appreciated.

Thus, we found that the prices in the southern market are higher, Romania has the lowest price, and in the Central European market prices, Romania has the highest price. (Do you realize what an advantage Romania would have if it had 5 GW of pumped storage capacity?)

Who will win in the end?

It must be said that this applies to both energy markets, gas and electricity.

It is not difficult to determine who the real winners are, given that we have two options to analyze: when the market price is above the maximum price and when the market price is below the maximum price.

Option 1: The price is higher than the limited price

The supplier collects a limited price from the consumer. Now it depends on who bought it. If he bought directly from the manufacturer, then it is possible, if he bought from another supplier, it is another matter. Basically, the money collected pays for production, transportation, distribution, duties and taxes. He submits to ANRE the necessary documentation to verify the difference (between the price at which he bought and the price at which he sold) that he should charge and, if approved, he submits an application to the Ministry of Energy accompanied by ANRE’s approval. charge the difference. This continues because the restriction scheme is based on a cumbersome and bureaucratic system.

There is a player in the market that few have noticed: banks!

Settlements were delayed for several months. Since this is an important part of the cash flows of the energy industry, in order not to destroy the whole system, all suppliers had to take loans from banks in order to be able to close the financial loop of consumer-supplier-distributor-transporter-producer. We know that interest rates in Romanian banks are much higher than in EU countries. It follows from this that at least 10% of the bill goes to the banks.

The problem is that there are several suppliers in the market, and they trade their “goods” with each other to maximize their profits, that is, for each pair of purchase and sale transactions, they set a comparative markup.

Option 2: The price is below the limit price

For the gas market, everything is extremely simple: the production price of Romanian gas is lower than in the European market, which is supplied from different sources (pipeline or LNG), quite distant from the consumer. We probably need to intervene here, because if we look at the earnings of Romgaz and Petrom, we can see that these companies are much bigger than they were 5 years ago.

And we move on to electricity. Gas and coal producers suffer the most here, as they produce at prices higher than the state-guaranteed price ceiling. We recognize that not all electricity can be generated from intermittent renewables, hydro or nuclear (which have a lower cost of production) and that in-band energy consumption from gas and coal is required. (Let’s not forget that they are penalized with CO2 certificates!) The problem is that this in-band power also translates into intermittent electricity that comes in when renewables can’t operate, further increasing the price of producing them.

In December, we analyzed what the real price of electricity would be, taking into account last year’s electricity balance, and came to the conclusion that the “correct price” would be 401.9 lei/MW.

In the end, who are the winners?

Who wants a market crash? If we analyze the position of the suppliers who at the end of January 2024 declared that they prefer a limited price, we conclude that this is nonsense, because they arose due to the need for the free market to work! _Read the entire article and comment on Contributors.ro