Legal Alert: CfD Energy Sector in Romania
15 April 2019
The Ministry of Energy has recently published for public debate a study describing the general principles for the implementation of a support mechanism through contracts for difference (CfD) production of electricity with low carbon emissions.
After receiving the views from the market players the Ministry of Energy is expected to adjust the support mechanism (if necessary) and proceed to drafting the relevant implementation legislation.
What is the purpose of the CFD support scheme?
The purpose of the new support scheme is to promote investments in the low carbon emission generation technologies by enhancing the revenue predictability and lowering the project risk profile and related expected minimum IRR (hurdle rate) and financing costs. The CfD scheme is supposed to address the electricity market price risk, the regulatory risk and the inflation risk.
What is the scope of the CFD support scheme?
The support scheme is designed to be applicable to two types of projects - both consisting of reduced carbon emissions generation capacities:
(i) renewable projects (wind, solar, hydro, biomass); and
(ii) special projects having a strategic importance for the security of the Romanian energetic system - Unit III and IV Cernavoda nuclear project, fossil (coal, gas, oil) fuel based power plants having 'ultrasupracritical' carbon reduction capacities (involving carbon capturing and utilisation technologies).
The CfDs for the renewable projects are to be awarded via public tender process to the bidder asking for the lowest strike price. The Government may run separate tenders for projects generating electricity on a continuous basis (hydro, biomass) or intermittent basis (wind, solar).
The CfDs for the special projects will be awarded either via public tenders or direct negotiations tailored to the specific features of such projects.
What are the mechanics of CfD support scheme?
The support scheme is to be implemented via a long term contractual arrangement (ie. contract for difference) between the electricity producer and the state owned counterparty (OPCOM) which will be managing the CfD payments platform.
The CfD will provide for a fix 'strike price' and the counterparty will pay to the electricity generator the difference between the strike price and the 'reference price'.
The 'strike price' is supposed to reflect the investment cost related to a certain technology and is to be set through tender (for renewable projects) or direct negotiations (for special projects). It may be subject to adjustments (upwards or downwards) following the changes in O&M costs related to such technology, specific regulatory costs and inflation.
The 'reference price' is to be determined annually (ex ante and ex post) following the relevant historic average day ahead market price in the relevant year and ex-post monthly/quarterly subject to the payment and adjustment mechanics. Setting the 'reference price' involves a mature, transparent and competitive electricity market in Romania.
Should the selling price end up below the strike price, the counterparty will pay to the producer the difference between the higher 'strike price' and the 'reference price' or conversely should the selling price be above the 'strike price', the producer will pay to the counterparty the difference between the higher selling price and the lower 'strike price'. The details of the payment mechanism and special circumstances (such as 'negative prices', curtailments) are to be worked out in the implementation legislation.
The duration of the CfD will be aligned with the duration of the project/investment. CfD is expected to have other provisions supporting the cashflow/revenue preservation in a typical bankable project contract.
The government will set aside annual support budgets for the purposes of funding the payments under the CfDs, namely: Euro 125m for renewable projects and Euro 215m for nuclear projects. The budgets for other low carbon emission technologies are to be determined at a later stage.
The CfD support scheme seems to be a way of achieving the revenues predictability. Such predictability used to be provided by the long term bilateral PPAs which are currently prohibited in Romania.
The financing of the payments under the CfD support scheme is to be passed to the end-consumers (included in the electricity bills) by the Counterparty through the suppliers/distributions.
Is state aid assessment involved?
We expect the CfD support scheme to be subject to EU Commission’s clearance as a state aid framework scheme (for CfDs tendered to renewable projects) and as compatible state aid measure (for individual projects). Following such clearance process, the above described CfD based support scheme may undergo adjustments. There are precedents of the CfD support schemes in the EU in order to promote investments in energy sector (eg. Hinckley Point nuclear project in the UK, renewables support scheme in Poland).