Directly negotiated power purchase agreements with physical delivery (“PPAs”) have been a sensitive topic in Romania since 2012, when they were prohibited under the new energy law no. 123/2012 (the “Energy Law”) and continue to be a hot topic today, even though (long term) PPAs negotiated over the counter are expressly allowed under art. 3 (o) of Regulation (EU) 2019/943 (“Internal Market Regulation”), as they fall under the concept of “long term supply agreements”. This is mainly because Romania has stumbled over the last 2 years in reintroducing the directly negotiated PPAs back into the domestic legislation, in line with EU rules and EU market practice.
First, ANRE alluded to the permissibility of directly negotiated PPAs by regulating, under Order no. 236/2019, the possibility to trade electricity on “non-regulated markets”. This was such a prudent step that was barely noticed in the market. Then, ANRE made a further step by clearly defining in Order no. 65/2020 the concept of “long term supply agreement” used by the Internal Market Regulation as “a contract with a delivery period exceeding 1 year”, currently reduced to “1 month” as per Order no. 26/2021 amending Order no. 65/2020.
Meanwhile, the provisions set forth under art. 23 (1) of the Energy Law according to which electricity transactions on the Romanian market are performed in a “public, centralized, non-discriminatory” manner remained in force, colliding with art. 3 (o) of the Internal Market Regulation. This not only deterred investors to conclude directly negotiated PPAs but it also made ANRE reluctant to encourage them openly from the start. However, as the time passed and art. 23 (1) of the Energy Law remained unchanged, press statements of ANRE officials became increasingly confident in supporting the possibility of concluding directly negotiated PPAs thanks to the direct effect of EU regulations (i.e., art. 3 (o) of the Internal Market Regulation) combined with the complementary provisions enacted by ANRE (i.e., definition of the long-term supply contracts referred to in art. 3 (o) of the Internal Market Regulation).
Further on, under Government Emergency Ordinance no. 74/2020 (“GEO 74/2020”), the Government partially repealed the prohibition imposed on directly negotiated PPAs with regard to the new capacities commissioned after 1st of June 2020. However, GEO 74/2020 has not yet been discussed in the Parliament, which is solely competent to confirm or dismiss it. The Energy Law was indeed amended by Law no. 155/2020 so as to allow for the signing of PPAs in advance of a new production facility becoming operational, thus setting the stage for a foreseeable project finance scenario. But there was no express exception from the centralized market rule regulated for this type of PPA, so that ANRE has created a special centralized market managed by Opcom for precisely this type of contracts. Checking on the Opcom website, the number of participants on this centralized market seems to be … zero.
Despite the flexibilization of the legal framework, some investors are still reluctant to proceed with directly negotiated PPAs due to several reasons, amongst which probably two are paramount: (i) lack of trust in the Romanian legal framework; and (ii) unusually high imbalance costs (above the EU average). As regards (i) above, it is clear from the above that a straightforward legislative action has been avoided and convoluted in many twists and turns. Not long ago, the Senate even approved a bill of amendment to the Energy Law that expressly provided for a ban on directly negotiated PPAs (of course, this amendment never came to force). Another concern could be that overturning any national measure deviating from the EU law, although perfectly achievable, would require a lot of time and effort spent, so why bother when other jurisdictions are more investor friendly? Finally, the most straightforward provision allowing directly negotiated PPAs under domestic law is included in a Government ordinance (GEO 74/2020) that could theoretically be overturned by the Parliament. As regards (ii) above, the prohibitive imbalance costs may encourage the financial contracts (as hedging products) rather than the actual PPAs with physical delivery (as supply contracts). It has recently been announced that Axpo and CEZ signed a long term PPA, which was regarded as a positive sign for the Romanian PPAs market, but (surprisingly or not) it turned out to be only a financial contract.
So, where are we now with PPAs? We have seen above that the Romanian legislation in force kind of stumbles, but when seen through the compulsory lenses of the EU legislation, it should provide a relatively clear ground to PPAs for a smooth landing. However, despite this, investors are still waiting for a totally clear ground and the Government apparently wants to secure it.
On April 29, the Government launched a bill of law to amend the Energy Law (the “Bill”) for transposing Directive (EU) 2019/944 on the common rules for the internal electricity market (the “Internal Market Directive”). The Bill repeals art. 23 (1) of the Energy Law and specifically provides that directly negotiated PPAs are allowed (with no restrictions). However, since then not much progress has been made to approve the Bill by the Parliament.
Recently, on September 21, the Government launched a draft emergency ordinance also meant to transpose the Internal Market Directive, clarifying and supplementing the Bill (the “Ordinan 9ce”). The Ordinance brings some novelties, such as the possibility to have several market operators (thus breaking the current monopoly of Opcom), or the transfer of certain authorization competences for the new production capacities from ANRE to the Ministry of Energy, but it reconfirms (in the same terms as the Bill) the repeal of the centralized market requirement for electricity trade. This is indeed a clear ground, as solid as it could be given the current political instability at Government level and the fact that, the same as GEO 74/2020, the Ordinance must eventually be approved by the (sometimes unpredictable) Parliament. The enactment of the Ordinance though is expected to be a much more expeditive process than the approval of the Bill, especially since Romania is running late in transposing the Internal Market Directive.
Very importantly, in addition to the above, the National Plan for Recovery and Resilience for Romania, freshly approved on September 27 by the EU Commission (the “NPRR”) includes a commitment of the Romanian state to allow the direct negotiation of PPAs by all producers. Also, the NPRR sets clear targets for Romania as regards the implementation of the contracts for difference to support renewables (“CfD”) (i.e., second quarter 2023) and new renewable capacities financed under the CfD mechanism (1,500 MW by the fourth quarter of 2023 and 2,000 MW by the second quarter of 2025). These targets should boost renewable investments which will raise in their turn the demand for directly negotiated PPAs.
Despite the remaining uncertainties, it is quite unlikely that anybody would be able at this point to successfully challenge or oppose in the long run the reality of directly negotiated PPAs and this should not be a political stake any longer.
By Cosmin Stavaru, Partner, Bondoc si Asociatii