The Romanian energy transition: the outlook for coal

Radu Dudau, EPG Director

One of the major present challenges of Romania’s energy sector is the crisis faced by the coal-fired power generation plants, caused by their inability to cope with the high prices of ETS certificates. Meanwhile, the Romanian government does not have a coherent strategy for managing the short- and long-term consequences of this crisis.

With about 5 GW of installed capacity, the country’s lignite and hard coal power generators account for more than a third of the average yearly electricity production. The National Electricity Dispatcher uses 1,600-2,000 MW of lignite-fired power generation to cover the load curve. Out of Romania’s total power generation of ca. 60 TWh, coal-fueled power covers 25%. Both the Oltenia Energy Complex (OEC), the lignite company, and the Hunedoara Energy Complex (HEC), the hard coal one, integrate mining activities and thermal generation of power and heat.

However, over the past two years, the price hike of the CO2 certificates under the EU ETS trading scheme – called EU Allowances, EUAs – has imposed an unbearable financial burden on the two state-owned coal companies. In early September 2019, the EUA price was ca. Ä26, down from Ä29 in mid-July – a level that was never reached since soon after the introduction of the EU ETS system in 2008. For the better part of the 2010s, the EUA price hovered between Ä4 and Ä6. To recollect, the recent price hike was mainly triggered by the recent reform of the ETS market, agreed upon in November 2017, with the introduction of the Market Stability Reserve, which resulted in a tightened balance of supply and demand.

ETS certificates

The current price trend on the ETS market has greatly accelerated the anticipated demise of the coal-based power generation sector in Romania and, indeed, the entire Southeast European region. In 2018, OEC booked a loss of Lei 1.1 bn, mainly because of its obligation to acquire CO2 allowances, as well as the higher costs of serving its debt, on account of a worsening exchange rate of the Leu against the Euro. OEC had to buy ca. 13 million EUAs until May 1, 2019 at a total cost of Lei 1.4 bn, which came down to 40% of downturn. To this purpose, in April 2019 it took a loan of Lei 500 million.

For its part, HEC is on the brink of insolvency. In fact, the company did declare insolvency in January 2016, following several filings by businesses whose services and goods it stopped paying. In November 2016, though, the Hunedoara Tribunal annulled the decision by a lower court to open insolvency. Subsequent fillings by HEC have been turned down. At present, the company’s assets are under the sequester of the National Agency for Fiscal Administration or serve as collateral for the state guarantees given by the Finance Ministry for a state aid that the European Commission deemed illegal in June 2015.

The latter is indicative of the degree to which the EU restrictions on state aid have been affecting the economic viability of the national coal companies by choking off the traditional subsidy channels. In November 2018, the European Commission found that HEC “received around Ä60 million of incompatible State aid from Romania through four publicly financed loans. The state now needs to recover the illegal aid plus interest.” The loan referred to was granted to HEC by the government in April 2015 with the European Commission’s approval of a state aid, according to the EU rules for temporary rescue, and was supposed to be paid back in six months. The Energy Ministry submitted a restructuring plan on the company’s long-term viability. However, HEC was unable to repay the loan, while the Commission concluded that the restructuring plan could not ensure the company’s long-term economic viability without continued state aid.

Government policy

Nevertheless, continuing state aid to the coal sector is exactly what the government plans to do. In a statement by the Energy Ministry in February 2018, HEC’s Plan of development of mining and energy production activities up to 2030 was assumed to depend on continued state subsidies: “To continue activities in safety conditions, investment of Lei 168,213,000 is necessary for 2014-2024, from the state budget.” In a separate instance, in April 2019, a State Secretary of the Energy Ministry said the ministry would notify a support scheme for OEC to the European Commission by which the state would cover the EUAs costs “that the market sales cannot internalize.” This approach shows, to say the least, a poor understanding of how the EU ETS system works.

The government does not actually have a clear-cut coal phase-out strategy. In effect, since the beginning of 2017, repeated commitments were issued by the Energy Ministry about continuing coal mining and investment in lignite-based power generation assets. The paper of the Energy Strategy 2019-2030, published in October 2018, emphasizes the role of lignite in ensuring grid stability and energy security by 2030 and beyond. One of the strategy’s main investment objectives is an improbable new 600 MW supercritical lignite-fired plant in Rovinari.

As a matter of fact, though, it should have been obvious that any such plans were futile, because both of the regulatory framework and the market environment. For one thing, a bunch of stringent new EU regulations are creating a forbidding investment and operating environment for the coal-fired plants: a limit of 550g CO2/kWh for power generation units admissible on the capacity markets as of 2025, while the typical lignite-fired coal plant emits in excess of 1000 g CO2/kWh; new, restrictive BAT/BREF limits on NOx, SO2 and particulate emissions from Large Combustion Plants, that must be complied with by the end of 2020, but which are being largely exceeded by the lignite plants in Romania. Add the almost full curtailment of EU finances for coal investment – except for the Modernisation Fund which, for Romania and Bulgaria alone, allows investment in the refurbishment of existing coal plants used for district heating.

The economic conditions of the clean energy transition are making the coal industry’s long-term survival virtually impossible. As shown in a Carbon Tracker Initiative report of 2018, considering the learning curve of the renewable energy technologies, by 2025, the new wind and solar capacities will be significantly cheaper than new coal-fueled units in terms of capital and operational, and by 2030 the new renewable energy sources (RES) will be cheaper than the operational costs of the existing coal plants. Some studies point out that Romania’s coal regions have a solar PV potential of 2,000 to 5,000 GWh/year, and a sizeable wind energy potential of 5,000 to 10,000 GWh/year.

But the Romanian energy system needs a solution to the crisis of its coal power generators way sooner than the moment in time when the share of RES will be large enough and sufficiently well integrated to ensure security of electricity supply. True, Romania must start scaling up its RES capacities – beginning by creating a friendly regulatory environment, which does not deny PPAs to RES investors – and, in the process, take all the measures to ensure grid adequacy. But the lead time to achieve the necessary level of capacity, as well as the lead time of any of the “projects of national interest” in the energy strategy – two new 700 MW nuclear reactors at Cernavoda, a 1,000 MW pumped storage hydro power plant at Tarnita, and a vaguely defined “hydro-energy complex” at Turnu Magurele – are at least a decade-long, not to mention the uncertain prospects of the said “projects of national interest”.

It should be clear, against this background, that Romania needs a substantive phase-out plan for the coal-fired power generation that offers the quickest possible solution able to ensure grid stability and security of supply while also complying with the country’s EU energy and climate targets of greenhouse gas emissions reductions, RES share in the final energy consumption, and improvements in energy efficiency. The solution, at the same time, must be cost effective and aligned with EU’s long-term strategy of reaching net zero carbon emissions by 2050.

Compelled by the facts, the government has grasped that, for practical purposes, the short-term action at hand is to replace some of the oldest lignite plants with new, natural gas turbines. And indeed, the construction of several new gas plants was announced over the past year:

• A 400 MW CCGT unit at HEC’s Mintia (Deva), to be built by Romgaz by 2022;

• A 200 MW CCGT unit at OEC’s CET Craiova 2, to be built by 2024;

• A 300 MW CCGT at OEC’s Isalnita, to replace one existent lignite group, to be built by 2025;

• A 330 MW at OEC’s Turceni, to replace one of the existent lignite group, to be built by 2025.

All these planned constructions come on top of the already progressing construction of a 430 MW CCGT at Romgaz’s Iernut, due to be commissioned in 2020, as well as a smaller-scale 73 MW cogeneration unit at Rompetrol’s Midia plant in Navodari. There is also word about a new 50 MW gas turbine at CET Titan, in Bucharest, as well as other private projects for gas units. All in all, one is likely to see ca. 2,000 MW worth of new gas-fired power generation in Romania by 2025.

Ironically though, the change of heart at the Energy Ministry from coal to natural gas has happened just as the Romanian government introduced legislation that has clearly discouraged the development of new gas fields in Romania, such as the 2018’s Offshore Law, which apparently put off ExxonMobil and OMV Petrom, the investors in the Black Sea’s main gas field, and even more so the GEO 114/2018, which effectively suspended for three years the liberalization of the Romanian gas market. Meanwhile, Exxon is reported to be seeking exit from the Neptun Deep project, which by itself may lead to a fateful delay in the development of the country’s Black Sea gas finds.

These blatant instances of misgovernance occurred on a slow yet steady trend of diminishing gas production in Romania – 4-5% yearly. The consequence is that an increasing gas consumption in the next few years could only be met by growing gas imports, which are consistently more expensive than Romanian gas production. This, in turn, is likely to impact the profitability of those new gas units, especially considering that they too will have to acquire expensive EUAs – albeit less than half per MWh than the coal plants.

Getting a grasp of how the energy markets are going to evolve in the next ten years in such a dense environment of climate and environmental regulations and considering the profound changes in terms of technology costs is paramount for the member states’ ability to manage energy systems that are decarbonizing, while being stable and well-provided. In any event, the National Energy and Climate Plans (NECPs) of the East and Southeast European member states, due to be submitted in final form by the end of 2019, ought to offer a path forward that includes both a short-term solution to the challenge of coal-fired power generation, and a long-term trajectory towards decarbonization.

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