July
2007

LEGISLATION

Attracting investments in the electricity sector - the approach within the Energy Draft Strategy of Romania for the period 2007 – 2020

The discussion paper „Romania’s Energy Strategy between 2007 - 2020” (“Draft Strategy”), drafted by the Ministry of Economy and Finance, brings to the attention of public a few very interesting details regarding the sensitive issue of the policy of attracting private investments within the energy sector.

     On the background of corruption scandals that have arised in relation to certain privatizations in the energy sector, the process of attracting private investments registered a slow-down in the first half of the year, or, as certain opinions asserted a step back. Under such circumstances, there were voices, and not just few, who required the Romanian Government to give up privatizing some sectors, like the power distribution sector (n.n. there are three more state-owned power distribution companies: Muntenia Nord, Transilvania Nord and Transilvania Sud) or the electricity power production sector (in this case, the privatization process has started only recently).

     These aspects will represent the subject our brief analysis.

1. Why should this policy of attracting private investments be continued?
     The Draft Strategy emphasizes the necessity of investments due mainly to a precarious status of power generation installations in the energy sector.
     Thus, in what concerns the power generation sector, it is mentioned that approximately 80% of the thermal power producing plants in Romania were put into function between 1970 – 1980 and their normal operational life has been already exceeded. A great majority of thermal power producing capacities is not equipped with installations for reducing the level of pollution, therefore emission of many substances exceeds the maximum level allowed within the European Union. Furthermore, it is estimated that 37% of the hydropower producing capacities have exceeded their normal operational duration of function as well.
     The Draft Strategy specifies, with respect to electricity distribution, that 65% of the distribution grid has a high level of physical depreciation. In addition to this, 30% of installations are obsolete, as they use equipment manufactured around the 60s. Such aspects make Romania have in 2004 an annual average technological consumption of 12.6%, compared to the average consumption of EU countries which is approximately 7.3%.
     The figures above emphasize the fact that a large number of generation and distribution installations are obsolete and overused, and these aspects generate a high level of consumption and exploitation costs, not to mention the need to modernize the installations in order to reduce pollution (according to the Draft Strategy, the value of investments needed for the environment protection within compliance period 2008 - 2017 is approximately EUR 1,750 million). Consequently, such necessity is still high, even if progresses have been done in the recent past years. 
     It is possible that a certain part of the necessary resources to be provided through the EU structural funds. These funds are mainly directed to promote renewable energy (wind generated power, biofuels, hydro energy under 10 MW) and environment protection. Even if the amount of these funds is significant in the post-accession phase, they will not be able to replace (and this is not advisable, as this is not their purpose) the private financing sources, as subsequently mentioned.

2. Methods to attract investments, according to the Draft Strategy
     The Draft Strategy sets up from the beginning that the investment effort with respect to restructuring and renewal of the energetic capacity will be sustained mainly through privatization. Thus, re-grouping of power production activities through natural aggregation as a result of the privatization process is to be taken into consideration. Another purpose should be to consolidate the private power generators who are competitive at a regional level, by acquiring power production units in more countries in the region.
     It shall be acknowledged that, as shown in the Draft Strategy, in the specific case of restructuring the power generation sector, the European Commission specialists have recommended this restructuring through privatization, with the merging of thermo-hydro units to be accomplished naturally, following the market moves. The same advice has also been submitted by the World Bank experts.
     Within this logic framework, the Government undertakes, among other measures, the re-organisation of the power production sector, inclusively by using privatization mechanisms on the capital market (e.g. issuing bonds convertible into shares), privatization of thermal power generation units which have high production costs, privatization of power production complexes such as Turceni, Rovinari and Craiova, and also by forming joint-ventures (brown/greenfield) between local producers and international operators.

Claudiu Munteanu-Jipescu
Managing Counsel, Salans


Source : http://www.thediplomat.ro/law_0707.php