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August 11, 2022

Reducing the impact of gas and energy bills must start from the causes that generated the price increase

Increase in gas and electricity prices, forecast by the Intelligent Energy Association since the beginning of the year, is currently explained by different causes, all external of course: “this is what happens all over the world”, “Russians, Americans, Hungarians, the EU etc. are to blame”, anyone else but us. If the entire world is not to blame for what happens in Romania, then “liberalization” is the culprit, and not how it was prepared in the last 10 years, not the fact that we became net energy importers (48% of Romania’s energy comes from import, following to reach 73% in only 10 years if we continue the current policy), not energy policies, not the incompatibility of the duality of director in energy companies – civil servant, not the lack of professionalism and vision etc.

9 years ago, the Romanian Government agreed with the World Bank, the IMF and the European Union to liberalize the energy market (natural gas, electricity and heat), but only after going through a process whose goal was:

  • To prepare consumers through dissemination programs (consumers were to be prepared for the free market through the 55 national programs for the dissemination of information specific to the free market, included in international agreements) – action not performed.
  • To restructure institutions that were to ensure the functionality of the free market – National Consumer Protection Authority (ANPC), Competition Council, ANRE – these were to be depoliticized, professionalized and streamlined – action not performed.
  • To establish an Entity for the Alternative Resolution of Disputes, entity that would mediate the commercial conflicts between consumers and suppliers, in conditions in which none of the existing entities has this possibility at the moment – action not performed.
  • To develop a strategy to diminish energy poverty and protect vulnerable consumers – action not performed.
  • To deregulate prices (gradual increase in prices)action performed.

Therefore, one can see that market liberalization in the last 8 years led to a single direction – increase in energy prices, increase benefiting primarily the STATE and certain suppliers – “the smart guys”.

Those who favored this approach were certain civil servants and dignitaries, who held positions in the management of energy companies, rewarded with significant amounts directly proportional to the profits made by these companies and who had an interest in rising prices, leading to higher profits and, respectively, increase in the amounts they could collect. This cause must be eliminated by prohibiting the practice of cumulative positions as civil servants and directors in state-owned companies.

Reduction of the production capacity for electricity (by closing certain capacities) and natural gas (by natural depletion of gas fields), in conjunction with failure to bring online new capacities, due to inefficient energy policies brought Romania in the situation of discrepancy between supply and demand, with the prospect of further deepening in the future. This cause, which will be much accentuated in the future, must be eliminated by stimulating strong and fast investments in electricity and natural gas production capacities.

Other punctual causes were added in the last year to these systemic causes:

  1. Increase in gas imports as a result of higher consumption and declining production in 2021 (natural decline of fields resulted in a production decline compared to last year by around 6%),
  2. Introduction of the administrative measure by authorities – the Gas Release Program (GRP), which caused an explosion of gas exports (gas export in the winter of 2020/2021 accounted for around 10%).
  3. Exports determined an increase in imports in Romania. While exports were made based on medium-term contracts, imports were made in the short term at higher prices (the difference between the price of imported gas and the price of exported gas in 2020 was around 12%, meaning that we bought from import by around 12% more expensive than the price at which we made exports).
  4. GRP determined a false gas deficit, producers being forced not to sell gas for a long-term, basically blocking one third of long-term gas sales.
  5. Failure to publish the reports on average prices in Romania by ANRE created the false opinion that prices of marginal products in the market were the average market prices and determined some suppliers or consumers to accept the payment of higher prices for the purchased gas, even if the average price of gas purchased that month was much lower. (The average price for the acquisition of gas as commodity in August 2021 was around RON 100/MWh. This price was not publicly presented and it has been suggested that the purchase price is that at which gas was traded in August 2021 on BRM, namely RON 220/MWh, so consumers accepted sale-purchase contracts at prices higher than RON 220/MWh).
  6. Changing GAZPROM’s policy in terms of gas delivery during summer, when the practice of this company in the last 20 years was to provide additional and cheap gas to Europe, determined as of May 2021 a concern at the level of several European countries and a rush for any gas available, aspect resulting in an accentuated increase in gas prices, including gas purchased in the short term that entered Romania.
  7. Changing the gas flows to the Balkans has led to moving the main gas import point in Romania to the West, at the border with Hungary. An insufficient point in terms of import capacity to ensure the gas quantities for demand in Romania, but also a point through which gas that reaches Romania is at a higher price than what happens in the other points. This situation creates a real concern in Romania’s gas supply next winter, which caused panic among suppliers, an aspect extremely visible in the price at which gas is traded for Q4/2021 – Q1/2022.
  8. Inappropriate public policies, of increasing gas demand in the context of effective lack of gas resources, and of boosting imports.
  9. Speculations of suppliers, who took advantage of the current market chaos, imposing high prices and contractual clauses detrimental to consumers.

Getting out of this situation involves a differentiated approach of eliminating the causes, diminishing the bills for the following days as a matter of urgency through specific measures and immediately after the winter passes eliminating the systemic causes that caused the price hike:

  1. Urgent measures for decreasing energy prices
Reasons for the increase in gas pricesProposed measuresPotential reduction of the price of gas as commodity (%)
Gas deficit the winter of 2021/2022Stimulating gas contracting in the near future to increase the quantities of gas in the underground storage facilities Stimulating gas contracting for the winter of 2021/2022 Strategy to ensure Romania’s energy security through long-term import contracts      15-30%    
GRP has created a false crisis in the gas market as a result of the artificial discrepancy between supply and demandSuspending GRP for the winter period and rethinking it in the form of Best Practices, mandatory at the level of each producer, to increase the liquidity of the Romanian market      6-10%
Lack of information on average selling prices of natural gasImposing by the Parliament of compliance with the legislation in force by ANRE on publishing data regarding the monthly average prices Supplementing the legislation in order to force ANRE to publish weekly the average prices for gas purchased on the wholesale and retail markets      *
Speculations of suppliersChecks at suppliers to find the abusive measures in the market that they have practiced in relation to consumers Imposing a progressive tax model for surplus profits Imposing the obligation to publish the markup practiced by suppliers      *
High taxationTemporary reduction of VAT Temporary suspension of excise duties19%
Energy povertyMeasures to stimulate the reduction of energy losses and increase energy efficiency Energy performance contracting    *

*) couldn’t be estimated

After the application of these methods and monitoring how the market reacts, we should have moved to the next level of consumer protection: temporary subsidies for consumers – a way to mitigate the impact of price increases on consumers.

If after the application of the elements presented above the impact of prices continues to reflect on consumers, capping prices can also be considered for a short period and through a method that would effectively reach its purpose (without transforming into an advantage for suppliers and not having an effect on consumers in the medium term, as it happened with GEO 114, GRP) and without bringing a significant impact on investments, respectively creating the risk of unfavorable evolution of energy prices in the long run.

  • Long-term systemic measures to reduce energy prices
  • Preparing consumers through dissemination programs for consumers
  • Restructuring the institutions that must ensure the functionality of the free market – National Consumer Protection Authority (ANPC), Competition Council, ANRE – through extensive depoliticization, professionalization and streamlining measures
  • Establishing an Entity for the Alternative Resolution of Disputes, entity that would mediate the commercial conflicts between consumers and suppliers, in conditions in which none of the existing entities has this possibility at the moment
  • Developing a strategy to diminish energy poverty and protect vulnerable consumers
  • Strategies for building as a matter of urgency new electricity, heat production capacities, developing onshore and offshore gas production capacities
  • Defining a new energy model in line with the current and future requirements, ensuring Romania’s energy needs in the following 50 years in line with social, environmental constraints etc.

Romania must accept that the Romanian energy system is no longer coping with present and future requirements, is dependent on import sources, and must urgently outline clear and realistic Energy Security strategies and define a New National Energy Model, in the context of future developments.

Translation from Romanian by Romaniascout.