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The green energy blockade: 2016 starts with more bankruptcies, losses of billions of Euro and investments at a standstil

Nobody invests in wind or solar renewables anymore in Romania. As investors representing the eight billion Euro in projects built so far meet the new government's Energy ministry led by Vlad Grigorescu to drive the subsidies back up, they tell The Diplomat - Bucharest that a new incentive system, combined with a series of legal and taxation changes, might represent their salvation. By Bogdan Tudorache

2016-02-07 17:07:26 - From the Print Edition

4 Photos
In 2014, the green energy investors lost about 500 million Euro. In 2015, possibly another half a billion Euro was gone, as investment return rates (IRR) became negative. Only two or three bankruptcies so far, but the eight billion Euro invested into Romanian renewables is clearly fading.
As the real estate bubble affected its investors, so did the green bubble, with a minor exception: the IRR was initially guaranteed by the Romanian state via a hefty subsidy plan, which lured in foreign flows of capital in the long term. Now, the new investments amount to next to nothing, as the subsidies have been severely cut. And since July last year, almost none of the subsidized green certificates (GCs) have seen the market: a powerful industrialists lobby that convinced the authorities to except them in various ratios from contributing to the subsidy scheme has also confused GCs buyers about their quota targets and pricing.

A flood of GCs, no buyers


The green certificate (GC) system was created to subsidize the renewable energy sector starting with 2005-2006 and the subsidy scheme has been cut drastically during 2013-2014, while part of the GC issuance was postponed to 2017-2018. Each type of energy received a various number of GCs, ranging from two to six units, initially allowing generous investment return rates (IRRs). As government sliced the subsidies, IRRs diminished even to negative values, say industry pundits interviewed by The Diplomat-Bucharest. Billions of Euro in investments, thousands of jobs and a lot of green energy production capacity is lost, as current players struggle to keep their projects alive.
The GCs have a minimum and a maximum value set by law, and they expire in one year from issuance. While energy producers sell them together with the power produced, the power distributors being obliged to buy, last year witnessed a drastic drop in sales after the large industrial companies' lobby.
One of the issues created by the lobbyists′ success was that power distributors did not know how to calculate the price and distribution of GCs, since some of their customers have been excepted and the other clients, including the regulated (the subsidized household segment) small consumers and larger companies alike, will have to be surcharged with an unknown amount to balance the situation.
"The market will see an inflow of green certificates (GCs) in 2016, with about 18 million being issued and only half matching the market demand. Besides these 18 million issued in 2016, there are four to five million more GCs unsold during the issuance years of 2014 and 2015," says Martin Jan Moise, prime vice president of PATRES, a professional organization representing green energy owners with projects of about five to 600 MW of installed capacity.
A third of the renewable energy projects will undergo insolvency or bankruptcy this year and the next, while the GCs quota remains extremely small, also says Viorel Lefter, president of PATRES.
At the end of 2016 the market will be flooded with about 22-23 million GCs, and the current quota, of about 12 per cent, approved by the national regulatory body ANRE, allows buyers to get only about 12 million.
"So this is where the problem lies: The actual quota covers just about 50 per cent of the GCs, and if we look at a solar park, for example, it would get four out of the six GCs that were initially provided by the support scheme. So, besides getting only four GCs, theoretically it can sell only two of them, and the other two are postponed. If the owner would eventually sell them all, that would have been fine, but they also expire," Moise explains.
"The problem gets more intricate as the sale of GCs is not 50 per cent unitarily applied to all producers, some sell more, others, less...Some sell 100 per cent of them having the double quality [of producers and suppliers of energy], while others do not sell at all- especially the smaller producers being affected."
Most of those affected are small Romanian entrepreneurs, that put out one to three million Euro into small projects and also have other businesses.
"These small entrepreneurs may have small, insignificant capacities individually, but when you add them up, it becomes important. Large players will survive, owing to their critical dimension. Small entrepreneurs, mostly or largely with Romanian capital, will be worse hit."
And the resulting chain reaction will hit the entire economy as they may go bankrupt.
"When these companies took loans from banks, they brought in a lot of collateral. Let's say that a construction materials distributor has guaranteed the credit with assets and incomes of the distribution company. So other companies and the banks will also be affected."

Meeting the government, united


Powerful industry associations met the government and large consumers again this January in their first 2016 attempt to change the renewables legal regime.
The regulatory body approved just a 12.15 per cent quota for the GCs' 2016 issuance. The National Authority for Energy Regulation (ANRE) issued the norm related to this quota during a special meeting on December 31, 2015. The government usually picks such difficult dates to evade opposition from the private industry, an investor previously told The Diplomat.
Rising this quota back to the initial level (max 17 per cent as per initial Law provisions) is one of the investors' demands, and the final solution hasn't been yet agreed upon. But starting last year, a working group has been formed to meet the government, investors and large industrial consumers to better regulate the renewables market, says Catalina Dragomir, president of the Romanian Wind Energy Association (RWEA) and managing director of Vestas CEU Romania.
While PATRES represents mostly Romanian entrepreneurs owning the projects, RWEA is the most powerful wind association, the Romanian Photovoltaic Investors Association (RPIA) has a smaller market slice and the Romanian Micro Hydro Association (ARmHE) represents mostly small investors in hydro energy.
"The year 2015 was a turning point as all of the major green energy players succeeded in coming to common grounds. The four associations succeeded drawing a common position and launched a lot of messages to authorities, starting with the second half of the year, when we also readied studies about the industry," says Dragomir.
One of the studies reveals the impact of legal changes to the market and overall renewable investments, while the other completes a financial review analysis on installed wind energy producing capacities in 2013 and 2014, accounting for 90 per cent of the wind producers.
"The two studies confirmed what we have stated continuously for the past two years, that we are not suffering a post-bubble effect, as some messages to the market are stating, but the situation is critical, more than worrying," Dragomir adds on.
Losses are obvious: in 2014 revenues for the wind energy producers dropped 40 per cent as compared to the previous year, reflecting a net loss of 10 per cent in one year: 500 million Euro to overall investments of four to five billion Euro in wind. Assets depreciated, the IRR approached zero or even fell into negative levels.
"While the investment return rate was almost zero, as compared to the initially-drawn target of 10.9 per cent as accredited by the renewables law, on the basis of which all of the financial results were adjusted and market regulator's decisions are still taken. These are catastrophic results and we have presented them to the authorities since July last year. We started at first with the Ministry of Energy, with ANRE, Transelectrica and Opcom being invited too," Dragomir adds.
But even if the authorities acknowledged the losses in the industry, they did next to nothing to change the situation. On the contrary, the large industry consumers′ lobby succeeded, and about 37 companies are now exempted up to 80 per cent from paying their GCs quota.
"A bit surprisingly, authorities confirmed our data, proving that they know the exact state of the industry, but taking no measure about it. Following our studies, it became clear that the industry needs changes, otherwise it is headed for collapse. There are already two insolvency cases confirmed by the courts, but in 2016 their number will grow even larger," Dragomir explains.
Industry leaders created a document asking for several measures, the most important - growing the 12.15 per cent GCs quota - so far being denied by the authorities. Also, the postponed GCs must have a longer marketable period, from the initially 2.5 years proposed to a longer period of up to six years.
During the mid-January meeting with the government, investors also proposed changing the taxation regime of the GCs. Now they have to pay the general flat income tax of 16 per cent at the issuance of the GCs, instead of paying it after they are sold.
"We have asked for prolonging the one-year lifespan of the GCs, a measure that will allow the market to relieve some tension, as well as annulling the ministry of Finance's decision regarding taxing the GCs upon issuance."
Also, only after GCs expire, their 16 per cent expenditure gets recognized into the balance sheet of a company.
"This is impacting your cash flows, and authorities may even block your accounts and send you into insolvency if you don't pay this tax," Dragomir says.
The drop in revenues has also seen bankers refinancing and rescheduling lending lines, she adds.
"The effects go to the entire economy".

How to solve the problems


"We see wind and hydro going hand in hand, and we think that the future for all renewables points to a feed-in tariff solution, while integrating the national strategy into the global strategy- as every country adopts more and more green energy solutions," explains Sebastian Enache, business development manager of Monsson Romania.
In the meantime, companies like Monsson are closing their projects. Monsson decided to decommission some turbines as a new project costs were now covered only in a ratio of about 20 per cent, says Enache.
"If we were to start the project, it would have had produced the needed return to break even in about 50 years, so we decided to reserve it for better days - if they'll ever come."
A wind park's lifespan is 20 years, while the break-even point ranges worldwide between seven and ten years.
"In the current conditions, our investment return rate (IRR) is of minus 1.94 per cent annually, for the next 25 years," says Enache.
Yet, Monsson and other large wind energy players shifted their revenue mix towards maintenance and services. Monsson started a global maintenance and new services expansion.
"After the support-scheme fall, Monsson deeply felt the revenue drop, as the owner of wind parks. The majority of wind parks will go insolvent, and that's why expanding abroad was a good decision. Last year we have had projects in New Zealand, Sweden, Turkey, Pakistan and many other countries."
He also explained that Turkey has in its target installing about 30,000 MW of wind power, and the system benefits from a support-scheme that helps Turkey build about 2,000 MW of wind each year.
Enache also believes that the new government should move up a notch.
"I would like to see, finally, professionals talking to other professionals. Up to now there has been a ′politician to professional′ debate, each having his own viewpoint, everybody wanting to make things right but understanding things differently...I hope now that discussions will be held between specialists, and I'm sure that if this will happen, better solutions will be found.
"Unfortunately, time is not our friend, and the government, as much as it is a professional one, must respect procedures and criteria, public consultations. It must take into account all aspects, and consult with everybody, and this takes time. But in time this can lead to the salvation of the green industry and can trace a clear direction for renewables in the future.
We must not notify the EU about changing the legal framework, as we must not change the law, but only its application norms. As the norms came without asking the EU, they can be changed in the same way," Enache says.

What does the ANRE say


All of the above-mentioned solutions will not solve the overall problem of the renewables sector, says Zoltan Nagy-Bege, member of the regulatory Committee of ANRE in charge of the sector.
"If you ask me, personally, these types of punctual changes - let's prolong the GCs availability period, or to modify their minimum value, or the maximum value - do not solve the situation. This support scheme must undergo much broader changes, to solve at least a part of the problems that the renewable investors have, and yet to have solutions not additionally charge the bill payers," Nagy-Bege adds.
The GCs so-called "black market" allows the producers to sell their certificate inside bilateral energy deals where the energy gets a special discount to allow in the GCs' price. This method of bending the law allows investors to get rid of their GCs before they expire, even if lowering the price to a fraction of market average, while buyers are also happy for meeting their quotas.
While admitting there is a hidden price effect in the discounted energy sale that includes the GC costs, Nagy-Bege thinks the Competition Council should further investigate the issue, if there is something illegal to the matter.
"We must accept that this is the reality in the market, this is the effect of the support-scheme in the renewables energy market. At least this is my opinion, but I'm no specialist in competition legislation. Maybe the Competition Council should start an investigation and, if they find something illegal, sanction it," says Nagy-Bege.

Unblocking the feed-in tariffs for smaller players


While the large market players′ proposal regarding a broader feed-in tariff for all renewables is an abstract idea, a much smaller scheme for feed-in tariffs elaborated in 2013 or earlier, that came into effect in mid-2014, was blocked by authorities three times until now.
According to Nagy-Bege, the feed-in tariff for smaller players has had already many "attempts" to be applied for small units with capacities of less than one-half to one MW. Initially, the Law 220 norms provided application for units under one MW, however, analysts explains to The Diplomat that this would have had cut the already-feeble GCs quota offered to the other green investors.
"In June 2014, we received a suggestion from the EC that we should apply feed-in tariffs for capacities smaller than one-half MW. Until then, the law provided for those under one MW. Any state has the right to apply the support schemes for capacities of under one-half kW without approval from the EC... as of July 1, 2014. We revised the methodology quickly, and we sent it to the government...and there it remained," Nagy-Bege adds.
After that, Law 122/2015 came into effect, and ANRE and the Ministry of the Economy sent a new support scheme to the government's approval, which was never applied as well.
"So we had three attempts to apply the legal provisions...regarding the feed-in tariffs. Honestly, I don't know where the blockage lies," he says.
As for a feed-in tariff for large players, it is hard to believe it will come under debate very soon.



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