Vol. XIII No.12
December 2008



New Incentives to Invest in Renewable Energy...

Last month, the Romanian Digest™ published an article regarding forming and operating electrical facilities in Romania using renewable energy (see: Creating Renewable Energy in Romania ( http://www.hr.ro/digest/200811/digest.htm)). This month, because new and crucial legislative developments in the field have finally been enacted, we return to the subject – but not the general legal framework that we discussed last month; here we review the new incentives for investors established by the new legislation. The new law, Law No. 220/2008 enacted by the Parliament of Romania on October 27, 2008, might well represent the turning point for investors in doubt as to whether to invest in renewable energy projects in Romania. Everyone is now holding their breath to see how the law will be enforced and what subsequent regulations will be enacted. Law 220/2008 was published in the Official Gazette of Romania, Part I No. 743 of 03/11/2008, and came into force on November 6, 2008.

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The incentives introduced by Law 220/2008 cover electricity produced in small hydro power plants with an installed power of no more than 10 MW, electricity produced with wind, solar electricity, geothermal energy and associated combustible gases; biomass; biogas; and waste fermentation gas; and fermentation gas from sludge in waste water treatment plants, all of which is delivered to the electric power network. Furthermore, the new law expressly states that the export of electricity from renewable energy sources that have benefited at production from green certificates (described below), and also from the production of electricity from imported industrial and/or urban waste, irrespective of the installed power of the production capacity, do not benefit from the incentives provided in Law 220/2008.

The purpose of the proffered incentives is to foster investment in electricity production from the renewable energy sources described above. Law 220/2008 offers support to investors by measures aimed at the reduction of production costs for energy created from renewable sources, an increase of profits through the increase of sale prices for electricity produced from renewable energy sources and an increase in sales, as further discussed below.

The duration of the incentives provided by Law 220/2008 for the production of electricity from renewable energy sources (hereinafter “E-RES”) is 15 years in case of electricity produced in new power plants; 5 years for electricity produced by imported second-hand wind electric power plants which have also been used for the production of electricity on the territory of other states; 10 years for electricity produced in refurbished hydroelectric power plants with a maximum production of 10 MW; 3 years for electricity produced in non-refurbished hydroelectric power plants of maximum 10 MW output; and 10 years for thermal energy produced from geothermal sources in plants of at least 5 MWth output. Law 220/2008 provides that such terms are calculated from the date when electricity producers start production and receive green certificates for electricity, if the power plants have commenced operations or, respectively, their renovations have been completed prior to the end of 2014.

The implementation of Law 220/2008 may encounter certain difficulties due to unclear definitions of certain crucial terms. The Law is not entirely clear on what exactly is meant by “new power plants” or “refurbished power plants”. Clarifying the meaning of such terms also has a great impact on the duration for which the incentives system is applicable for the respective power plants, and therefore it has a direct influence on the value of the support that investors will eventually obtain.

“New electricity power plants” is, in fact, a key term used by Law 220/2008 because they receive the longest incentive term. According to the law, electricity power plants are considered new if they were built after 2004. However, the law does not mention if a change in the ownership of such power plants that occurred after their construction influences the period for which such power plants will benefit from the incentive system. Since the law does not make such a differentiation, one can only conclude that a change in ownership does not affect the enforcement of the law, but there is no way of guessing how the authorities will interpret this matter.

However, an even greater impact in practice is what is understood by refurbished power plants and what exactly is to be considered to be the difference between the refurbished and the non-refurbished power plants. This is due to the fact that refurbished plants benefit from Law 220/2008 for a period of 10 years, whereas non-refurbished plants benefit for only 3 years. Under the new law, a refurbished power plant is a power plant with an installed maximum power output of 10 MW that fulfills the following two conditions: it has an operational life of at least 15 years from commencement of operations and it has undergone significant revamping with modern technology to increase its production efficiency; and such refurbishment must be completed before the end of 2014.

The law provides that the quantity of electricity produced in a refurbished hydroelectric power plant for which incentives may be granted is to be established by the National Regulatory Authority for Energy (hereinafter referred to as “NAER”). For such an operation, NAER must take into consideration the net production of electricity obtained in the past 10 years prior to the refurbishment and the net production of electricity obtained after such refurbishment.

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Green certificates
A green certificate is a tradable commodity proving that certain electricity is generated using renewable energy sources. Typically one certificate represents the generation of 1 MWh of electricity. The main characteristic of a green certificate is that it can be traded, distinct from the quantity of electricity it represents, on a special market organized for this purpose. In this manner, producers of E-RES that obtain green certificates on the basis of the quantity of E-RES they feed into the grid are able to sell them and, thereby obtain extra income in addition to income generated by the sale of electricity. Suppliers of electricity are obligated to purchase and supply to end users a certain percentage of E-RES from the total of the electricity they provide. They prove that they have complied with this obligation by the number of green certificates they hold. Therefore, in order to fulfill the number of certificates they need, the suppliers of electricity must buy green certificates from the market for green certificates. At the European level, certificates are traded freely for states that are part of the European System of Green Certificates. Within this system there is a single market of green certificates that can then be sold in any of the states that have affiliated to the system.

The primary incentive in Law 2002/2008 is provided through a system which allows producers of E-RES to obtain more green certificates than they were able to until now. The trading of green certificates represents one of the mechanisms that support the production of E-RES in Romania. Because the green certificates actually represent the core of the incentives system, the conditions in which they are issued and traded are essential and have a significant impact especially on the activity of producers and suppliers of electricity.

According to Law 220/2008, the producers of E-RES will receive:
  • a green certificate for each 1 MWh produced and delivered in the electric power network from new hydroelectric stations/groups or from refurbished hydroelectric stations/groups with a maximum output of 10 MW;
  • a green certificate for each 2 MWh delivered in the electric power network from hydroelectric stations with an installed power between 1 and 10 MW, which do not fall under the provisions of the previous paragraph;
  • two green certificates for each 1 MWh delivered in the electric power network from hydroelectric stations with an installed power of up to 1 MW/unit;
  • two green certificates, until 2015, and a green certificate, starting from 2016, for each 1 MWh delivered in the electric power network by the producers of electric power from wind energy;
  • 3 green certificates for each 1 MWh delivered in the electric power network by the producers of electricity from biomass, biogas, bioliquid, waste fermentation gas, geothermal power and associated combustible gases;
  • 4 green certificates for each 1 MWh delivered in the electric power network by the producers of electricity from solar power.

Producers who generate renewable energy must be denominated as “priority producers” by the NAER in order to obtain green certificates, and this is achieved by applying, on an annual basis, for registration with the transport and system operator, i.e. CN Transelectrica SA. Following the successful registration, the transport and system operator has the obligation to issue, on a monthly basis, green certificates to registered producers for the quantity of electricity produced from E-RES and effectively delivered through the electric grid to consumers.

Suppliers of electricity, i.e. the entities dealing with purchasing electricity from the producers and supplying it to the end consumers, have the obligation to purchase, on an annual basis, a certain number of green certificates equal to the result obtained from the multiplication of the value of the mandatory target established by the NAER for the respective year with the quantity of electricity, expressed in MWh, annually supplied to end users.

The supplier that does not fulfill the annual mandatory target regarding the number of green certificates it is obligated to purchase is required to pay the counter value of the non-acquired green certificates at a fixed price of €70 for each certificate that it has not acquired, annually adjusted by the consumer price index for Romania, calculated in lei at the average value of the foreign exchange rate established by the National Bank of Romania for the month of December of the previous year. This amount will be used by the NAER to facilitate the access of producers from renewable sources to the transport/distribution network.

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The trade and commercialization of green certificates and E-RES
According to Law 220/2008, green certificates are traded on a centralized market, as well as a bilateral contracts market, where producers and suppliers of electricity from E-RES have entered into trading contracts for green certificates. As mentioned above, suppliers are required to annually purchase a certain number of green certificates relative to the amount of electricity annually supplied by them to their consumers.

The law also provides for the trading of green certificates on the market until 2014. Afterwards these values will either change, or if it has achieved its purposes the green certificates system will be abolished. Therefore, the minimum trading value is of €27/certificate, while the maximum trading value is of €55/certificate. The trading values are to be annually adjusted by the consumer price index for Romania. The certificates are thus sold on the market at the market price which cannot be lower than €27, but cannot exceed €55.

At the moment, Romania is not affiliated with the European System of Green Certificates due to the fact that the Romanian energy market has not as of yet met European standards. However, as soon as this happens and Romania enters the European System of Green Certificates, Romanian energy producers will be able to sell their green certificates on the European market, while Romanian energy distributors will be allowed to buy green certificates on the same European market.

Electricity producers of renewable energy are able to sell the electricity they produce on the wholesale market at that market price. However, electricity produced in electric power stations having an installed power of less than 1 MW, may only be sold to suppliers that are licensed in the areas in which the electric power stations are located at regulated prices set by NAER at the national level.

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Facilities for investors and access to the electricity grid
Meant to encourage investments in the field of E-RES exploitation, Law 220/2008 sets forth the facilities to be granted to investors for strategic projects in the field: guaranteeing to a maximum of 50% the value of any medium and long term loans; ensuring the transport infrastructure and utilities necessary for the initiation and development of the investment; ensuring access and the refurbishment of the existing infrastructure; exemptions from the payments of certain taxes and duties or reductions for reinvested profit for a period of 3 years from the start of the investment; and granting of financial contributions from the state budget for newly created jobs. Investors may also benefit from the following facilities: tax and duty exemptions or reductions for reinvested profit for a period of 3 years from the commencement of the investment; and the grant of financial contributions from the state budget for newly created jobs. However, the conditions and the period for granting such facilities are subject to a Government Decision to be adopted within 90 days from the effective date of Law 220/2008.

Producers of E-RES are granted priority access to the transport/distribution electric grid unless such priority affects the safety of the National Energy System, which is formed by all the grids, installations, equipment and plants. Therefore, the network operators (i.e. transporters and distributors) must draft regulations, which are to be periodically reviewed, regarding the costs for technical adaptations, connections to the network and network consolidations necessary for the link to the network of producers of electric power from renewable sources. The network operators must provide each new producer of electric power from renewable sources wishing to connect to the network with a detailed estimate of the costs related to such connection.

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The fact that the Romanian Parliament felt the need to issue a law detailing incentives for the production of E-RES, attests to Romania’s commitment to encourage an increase in renewable energy development. The nation has set a requirement that 33% of Romania’s production and supply of electricity be from renewable energy by 2010, 35% by 2015 and 38% by 2020. While these may not be easily achievable goals, the nation does seem serious about realizing them. Still, Law 220/2008 uses certain key terms that will have a great impact on the effective activity of potential producers or suppliers of electricity from E-RES, and those terms still need to be further clarified. At this point, the participants in this field await the regulations to be issued by the president of the NAER that will detail and clarify such terms, and set forth the proper enforcement of the law – which will further demonstrate Romania’s long-term commitment to promoting the production of E-RES electricity.

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Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2008 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

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