European expert: How Romania could blow up the market

Reading time: 3 minutes

The Slovenian Janez Kopač, the former director of the Secretariat of the Energy Community between 2012 and 2021 and the former Minister of Finance of the country, explains, in an analysis published by Euractiv.com, the way in which an apparently hasty or insufficiently substantiated decision by the Government of Romania could is devastating the electricity market across Europe, right on the threshold of the start of the cold season and in a delicate geopolitical situation.

The exceptional tax proposed by Romania on electricity market players has a major design flaw: it is retroactive and applies to all traders, many of whom are now at risk of bankruptcy, writes Janez Kopač. As such, Romania’s proposal violates EU law and risks triggering a dangerous domino effect on the EU electricity market, he warns.

Here, below, are the explanations and arguments of Janez Kopač (subs. ed.):

While trying to find a panacea for the overheated electricity market, EU energy ministers and the European Commission did not even notice that the Romanian government introduced legislation that effectively killed the country’s electricity market.

Considering Romania’s important role in cross-border exchanges with its neighbors, this measure could trigger a domino effect that could devastate the single European energy market.

On September 1, the Romanian government adopted a series of amendments to the Emergency Ordinance no. 27/2022 regarding the measures applicable to final consumers on the electricity and natural gas market between April 1, 2022 and March 31, 2023 and published them on the same day in the Official Gazette.

The normative act retroactively taxes all market participants for deliveries from the period until March 2023 with a tax of 98% on the difference between the average monthly price of purchase contracts, regardless of when they were concluded, and with a tax of 100% on the difference between the export price and the market price for the next day.

If the fee is not paid, the penalty is the prohibition to participate in transactions.

The measure might seem like an exceptional tax, but it is far from that. It is retroactive, applies to all market participants – not just producers – and charges all transactions, even if they were agreed and contracted a long time ago.

This means that if a trader bought electricity from a Romanian producer at a price of around 50 EUR/MWh in 2020 with delivery abroad in September 2022 and concluded a hedging contract, i.e. for 51 EUR/MWh, now he will have to pay 100% of the difference between the current price and the price mentioned in the contract.

Let’s assume that the current price is 500 EUR /MWh. The tax base will be approximately €450/MWh, and the difference will correspond to the tax amount.

A trader who earned €1/MWh clearly cannot pay an additional tax of €449.

This indicates an obvious consequence: the bankruptcy of local traders and the flight of foreign ones. The quantities simply will not be delivered to customers.

Traders from all over Europe are alarmed. Romania is an important part of the single market, and failure to deliver could have serious consequences for traders across the EU.

The first unofficial comment of the Romanian government on this topic was that the measure applies to volumes traded on the spot market and that the majority of the market is managed by spot transactions.

However, publicly available data shows a different picture.

The share of Romanian electricity sold on spot markets is currently almost 40%, while the rest was sold on forward markets a long time ago.

The text is currently being discussed in the Parliament, and the first installment of the related tax would be paid by market participants until October 25.

Let’s hope that the EU-wide tax on producers of inframarginal electricity – i.e. not powered by gas – will be adopted soon. One of the provisions of the European measure is for it to become effective at the EU level, repealing all national measures, including the Romanian one.

Hasty national measures such as this put the European single market at risk. It is incompatible with the basic principles of the EU regulatory framework in the field of energy and the principle of free movement of goods and blatantly violates them.

At a time when energy companies are facing increasingly unmanageable liquidity requirements and the energy sector is on the brink, the retroactive taxation measures imposed by the Romanian government on all energy companies operating in the country could be the proverbial butterfly that flaps its wings and triggers the first domino in a whirlwind of chain insolvencies.