ROMANIA: A 'EUROPEAN' MODEL FOR THE ENERGY SECTOR

UNCLAS SECTION 01 OF 02 BUCHAREST 000497

SENSITIVE

STATE FOR EUR/CE ASCHEIBE

SIPDIS

E.O. 12958: N/A
TAGS: ENRG ECON EINV PGOV KGHG RO
SUBJECT: ROMANIA: A 'EUROPEAN' MODEL FOR THE ENERGY SECTOR

REF: A) Bucharest 440

Sensitive but Unclassified, not for Internet distribution.


1. (SBU) Summary: The Government of Romania (GOR) is considering
the creation of two vertically integrated energy companies formed
out of existing state-owned assets, reversing a decentralization
process that the GOR now sees as having been flawed. Instead, two
"national champions" able to compete on the wider European energy
market will be fostered. If approved, the entities will each
include enough production, generation, and distribution assets to
account for 90 percent of the Romanian energy market. U.S. and
other multinational companies have raised competition concerns with
regard to this proposal, which seems to be have been driven by
political, not economic, considerations. End Summary.


2. (SBU) The proposal to develop two "national champions" was first
mooted for post in a meeting between the Charge d'Affaires and the
Minister of Economy (reftel). Conversations with lower level
interlocutors have revealed additional details of the Ministry of
Economy's (MoE) plans. Under the Ministry's proposal, the first
entity would bundle the two operational nuclear reactors with two
hydro power stations, several coal-fired power plants, and the
national hard-coal mining company. The seQnd entity would bundle
natural gas producer Romgaz with the remaining hydro power stations,
all natural gas fired power plants, the lignite fired power plants,
and the lignite mining companies. Both companies would also include
distribution. Notably absent from this mix is any renewable or
alternative energy generation component, with the exception of a
legal mandate to purchase "green certificates" on the market. Since
neither of the integrated companies will include renewable
generation, continued growth will depend entirely on the private
sector, which in the absence of feed-in tariffs or mandated
renewable production quotas, may struggle to sell power to the
integrated companies' distributors. This, coupled with the
perpetually delayed implementing regulations for Romania's renewable
energy law, could slow-down expansion plans in this booming sector.


3. (SBU) The American Chamber of Commerce (AmCham) recently hosted
a meeting with Alexandru Sandulescu, Director General of the Energy
Policy Directorate in the MoE, to discuss energy policy, focusing on
the proposal to "integrate" the state-owned companies. The meeting
was revealing in that Sandulescu repeatedly referred to the proposal
as a "political" one that was made without the involvement of
professional Ministry staff. Speaking candidly, Sandulescu shared
his concerns about possible flaws in the bundling proposal. In his
opinion, the inclusion of reactors 1 and 2 of the Cernavoda nuclear
power plant in one of the new entities would make it harder for the
nuclear power company Nuclearelectrica to finance reactors 3 and 4,
which are currently under construction. Another concern is with the
integration of energy distribution, raising the possibility of an EC
infringement procedure unless distribution is somehow cordoned off
from the rest of the business.


3. (SBU) The cost assumptions underlying the MoE's proposal are also
questionable. The MoE has publicly stated that the companies will
have an average cost of 44 to 45 euro per MWh. However, these
estimates are based on 2006 data and do not factor in the mining
industry coal subsidies that will be included in the price of
electricity as of 2010, nor do they include the cost of CO2
allowances, which will be required starting in 2013.


4. (SBU) Potential private sector competitors to the new companies
are worried about the market implications of having two state-owned
and operated companies controlling 90 percent of the energy market.
These concerns have spurred Romania's Competition Council (RCC),to
announce that it will scrutinize the plan closely. EU Energy
Commissioner Piebalgs has also publicly advised Romania against
taking measures that would reduce competition on the power market.
Still, the plan appears to have legs, with the MoE issuing a string
of press releases over the last month making the case for the plan.
As the MoE sees it, Romania's energy sector was wrongly
decentralized according to generation type. This has left the
market fragmented and unable to make needed investments in the
future. It has also contributed to a situation where very little
energy is traded over the energy exchange, as both the energy
producers and major consumers have an incentive to lock in
non-transparent long-term bilateral contracts. The MoE also admits
to wanting to build companies big enough to compete throughout
Europe, like many of the "national champions" in neighboring states.
Left unsaid are the underlying goals of reasserting stronger state
control over a strategic sector and protecting employment by
allowing cheap hydro-power to subsidize the jobs of coal miners and
inefficient thermal power plants.


5. (SBU) Comment: The final shape of the MoE's proposal is still
under discussion and the jury is still out as to the ultimate

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impact. Particular points of concern are the integration of
distribution and the lack of a well thought-out plan for encouraging
the new companies to develop renewable generation capacities. The
non-transparent way that the plan has been drafted and the MoE's
unwillingness to engage with a broad range of stakeholders bode ill
for the proposal. Another worrying factor is the top-down manner in
which the proposal was developed, with little input from career
technical staff at the MoE. That being said, if distribution can be
firewalled off from production and if integration is a prelude to
privatization then the proposal may yet end up positively.
Unfortunately, given the way this proposal has developed so far, its
overall impact will likely be negative, both for the private sector
and for Romania's commitment to reduce greenhouse gas emissions.
End comment.
GUTHRIE-CORN