Key View: New capacity growth coming into the market will be focused around the development of non-hydropower renewables, which we expect to reach 9GW by 2031, up from 5.2GW over 2022. We highlight that thermal capacity will be dominated by conversions from coal to gas with generation from the sector remaining stable at an average of 17.5TWh over the decade. Upside risks are posed to new nuclear capacity and our muted outlook from the development of new reactor technologies.
- The Romanian government announced it was aiming to bring forwards the coal phase out by two years to 2030, which we currently do not expect to be reached. This move comes at a time of very high uncertainty and energy security challenges for Europe against the backdrop of the Russian invasion of Ukraine.
- An over exposure to Russian gas imports is driving a sizeable shift in energy policy for many EU gas power markets, eroding support for new growth as the market seeks to diversify the energy mix to lessen natural gas consumption. As such we expect to see a near term boost to coal generation.
- That said, downside risks are present to our long-term coal outlook. Should the market realise an increased level of renewable deployment and successfully install new nuclear power capacity over the coming decade, then we will adjust our outlook accordingly.
- The government is seeking to unlock EUR0.6bn in EU funding targeted at the development of renewable capacity under the market's National Recovery and Resilience Plan, which has been enhanced owing to the Russia-Ukraine conflict.
- However, Romania is running the risk of not being able to access parts of the funding owing to deadlines approaching and contracts for projects not being signed. We therefore expect the government to step in and accelerate the renewable planning approval prices to access EU support schemes on time.
- Policy continuity faces some level of risk after Romania’s previous government lost a vote of no-confidence in October, the formation of a new ruling coalition in November between the two largest parties - incumbent centre-right National Liberal Party and the centre-left Social Democratic Party - is an alliance of ideologically disparate parties. We highlight risks of the new government shifting away from efforts at fiscal consolidation, as well as potential for infighting between its members stalling policy formation over the coming quarters.
The government decided to adopt a harder target at phasing out coal fired power in favour of alternatives such as natural gas and low carbon power types. The EU has approved Romania’s EUR30bn recovery funding plans which will allocate 41% towards the energy transition while committing to a coal phase out by 2030. We expect the switching of coal to gas to play a major role in the market's decarbonisation aims.
As the market phases out coal fired power, we expect investment into low carbon power projects, such as renewables and new small nuclear reactor types to accelerate. Romania had been shifting its policy on renewable energy such as wind and solar power. The market's National Energy Climate Plan (NECP) and expanded EU funding has been approved by the EU which outlines a target to increase solar and wind capacity by an additional 6GW.
Broadly the market's renewable sector has benefited from constructive changes to legislation. Amendments over Q122 to the market's PPA regulations are already proving to be transformative. We highlight that the restoration of legal security for PPA’s will drive more growth. Furthermore, growth is supported by reforms to the net metering schemes which have been raised.
Investments into the market's ageing grid infrastructure are a key focus for the government. This will be essential for the inclusion of increasing levels of renewable power generation. Here, the market benefits heavily from EU membership in contrast to regional peers and the EU’s ongoing investment into grid projects.
Over our 10-year forecast period, coal will lose its pre-eminence in the market, slipping to 12.0% of total generation by 2030. This is due to the closure of a number of coal plants, in line with plans to phase out coal by 2032 and the EU's Large Combustion Directive, which dictates that these plants must shut down when they reach 20,000 hours of running time (beginning in January 2008) or by the end of 2015. In contrast, the percentage of gas in the power mix is expected to rise slightly over the forecast period from 13.7% in 2022 to 18.2% by the end of 2031.
We note that our view is supported by plans announced in January 2020 by state-run Complexul Energetic Oltenia (CE Oltenia), the second-biggest electricity producer in Romania, to close all of its coal-fired power plants and coal mines, and replace them with gas-fired power plants and renewable energy capacities. The commitment is included in a memorandum approved by the Government in December 2019, through which the company received an emergency state loan of RON1.2bn (EUR251mn) to pay off its CO2 certificates and avoid insolvency. With this restructuring plan, the company hopes to convince the European Commission to approve a state aid for five years and help it make the transition to cleaner energy. CE Oltenia currently operates four coal-fired power plants with an installed capacity of 3,240MW.
Over Q221 the Romanian government announced that the country would completely phase out coal by 2032 and set up a coal exit commission to plan the sectors reduction. We therefore expect that pressure will mount on the sector as new capacity comes online in other segments. Romania has outlined plans to convert a large number of its coal generating fleet with natural gas systems by 2030. However, beyond our forecast period we note the long-term climate credentials of natural gas are being called into question as the sector could also find itself isolated by carbon policies. As outlined by our Country Risk team's assessment, criticism across the EU is being brought on to the government's aims to invest heavily in gas infrastructure and to avoid ‘locking in’ a fossil fuel to Romania’s energy mix. This criticism has had real impact with the allocation of the EU’s recovery fund. We note that several gas-fired focused proposals have been rejected by the EC, leading us to remain cautious over the sector’s long-term futures.
As the energy transition moves forwards across Europe, the growing concern for many still burning coal has been the rising cost of carbon credits. As we have previously highlighted the EU Emissions Trading Scheme operates in all EU member states and sets a price per unit of carbon emitted with a fixed number of emission allowances (EUA’s) declining annually. The Emissions Cap Phase 4 (2021-2030) will see the number of EAU’s decline at an increasing yearly rate of 2.2% compared with the current 1.7%, adding pressure on carbon emitting power plant operators as EUA prices rise. Therefore, we expect to see a sharper drive to convert generation to lower emitting systems such as natural gas while the build-out of additional renewables and nuclear capacity moves forwards at a slower pace.
The government’s decision to adopt a harder target at phasing out coal fired power in favour of alternatives such as natural gas but also low carbon power types. The EU has approved Romania’s EUR30bn recovery funding plans which will allocated 41% towards the energy transition while committing to a coal phase out by 2032.
Future Proofing The Thermal Sector
We have maintained our assessment that the thermal power segment in the market will see a phased transition away from coal in favour of gas over the long term. We therefore expect natural gas’s share of thermal generation to rise from 42.5% over 2022 to 64.4% by 2031. Leading coal power producer CEOltenia announced over Q122 that it was seeking funding support to switch to gas due to profitability. We expect that these pressures will remain with high carbon prices. The EU approved the government's plans to provide EUR2.66bn for the firm's restructuring plans which we expect to look at the long term viability of new gas projects as well as solar developments. CEOltenia directly applied for funding from the EU to develop two new facilities of a combined 1.3GW.
Over Q122, it was announced that a large-scale data campus in the market was being planned which would incorporate a Rolls-Royce mtu trigeneration plant. The 200MW system will provide flexible power supply to what is being planned to be the second largest in Europe. The system is being developed to incorporate a future 25% blend of hydrogen in normal operations. Furthermore, this could be retrofitted in future to burn 100% hydrogen as part of Romania’s plans to decarbonise its power sector in the long term. We also highlight the markets renewed drive for the hydrogen sector amid the plans which will see CE Oltenia, a state-owned utility convert 1.3GW’s of coal to gas which includes blended natural gas and hydrogen systems. Furthermore, Romgaz seeking to develop a 150MW gas project with a carbon capture and storage system.
Ukraine - Russia Conflict Poses Upside Risk
Despite the transition away from coal we highlight that the ongoing Russia-Ukraine conflict has placed significant pressure on gas prices and gas import security. We expect this to add near-term support for the use of coal in the market and add risks to our outlooks. Over April 2022 CEOltenia announced it was seeking new contracts to expand its work force, extract more coal and increase electricity production. The firm brought back online a 300MW unit which is to be held as a strategic reserve in the event of supply constraints. However, we do not expect this to derail long term plans to switch to gas and continue to expect the market to expand its domestic gas production capabilities.
Nuclear power generation is one of the key growth areas for the Romanian electricity sector. Nuclearelectrica currently provides almost 19.6% of Romania's power production, which comes from two 706MW reactors at the Cernavoda nuclear plant.
Unit 1 and Unit 2 of the Cernavoda nuclear plant are fully operational. Attention is now focused on developing Units 3 and 4, which, combined, would add 700MW to Romania's generating capacity. Plans to develop these two reactors have been in place since the 1970s. Various investors have pulled out in the last few years, deterred by broader political instability and delays to the deregulation of the power sector, which has some of the lowest electricity prices in Europe. Others pulled out in the aftermath of the Fukushima disaster in Japan.
In November 2013, it was reported that the majority state-owned Nuclearelectrica had signed a deal with the China Nuclear Power Engineering Company (CNPEC), CGN and the Canadian company Canada Deuterium Uranium (Candu) for the development of two of these reactors. This was followed in late July 2014 by the signing of a binding and exclusive cooperation agreement between CNPEC and Candu in Vancouver for the construction of two more reactors at Cernavoda.
In September 2014, CGN submitted its offer to build the two units and was accepted as a qualified investor. In October, Nuclearelectrica designated CGN as the 'selected investor' for the project, and the two companies signed a letter of intent to proceed. In November 2015, the two companies signed a further agreement for the development, construction, operation and decommissioning of Cernavoda 3 and 4. The project joint venture will be at least 51% CGN. Nuclearelectrica and CGN said the EUR7.2-7.7bn agreement also moves the project closer to the stage of project financing and selection of investors.
In January 2016, the government wrote to CGN outlining major areas of support and commitment associated with the project, including electricity market reform, tariff mechanisms, electricity sales, state guarantees, financial incentive policies, and continuity of those policies. In May 2016, the Supreme Council of National Defence approved the energy minister's report on the project, which showed that building Reactors 3 and 4 at the Cernavoda Nuclear Power Plant are an investment priority for Romania
However, negotiations for forming a joint venture company with Nuclearelectrica never took off, with the only significant development in four years of discussions being the signature in 2019 of preliminary agreement on the construction and operation of two new reactors at the nuclear plant.
In June 2020, Romanian authorities decided to end the partnership with the CGN, to develop the two units. The decision was formalised on June 12 2020 at the shareholders' general meeting of Nuclearelectrica. Shareholders also empowered the company's board of directors to initiate the necessary actions for analysis of strategic options for the construction of additional nuclear energy production capacities.
In October 2020, Romania and the US signed a draft intergovernmental agreement on cooperation to expand and modernise Romania's nuclear power programme. Areas for cooperation could include the completion of units 3 and 4 at the Cernavoda nuclear power plant and the refurbishment of unit 1 at the plant. In addition to the construction and refurbishment projects at Cernavoda, the agreement calls for cooperation in areas such as regulation, exchanges between research laboratories and universities, staff training, as well as research and development. It also provides for cooperation in the development of small modular reactors in Romania. The US government has expressed its interest in exploring financial institutions to support the funding of these projects.
In February 2021, Cosmin Ghita, CEO of Romanian utility Nuclearelectrica, said that a final investment decision for the Cernavoda nuclear power plant expansion project is expected in 2024, with commissioning of unit 3 planned within the next 10 years., Ghita also said that Nuclearelectrica will present a proposal to start the project at its next annual general meeting of shareholders.
In January 2021, Romanian state-owned power producer Nuclearelectrica received a USD1.28mn grant from the US Trade and Development Agency. The money will be used to identify new potential sites suitable for deploying small and modular nuclear technologies outside Cernavoda. The grant followed the signing of a draft intergovernmental agreement between Romania and the US on cooperation to expand and modernise Romania's nuclear power programme. Areas for cooperation could include the completion of units 3 and 4 at the Cernavoda nuclear power plant and the refurbishment of unit 1 at the plant.
The Parliament of Romania has ratified an agreement between the governments of Romania and the US for the expansion of the Cernavoda nuclear power plant. The USD8bn agreement, signed in 2020, provides that the US will help Romania in the construction of two new reactors (Unit 3 and Unit 4) at the Cernavoda plant and refurbishment of Unit 1. A feasibility study for the two units was launched in July 2020, and Romania aims to commission Unit 3 in 2030 and Unit 4 in 2031.
Over Q421, the Romanian integrated National Plan for Energy and Climate Change was approved by government which has outlined the development of the two new Cernavoda nuclear power plant reactors totalling 1.4GW. It is hoped that this will enter operation at the end of the decade just beyond our forecast period, although we remain sceptical to their timely completion. However, support remains strong for the nuclear sector in Romania which represents 18% of the power mix. Should cooperation between the US and Romania on this project remain strong we expect construction could begin in the near term.
SMR Technology Poses Upside Risk
While we do not expect any new large-scale nuclear facilities to come online over the coming decade we do see possibilities rising for new small modular nuclear reactor (SMR) technology deployments. Both Romania and Bulgaria have already signed agreements with US firms to supply SMR technology. Romania's agreement is with Nuclearelectrica to construct a 462MW system comprised of six 77MW NuScale Power reactors by 2027. Over Q421 Romania's Autonomous Directorate of Nuclear Energy Technologies announced that another US SMR developer, Last Energy, was seeking to develop a start-up demonstrator project in the market. The first phase could see a 20MW site provide heat and power while also being used to produce hydrogen.