CfD Scheme Soon to Be Launched in Romania

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With a slight delay from the initial announcement made by authorities at the end of last year, the Ministry of Energy has just submitted for public consultations the much-awaited draft of Government decision approving the Contracts for Difference (CfD) scheme. An information note for bidders summarizing the key elements of scheme and the next steps was also published.

The scheme, inspired by UK model, will support onshore wind and photovoltaic projects with a total capacity of 5000 MW split in two auctions, (i) a first auction in 2023 for 2000 MW and (ii) a second auction in 2025 for 3000 MW, each auction equally split between the two technologies.

In order for the scheme to be launched, several pieces of legislation are to be adopted and EU approval must be obtained. Nevertheless, the calendar for the 2023 tender is quite ambitious, with final objective to sign the CfD contracts by the end of this year.

The estimative calendar is the following:

(i) publication of the Auction Initiation Order: 2-4 weeks

(ii) 2 rounds of clarifications from interested bidders: September – October 2023

(iii) submission of bids: 13 – 17 November 2023

(iv) signing of CfD contracts: 25 – 29 December 2023

Nevertheless, the above calendar will be updated upon the issuance of the Auction Initiation Order.

1. Overview of the CfD mechanism

The CfD system is a two-way support payment between the strike price (price auctioned by the producers) and market reference price. Should the market reference price fall below the strike price, the CfD beneficiary is paid the differential by the CfD counterparty, for each MWh of electricity produced and delivered into the grid. If the reference price exceeds the strike price, the CfD beneficiary pays the CfD counterparty the differential.

CfD beneficiaries are free to sell the electricity based on their own trading strategy (e.g. OPCOM markets, PPAs).

The CfD counterparty is OPCOM, the operator of the electricity and gas market. The CfD beneficiaries will be selected based on a competitive process organized by Transelectrica (transmission and system operator), separately for each technology. The bidders must include in their bids the strike price, project installed capacity and target commissioning date.

2. Project eligibility requirements

The eligibility requirements will be set out in the Auction Initiation Order. Nevertheless, based on the Information Note, the following project related eligibility requirements are expected:

(i) the minimum project capacity is of 5 MW, with maximum capacity to be set out in the auction initiation order; nevertheless, considering the total 1,000 MW capacity allowed for each technology for the first auction, we expect that the maximum capacity to be quite low, in order to allow for multiple projects in the scheme;

(ii) the grid connection permit (ATR) must be already obtained, with connection date no later than December 2026;

(iii) projects for which the EPC contracts or equipment supply contracts were concluded are still eligible to the extent such contracts were concluded after July 20, 2022.

(iv) the projects with behind the meter storage capacities or hybrid projects with single meter will not be eligible;

(v) project benefiting from other support schemes (for example projects financed by the National Recovery and Resilience Plan or Modernization Fund soon to be launched as well) will not be eligible; therefore, a choice between the two will need to be made; a strategy could be to apply for both schemes and decide after the results.

A positive change is that the Information Note no longer includes the setting-up authorization among the project eligibility requirements as previously considered by the Ministry of Energy.

3. Bidders Selection Criteria

The selection criteria are not yet available and will be set out in the auction initiation order.

According to previously announced principles, the ranking is done solely based on strike price offered. In case of tied bids, the ranking is done based on the following criteria:

(i) offered capacity (larger prioritized);

(ii) target commissioning date (earlier prioritized);

(iii) application date (earlier prioritized);

(iv) random draw.

4. Key Financial Principles

Few important changes to the financial principles have been made as compared to the principles previously announced. The key financial terms are the following:

(i) the strike price will be submitted by bidders as an EUR/MWh price; a RON strike price had been previously considered by the Ministry of Energy;

(ii) the strike price may not exceed the maximum strike price to be set out in the Auction Initiation Order;

(iii) the market reference price is the average monthly weighted day-ahead market price for the respective technology to be calculated based on a methodology to be approved by ANRE;

(iv) of great importance is that the CfD beneficiaries will not receive the CfD payment for the time intervals where the market reference price is negative. This severely affects the stability given by the CfD contract and its bankability, especially considering that we have already seen negative prices earlier this year and such cases are expected to become more frequent once new capacities are commissioned;

(v) the strike price will be subject to annual indexation based on the Euro Area Consumer Price Index;

(vi) the CfD payments will be calculated in EUR and paid in RON using the monthly average of the daily RON/EUR exchange rates published by the National Bank of Romania;

(vii) the CfD payments are made as of the date the bidder obtains all necessary connection and operation licenses and authorizations and at least 80% of the awarded capacity is commissioned;

(viii) a participation guarantee and a good performance guarantee will be required. The values thereof are not yet available and will be set out in the Auction Initiation Order.

5. Key contractual timeframe

The duration of the CfD contract is of 15 years, which is quite positive from a bankability perspective.

The target commissioning date (Target Date) must not be later than December 2026. Despite a contradiction between the Romanian and English versions of the Information Note, should the CfD beneficiary reach commercial operation after Target Date without exceeding 24 months thereafter, such period shall be deducted from the CfD contract duration. Should the delays exceed 24 months, the CfD contract is terminated, and the good performance guarantee is executed.

6. Funding of the scheme

The Ministry of Energy is responsible for ensuring the liquidity of the CfD fund. The CfD scheme is planned to be financed both from the Modernization Fund (subject to obtaining the approval of the Modernization Fund Investment Committee), as well as through a levy payable by the final consumers to be collected by suppliers (similarly to the green certificates contribution). The levy will be already implemented starting January 1, 2024.

Judging by the experience with the green certificates scheme in the first “waive” of renewables (where the authorities severely intervened in the scheme rules due to complaints from big industrial consumers), we estimate that the impact on the final consumers is important for the stability of the scheme. From this perspective, change in law provisions in the CfD contract will need to be carefully reviewed.

7. Conclusions

The CfD scheme is a long-awaited support mechanism benefiting from huge interest from the investors in renewables and financing banks. It can significantly contribute to easing the financing process at a time when banks look with interest but also with cautious to the energy market and when PPA market lacks liquidity.

The CfD scheme is highly positive for Romanian state as well, since competitive CfD schemes tend to lower the cost of supporting low-carbon generation over alternatives, such as green certificates or feed-in tariffs, due to competition in determining strike price and lower revenue risks for beneficiaries.

Nevertheless, the terms of the CfD contract and the related pieces of legislation to be adopted will be very important in assessing all legal and financial implications for bidders.