Romania: Challenges on energy market, chance for Investors

14. January 2015. / SEE Energy News

On the global level, the energy sector is under great pressure: the discovery and exploitation of oil shale, the encouragement of renewable energy resources development and the recent drop in the oil price, represent a pressure on the companies in the energy sector. Only the companies from the field of public services – energy and gas transmission and distribution – have not been affected by this. The situation is still not favourable for producers and suppliers, but opportunities for long-term investors are starting to appear.

In Europe, electricity market has become highly distorted in the previous years. On one hand, because of the recession and the consequences of the financial crisis, consumption has dropped significantly, particularly in the industrial sector, whereas, on the other hand, the aims adopted by the European countries in terms of reducing carbon-dioxide emissions, lead towards a spectacular growth of investments in renewable resources, the majority of which is subsidized, which has created an energy surplus in the system.

Between the reduced demand and the oversupply, the wholesale prices of energy suffered a collapse, having lost over 85 percent of value between the maximum in May 2011 and the minimum in May 2013. From time to time, the excess of energy was so high that the prices on the day-ahead market were negative, i.e. producers paid to distributors to take over energy – such anomalies were visible on the German market at the beginning of 2013.
Whereas the producers of green energy, for instance, from the wind or the Sun, were compensated through subsidies and generous benefits from the priority in the takeover of energy into the system, the conventional producers possessing thermal and nuclear power plants were heavily affected.

The drop in prices lowered the profit and contributed to some production units becoming unprofitable. However, as renewable energy is unstable in its essence, depending on the weather conditions, the authorities forced the conventional producers to continue operating despite the losses, so as to be sure that consumer needs were covered. On the German market, the situation is further complicated by the Government decision to completely give up on nuclear energy, which caused an additional shock for the companies such as E.ON and RWE. On the other hand, consumers have been forced to bear the costs of green energy subsidies, and they have been paying some of the highest electricity bills in Europe.

In general, the picture of the energy market in Romania looks the same. For the most part of 2014, the prices on the OPCOM exchange were minimal, which is reflected very well in the fee shares of the company Nuclearelectrica, the only energy producer listed on the Bucharest exchange. The company lost more than one third of the value and had net losses in the second quarter and then also a failure in placing energy in the auctions for 2015.
In fact, the only ones who have been spared from this deterioration are not the integrated companies, but the transmission systems operators, Transelectrica and Transgaz. Their activities and the tariffs they charge are regulated by the Energy Regulatory Agency ANRE, which provides the predictability and higher stability of revenue and net profit.
The future prospects indicate towards the possibility of a moderate recovery, in the context in which economic recovery is still shy, and cannot increase consumption. On the European level, the decision-makers have become aware of the imbalances created in the recent years, and negotiations have been conducted with the aim of raising the value of green certificates. This should be transposed into higher electricity prices, but without radical changes, so that the prices are now stabilized at a fairly low level.

On the national level, there are negotiations over the creation of a balancing market, which would provide a compensation for traditional electricity producers for keeping their capacities and thereby stabilizing the system. The very generous subsidies have also been moderated in the recent years, so that the renewable resources boom is nearing its end, slowing down the rhythm of emergence of new energy capacities on the market. According to the currently available information, it is more likely that we will have market stabilization on the low level, than a period of impulsive growth.

Until a few months ago, oil producers and service companies in the oil industry seemed to be safe from the problems affecting electricity producers. On paper, the companies such as Exxon Mobil still hold the title of the world’s most valuable companies, on an equal footing with the IT giants such as Apple, Google and Microsoft. However, since June 2014, the oil price has dropped by around 30 percent, bringing along the market capitalization of oil producers (Exxon, Chevron, Shell, Total, but also the biggest company in Romania, OMV Petrom).

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