Monday, June 21, 2010

Romania: Power Pressure

Oxford Business Group Latest Briefing

Romania is planning a major restructure of its energy sector by bundling its electricity utilities, privatising part of the industry, and seeking to attract local and foreign investments to reverse the slow decline of its generation capacity. The country must also meet certain deadlines for complying with strict EU emissions standards, though the government is facing numerous hurdles in its efforts to achieve these goals.

Plans to consolidate most of the country's energy utilities into two large holding companies are awaiting final clearance from regulatory and anti-trust agencies. Consolidation would allow producers using older coal-fired technology to merge with state energy firms that use nuclear energy, gas or hydropower to generate electricity.

Under the plan, the state power provider, Termoelectrica - responsible for generating power using coal-fired plants - would be broken up. Its plants would be divided between the two other major state power suppliers firms, Electra and Hidroenergetica, which in turn would be opened up to private investment. Although these newly formed energy firms would provide for more economical administrative sales methods and allow for the sale of surplus assets as needed, the consolidations do not address the main problems facing Romania's energy industry - ageing plants and a lack of investment.

According to official estimates, the capital needed to improve efficiency and ensure that facilities meet EU standards could reach up to $10.7bn - money that the government cannot spare as it looks for expenditure cuts to comply with the requirements of its IMF standby agreement.

The government is also planning to privatise other segments of the energy sector. On May 11, the economy minister, Adriean Videanu, announced the planned floatation of at least some of the shares of state-owned gas producer Romgaz on the Bucharest Stock Exchange early next year, reviving a plan that was rejected in 2006.

"We want to list Romgaz and we will soon start the evaluation so that 10-15% of company shares could be floated in nine months," Videanu told local media.

The government hopes that floating part of the country's largest gas producer on the local bourse will not only attract investors but will also energise the exchange itself.

"It is important to try it on the bourse because this can also revive the Bucharest Stock Exchange, while companies could attract capital for investments," Videanu said.

The government hopes to dust off the long-postponed plans to double Romania's nuclear energy capacity. In late May, Prime Minister Emil Boc said he hoped that two new reactors at the Cernavoda nuclear plant would be commissioned soon and that a second nuclear power station would be built in the coming years. After a May 20 meeting with Yukiya Amano, director-general of the International Atomic Energy Agency (IAEA), Boc said nuclear energy was a vital component in Romania's energy mix.

However, though nuclear power may be vital to the country's energy scheme, the state will soon play a smaller part in the mix. The government has unveiled plans to cut its 51% controlling interest in EnergoNuclear, the company established to build two new reactors at Cernavoda, the country's only nuclear power station. The aim is to reduce its stake to between 20% and 34%, to free up government funds for use elsewhere. It is possible that other stakeholders in the scheme - many of them foreign companies - may seek to increase their shares in EnergoNuclear or that a new potential partner may emerge when the government scales back its stake.

One discouraging factor for investors, at least in the short term, is that demand for electricity fell by 8.2% in 2009 as production was scaled back and consumers sought to cut costs. According to Petru Ruset, the head of divisions, energy transmission and distribution, fossil and renewable power at Siemens Romania, this weak demand will temporarily stall new investments.

"There is a high investment interest in building cogeneration units in Romania, but companies prefer to wait at least until the electricity demand will rise again as a consequence of an increase in industrial output," Ruset said in an interview with the regional press in June.

Though 2010 could be a slow year, with demand for power remaining low due to weak industrial activity, consumption will pick up in the medium term as eurozone economies rebound. To prepare for higher consumption, Romania would likely need to put in place at least some of the investments necessary for the expansion of its energy industry.

No comments: