The Romanian government was one of the first in the EU to react when energy prices started to rise. Even before the war in Ukraine started, Bucharest launched a grant scheme last November to protect one of the bloc’s poorest populations from their impact.
As other EU countries roll out their own consumer protection programs, Romania’s experience shows the pitfalls of such initiatives as prices hit unforeseen records in the wake of Russia’s full-blown invasion of Ukraine.
Under Bucharest’s plan, launched after the global reopening following the Covid pandemic and a shortage of supplies from Russia, prices drifted upward, buying utilities at full market price and selling at capped price, with the state compensating them for the difference. .
But with the price hike resulting from sanctions against Russia over the invasion and Moscow throttled gas supplies to Europe, the government is struggling to keep payments on track. As a result, repayments are coming late — and possibly not at all — and are warning energy companies that they are facing a cash flow crisis.
“The situation is getting worse,” said Laurentiu Urluescu, president of the Romanian utility association Afeer, adding that the first payments did not come in until June.
The government has budgeted about €2 billion this year to cover the repayments. But Afeer estimated the cost at €6 billion, despite gas prices falling from record highs in August, while energy regulator ANRE estimated it at €8 billion – about 3 percent of GDP.
According to ANRE, the government had paid just over 1 billion euros to the utilities by mid-October.
Romania will not fully liberalize its energy market until 2021, but the government is considering a return to regulated prices to prevent bills from rising further. The ruling coalition began ongoing talks last week, with a decision due this week, according to senior coalition politicians.
Urluescu warned that the liquidity crisis imposed on suppliers had forced many to borrow to cover the shortfall, with in some cases their credit lines nearly exhausted. “It is sector-wide. . . About 100 suppliers have the same problem.
“We see the same effect on all market participants,” he added. “There are still no futures deals, only the spot market is liquid.”
The government tried to cover some of the costs in April by imposing an 80 percent windfall tax on electricity producers and gas wholesalers, levied on revenues above a certain level. Many of the companies have made record profits as prices soared.
But the attempt failed. As their margins came under pressure, the wholesalers increased their prices further, said Cristina Prună, a liberal opposition MP who specializes in energy policy. Meanwhile, utilities assumed they would be compensated for the difference between the wholesale price and the capped price, not forcing wholesalers to compete for business by lowering prices. As a result, the state faced even higher costs, Prună said.
“This was a social measure with private money. This is completely wrong and destroys the energy sector,” she said. “There is a high risk of a negative knock-on effect on the entire supply chain.”
The Department of Energy did not respond to requests for comment.
Even large multinationals are feeling the pressure. German utility Eon, which has 1.5 million customers in Romania, was so concerned about the market impact of government measures and payment delays that the chief executive of its Romanian subsidiary wrote a letter to the country’s prime minister, Nicolae Ciucă, in August.
Eon Romania was facing an “extremely critical financial situation due to the extraordinary cash shortfall, with serious consequences for the security of supply of Romanian consumers,” Volker Raffel wrote in the letter, which was seen by the FT.
The company was “completely vulnerable” to wholesale price increases and delays in repayments, Raffel said, and as a result, its debt burden had nearly quadrupled to about $500 million since December.
About a week after the Eon letter, the government introduced a tax package – which it described as a “solidarity package” – to raise funds from other parts of the energy sector. It included a recovery of trade margins, taxes on the export and import of gas and electricity, and a cap on the wholesale price level for which the government was willing to reimburse companies.
However, according to industry and observer figures, the package has exacerbated the problems. It placed a 98 percent tax on energy trading, levied on margin — the gross difference between the buying and selling price — rather than on profit. That had a chilling effect on the market, as participants were faced with paying direct overheads, such as low-margin salaries.
“Trade activity will almost disappear,” Urluescu said. “In September, we saw exactly zero deals on electricity or gas futures markets. It is downright disastrous.”
Romania, which has significant domestic gas reserves, has nearly filled its gas storage facilities, Ciucă told reporters last week. At 3 billion cubic meters, however, they only cover about a quarter of the country’s annual consumption, making imports vital. The new rates had kept cross-border traffic at a fraction of normal levels since September, even when Romanian spot prices were favourable, Prună said.
Urluescu warned that many utilities are considering closing or abandoning customers.
Utilities’ problems are having a knock-on effect on banks, Eon Romania warned in its August letter. The company’s debt alone amounted to about 0.5 percent of the total balance sheet of the Romanian banking system, data from the central bank shows.
The Romanian Banking Association did not respond to requests for comment.
“I’m worried about the whole system,” said Razvan Nicolescu, a former energy minister. “It is not sustainable. They went a bit too far with the taxes, especially with the trading companies. . . it was a mistake.”
Instead, Bucharest should establish a total amount of subsidy it can afford, target vulnerable industries and those households facing the greatest problems, and raise the money sustainably through taxes, he said.
“Businesses should play a social role, especially in Eastern Europe, where wages are still below the EU average, while prices are almost the same,” he added. “But don’t cover groups that don’t need it. No reason to protect companies [that do not rely on large amounts of energy]such as real estate agencies. Protect bakeries or glass factories instead.”
Additional reporting by Patricia Nilsson in Frankfurt