In the current global context marked by the transition to sustainable energy sources, Romania has adopted a modern mechanism to support the development of renewable energy projects: Contracts for Difference (CfD). This instrument provides financial stability to energy producers and contributes to Romania’s decarbonization goals within the European Union. Below, we will explore in detail how this scheme operates in Romania and the benefits it offers to participants.
What are Contracts for Difference (CfD)?
Contracts for Difference (CfD) are financial agreements between energy producers and a government counterpart or a government-designated entity, guaranteeing a fixed price, known as the “strike price,” for the energy produced. If the market price falls below this fixed price, the government compensates the producer for the difference. Conversely, if the market price exceeds the strike price, the producer returns the difference to the government. This financial stability provided by CfDs makes investments in renewable energy more attractive by reducing the risks associated with market price fluctuations.
Implementation of CfD in Romania
Romania launched the CfD scheme as part of a broader effort to modernize the energy sector and reduce carbon emissions, in line with its commitments to the EU. Funded through the Modernization Fund and the EU-ETS mechanism, this scheme supports new renewable energy projects, particularly solar and wind.
A key aspect of the CfD scheme in Romania is the transparency and fairness in setting the strike price, determined through a competitive auction process. This ensures a fair market for all participants. Eligible projects for funding must be new and utilize specific technologies such as solar or wind energy, without allowing technology combinations.
The first phase of the CfD mechanism will be implemented by 2025 through two auctions, one in 2024 and another in 2025. The total capacity targeted for the first auction is 1.5 GW of renewable energy, divided between 1000 MW for onshore wind energy and 500 MW for solar energy. The second auction will offer 1500 MW for onshore wind energy and 1500 MW for solar energy.
The CfD scheme is funded by the Modernization Fund, and the European Investment Bank has approved a budget of €3 billion to support the Liquidity Fund, which will cover payments to producers benefiting from CfD contracts. The impact on the final consumer regarding bills is minimal since the Liquidity Fund is not financed by them. A contribution will be established to cover the administrative costs of the scheme, including those of Transelectrica for managing the auctions and of OPCOM for administering the CfD contracts.
Involved Entities
- CfD Operator – The National Power Grid Company “Transelectrica” S.A., which manages the CfD auctions.
- Ministry of Energy – Ensures that the CfD Liquidity Fund has sufficient funds for the CfD counterpart to meet its payment obligations.
- CfD Counterpart – OPCOM, the market operator, which signs CfD contracts with producers, manages the contracts and the Liquidity Fund, and handles payments under the CfD contracts.
- National Energy Regulatory Authority (ANRE) – Issues secondary legislation regarding the CfD framework, including the methodology used by the CfD counterpart to calculate the reference price.
Details Regarding CfD Contracts
The CfD contract is an agreement between the producer and OPCOM, with a duration of 15 years, defining the rights and obligations of each party. It is a bidirectional support mechanism related to the energy produced. Each CfD contract will have its own strike price, set through an auction, which will be below the maximum strike price established for that auction. For the first auction, the maximum strike prices are €91/MWh for photovoltaic projects and €93/MWh for wind projects.
Payments will be made monthly, and the market reference price will be determined as the average price of electricity sold on the day-ahead market for the technology specified in the CfD contract.
The CfD contract allows three years for projects to reach commercial operation, with an additional two-year allowance for justified delays. The contract also includes provisions regarding legislative changes and allows the parties to restore the contractual balance in case of systematic overcompensation or undercompensation.
Benefits of the CfD Scheme
The main advantage of the CfD scheme is the significant reduction of financial risk for renewable energy producers. The stability provided by the fixed price ensures investment predictability, thus encouraging the development of new production capacities. Moreover, the scheme promotes competition among developers, which can lead to more competitive prices and a more efficient use of public funds.
Disadvantages of the CfD Scheme in Romania
However, there are also associated risks. If the funds from the Modernization Fund are insufficient to cover the obligations under the CfD contracts, the scheme could be suspended or canceled, creating uncertainty for investors. Producers must assume the risk of a 15-year obligation, in a context where the energy price set by the CfD may become higher than that on the spot market or long-term markets.
The Romanian state also takes on risks, committing to significant payments from the beginning of the investment period, which could create pressure on the energy market.
Conclusion
Romania’s CfD scheme offers stability and predictability for investors, but it also comes with a series of risks and uncertainties for all parties involved. Developers must carefully analyze the costs and benefits, plan rigorously, and actively collaborate with authorities to maximize the success of their projects.
Advice for Developers:
- Accurately calculate the LCOE (Levelized Cost of Electricity) for your project, as this will determine your bidding price.
- Carefully evaluate construction and commissioning timelines, as the CfD scheme requires participants to provide both a participation guarantee and a performance guarantee; any deviation from the imposed schedule will be penalized by exclusion from the CfD scheme and forfeiture of paid amounts as penalties.
- Determine if the CfD scheme applies to you. If your project is nearly complete and ready to produce energy ahead of schedule, it may not be necessary to apply for a subsidy if you can capitalize on market opportunities.
- Engage expertise early. Participating in the CfD financing scheme is a project in itself, requiring thorough preparation.
- Communicate with authorities. Each project has its particularities, and communication with authorities can prevent potential legislative issues.
- Stick to your strategy. The energy market is volatile, but maintaining composure and adhering to the initial strategy is crucial for long-term success.