We are at a moment of historic transformation, which highlights the essential role of distribution networks and the urgent need to strengthen, modernize and develop them so that they can support the unprecedented electrification of buildings, transport and industry. In the coming period, we need to invest double, maybe even triple what we have managed so far, given that the current challenges are completely different from those of a decade ago, Volker Raffel, CEO of E.ON Romania, told Energynomics.
To the Energynomics question “Is the level of the new rate of return RRR announced by ANRE sufficient to support future investments? What should be the level of this rate to allow the electricity grid to face the challenges of the future? But in the gas distribution segment?,” Volker Raffel answered:
”We have to see the final result, as the methodology containing the important elements for the next regulatory period is still under discussion. But from what we have seen so far, I fear that the regulatory approach is still too much a continuation of history and not focused enough on current needs.
There are two major differences from the situation six years ago, when the rules were set for the last regulatory period: inflation and interest rates are higher today, and therefore the regulation needs to be updated accordingly to economic realities. And the current energy context requires a lot of investment, a lot more investment.
We are at a moment of historic transformation, which highlights the essential role of distribution networks and the urgent need to strengthen, modernize and develop them so that they can support the unprecedented electrification of buildings, transport and industry.
Customers will use and produce more electricity, many customers want to use gas, new technologies are emerging – such as solar panels, heat pumps, electric cars and hydrogen – and all this requires bigger, stronger and smarter grids.
I understand that ANRE has to consider the customers’ perspective, so it is careful about the impact on the final price. But if we invest more in networks and if we thus integrate more renewable sources, then they reduce the total cost of electricity. Not every moment, but overall. Thus, the share of networks in the future final bill, without ceilings, will increase by only 3-5 bani/kWh or, for an average household in Romania, by 3 to 5 RON for 100 kWh per month, but at the same time the share of the effective cost of electricity will decrease.
And given that we already use more electricity for air conditioners and will use even more in the future – for example for mobility – we even have a chance to keep the grids’ cost per kWh under control.
Investments in distribution networks are key to improving the quality of service offered to customers, but more than that, they will pave the way for the ‘democratization’ of access to green energy, with direct and indirect benefits across the economy.
That is why, in the coming period, we need to invest double, maybe even triple, than we have managed so far, given that the current challenges are completely different from those of a decade ago.
In the electricity sector, a few years ago we had about 100 energy production points in Romania, but now we are moving towards hundreds of thousands of such points. At the same time, we are faced with new consumption patterns and we have air conditioners where before there was no consumption, and if we also think about electric cars, the situation becomes even more complicated. We’ll also have hundreds of thousands of storage points, and the key to making it all work is networking, networking, and networking.
In the gas sector, new networks are being built in many places in Romania, and they must be prepared for green gases and hydrogen if they are to have a future.
However, we are talking about huge investments, achievable in the long term and for which the distribution operators must have financing already today. According to the ACUE Federation, in the next five years, investments of at least 6 billion euros are needed in Romania, which will have to be financed from the distribution operators’ own sources, in addition to the European funds available for electricity networks.
The idea of EU funds is to mobilize, with 1€ of public money, approximately 4€ from the area of private capital, which is likely to generate a substantial positive impact. But this only works if there is a regulatory framework to allow it.
But the picture at the moment does not indicate this, because the regulator has chosen the following approach: a) apply a low return on past investments (already decided) and b) give some incentives for new investments (under discussion). I believe that the return on historical investment is, at this point, set artificially low and does not take into account current economic realities.
But this is a discussion that experts will follow in detail. As for us, we will revise our investment plans when we know the final result, including the methodology, which is expected to be finalized soon.
However, reading the draft, especially in relation to the worsening of the treatment of EU funding, I can only hope that this is a misunderstanding in the middle that needs to be corrected.
In the past, ANRE granted an incentive bonus of 2% for electricity distributors’ (DSO’s) investments in EU-funded projects. Recently, all electricity distribution companies in Romania signed financing contracts (through the Modernization Fund) with the Ministry of Energy. Just for us, in Moldova, we are talking about hundreds of millions of euros, and other projects with important values are in the process of being approved. All requests were made on the understanding that this incentive would continue to apply, but under the current proposals, the return to investors is sharply reduced. There could not be a more inappropriate time for this.
To explain a little: banks usually ask for interest rates of the type “ROBOR + X”. The regulator assumes that banks would require credit margins below 1%. But anyone who has taken out a loan knows this very well that Romanian banks, as well as international development banks, request credit margins somewhere between 2-3%. That difference can be made up by giving that 2% incentive bonus, but that’s gone now.
It is also important to understand that a market participant, such as a power producer receiving EU funds, has lower costs but still the same market income. Conversely, for a regulated network operator that chooses to replace, for example, an investment of 100 million euros with a similar project with 80% co-financing, the regulator also reduces the income by 80%. To compensate for this, the incentive has been granted in the past for good reason.
The co-financing of such critical projects from European funds, which have a strong anticipatory character, should continue to be stimulated by the regulatory framework by ensuring a mechanism to improve the yield offered, with distribution operators committing in the short term to additional expenses that will provide benefits to end consumers in the medium and long term. This effort comes at a time when the investment approach is already high.
Unfortunately, the already approved base rate of return is too low, as I said earlier. If the business idea is for private investors to get an insufficient return on their investment to support Romania to absorb “free EU money”, then this is an idea that does not work.
Regarding investments in gas networks, Delgaz Grid estimates for the next 10 years a need estimated at approximately 6 billion lei (about 600 million lei/year).
Therefore, I believe that the methodology regarding the fifth regulatory period in the energy sector, which will start on January 1, 2025, must ensure the premises of a coherent development of Romania’s energy infrastructure, taking into account the turning point in which we are. It will determine not only what the energy system will look like in 10 or 20 years, but also the competitiveness of the country, through its impact on the entire macroeconomic and social environment.
We do not know if in five years EU funds will still be available in similar sizes for Romania. But what I do know is this: never before have more EU funds been available to modernize electricity networks than there are today. We have demonstrated that we can successfully absorb EU money in the past, which is seen in the improvement of network performance, but at the same time, let’s not forget that this money ends up predominantly in the Romanian economy. We are talking about billions of lei, money that the Romanian energy system really needs.
Knowing that real professionals work at ANRE, I cannot imagine that this institution would want to prevent this unique opportunity, and therefore I hope that it is only an error that appeared during the very intensive work that is currently being carried out.
And since you specifically asked about gas networks: the regulation for gas will come after the regulation for electricity is finalized. However, there is one major difference from power grids.
Electricity networks need to be modernized and are the backbone for a long-term future. In terms of gas networks, we have conflicting political objectives between the EU – which sets the elimination of gas use by 2050, especially for heating – and Romania – which proposes to connect new regions to gas networks. Until we have a coherent policy, we cannot know whether an investment in a gas pipeline is worth making. Will it be used for 40 years or will it be closed after 20? Romania needs a specific heating strategy to answer this question.
Of course, it is a difficult task, which must be discussed next year. As long as this uncertainty persists, it should be addressed in the regulatory framework through a higher rate of return (RRR) to avoid investment in this sector being massively blocked.
Also, the availability of credits is different for gas networks, as European development banks are not allowed to grant credits for this sector and specific EU funds are not available. And if, under larger EU programs, small amounts might be available, the government allocates them to other sectors.”
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The full interview will appear in the forthcoming issue of Energynomics Magazine in early October 2024.
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