The green transition could mean, for Romania, the realization of projects of about 60 billion euros, in the long term. Romania could become a regional industrial force in the renewable energy sector and can assume a strategy to develop a new industrial chain for digital solutions in the green sectors. In the context of the pressure from the cost of labor in Western Europe, but also the decrease in the cost of technology, an opportunity can be created for the relocation to Romania of a part of the aggregate value chain of production. At the same time, the loans offered by the banking system to companies investing in green projects exceeded 5 billion lei by the middle of last year, a growing share in the total volume of financing, said Florian Neagu, deputy director of the Financial Stability Directorate of the National Bank of Romania (BNR).
What is the share of green financing offered by the Romanian banking system and how can we increase this share?
Green lending stood at 5.1 billion lei at the end of June 2021, accounting for about 4 per cent of total bank exposures to non-financial corporations. In the last six years, we can see a significant acceleration of climate finance, given that we started from a value of 1.5 billion lei (1.5 per cent of total exposures to companies) at the end of the first quarter of the year 2015. However, the volume of green lending has significant room for improvement, given the scale of projects that are expected to be implemented by the authorities or the private sector.
According to the calculations of the CNSM Working Group (National Committee for Macroprudential Supervision within the BNR) to support green financing, the value of these projects amounts to about 60 billion euros, and many have no sources of funding from European funds or the budget. The benefits would be multiple, both in terms of business opportunities for credit institutions and in terms of increasing financial intermediation in Romania, which is currently at its lowest value in the European Union. However, it is important that such funding is increased sustainably, without compromising financial stability.
The implementation of the measures approved by the CNSM mentioned above is a central element both for increasing in a sustainable way the access to finance for projects related to the climate change agenda and for supporting the structural change of the economy towards a valuable one. added superior. In total, CNSM Recommendation no. R/6/2021 on support for green financing includes 16 measures, which aim, in addition to the two objectives outlined above, to improve transparency and awareness of the impact of climate change on the economy and the financial system. Four of these recommendations are addressed to the National Bank of Romania, and they are in the process of being put into practice by the requested deadline:
- “Communication by national authorities to entities in their area of competence with recommendations on the prudent approach to climate risk. The recommendations shall cover at least the following areas: (i) governance, (ii) strategy, (iii) risk management, (iv) scenario analysis and stress testing, and (v) transparency.” In the next period, the BNR will send a letter to banks and non-bank financial institutions (NFIs) in the Special Register in which recommendations will be set out for the 5 areas concerned.
- “Analyzing the opportunity to relax the prudential requirements for green financing, in line with similar concerns at European level, from the perspective of stimulating this type of lending, without affecting financial stability.” The first results of the analysis are to be published in the Financial Stability Report, December 2021 edition.
- “Completing the Credit Risk Center within the BNR with information on green loans, starting from the European taxonomy”. The new green funding reporting requirements are expected to take effect in the first half of 2022.
- “Building a climate change risk monitoring chart for climate change, regularly updated and disseminated, and running an annual stress test exercise on climate risk issues, with the dissemination of results.”
What is the need for investments that Romania has in the segment of energy investments and how do you see their development in the coming years?
From this perspective, there is significant potential for development. According to PNIESC, by 2030 Romania must have net installed capacities of 5.1 GWh of solar and 5.3 GWh of wind. Thus, the additional capacities to be installed from renewable sources are 6.9 GW, in the period 2021-2030. The development of energy investments requires a clear and predictable regulatory framework, based on the development of credible impact studies discussed in advance with the private sector. In this context, a working group of both the private sector and creditors, as well as experts from line ministries, made four recommendations in this area.
- Implementation of a support scheme for the tender for new renewable energy capacities through Contracts for Difference (CfD), through which the project revenue for each MWh produced will be secured for a sufficient period
- Amendment of GEO 74/2020 for the amendment and completion of the Law on electricity and natural gas no. 123/2012 to allow the conclusion of PPAs (power purchase agreements) by all renewable energy producers, outside the centralized market, freely and directly negotiated with suppliers or final consumers of electricity and with the possibility to be concluded before from the beginning of construction
- Launch of a support scheme for new high-efficiency cogeneration capacities whose beneficiaries will be selected based on a competitive bidding procedure
- Revision of the Development Plan for the Electric Transmission Network in order to fulfill Romania’s obligations to meet the renewable energy targets in 2030.
- An essential role in the latter case belongs to Transelectrica, which should revise and substantially advance its investment plans.
These proposals were adopted by the General Council of CNSM, which issued in June 2021 the recommendations to the Government with the proposal to be implemented in the next 1-2 years.
Is Romania ready and to what extent are Romanian companies ready to face the new wave of digital and renewable investments?
In terms of digitalization, Romania already has a solid foundation on which to build, starting with the existing IT sector and the workforce in this field. Thus, Romania can propose a strategy through which to develop a new industrial chain for digital solutions in the green fields (hardware, software, but also integrated solutions), with applications in the energy, transport, residential, industrial, etc. sectors. Romania can position itself in a niche that will attract foreign direct investment-related to green projects: it has recorded the largest reduction in greenhouse gas emissions in the last 30 years in the region and compared to the EU27 average, respectively and – proposed ambitious plans for the share of renewable energy in total energy sources.
Romania could become a regional industrial force in the renewable energy sector. In the context of the pressure from the cost of labor in Western Europe, but also the decrease in the cost of technology, an opportunity can be created to relocate part of the aggregate value chain to Romania (for example, in the case of wind energy, Romania does not host aggregate production of no wind turbine manufacturer, but only of certain components). For this to happen, it is necessary to develop new renewable energy capacities, energy storage, green hydrogen-based technologies and systems, and to ensure that the new capacities need to be connected to the grid.
The Ministry of Economy needs to develop Romania’s industrial policy that focuses on the climate change agenda, with annual staging until 2025, in conjunction with the European Commission’s New Industrial Strategy for Europe, where the focus is on two areas: green transition and digitalization. Industrial policy must also include solutions for the relocation of foreign production chains related to climate change from abroad to Romania. In the absence of such measures, Romania will continue to significantly import goods and services for the implementation of the European and national green agenda, with an increasing impact on the trade balance.
More specifically, in the absence of comprehensive measures, the authorities and the private sector will borrow considerable sums over the next decade to pay other economies, and the added value created in the country will remain modest. The result will be that we do not take advantage of the opportunities created by the international climate change agenda, but we will pay the costs of the transition. Firms in sectors classified as carbon-intensive have an important role in the economy: they generate over 40 per cent of the added value produced and accumulate over 50 per cent of the assets of all companies. Therefore, the preparation of an orderly transition is essential, otherwise, the economy may suffer considerable disruptive effects in the coming years.
What should Romania do to attract as many European funds as possible, in the context of the Fit for 55 targets?
European funds to support the green transition can play an important role in the development and transformation of Romania’s economy and can contribute substantially to sustainable economic growth in the medium and long term. According to the calculations of the CNSM Working Group on Supporting Green Funding mentioned above, attracting green grants from the Next Generation EU (NGEU) could have a cumulative impact in the medium term (next six years) on the economic growth of 1.9 percentage points and 2.3 percentage points. In addition, if all green funds from the NGEU (grants and loans) and the Multiannual Financial Framework are successfully attracted, the impact on medium-term economic growth would be around 5.7 percentage points.
Previous experiences in attracting European funds are not promising, as the authorities show that they cannot make the most of the resources made available by the European institutions. Romania has managed to absorb after the first six years of implementation (normalized duration of the NGEU program) about 39 per cent of the total volume of allocations, both in the first European financial cycle (2007-2013) in which it took part and in the second (2014-2020).
Therefore, there is room for improvement in the absorption rate of European funds. The delayed start, even by two years, of green projects (in 2024 compared to 2022) will reduce by over 33 per cent the total favorable effect on the Romanian economy in the medium term. One of the solutions proposed by the National Committee for Macro-Prudential Supervision was the more consistent involvement of the private sector in the conduct of financing (from domestic financial institutions and international financial institutions). Also, strengthening the institutional capacity and the framework for implementing and monitoring the projects included in the PNRR can contribute to a higher absorption rate than previous iterations.
