The study conducted by Valorem for the ACUE Federation has reopened the public dialogue on the investment needs for the development of the electricity infrastructure in Romania. The start was the conference-debate recently organised by Financial Intelligence and ACUE – Federation of Associations of Energy Utility Companies (SEE VIDEO!). On this occasion, Volker Raffel, President of ACUE and CEO of E.ON Romania, put forward the idea that the Valorem study constitutes a sufficient technical basis for reopening discussions with ANRE, with a view to adjusting regulations in order to more effectively incentivise investments in energy infrastructure.
Normally, tariffs and remuneration mechanisms are set for the entire duration of the regulatory period (5 years) and can only be changed if new and relevant information comes to light. “We can only come back to this discussion if we have new arguments. And I think with this study we have new arguments,” said Volker Raffel.
The President of the National Energy Regulatory Authority has stuck to his position. Specifically, George Niculescu emphasised that ANRE will support investments through instruments already existing in the methodology, such as return bonuses for exceeding minimum investment thresholds or for reaching certain performance indicators. “The rate of return of 6.94%, in our view, is a reasonable one and incentivises investment through the additional percentages that are granted.” The president of ANRE expressed scepticism about the economic multiplier effects in the Valorem study (1 to 6, up to 1 to 10) and added: “It is fair to say that the loss of 1.1 billion euros of investment is theoretical. We have no certainty that this difference in investment will be made even if we have a rate of return approved by ANRE at the level requested by the operators.” The regulator, along with the MPs present at the debate, suggested or directly expressed that any increase in costs to the end consumer is unacceptable.
We need at least 1.2 billion euros a year
The average annual investment needed to modernise Romania’s electricity grids is estimated at 1.2 billion euros, according to several sources. The estimate is based on data from Eurelectric, which divides this amount into four components: 400 million euros for needs generated by increased demand, 200 million for the integration of new generation capacity, 400 million for the replacement of obsolete infrastructure and 200 million for the digitisation and automation of networks. The same orders of magnitude are also supported by the Energy Policy Group (EPG), based on the European Commission’s projections on the growth of renewable capacity in Romania and national decarbonisation targets. In addition to these analyses, the assessment of the investment strategies of some energy distributors (DSOs), which indicate a need of between 2,369 euros and 2,584 euros per kilometre of grid, extrapolated at national level. For gas distribution networks, needs are estimated at around 4,800 euros per kilometre, according to the same methodologies. The estimates were centralised and validated in the analysis carried out by Valorem for the ACUE Federation.
Through tariffs we pay for investments worth 400 million euros a year
The analysis shows that, under current regulations, distribution companies will invest no more than 400 million per year, the minimum investment needed to maintain the asset base. Why?
Firstly, the regulated rate of return is perceived as too low to encourage significant additional investment. The regulated rate is 6.94 per cent, and companies point out that the real cost of capital exceeds 9-10 per cent under current market conditions, making additional investment unattractive. “In the world where I come from, the cost of capital for Romania is very rarely lower than 10 per cent,” concurred Radu Hanga, President of the Bucharest Stock Exchange. “The Romanian state is now borrowing for 10 years at 7.5% a year. In theory and even in practice, a private company cannot borrow cheaper than the state”. […] If 1 leu that I invest costs me 9% or 10% or 8%, and the return I get is 6.94%, I’m not going to make that investment,” he explained.
The rate of return of 6.94% can be increased by two percentage points (pp), repeated ANRE president George Niculescu, referring to the incentives included in the methodology: 1 pp for new investments beyond the minimum level, 0.5 pp for reaching certain performance indicators and another 0.5 pp for investments made with European funding. “We are rewarding and subsidising distribution operators who have understood the need for investment and who actually make these investments,” the president of ANRE has repeatedly said in defence of the principle underlying the methodology and the incentive system. If we grant a higher WACC (weighted average cost of capital) for the minimum amount of investment, there is “the risk that at the end of the fifth regulatory period we will observe that distribution operators maintain their investments at the minimum amount for which they receive an increased rate of return”, he said in August 2024.
Companies also cite the limitations of the current regulatory framework in terms of investment recognition mechanisms – without a review of these conditions, the necessary additional investment will not be realised.
Loans subsidised through the Modernisation Fund
So where can we find the gap of around 1 billion euros a year needed for Romania to modernise its networks and become truly ready for decarbonisation, electrification and digitalization?
One proposal came from Energy Minister Sebastian Burduja, who talked about reforming the way Romania uses the Modernisation Fund. Instead of traditional grants (CAPEX), the minister referred to the use of subsidised loans, which would be partially recognised in the regulated asset base and which would allow for a significantly higher financial multiplier effect: “Romania has opted for this model of grants aimed at CAPEX-type investment. In discussions with the EIB [European Investment Bank, editor’s note], we were told that a variant chosen by other countries and which would be wiser would be to transform this financial envelope into subsidised loans. I understand that part of those costs could be recognised on a regulated asset basis in the RAB.” Burduja reckoned that this could multiply the available funds by two or even three times, turning 1.2 billion euros used in grants into at least 2-3 billion euros in subsidised loans. “It is a working option. I am waiting for proposals from distribution operators and we will certainly have discussions with ANRE and a bank to implement the instrument – a natural partner would be the new Investment and Development Bank” [BID].
This would not only help bridge the financing gap, but also help attract private capital by creating a lower risk environment with predictable returns.
Involving pension funds through public-private partnerships
Another funding channel discussed was institutional private equity, in particular pension funds, which have significant liquidity but are constrained by the current regulatory framework on investments. The idea was supported by several speakers, including Radu Hanga (BVB), but also by MP Mihai Cătălin Botez, vice-chairman of the Chamber of Deputies’ Commission for Economic Policy Reform and Privatisation, who advocated the relaunch of public-private partnerships as a tool to attract these funds. “We have some pension funds that are sitting on some money and that have some restrictions on the sources they can invest in. One of the investment destinations is represented by these public-private partnerships, […] if we manage to regulate this area well”.
The key message is that pension funds could become a solid and long-lasting source for energy infrastructure development, provided the legal framework is adjusted and the right financial instruments are created. These need to combine competitive returns with acceptable risk: “If [such a mechanism] gains the confidence of pension funds… we can have serious momentum in developing these infrastructures,” suggested Mihai Cătălin Botez.
The idea of involving pension funds also came up at the “International Approach: Catalyzing Romania’s energy future” conference, organised by Energynomics in London. Edward Randolph, chief investment officer at Amber Infrastructure, noted that pension funds in Romania, although they have growing capital, cannot invest in infrastructure. This is highly unusual by global standards and prevents them from co-investing alongside foreign investors. Because of these restrictions, it is actually easier for foreign pension funds to invest in Romania than domestic ones. Edward Randolph believes that only a small regulatory change is needed to solve this problem, unlocking more investment from local financial institutions and creating better opportunities for both Romanian and foreign investors.
Conclusion: diversification, mobilisation, reform
Everyone accepts that it is imperative that investment in energy infrastructure grows strongly and rapidly, even if there may be differing opinions on the exact amounts that would be needed. At ANRE level, it seems unreasonable to support all the necessary investment through the distribution tariff (a socialised cost) alone, however small the additional burden on the bill. [As a reminder, the Valorem study shows that the impact on the final consumer would be an increase of only 5 lei per year on electricity for households and 0.4% for industrial consumers, with the prospect that, in the medium term, tariffs will fall due to the reduction of losses and the efficiency of the networks].
This calls for a diversification of funding sources and the mobilisation of several entities. Reforms are needed to make creative use of the amounts available through the Modernisation Fund, but also to operationalise public-private partnerships in such a way as to allow pension funds to be involved.
Reforms and optimisations are also needed at the level of the regulator, representatives of the distribution companies said in a half voice. The president of ANRE reaffirmed his openness to dialogue: “Where there are still things to be clarified and improved, the Regulatory Authority obviously has the channel of dialogue open at all times”.
On a more general level and with a more radical approach, Corneliu Bodea, CEO Adrem and President of the Romanian Energy Centre (CRE), underlined the idea that tariff methodologies and the traditional approach can no longer be applied in a context where grids must simultaneously support electrification, digitalization and the integration of renewable sources: “We can no longer look at the pricing methodologies or energy regulatory methodologies of the past”, because the way energy systems – the grids, but also their regulation – have been designed no longer corresponds to the new context in which the energy market finds itself, marked simultaneously by competitive pressures and sustainability imperatives. Several voices have suggested that a fundamental reform, not just technical adjustments, is needed to make regulation a facilitator of investment and avoid it becoming a systemic obstacle.
