How to alleviate the burden of connection reinforcement costs

Daniel Vlasceanu – Partner at Vlasceanu & Partners

General considerations

It is clear that the market of developing RES projects (specifically wind and PV) is rapidly changing during what is nowadays known as the “second wave” of renewables. The biggest hurdle developers have to overcome now is the capacity risk. This time three years ago, the capacity risk was substantially lower: rather anywhere one could find a suitable location, a project would have got grid connection approval without reinforcements of the grid. As time passed, such situations became fewer and fewer. For projects initiated last year in southern Romania (with the highest irradiation area) last year only in certain locations one could obtain the connection approval without reinforcements. For connection applications filed this year only for small size projects and on an exceptional basis one could hope not to receive reinforcements in the connection permit (ATR).

On a theoretical level, one should see it as a highly positive element: it reflects an explosion of RES projects that might help Romania turn its current energy production mix into a greener one in just a few years. But on a practical level, the situation is not the same: (same like in the first RES wave from) the majority of the permitted projects will remain on paper. But, for a certain period of time (i.e. maximum 18 months) when the ATR is valid, said capacity is blocked and any subsequent project receives reinforcement costs as if all the previously authorized or under authorization projects will be built! In some cases this leads to discouraging serious investors that otherwise might decide to move forward (i.e. beyond the “paper phase”) and built those projects.

Potential remedies

1. Financial guarantee

Romania is one of the few (if not the only country) in the region that does not have a guarantee imposed when filing the connection application. In other jurisdictions (Poland, Hungary, Greece etc) it is mandatory to constitute a substantial pecuniary guarantee (proportional) which is to be deducted/ returned later to the investor that moves forward with the project. This would surely help filtering between the developers that intend only to “trade” permits and the serious ones that want to develop serious projects (even if their business model implies selling the project at RTB, it will surely remove the ones that do not have a complete understanding and the financial resources to progress a project till RTB at the highest standards).

Therefore, legislation should be amended to include such a mechanism and we are aware that ANRE and the Ministry of Energy are seriously considering such instrument.

2. Operational limitation

As of 17 June 2022, ANRE Order no 81/2022 introduced the possibility to opt for operational limitation (it is now specifically set forth under Art 17 of ANRE Regulation no 59/2013 regulating grid connection conditions). Should the investor choose this option, it will substantially reduce its expenses with the reinforcements imposed for N-1 scenario, but with the downside that production will be stopped automatically in case of grid overload (i.e. CAPEX investment is reduced at the expense of subsequent revenues). So, if the investor selects the operational limitation, a specific study is to be performed and submitted during the procedure for approval of the solution study; once approved, the technical device constituting the automatic limitation solution will be reflected in the ATR.

Note is to be made that should the grid be enhanced so that there is no need for operation limitation, the ATR (or the Connection Certificate, as the case may be) will be updated as such (as per Art 17 para 16 under Regulation 59/2013).

3. Recomputation of the reinforcement cost

Another option to reduce/ even remove the reinforcement costs is the recomputation of the costs prior to putting into function the power plant. Reinforcements are general [i.e. they benefit to more than one project - referred to under Art 42 para 1 letter b) under Regulation 59/2013] or specific [i.e. they are implemented specifically for a single project referred to under Art 42 para 1 letter a) under Regulation 59/2013]. Assuming an investor decides to built a project with general reinforcements, it will make use of the provisions of Regulation 59/2013 which sets forth a number of situations when reinforcements can be recovered (either from the grid operator – if such reinforcements are already set under the respective operator’s grid improvement plan) or from other investors that put their plants into operation at a later moment. Either way, a conclusion is clear: investors committed to a project that built it fast, may decrease the burden of the Ti component (= reinforcements) of the Connection Tariff. It is, of course, a matter of risk appetite and ability to understand/ estimate the possibility to recover/ recomputate such costs.

Closing remarks

Romania is in a very good position now in terms of investment opportunities as many foreign large investors are seeking to enter the market. Yet, permitting and constructing RES projects is (same like in any other energy sector) a risky and capital intensive business. We should make sure that only the serious developers do get to play this game and avoid, from early stage, problems caused by limited know-how/ lack of experience; at the same time, incentives should be provided to the serious investors and avoid artificial hurdles (such as the 50 ha limitation or ability to book capacity in the grid on paper.