Contracts for difference support mechanism. Rules for the first two auctions now in effect.

Given Romania’s ambitions to increase its electricity production capacity from renewable sources at a fast pace, over the last year, the Government worked on the legislative package governing a two-way Contracts for Difference (CfD) support mechanism.

The CfD support mechanism will consist of several standalone state aid schemes, all under the framework of the Romanian Government Decision no. 318/2024 approving the general legal framework for the implementation and functioning of the support mechanism through contracts for difference for low carbon emissions technologies (“GD 318/2024”).

Significant progress has been made last week with the publication in the Official Gazette of the rules for the first two auctions to be organized in 2024 and 2025, adopted further to the Ministry of Energy’s Order no. 1120/2024 on the approval of the State aid scheme through contracts for difference for the generation of electricity from offshore wind and solar renewable energy sources (“Order 1120/2024”).

Despite the advancement, the puzzle is still missing some pieces as the actual launch of the first auction is contingent upon the adoption of the last fragments of legislation (including the calendar and auction procedure).

Although a promising mechanism at a first glance, we are eagerly waiting for the responses from both developers and lenders on the viability of the mechanism considering the rather controversial items that have been strongly debated during the public consultations (such as lack of difference payments during the periods with negative prices, incompatibility with PPAs and the profit-sharing mechanism).

A. GENERAL FRAMEWORK (APPLICABLE TO ALL CFD SCHEMES)

The CfD state aid will be granted through distinct support schemes to be implemented through orders issued by the Ministry of Energy where CfD contracts will be awarded either further auctions or further to direct negotiation in case of projects for which, due to the specifics of the technology, a competitive selection process cannot be applied. 

Each and every CfD scheme to be adopted in Romania will function based on the following rules:

1. Nature and form of the aid:

• The CfD support will have the nature of operating aid for accelerating the rollout of renewable energy;
• The aid will be ensured further to the so called “difference payments” meaning that if the strike price resulting further to the auction is lower than the reference price set by the competent authority, the beneficiary will be entitled to receive from the CfD counterparty (i.e. the energy market operator OPCOM S.A.) the difference between the strike price and the reference price and vice versa (if the reference price is higher than the strike price, the beneficiary will pay to the CfD counterparty the difference between the reference price and the strike price).

2. Financing of the CfD Schemes

• The CfD schemes will be financed as follows:
  • the administrative costs of the CfD operator (TSO) and the CfD counterparty (Opcom) will be financed through the CfD contribution collecting mechanism applied to all final consumers and
  • the amounts required for the CfD payments will be financed through non-reimbursable funds of the European Union. In addition, the funding may be also provided through additional sources, namely CfD payments from the generators under the CfD scheme.

3. Eligible projects:

Will be eligible for CfD state aid mainly new projects under the development phase, unless provided otherwise further to a CfD Scheme (as further detailed in Section B, the first auction round to be held in 2024 will apply to new projects during the permitting phase only).

4. Electricity supported by the CfD scheme:

• The difference payments will be made for the quantities of electricity measured and delivered in the National Energy System (SEN) and sold on the organised markets (please see item 5 below);
• No difference payments will be made for the amount of electricity delivered in SEN when the price during the settlement interval(s) on the relevant wholesale market or the average of the prices on the relevant wholesale markets used to determine the reference price corresponding to the delivered production (as the case may be) is negative.

5. Reference price and adjustments:

• The reference price will be approved by ANRE by reference to the monthly weighted average of the day ahead market for the relevant technology;
• The reference price will be adjusted (increased or decreased) by ANRE if (a) it leads to the overcompensation of the beneficiaries and an increase of the costs for consumers or (b) over 50% of beneficiaries notify ANRE about the systematic undercompensation due to the fact that the reference price no longer reflects current market conditions.

6. Sale of the electricity supported by CfD scheme

• The beneficiary will be required to sell the electricity benefiting of the CfD Scheme on the organised markets only. Hence, directly negotiated PPAs are strictly prohibited;
• Breach of the abovementioned obligation will result in the exclusion of the beneficiary from the CfD support scheme and will trigger the obligation to pay the amounts provided for in the agreement upon such termination, including the reimbursement to the CfD counterparty of any difference payments received by in the year of termination which relate to the quantities sold outside the organised markets;
• Profit sharing scheme: should the beneficiary sell the supported electricity through  bilateral agreements entered into on the organised markets at a price higher than the reference price, the beneficiary will pay to the CfD counterparty a percentage of the profit as follows:
  • if the price/MWh is higher than the reference price but lower than the strike price, the beneficiary shall return 50% of the revenues obtained under the bilateral agreement, computed by multiplying the quantities sold under the bilateral agreement with the difference between the bilateral agreement price and the reference price;
  • if the price/MWh from a bilateral contract exceeds both the strike price and the reference price, and the strike price is higher than the reference price, the beneficiary shall return:
    • 100% of the revenues obtained from the bilateral agreement, computed by multiplying the quantities sold under the bilateral agreement with the difference between the strike price and the reference price;
    • 50% of the revenues obtained under the bilateral agreement, computed by multiplying the quantities of sold under the bilateral agreement with the difference between the bilateral agreement price and the strike price;
  • If the price/MWh from a bilateral agreement exceeds both the strike price and the reference price, and the reference price is higher than the strike price, the beneficiary shall return 50% of the revenues obtained under the bilateral agreement, computed by multiplying the quantities sold under the bilateral agreement with the difference between the bilateral agreement price and the reference price.

B. SPECIFIC RULES FOR THE AUCTIONS TO BE ORGANIZED IN 2024 AND 2025

1.Volume of renewable electricity capacity

Until 2025, an aggregate capacity of 5,000 MW will be offered for auction, distributed as follows:

• 1,500 MW (out of which 1,000 MW onshore wind and 500 MW solar) will be awarded until the end of 2024;
• 3,500 MW (out of which 1,500 onshore wind and 2,000 MW solar) will be awarded until the end of 2025;
• A beneficiary may not be awarded (directly or indirectly) a capacity higher than 25% of the total capacity offered during each auction.

2. Who can apply?

2.1. Eligibility criteria for the projects

The first CfDs scheme will apply to NEW onshore wind and solar projects with an installed capacity equal to or higher than 5 MW that satisfy the following criteria:

• the project did not enter the construction phase (defined in a broad and unclear manner);for the first auction to be organized in 2024, the project should secure the connection rights within 6 months as of the signing of the CfD agreement. For the subsequent auctions, the timing for securing the connection rights will be that established further to the auction initiation order;

• the envisaged commissioning date mentioned in the financing request should not exceed 36 months as of the envisaged date for the signing of the CfD agreement.

2.2. Eligibility criteria for the applicants

The applicants filling the financing applications and in certain cases their legal representative and shareholders, parents and controlling entities should satisfy the criteria mentioned by Order 1120/2024, such as:

• the applicant should have duly fulfilled its obligation to pay taxes in Romanian or in the country of residence (as applicable);the applicant should have not been declared in a serious situation of violation of the public procurement legislation and/or of the obligations assumed through a contract or financing agreement from public funds;the applicant or its legal representative should have not been finally convicted for certain crimes/offences expressly provided by law (such as fraud, corruption, money laundering);the applicant should not be the subject of a recovery decision of state aid that has not been recovered in full;

• the applicant, its shareholders, controlling entities, parent companies, subsidiaries and its legal representative, including any of its directors, officers, employees or agents, should not be subject to any international sanctions applied by the United Nations, the European Union or any other authority with jurisdiction over them;

Participation guarantee: the applicants will have the obligation to set up a participation guarantee in the form and amount approved by the respective auction order. The participation guarantee will be returned if the beneficiary’s financing application is not successful or, in case the application was successful, provided the beneficiary signs the CfD agreement in due time and provides the performance guarantee no later than 15 days as of the signing of the CfD agreement.

3. Duration of the aid

• The difference payments will be made for a period of maximum 15 years which will be reduced as follows:
  • pro rata with the number of days of delay, in case the commissioning of the project occurs after the target commissioning date mentioned in the financing application;
  • pro rata with the percentage of capacity that was not commissioned, in case the commissioned capacity is less than 100% but higher than 90% as compared to that included in the financing application;
• Failure by the beneficiary to commission at least 90% of the capacity within 24 months as of the envisaged commissioning date included in the financing application will result in the withdrawal of the CFD aid and the enforcement of the performance guarantee.

4. Strike price:

• The strike price of the CfD will be price bid by each successful application in the auction. Applications will be selected starting from the lowest strike price bid until the volume of the auctions is reached;
• The maximum strike price for the first round of auctions is set at EUR 93/MWh for onshore wind projects and EUR 91/MWh for solar projects. Ministry of Energy may update the strike price for the second round of auctions;
• After the entering into the CfD agreement, the strike price will be indexed against the inflation rate once every three years if the CPI (consumer price index) index is at least 10% higher than the CPI index applicable at the date of signing of the CfD agreement or at the last indexation of the strike price.

For any further details regarding the above, please contact Raluca Gabor, Counsel and Head of our Energy team, at RGabor@saa.ro or Andreea Toader, Associate, at AToader@saa.ro.