MIHAELA CUTURESCU

 | 

ERNST & YOUNG SRL

  |  27.06.2013

Financing conventional energy – how and why

Investments in conventional energy in Romania are required considering the age of power plants and the value of emissions, as a natural consequence of lack of rehabilitation or modernization actions in the last decades. Certain levels of emissions (dust, nitrogen oxide and carbon dioxide) are imposed by the EU regulations and in order to achieve them, it is necessary for certain power blocks to be retired.


MIHAELA CUTURESCU

MIHAELA CUTURESCU

SENIOR CONSULTANT, CAPITAL AND DEBT ADVISORY SERVICES at ERNST & YOUNG SRL

Initially envisaged as optimal alternative, renewable energy sources are unstable by nature, involve retirement of agricultural land and have high costs, being sustained by a supportive schemes which reflect in costs for the State and ultimate consumers. At least for the Romanian market, the balance between renewable projects and conventional energy was overlooked in the past years and the investments in modernisation of coal fired plants were extremely low. Currently, only two power blocks are under rehabilitation: power block 4 in Rovinari (expected to be concluded by mid-2014) and power block 6 Turceni, under capital repairs (as per Transelectrica information as at April 2013).

 

The level of expenditure to be undertaken in order to sustain this kind of process is a huge burden for the Romanian state, that is the majority shareholder for most of the power plants. Privatisation would be one of the options to be thoroughly analysed by decision markers, especially under the light of recent events when investors for reactors 3 and 4 in Cernavoda plant were difficult to attract. “Creative” alternatives in terms of privatisation involve offering incentives (financial or fiscal) and may prove to be beneficial if tailored for on energy sector features.

 

On top of intrinsic benefits of conventional energy investments, the Romanian state may take a step forward to speed up the rehabilitation program through involvement of certain instruments that would enhance the value for the private investor and increase attractiveness of the project. An interesting tool that could be useful to investigate is the World Bank guarantees, applicable to infrastructure projects of national importance. The guarantees cover for sovereign risks and have the ability to attract long-term private partnerships and commercial funding for development of energy sector.

 

Previously used in infrastructure projects in other countries in the region, promissory notes represent a beneficial instrument for obtaining commercial funding, as a form of State guarantee used to improve the credibility of the project and attract financing. This instrument needs a longer time frame to be implemented and the rating of issuing entity/country rating may negatively affect the overall attractiveness of the project.

 

The global economic environment has put a pause on investments and had incentivized a thorough analysis of markets and sectors with high potential to stay and deliver on the long term, creating additional pressure on profitability that highly affected the state-owned entities. Thus, privatization is a difficult process to handle and boosting value should be a major focus area for the Romanian state.

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