Romania has been affected by the same supply shock that has been driving power prices evolution in 2022 across the entire European continent. In this blog, we look at some of the fundamental variables affecting the balance of supply and demand and explore the value that can be captured by renewable asset owners in the coming years. In a nutshell, in Romania there is little support for prices reaching the 2022 levels, the balance of risks being mostly to the downside due to likely higher hydro generation, a significant increase in solar generation and tamed economic growth prospects. Furthermore, solar PV value per MWh is significantly higher than wind in Romania and will remain so in the foreseeable future. The value extracted by wind and solar assets as a proportion of power prices is set to decrease as more and more wind and solar power are introduced in the system.
Electricity Market Fundamentals
We saw demand decreasing by 6% in 2022 as opposed to 2021 due to power prices averaging EUR 270/MWh, an increase of 243% compared to 2021 when prices averaged EUR 111/MWh. This evolution is driven by the increase in the gas prices in 2022 following Russia’s invasion of Ukraine and the cessation of gas supplies to European markets to which Romania is interconnected.
Figure 1: Electricity Demand Evolution
Except for the rise in the gas prices, the most significant variable affecting prices in 2022 in Romania was a steep decline year on year of hydro generation due to a severe drought that has affected key European markets, including Romania. Hydropower generation decreased by 18% in 2022 against 2021. This evolution lent a significant support to high prices in 2022 that is unlikely to repeat in 2022 given that droughts are statistically independent and rarely occur at the same intensity one year after the other.
Figure 2: Hydro Generation
One of the positive evolution in 2022 is that solar power generation increased by 5% year on year driven by the incremental utility scale capacity added to the grid, as risk appetites were larger at high prices, and the additional decentralized capacity installed by the growing prosumer numbers in Romania.
Figure 3: Solar Power Generation
Wind power has seen a significant increase in 2022 compared to 2021, increasing by 7% on the back on stronger winds as no new projects have been connected to the grid in 2022.
Figure 3: Wind Power Generation
As we explained in the previous post, power prices have declined abruptly in January and February of 2023 on the back of lower gas prices and currently power for next year trades between EUR 135/MWh and EUR 147/MWh on EEX. Currently, there is little support in European markets for prices to drop significantly below this level with risks mostly being to the upside if the balances of supply and demand on the gas front deteriorates and carbon prices remain at high prices. Romania has a significant generation share of hydro and if the drought of last year does not repeat, any risks to the upside will be tamed by this situation.
Fair Remuneration of Wind and Solar
The fair remuneration of solar and wind assets is a hot topic currently as the pipeline of ready-to-build projects has increased significantly in the last year. We found a value factor of 1 for solar PV and of 0.88 for wind power in Romania, meaning that in 2022, absent balancing and administrative costs, a solar PV asset captured, for each MWh delivered to the grid, the entirety of the average power price, namely EUR 270/MWh while onshore wind captured only 88%, namely EUR 238/MWh. Given this fundamental situation, solar PV will far outweigh onshore PV in installations in the current development wave given lower costs, higher value of the electricity from solar PV and lower balancing costs.
Figure 4 shows the evolution of the fair remuneration of solar and wind projects in the coming 5 years. A purely merchant solar PV project is expected to have a fair remuneration averaging EUR 83/MWh while a wind project is expected to have a fair remuneration of EUR 67/MWh, significantly tilting the decisions towards solar PV taking the lead in the new development wave.
Figure 4: Fair Remuneration of Merchant Solar and Wind Assets
Our platform based on artificial intelligence helps buyers of electricity get fair prices from suppliers. Despite this market being currently highly illiquid in Romania, we believe the future is bright for such a platform in a highly complex market such as electricity anywhere where liberalized markets are the norm.
We are also building an advisory practice to help large buyers of electricity navigate more complex and tailored contracts such as PPAs under the current volatility and a large renewable energy buildout. If you are a large buyer of electricity, please get in touch with us.
Last but not least, if you are a developer of renewable energy projects, we will be able to help you in the very short future to extract maximum value out of the projects you bring to the market. We are here to help, so please get in touch with us.
We are three founders, Andrei Ilaș, with deep experience in renewable energy cost analysis and commercial analysis spanning 10 years internationally, Vlad Iliescu a Microsoft MVP on Artificial Intelligence building all our suite of models and Florin Grosu, a fintech entrepreneur with large commercial experience across industries such as insurance and banking.
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