Romania needs to set straight its policies for 2030 and 2050 – Laurian Lungu (2019 Energy Strategy Summit)

The energy transition process will be complex, lasting, with strong implications for resource reallocation and involving all market players, from companies and decision-makers, to consumers.

Member states are required to send the final version of the National Climate and Energy Plan (PNIESC) for the period 2021-2030 by the end of this year, said Laurian Lungu, co-founder of Consilium Policy Advisors Group – CPAG at the 2019 Energy Strategy Summit, an event organized by energynomics.ro. The plan should, implicitly, determine the development guidelines for the energy sector and its alignment with the requirements of the Union, Lungu said.

At present, the European Union has the most advanced regulatory framework supporting the transition to clean energy. Romania is only a year away from a first interim mid-term evaluation of 20/20/20 targets.

“Romania achieved, at the end of 2017, the majority of the objectives assumed, with the exception of R&D expenditure, which is of only 0.5%, against a 2% target. This is a difficult structural problem – in all past years Romania has not invested more than 0.5% of GDP in R&D,” Lungu says.

Last year, however, the Union adopted more stringent targets for 2030. The target of renewable energy in final energy consumption has grown to 32% and Romania has the potential to assume 34%. The energy efficiency target was increased to 32.5%, as primary energy consumption in the Union increased in 2017 for the third year in a row and moved away from the 2020 projection.

Given the ambitious targets of the European Union, there are three issues that can influence the energy transition in Romania. The first aspect, explains Lungu, refers to the link between economic growth and energy consumption. The second is addressing the dual challenge of decarbonization: we need more energy, less emissions – and natural gas is a necessary and effective solution. Then, a third element is the identification of funding resources for energy transition.

The correlation between energy consumption and economic growth

Most analyzes support the correlation between energy increases and economic rhythm. Thus, causality is unidirectional, from energy consumption to economic growth.

“It is a meaningful assumption if we imagine energy as an input factor, facilitating the adoption of new technologies, which leads to increased productivity. There are empirical studies suggesting that this was the situation of Romania, at least before 2009 and the outbreak of the crisis. The relationship was much stronger between 1991 and 2009, with the correlation factor of 0.82 – quite high, in the context of a maximum of 1. Immediately after the crisis, however, the constraints imposed by efficiency gains led to resizing sectors such as the fertilizers. This resulted in the weakening of the correlation, which reached only 0.18 in the period 2010-2017,” says the CPAG analyst.

At the same time, it also contributed to the reduction of the energy intensity in industry, which decreased by over 40% between 2007 and 2015.

“As an economy grows, it becomes ‘lighter’, as Alan Greenspan (formerly FED Governor) said. That is, it has a larger contribution to GDP in the services sector – which at present it is of 55%, in the case of Romania. This also influences energy consumption, facilitating switching to clean sources.”

The share of the IT sector in GDP reached over 6%, surpassing agriculture, which is only 4% – thus also affecting the energy consumption. Although it has decreased over time, the share of GDP of the industry sector is higher in Romania (25%) than the EU average (20%). The same feature is observed in other regional countries – in this case of the Czech Republic, Hungary, Slovakia or Poland – countries that have integrated into the EU added-value chain. That is why the Romanian economy has a high exposure in the hypothesis of a lasting conflict on the rise of tariffs and the global trade war.

“Even medium to long-term energy consumption could be affected. At present, the average energy consumption in industry is of 30% of the total.”

The challenge posed by the context of decarbonization

In the second context, decarbonization, in the context of energy demand growth with less emissions, it is relevant that any economy, in order to be climate-neutral, will need to grow substantially compared to the current level.

“On the current trend, global energy demand is projected to increase by a third over the next two decades, but at the same time, greenhouse gas emissions will have to drop significantly, reaching its zero value by 2050, in order to comply with the Paris Agreement. It will be a formidable challenge for the industry,” explains Laurian Lungu.

However, natural gas should play an overwhelming role in this equation, according to the analyst. At the same time, the increase of wind and solar energy will continue, but on the current trend, it will represent under 20%, in an optimistic scenario, in the energy mix of Romania, in 2030. And global forecasts are similar, the percentage varies between 15 and 30%. So the rest of the energy has to come from other sources. The International Energy Agency (IEA) provides in the baseline scenario a mix of oil and natural gas to over 50% in 2040 globally with an increase in gas input but with capture solutions, use and storage of carbon. Such solutions exist, but must also become commercially feasible.

“Romania has a privileged place in Europe in terms of natural gas resources. It is the most important source of domestic energy at the moment – almost 30% of the total energy mix, and projections on the 2030 horizon show that gas will continue to maintain this high share over a decade,” Lungu said, explaining that Romania needs to exploit the Black Sea gas to reduce its carbon footprint, as was the case in the US.

Financing the transition towards a low-carbon economy

A major opportunity for financiers and creditors, this transition process will involve a technological revolution and investment in infrastructure will be over four times higher than currently. In a baseline scenario, various analyzes estimate Romania’s investment needs to 25 billion euros for the 2030 horizon. That’s about 2 billion euros a year, or 1% of GDP figure of 2018.

“It is a consistent investment effort, especially in the current state of budget expenditure, with an over-emphasis on current spending, to the detriment of investment.”

Public investment has reached a historic minimum in the past two years, from the period after 1995, to 3% of GDP.

“As in other countries, much of this investment effort should be made by the state. EU funds can be a partial solution, but they must be attracted. And in order to make investments as effective as possible, there is a clear need for an appropriate sectoral plan, in the long run, agreed with the relevant stakeholders – which will also lead to an increase in private investment,” Lungu said.

“Without policies that will support a local market for free and competitive energy, achieving the 2030 targets will be difficult, and those of 2050 will be almost impossible,” concluded Lungu.

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Bogdan Tudorache

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