Manfred Paasch, CEO E.ON România: Only a free and functioning market can stimulate investors

Romania should foster and support the development an internal energy market at European level, that should be competitive, integrated and liquid, by ensuring efficient price-setting mechanisms, and an increased delivery security, at the lowest cost possible, Manfred Paasch, CEO of E.ON România tells Energynomics in an exclusive interview.

How did the COVID-19 pandemic affect this year and will affect during 2021 the electricity and gas markets in the CEE region and in Romania in particular?

The pandemic shed light on how much we rely on the energy sector. And that is because the gas and energy grids must function continuously even when the activities in other sectors stop/shrink. The context is difficult: the entire economy has taken a hit, statistical data show a drop in industrial output, and unemployment rate has gone up. According to the latest predictions by BERD and European Commission, the Romanian economy will go down by 5% this year.

In a context where many consumers (both in industry, but also in areas such as the hospitality sector) have closed down or reduced their activity, we are facing a decrease in the gas and electricity quantities sold year on year.

It is hard to tell how long the coronavirus crisis will last, how deep the economic recession and how wide the shock taken by the energy sector will be. This is the most difficult aspect of the crisis we are experiencing: uncertainty. Nobody knows what will happen in a week’s time, even less so in a month’s time, and such situation makes it impossible to devise a realist business plan.

We can see now the market is characterized by volatility and we expect that characteristic, which is specific to economic crises turbulences, to persist.

The entire development of the market will be dependent to a large extent on the pandemic and economic context, on the measures the authorities will take, and on the period over which such measures will be instituted. If the Romanian economy shows no sign of bouncing back, it is very unlikely that we will see a bounce back in demand.

Moreover, this complicated context is further compounded by the recent modifications in the legislative framework, which affects the businesses of the companies in the energy sector, adding an extra burden on the carrying out their business plans. Unfortunately, as far as Romania is concerned, the fiscal uncertainty and the lack of transparency are persisting, and they will further affect the business environment.

What are the key pressures we see on pricing and demand, for 2020 and the next year, and the medium term?

We can already see the first effects of the gas market liberalization, respectively a stepping up of the competition between the suppliers on the market, but also the entrance of new players, and hence there are more attractive offers in place.

For instance, we have recently launched E.ON Promo Gas, a digital package that can be contracted online only, providing household customers natural gas at an approximately down to 10% lower price than the one in the regulated offer.

We think that, in the future, quality services and solutions that bring in added value, that are devised to meet the specific needs of the customers – which in their turn are becoming ever more complex- will be the winning ones. The price of the natural is important, of course, but the quality and sustainability of the services will prevail.

How should the liberalization of the gas market develop from now on? How did your company prepare for the market liberalization of gas and how about the electricity (2021)?

It is only a liberalized market that can bring in the best offers for our customers and incentivize investors, provided it is fully functional. That means we should have a liquid and competitive market, with transparent prices and equal access for all the players, to the customers’ gain. It is also necessary to develop a robust and fair support mechanism to protect vulnerable consumers.

Our challenge, in the context of the liberalization but also of the transformations the energy industry is undergoing, is to make the shift from the traditional energy and natural gas supplier statute to being a partner providing innovative modern solutions and services, that lend themselves to the specificity and needs of the customers in all categories.

Therefore, our strategy is to provide our clients as varied a portfolio of products as possible, that should ensure not only a competitive price, but also savings by reducing consumption, along with safe use services for the natural gas installations. Our goal is to improve the lives of the people for a more sustainable future, and the E.ON products and services are meant to contribute to cutting carbon emissions.

For instance, E.ON Life is the perfect solution to reduce by up to 25% the natural gas consumption relying on condensing boilers controlled by smart thermostats.

The increasing number of customers opting for our solutions gives us trust in our medium- and long-term business results. As far as the liberalization of the electricity market is concerned, we will witness most probably a development similar to that of the natural gas market, namely a diversification in offers, an increase in competition, and we can also expect to see new players in the market.

How should the gas market become more liquid? What instruments are needed?

Romania should foster and support the development an internal energy market at European level, that should be competitive, integrated and liquid, by ensuring efficient price-setting mechanisms, and an increased delivery security, at the lowest cost possible. If it actively pursued its integration into the European market, Romania could also secure import/export routes and clarify the legislation on natural gas fields exploration.

After the market liberalization on July 1st, 2020, and the implementation of the Gas Release Program (GRP) whereby the producers are under the obligation to put on of-fer 40% of the annual output, the internal market has become more liquid, that being a first step in defining the Romanian market as an important hub in the European market considering that Romania is EU’s second natural gas producer.

The next steps must include market mechanisms and channels to transform the Romanian gas market into a market dominated by a small number of players in an active, competitive market that is correlated with the EU hubs (Baumgarten, Austria and Dutch TTF Gas Hub, the Netherlands).

How can we really protect the vulnerable consumers?

The policies protecting vulnerable consumers are different across Europe, some countries having models giving prevalence to energy efficiency, others use social protection systems, direct payments to social groups considered vulnerable, while still others use a mix of those two approaches.

Since policies in Romania are unclear, it is necessary to adopt a clear policy and legal framework to define the phenomenon, to improve the data collection and monitoring system regarding energy poverty and vulnerability, and to adopt concrete protection measures, oriented towards those consumers who do need support.

We have always pleaded for a protection mechanism of vulnerable consumers, one that provides a targeted assistance instead of an across-the-board, low price driven subsidy, and we think that is important in establishing a free market.

We advocate such mechanism as the number of the vulnerable consumers might be much more than a million, according to estimations. It is certainly necessary that the vulnerable consumer be very clearly defined this year and so should a concrete, functional support method for them.

The Ministry of Economy, Energy and Business Environment, the Labor Ministry, and the Finance Ministry have the task to solve these problems with expedience, until the end of this year.

Of the overall funding that Romania will get from the EU, how much money is needed in the distribution and supply sectors, and how much money will your company access? How about the Modernization Fund?

According to the Integrated National Plan for Energy and Climate Change, the energy sector should need total investments amounting to approximately EUR 22.6 billion in the period 2021-2030 in the production, transport and distribution of electricity. Out of the total amount, EUR 9.8 billion should be earmarked for the grids, EUR 12 billion for the power plants, while another EUR 800 million for steam boilers.

Romania will be able to benefit from the opportunities granted by EU funded instruments only if it is able to develop coherent strategies and plans for the following decade. This will be another test on Romania’s „much praised” potential.

Also, the country should pay attention to how appealing the business environment is (taxation regime, regulations, stability, predictability) and be aware all the time that it is competing with other countries in attracting and keeping investors here. Investing in revamping the existing production capacities is key, in parallel with investing in new, efficient, environment-friendly production capacities.

For the period 2021-2027, Romania will benefit from a total budget of EUR 79.9 billion, of which EUR 46.4 billion will be allocated resources from the Multiannual Financial Framework, and EUR 33.5 billion from the Next Generation EU instrument. Along with traditional structural instruments, the Fair Transition Fund represents a new and real opportunity for the national energy sector, Romania being the third beneficiary of these resources, along with Germany and Poland.

Also, the Fund for Modernization, for which the Ministry of Economy, Energy and Business Environment estimates an allocation of EUR 6.7 billion for the period 2021-2030, is a source of financing with investment potential for operators in the energy sector, therefore, the identification of the most appropriate measures for the effective implementation of the Modernization Fund access mechanism should be kept on the list of priorities of the authorities concerned.

E.ON Romania is directly interested in accessing these resources and aims to send to the responsible authorities a list of consistent and mature projects that will be able to shape up with the support of these resources. For E.ON, attracting European funds is a very important source of funding, so far co-financing for projects whose total value exceeds Lei 180 million having already been obtained.

Since 2012, five projects with European funding have been successfully implement-ed, another four being ongoing, aiming at continuing investments in the modernization of the electricity network, the installation of smart meters and the cyber security of the distribution system.

The most recent project for which we obtained, last year, a new European financing represents an investment of over Lei 31 million (of which 23 million are both EU funds and money from the national budget), which aims at the modernization of five transformation stations from Vaslui county.

At the same time, in the upcoming period we will start the smart metering works for over 10.000 electricity consumers in Iasi. An investment with a total value of almost Lei 54 million, which is co-financed with over Lei 19 million from EU funds and ap-prox. Lei 3.4 million from the national budget.

E.ON invested EUR 1.7 billion in Romania, most of it in the modernization of the natural gas and electricity grids, from 2005 until 2019. Another EUR 375 million have been allocated for the period 2020-2023.

How can we cope with the Green Deal, as Europe is only in part considering gas a transition fuel?

During these difficult times, one would have expected that projects such as the Green Deal would fade away after COVID-19 challenges, but instead new ambitions targets emerged. At the beginning of October, the European Parliament voted in favor of reducing greenhouse gas emissions by 60% by 2030 (compared to 1990 level), a target higher than the one proposed by the European Commission – at least 55% cut on emissions. This will put additional pressure on the member states.

The actions we are taking now will determine the speed and strength of the recovery. Therefore, I highlight once again that we live in times when the partnership between the public and the private sector should reach new dimensions, as the objectives of National Energy Plans and the EU goals can be achieved through a joint and strengthened effort.

For many EU member states, the requirements of the green economy, the digitalization and the need of strengthening economic governance represents a big challenge that should be solved together, over medium and long term.

The ambition of the Green Deal is that until 2050, human activity does not hurt nature and environment. In other words, the trace of carbon dioxide left by humans should not exceed the capability of environment to absorb it, conducting an environment neutral activity. It means that current economic sectors with high levels of CO2 emissions such as transport, energy, construction building, agriculture, chemical industry etc. should significantly increase investments for reshaping towards an environment neutral activity.

It is very important that we anticipate the structural changes of the energy sector early, and approach such changes through clear, lasting policies, in order to reduce and mitigate the economic and social impact as much as possible.

Given the ambitious initiatives to accelerate the energy transition at EU level, there are several dimensions that can influence the trajectory of this transition process. An important macroeconomic aspect concerns the dual challenge that exists in the con-text of decarbonization, namely more energy with less emissions. Thus, natural gas is, at least for now, a necessary solution, even more for countries with large natural gas resources such as Romania (2nd larger producer of natural gas in the EU after the Netherlands).

Our country must focus intensively on the consequences of the Green Deal. There are risks, but there are opportunities as well. Romania needs to solve the issue of outdated, polluting generation capacities that must be revamped or replaced with clean generation sources. A large percent of about 25-30% of Romania’s energy mix is still based on coal. Investments in power and natural gas grids are highly needed, but they require a new wave of smart rules and regulations. Furthermore, investments in wind-based generation, and prosumers – the new players on the market – should be incentivized.

On the other hand, at group level, E.ON has pilot projects in the exploration of the possible uses of hydrogen. For instance, the „Green gas from green energy” initiative, which E.ON SE floated last year, already includes many hydrogen based projects at the group level, with varied objectives and in various development stages. An illustration to that end is the „Smart Quart” project, under which E.ON is building a hydrogen grid in the Rhineland-Palatinate community, Germany. Initially, green electricity will be converted into hydrogen by resorting to the „electricity to gas” technology. It is then distributed into a microgrid and it can be used later to fuel buses or to generate heat.

We are therefore setting out to contribute to the rapid development of a hydrogen-driven economy. That can be done by instituting a quota of green gas or a similar mechanism that can open up possibilities for investments. For instance, E.ON SE is now making gas grid compatible for hydrogen distribution by 2030.

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This interview firstly appeared in the printed edition of Energynomics Magazine, issued in December 2020.

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Bogdan Tudorache

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