Proposal for the establishment of a CFD-type support system in Romania based on the Hungarian experience

Proposal for the establishment of a CFD-type support system in Romania based on the Hungarian experience

The development of renewable energy markets necessarily reaches a level where demand and supply diverge. In these cases, the price of the produced electricity is reduced. If this happens regularly, renewable energy projects become complicated and too risky. If we cannot estimate the price of electricity in advance, it is not possible to prepare a financial plan for 10-12 years. If there is no plan, there are no investors!

This problem can be solved by CFD (Contract For Difference), the formation of which was proposed by ASTRASUN years ago and partially implemented. When we proposed the CFD regulation, we assumed that the actors were able to plan realistically. We were wrong to the extent that, based on the Hungarian experience, the majority of the actors prepare a realistic financial plan, but the tender winners were the lowest bidders who prepared unrealistic, faulty financial models. They also destroyed the CFD model.

Fortunately for Romania, CFD support appears a little later than it did in Hungary. In this way, it is possible to adopt best practice and avoid mistakes.

Let's look at a short history of CFDs on the Hungarian market: The CFDs was announced 4-5 years after the FIT-type renewable energy take-over subsidy was abolished. The government's goal was to spend less support on renewables, which is why it switched to CFD.

Today we can say that this experiment did not work!

How did the CFD ("METÁR") auctions take place?
At the announced auctions, tenders were occasionally called for limited (approx. 120-150 MWp) renewable capacity. The number of project developments could have been much higher, according to my memories there were occasionally 500-1000 MW projects at least in the RTB stage, but only much fewer applied.

According to the call for tenders, the CFD grant was (would be) for 12-15 years. The applicant had to present a guarantee and accession documents (MGT-t (=ATR)). The guarantee (cash or bank guarantee) was HUF 10-15 million, approximately (€30-35,000/MWp.). The amount of the guarantee depended on whether the application was for a fixed or tracker solar system. No wind farm subsidy was advertised.

The winners were those who requested the lowest support price.

Only a few market participants won the support, with extremely low bids. Their offer level was 15-16 HUF/kWh, which corresponds to approx. 40-45 €/MWh.

The logic of the tender was that if the average price of electricity falls below this, the state will supplement it, if it is higher, then the difference must be paid.

As we know, during the Russian-Ukrainian war, prices sometimes rose to €500/MWh.

In such a case, the winning electricity producer sold the generated energy for €500, which the traders paid him at a reduced value with the commission, for example let the commission be 3%, which €15. The producer paid €460 between €40 and €500 to the state, as well as paid the commission, leaving only €25/MWh. That would have caused bankruptcy for sure.

What finally happened in practice? Low bidders took advantage of the regulation's opportunity to request that the CFD be launched. They did not do this, so they were able to sell it at the free market price. They failed the paid guarantee, but they still did better.

The state also did badly because it bought electricity for €500.

The Hungarian solution was therefore flawed: it did not result in a predictable market.

It is important to know that it was enough for one or two market participants who beat the bid prices: since every tender they submitted won, the others were uniformly left out of the CFD.

How to avoid it?

Preliminary axiom: CFD results in predictability.

In order to prevent the logic of CFD from being broken by one (or more) incompetent market participants, safeguards must be built in:

  • a participant can apply for a subsidy of no more than 150 MWp, or no more than 5% of the announced capacity. ("Participant" means a person who applies through any (affiliated) companies.)
  • if the CFD projects change owners later, the tendered capacity must be checked again based on the first rule, and if it exceeds the 150 MWp limit, the CFD will be lost and a dissuasive penalty must be paid.
  • only participants with professional references can apply. (at least 3 years of specialization, at least 10 MW project operating for at least 2 business years.) If the entrant does not have this, he must have his business plan audited by a major international consulting firm.
  • the lowest and highest 10% must be excluded from the tender bids.
  • prohibition of double support: applicants must declare under criminal law that they will not use other support for the project. Support should be taken into account if a specific product, for example solar panel, support structure, etc. for its installation, the given product is purchased with a payment loan longer than 6 months. Some states support the export of articles with up to 5-year loans. This cannot be used by a local (Romanian) business, but for example a Spanish company can get a 5-year loan for a Spanish supporting structure. This provides a competitive advantage.
  • there is no need for high collaterals because it gives international players a significant advantage. 3000€/MWp. collateral (cash or bank guarantee) is sufficient. Of this, 10% must be paid when the application is submitted, and the balance must be provided within 90 days after the announcement of the results. If the applicant withdraws, he loses 10%. If the project is not built within 4 years, the security will be lost.
  • Successive tenders must be added together from the point of view of the applicant. If the applicant reaches 150 MW, he/she can no longer apply.