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Price of water in hydro power plants - what’s next, legislative changes or infringement against Romania?

Price of water in hydro power plants - what’s next, legislative changes or infringement against Romania?

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The price of used water and its unjustified and non-transparent increase is one of the most debated issues in recent years by hydroelectric power plant operators and, in particular, by micro-hydropower operators, with a major impact especially in the context of the change in the support scheme for green energy and blockage in the green certificates market.

The effervescence of the subject is understandable given the major economic impact produced by the current level of the water price among micro-hydropower operators, close to financial collapse due to the excessive cost burden imposed by the authorities.

The Romanian National Water Authority (ANAR) is a unique operator for the specific services in the field of water resource management and exploitation, which has established, and then more than 4 times increased, the level of the water price, defined as a specific contribution to the management of water resources. There have been many voices, institutionalized or private, who denounced the illegitimacy of imposing such a price on water, a renewable natural resource rather than a commercial good, but also the incoherence and lack of transparency of the so-called price calculation method.

Used water is currently uniformly priced, to all hydro power producers without taking into account any of the technical factors that influence the operation of a plant: (i) the head (height of water fall); (ii) power difference; (iii) the difference in electricity production; (iv) tailwater quality (the burden of depollution of the water used by energy producers). In addition, ANAR has also ignored economic impact factors when setting of the price of used water: (i) the real capacity of economic operators to support such a price; (ii) the absence of such a tax in other EU Member States or the definition of a price mechanism according to the aforementioned technical factors; (iii) the obligation to pay the price of water for each plant of a micro-hydropower system, and not just at upstream.

The price was suddenly increased in 2010 through Government Decision no. 1202/2010, in times of economic crisis, creating even more problems for energy producers, also affected by the economic reality of that time. The substantiation note of the normative act did not refer to the economic reasons that led to a significant increase in the price of water, but mainly mentioned the need to cover ANAR's budgetary costs.

The consequences of this taxing system and its arbitrary increase are immediate and have a significant economic effect among hydropower producers. The most disadvantaged are energy capacities with high flow and low head (resulting in higher water consumption to produce a MW of energy), for which the cost of water can account for even more than 70% of the cost of production. In some cases, the cost of water may exceed even the revenues earned by the energy capacity, much diminished due to the conditions of the electricity market and the poor functioning of the green energy support scheme.  

The national legislative mechanism is, or should be based on, the European regulatory framework established by Directive 60/2000 of the European Parliament and the European Council, establishing a framework for Community action in the field of water policy. With regard to water pricing policy, the Directive requires that it take account of the principle of 'water service cost recovery' (therefore, the prices are to be set according to the (documented) costs of the water authorities' registration services), and that the water taxes should be based on a sufficiently detailed economic analysis to justify the value imposed by the authorities.

At the end of August 2017, the Competition Council published the report on the sector inquiry into the management of surface water resources and the effects on the downstream markets, and in turn continued to raise a number of potentially anti-competitive issues. In its report, the Competition Council supports the position of micro-hydropower operators and recommends amending the legislative framework so as to eliminate the imbalances and the problems found.

Among others, the Competition Council found that: 

  • the water price - or the specific water resource management tax - is not economically explained, and it is unclear whether it represents the price of a commodity or the fee of a service provided by ANAR;
  • the price calculation formula does not observe the principle of technological neutrality, according to which a legal provision should not favor a brand or technological solution;
  • the water pricing system is non-transparent, arbitrary, lacking economic basis and discriminatory, the gross water use tax being sized according to the need for ANAR financing, and not according to the water resource management costs, as is provided by law;
  • due to the high level of the tax and the fact that it is not correlated with the technical characteristics, all water power plants with drops below 12-15 meters and all micro-hydropower plants are out of the profitability range;
  • the costs incurred with water production put hydro producers in difficulty to compete in the operational market to which Romania, Hungary, Slovakia and the Czech Republic are connected;
  • the used water tax creates discrimination between energy market participants, especially since other segments of participants do not pay any form of environmental tax (wind or photovoltaic energy producers);
  • there is an unjustified economic or legal discrimination between energy producers on the same level, as different taxing levels are imposed even for water from the same source;

The recommendations which followed these findings support the requests previously formulated by the business environment, underlining inter alia:

  • the need to re-qualify water as a natural resource, which may be the subject of a concession in return for a fee, and not a price per unit of water volume;
  • establishing the level of water resource tax based on a detailed and transparent economic analysis; 
  • establishing the tax for hydropower producers taking into account the technical characteristics of the power plants;
  • addressing more flexible and easier ways to apply the water tax, including adopting the suggestions made by micro-hydropower operators to apply a certain percentage to the energy sold, a percentage that covers both the tax and the rent of the lower river bed);

It is important to mention the express recommendation of the Competition Council to the Romanian Parliament to establish a concession system for used water. The correlative message sent to the Government was to set up an interdisciplinary commission tasked with identifying within a reasonable time an optimal method of water pricing, observing the principle of technological neutrality and having the dual mission to encourage rational exploitation of waters and to penalize pollution, waste and fraud.

The Competition Council's report is a positive signal given to micro-hydropower operators and an institutionalized first step to support their efforts to change the legal and economic mechanism on water pricing. Rapid and correct implementation of the recommendations by the Competition Council could reinvigorate the market for electricity produced by micro-hydropower plants and avoid the collapse of a significant number of them.

The associations of hydro power producers welcomed the findings and recommendations issued by the Competition Council, perhaps a first step towards the normalization of the rules on managing and charging water resources in a transparent, non-discriminatory way, understanding and observing the specific operating conditions of the industry. Should the competent authorities still ignore the legal and economic reality of the use of water resources, Romania risks being brought before the EU institutions in infringement proceedings that energy producers intend to activate.  

By Carmen Dutescu, Managing Associate, Voicu & Filipescu

Romanian Knowledge Partner

Țuca Zbârcea & Asociații is a full-service independent law firm, employing cross-disciplinary teams of lawyers, insolvency practitioners, tax consultants, IP counsellors, economists and staff members. It also operates a secondary law office in Cluj-Napoca (Romania), and has a ‘best-friend’ agreement with a leading law firm in the Republic of Moldova. In addition, thanks to the firm’s dedicated Foreign Desks, the team provides the full range of services to international investors seeking to gain a foothold or expand their existing operations in Romania. Since 2019, the firm and its tax arm are collaborating with Andersen Global in Romania.

Țuca Zbârcea & Asociaţii is providing legal services in every aspect of business, covering all major areas of practice: corporate and M&A; litigation and international arbitration; corporate tax; public procurement; TMT; employment; insurance; banking and finance; capital markets; competition; healthcare and pharmaceutical; energy and natural resources; environmental; intellectual property; real estate; regulatory legal services.

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