South-East Europe Regional Energy Market: challenges and opportunities for Romania

The paper takes as its starting point the Athens Memorandum signed by countries of South-East Europe whereby a regional energy market in power and gas will be developed. The aim under the Athens Memorandum is that the South-East Europe Regional Energy Market (SEEREM) will be liberalized in a phased manner from 2005, and - ultimately - that this will form part of the EU's internal energy market. The subject of the paper is the extent to which Romania, one of the biggest countries in South-East Europe and traditionally a net energy exporter to the region, complies with requirements under the Athens Memorandum, and outstanding challenges related to successful SEREM accession. The paper argues that much progress has been made in energy sector reform in Romania: power prices have increased, payments discipline in the power sector has improved, independent regulators have been established for power and gas sectors, and power and gas utilities have been restructured. Nevertheless, a number of challenges remain if Romania is to fully benefit from participation in the SEEREM. Further power price increases will be required in the medium term, whilst payments discipline remains poor by industry best practice standards. In the gas sector, retail prices do not reflect border prices, and payments discipline remains a problem. The paper argues that gas price reform would likely have adverse affordability impacts, and proposes means to mitigate these through rationalization of existing social safety nets for gas and heat. On investment requirements, the paper notes that these are significant in power generation, and proposes a contract framework that would support mobilization of finance