Moldova’s energy dependence, avoidance of transparency and ignoring of debt for Russian gas, OP-ED

Moldova’s energy sector is among the most vulnerable ones in the region, mainly because it kept the considerable dependence on Russian energy sources and players. The provisions of the Association Agreement with the EU (2014) and of the Agreement on the Joining of the European Energy Community (2010) gradually change the quality of governance in the energy sector, but the transformations are rather slow for the country’s size and geopolitical opportunities.

For now, moderate progress has been made in adopting the European legislation on energy. Thus, the legislation on electricity and natural gas was adopted, even if with delay, one year ago, in May 2016, while the legislation on the energy regulator in the autumn of 2017, also by not sticking to the initial schedule. The putting of the renewed legislation into practice is a very difficult mission even if European technical assistance is provided in this regard. On the one hand, the energy regulator is a passive player on a market that is mainly liberalized on paper only. On the other hand, the energy characteristics of Moldova contain objective infrastructural constrains that can be overcome by ensuring the interconnection with Romania by building and making available the necessary infrastructure as soon as possible and by intensifying the energy connections with Ukraine.

The measures adopted by the authorities during the first months of 2018 reveal an attempt to maneuver between the involvement of the European players, partial protection of the status-quo and mitigation of risks related to the Russian factor. This can be deduced from the procurement of electric power for 2018-2019 and from the developments around the construction of the Ungheni-Chisinau gas pipeline.

Major shortcomings of Moldovan energy sector

The introduction of a bidding mechanism for purchasing electrical energy (January 2017) and building the Iași-Ungheni gas pipeline (August 2014) are only the first steps towards introducing “rules of the game” that would be beneficial for developing the energy market.

To really advance, a radical change is first of all needed in the behavior of the political class, which, despite the serious “energy handicaps” of the country, uses the energy sector for political-electoral goals. Therefore, the unwillingness to fully free the regulator from any political influence persists. Consequently, the adjustment of the tariffs for electric power and natural gas is delayed, the energy companies incur unjustified costs and these affect other sectors of the economy and the population in general.

Secondly, things at the energy companies that are run by the state should be brought in order. Both in the supply of electricity and in delivery of natural gas, the Government, together with Parliament, can adopt the measures needed to ensure transparency and, simultaneously, to optimize administration at companies of strategic importance for the whole energy sector (Energocom, Moldovagaz). This didn’t happen when the Democrats ruled together with the Liberal Democratic Party of Moldova under Vlad Filat (2009-2014) and when the Democrats built an obedient political majority around them (2016-2018).

Ultimately, the Moldovan authorities adopted no official position on the solving of the problem of debt for natural gas. The absence of this file from the official documents of the EU, which monitors the situation in the energy sector together with the Energy Community, arouses concern of almost similar size. The inexistence of a systemic and public approach to the debts owed by Moldovagaz to Gazprom is even more evident when the projects to integrate Moldova into the European energy system are in the process of acceleration. In this regard, the debt for natural gas is an inter-sector problem. This refers to the shortcomings of the current contractual framework with Gazprom. We also speak about the unlimited use of the Russian gas in the electricity production process by Moldavskaya GRES, which later sells power to Chisinau. Last but not least, there is a risk that the Moldovan infrastructure, including that built with European funds, will be taken over in exchange for debts.

”Double standards” and problem of transparency

The quality of the annual power procurement and the privatization of the state-owned company Vestmoldtransgaz fully demonstrate the defective approach adopted by the Moldovan authorities. Concomitantly, the companies run by the state are favored in the country’s energy businesses and procedures with arranged results are organized in this sector (Vestmoldtransgaz).

In the case of the purchase of electric power, the state-owned company Energocom S.A. was contracted the second consecutive year to supply electricity. Thus, during April 1, 2018 and March 31, 2019, Energocom S.A. will supply electricity to power operators at a final price of 52.8 USD/MWh, buying 70% of the electricity from the Transnistrian region (Moldavskaya GRES) and 30% from Ukraine (DTEK Energo).

The report by the Group of Observers (Energy Community, April 2018), which consists of European representatives, shows that the Ministry of Economy and Infrastructure favored again Energocom S.A. (BudgetStories, March 2018). More exactly, through the agency of energy companies controlled by the state (FEE-Nord, RED-Nord, Moldelectrica), the Ministry forced the extension of the opening of the tender contest (mid-March 2018), which was accepted by the Spanish company Gas Natural Fenosa. The delay was based on two reasons. Primo, Energocom does not produce electric power and only sells the energy generated by others. Segundo, in the tender contests staged starting with 2017 (IPN, June 26, 2017), Energocom S.A. has had to always synchronize the own participation in the tender contest (preparation and presentation of the bid, etc.) with permanently non-transparent negotiations with the other participants in the bidding – DTEK Energo (Ukraine) and Moldavskaya GRES (Transnistrian region, Inter RAO UES – Russia). Therefore, the postponement of the bid opening process is a sine qua non condition for Energocom S.A. to manage to obtain a convenient price from producers and/or suppliers of energy.

The organization of tender contests where the state institution applies double standards towards the participants discredits the whole effort that is supervised by the European partners and, consequently, discourages the participation by bona fide suppliers. In general, the eligibility of a state-run company in such tender contests should be related to financial transparency and the quality of internal governance, which are both unknown in the case of Energocom S.A. At the same time, the current power procurement guidelines require additional transparency-related criteria. Thus, a company that takes part in bidding should prove that it has production capacity or signed a contract for the provision of the necessary volume of electricity when confirming the participation in the tender contest. The European partners suggest a series of technical and procedural measures, including the creation of an electronic procurement platform that would exclude the possibility of taking concerted action in bidding (Energy Community, April 2018). Finally, the tender contests should become perfectly transparent and competitive not only for increasing confidence in the sector, but rather for excluding risks related to energy security.

The problem of reduced transparency and of dubious arrangements can be also seen in the natural gas sector. These shortcomings can be noticed in the privatization of the state-owned company Vestmoldtransgaz. Besides the fact that the public was not informed about the privatization process, this ended later than it was initially decided (December 2017). Moreover, the Moldovan authorities signaled from the start that the Romanian company Transgaz will be selected as a winner and this was confirmed in February 2018 (ZDG, February 2018).

The privatization of Vestmoldtransgaz is part of an investment process that envisions the investing of about €90 million in the construction of the Ungheni-Chisinau gas pipeline. Even if the given infrastructure is crucial in diversifying the sources and routes of supplying natural gas to Moldova, this should not justify the deviation from good practices. Any new player that enters the Moldovan energy market should do it by honest methods or the energy sector will be bypassed by sustainable investments.

Ignoring of debt for Russian gas and benefits for Transnistrian region

Moldovagaz, in which the state owns 30% of the shares, continues to accumulate debts to the Russian concern Gazprom. The Transnistrian region’s unpaid gas consumption accounts for over 90% of the debt of about US$ 7 billion. Thus, the Transnistrian administration manages to subsidize the deficient budget of the region and to create favorable conditions for the economic operators of the region. Consequently, Moldavskaya GRES produces electricity from Russian gas for which it does not pay, being thus privileged compared to other suppliers from the region that can supply power to the right bank of the Nistru. At the same time, by not paying for Russian gas the region can reduce production costs and increase the competitiveness of Transnistrian goods, including of those that are exported to the EU based on the DCFTA.

The non-solving of the problem of gas debt affects predictability in relation to the whole energy sector. The most pessimistic scenarios include the possibility for Russia to use the debt to take over a part of the energy infrastructure or to achieve political objectives, such as Moldova’s federalization.

Instead of eliminating the sources that create debts, the Moldovan authorities contribute to keeping them. It happens by enabling Energocom S.A to renew the contracts for the purchase of electricity from Moldavskaya GRES. On the other hand, the authorities keep the status-quo through which the Transnistrian region obtains incomes generated by the power plant (MGRES). This way the conflict does not escalate. On the other hand, Chisinau avoids a direct energy confrontation with Tiraspol and Moscow. Partially, this is due to the lack of alternatives. Ukraine announced it can supply Moldova with only 30% (by about 1bn kWh in 2017 and in 2018) of its power necessities (over 3bn kWh a year). Evidently, the Ukrainian suppliers could have increased the export capacities if the Transnistrian region hadn’t employed the dumping practice that derives from the access to cheap fuel.

A radical change in the situation will be seen if the building of interconnections with Romania (Iasi-Ungheni-Chisinau gas pipeline, Isaccea-Vulcanesti-Chisinau and Suceava-Balti aerial power lines) is completed. The given initiatives should be regarded by the European partners as an investment in the energy security. The security aspect should prevail given that the economic reason is significantly distorted by the Transnistrian factor. Besides interconnection, the EU and other European players should encourage debates on the solving of the problem of debt for Russian gas whose economic and (geo)political costs can have unfavorable consequences that are now considerably underestimated.

Instead of conclusion

The latest developments in the Moldovan energy sector reveal temporary favorable moves towards securing the supply of energy, with deviations from good transparency practices.

The authorities’ temptation to promote the interests of companies controlled by the state does not stop at least under the surveillance of European partners. Meanwhile, the energy legislation does not yet have a visible impact on the rules of the game at the local level. The keeping of the regulator in the shadow of the political class is a key cause.

Besides the increase in Moldova’s energy independence by diversifying the routes and sources of supplying energy, the case concerning the debt for Russian gas should also be in the attention of the public. In many regards, this is the most pressing problem that lacks yet a comprehensive approach on the part of the foreign partners. In the medium and long runs, the non-solving of this problem can play a destructive role on the socioeconomic and political stability of the country with negative consequences, including for security.