Ripple Effect: Geopolitical Pressures on Oil and Gas Signal Higher Electricity Production Costs in Romania — NRG-IA

Global Geopolitical and Energy Context Global energy markets are navigating a period of heightened volatility, marked by escalating geopolitical tensions in key regions. Recent developments indicate increasing pressure on oil and natural gas prices, factors that, through complex mechanisms, can also influence the electricity market. OPEC, for instance, saw a significant drop in crude oil production in March, reaching its lowest level since the peak of the COVID-19 pandemic in June 2020 (according to e-nergia and Profit.ro ). This reduction comes amidst a war in Iran, with warnings of a potential escalation of the conflict, statements that have already led to a sharp increase in oil prices and declines in Asian stock markets ( Economedia , CNBC). Risks are amplified by Gulf states' plans to build new pipelines to bypass the Strait of Hormuz, a vital energy route, amid fears that Iran could block access ( Economedia , Financial Times). In addition to these Middle East tensions, the conflict in Eastern Europe continues to affect energy stability. A drone attack on an oil refinery in Ufa, Russia, located 1,300 kilometers from the Ukrainian border, underscores the vulnerability of energy infrastructure in a wartime context ( HotNews.ro ). The economic consequences of these conflicts are so extensive that the International Monetary Fund (IMF), the World Bank Group, and the International Energy Agency (IEA) have announced their coordination efforts to address these challenges ( Economica.net ). Within this volatile global landscape, even European Union member states are feeling the pressure. Germany, for example, has implemented measures to limit fuel price increases, allowing only one pump price increase per day, against a backdrop of rising oil costs ( Profit.ro ). Domestically, Romania faces specific challenges regarding natural gas supply. Although the gas winter season officially ended on March 31, our country continues to extract gas from storage, instead of beginning injections for the next season, due to insufficient domestic production ( Economedia ). This situation highlights dependence on imports and vulnerability to fluctuations in international gas prices. Analysis of Pressure Transmission Mechanisms The evolution of electricity prices on the OPCOM spot market, particularly on the Day-Ahead Market (DAM), is influenced by a multitude of factors, among which the costs of primary fuels used for generation play an essential role. Although the Romanian market has shown some resilience to external shocks in previous periods, current pressures on oil and natural gas markets are creating a foundation for future adjustments. Impact of Fossil Fuel Costs on Electricity Generation A significant portion of Romania's electricity production capacity comes from thermal power plants, which use natural gas, coal, or fuel oil. When natural gas and oil prices (which directly influence fuel oil) rise on international markets, the operational costs of these plants increase. This is reflected in the offers that producers place on the DAM. The price formation mechanism on the spot market is marginal: the price is set by the offer of the most expensive production unit needed to meet demand at a given moment. Thus, a general increase in fossil fuel costs will push up the marginal price, even if other sources (hydro, nuclear, renewables) have lower operational costs. Romania's situation of extracting gas from storage even after the end of the cold season ( Economedia ) is an indicator of high domestic demand or insufficient production. This pressure on stocks and the domestic gas balance translates into higher costs for gas-fired power plants, which are often "price-setters" during certain hourly intervals on the spot market. Differentiation from Other European Markets Although the global context is tense, Romania's electricity spot market has, at certain times, shown different dynamics compared to the peaks observed in other European markets. This differentiation can be attributed to a diversified energy mix, including a significant share of hydropower and nuclear energy, which are less sensitive to fossil fuel price fluctuations. However, during periods of hydrological drought or unavailability of other capacities, reliance on thermal power plants increases, exposing the market to gas and oil price volatility. Impliсations for Consumers and the Energy Sector Upward pressures on electricity production costs have direct and indirect implications for all market players: Household Consumers: Even if final prices are regulated or contracted in the medium term, a persistent increase in acquisition costs for suppliers will, over time, be reflected in tariffs. Suppliers will need to adjust their offers, and ANRE interventions will be crucial to balance consumer protection with the economic viability of suppliers. Industrial Consumers: This category of consumers, often with contracts on the free market, is directly exposed to spot…