Moldova Braces for Higher Electricity Prices

The government is trying to rein in the budget deficit by cutting spending and reducing obligations, but geopolitical dogmatism and unfavorable economic conditions are only exacerbating the problems

At yesterday’s cabinet meeting, Vasile Tofan reported that the budget deficit had increased by another 3 billion lei – to 23 billion. Against the backdrop of a downward revision to the economic growth forecast, the deficit will reach 6% of GDP by the end of the year. This is directly linked to loans the regime previously took out for electoral purposes, which must be serviced annually. At the same time, the prime minister set a goal of reducing the budget deficit to 3% of GDP in the coming year, anticipating heated debates in parliament this fall. The government will not be able to significantly reduce its debt service costs; there is no sign of a new, low-cost credit line from the World Bank; and no major investments are expected in a country that is rapidly ramping up its military capabilities amid a corrupt and authoritarian regulatory environment. Moreover, the government is under pressure from its promises to raise teachers’ salaries starting at the beginning of the year, which will most likely be postponed once again. However, an attempt to secure funding for the project will be made nonetheless – traditionally, the government will try to extract these funds from the pockets of citizens. The regulator’s intervention has caused natural gas prices to skyrocket, pushing them to an unthinkable 20 lei per cubic meter. Most experts, including those loyal to the government, have long warned of the risk of subsequent increases in electricity prices. It is clear that even announcing another surge in inflation this month would be somewhat difficult for Tofan – it would amount to an admission of the government’s inability to manage crises. However, before the end of this fall, the government will inevitably authorize an increase in electricity prices by about one-third, since there is simply no other way to compensate for the emerging budget imbalances while maintaining the current geopolitical course. The current price, which is already extremely high compared to European countries and is supported primarily by solar power (and renewable energy in general), is not a credit to ANRE’s management. On the contrary, these projects operate largely in spite of an imperfect regulatory environment and a lack of energy storage infrastructure. Several instances of emergency purchases amid a shortage in Romania caused by the shutdown of the Cernavoda nuclear power plant led to unplanned expenditures. The transition to cogeneration using Chisinau’s combined heat and power plants at the start of the heating season will make domestic production more predictable, independent of the time of day and weather conditions; however, it will lead to higher costs, particularly due to the gas component following the recent rate increases. Global prices for fuel oil (an alternative fuel for CHP plants and a number of key industries) are showing increased volatility with a pronounced upward trend, as a result of which the government is unlikely to be able to save money by ignoring environmental considerations. The external situation, which PAS categorically refuses to view pragmatically, also does little to boost the optimism of Vasile Tofan and his cabinet. Romania has not yet restarted operations at a key nuclear power plant, which is also crucial for supplying Moldova at fixed prices due to low water levels in the Danube. Bucharest has decided to recommission several coal-fired power plants, but it is difficult to predict the reaction of Brussels, which is steadfastly promoting the “green agenda”, as well as the actual ability of the staff (temporarily recruited from among retirees) to ensure the long-term operation of such plants. The situation is even worse in Ukraine, where hydropower generation has also declined due to low river levels. However, the key risk is the statement made on Tuesday by the Russian president that attacks on Ukraine’s energy infrastructure will intensify. Vladimir Putin said at the SCO summit in Bishkek that he had issued such an order to the military, which, given the threats to civil aviation recently voiced in Kiev, will inevitably be carried out. The negative impact of regional energy problems is compounded by the government’s own mistakes. The failure to procure Norwegian gas turbine equipment, which would have provided stable reserve capacity in any region where it might be needed. Sanctions imposed at Brussels’ behest and the refusal to engage with Moscow in any way. Chisinau’s political attack on the Gagauz autonomy, which provoked a diplomatic chill with Turkey that, in an emergency, could have provided assistance through gas transit or even the deployment of floating power plants, had the new Romanian leadership of the Giurgiulesti Port permitted it. Finally, the categorical refusal to purchase electricity from the MGRES. At this stage, no one has analyzed how the government’s decision to impose a value-added tax on Transnistrian energy enterprises starting January 1 will affect power flows and balancing, nor what form the reaction of the regional administration and the Russian company INTER RAO, which owns the Cuciurgan power station, will take. The circumstances that have arisen as a result of objective market conditions and very specific miscalculations by Maia Sandu’s administration are, as of today, clearly risky. However, the government cannot afford a large-scale blackout due to the unpredictable public reaction and the technological risks to the entire power grid. Therefore, Vasile Tofan will seek to cover the energy deficit through imports, regardless of the cost per gigacalorie on foreign markets. Consequently, the price of electricity will inevitably rise as early as this fall, and by an amount comparable to the spike in natural gas prices. Any emergency or logistically complex deliveries will be passed on to consumers. The same applies to any crises in Ukraine, Romania, or between the right and left banks of the Dniester. The public must once again prepare for rising utility bills, inflation, and the overall cost of living; however, under the current PAS management model, it is pointless to count on wage increases, including those promised to teachers.