Tim Gosling in Prague -

In the years before the crisis hit in 2008, the Czech state-controlled utility CEZ pursued an ambitious strategy to turn itself into the biggest power group in the region. But that dream is in tatters as first its Albanian and then its Bulgarian businesses have buckled under government pressure, and now it risks losing out in a third Balkan country as Romania looks to cut renewable energy incentives.

Amid growing unrest over power prices in the region, Romania announced in late February that it's set to slash overly generous incentives for wind energy. That casts huge uncertainty over several projects that arrived as part of a gold rush in the past few years, including CEZ's Fantanele and Cogealac (FaC) wind farm.

Wind power investors face a drop of up to 75% in overall subsidies. The Romanian regulator ANRE is widely reported to be considering reducing both the ceiling on green certificates (from $55 to $30) and slashing the number of the index-linked tradable certificates available for each megawatt hour (MWh)of power by up to half (from two to one). The lowered ceiling is likely to be introduced in July, Romanian officials have said, with the cut in certificates - should it appear - to follow at the start of 2014.

Prevailing winds

The Romanian government's move makes sense, say analysts in the Czech Republic, a country where consumers still suffer from an over-generous scheme to support solar power that was redressed in 2010. As the economic crisis rages on, Spain, France, the UK and Germany have all cut incentives recently for renewable energy in order to relieve the upward pressure on consumer prices as these countries try to hit EU targets on CO2 emissions.

The left-leaning Romanian government will make its decision as it watches political chaos unfold in its southern neighbour Bulgaria due to rising electricity bills, with CEZ's distribution business a focal point of public dissent there. Energy prices are also prompting geopolitical tussles in neighbouring Ukraine and Hungary. That only raises the pressure on Romania to keep a lid on power prices, despite the likely best lobbying efforts of wind farm operators in the country, which include GDF Suez and CEZ.

Renewable energy producers rushed into Romania in recent years to take advantage of the generous subsidies, boosting the country's wind power capacity to around 1.8 gigawatts (GW). A study by Ernst & Young published in January named Romania as one of the most lucrative wind power markets in the world. However, since Bucharest revealed it's relooking at the subsidies, plans to add another 1GW or so in 2013 are being put on hold. CEZ announced in late February that it will lower plans to build another 1,000MW by 2016 to 300MW. E.ON hinted that it could pull a planned 100MW wind farm.

Jan Ondrich of the Prague-based advisory firm Candole Partners points out that much Romanian legislation is pushed through using "emergency" powers, meaning less consultation with parties like electricity producers, and also notes that the country has decent renewable energy alternatives to wind.

That leaves wind investors and producers arguing the line that Romania needs to protect its investment image and not do anything hasty to threaten it. "Romania benefits from a stable and predictable environment, and the law and regulatory changes are discussed with foreign investors in order to be fair and transparent," CEZ tells bne.

While Romania clearly intends to reduce the support on offer - Energy Minister Constantin Nita calls the €500m that renewable energy subsidies cost consumers in 2012 a "price too big for Romanians" - the big question for CEZ and other current investors is whether the cut in the number of green certificates will be retroactive or not.

Petr Bartek of Erste Bank - who estimates Romania's current scheme offers electricity producers total revenue of €150-160 per MWh compared with a European average of €100 - suggests that the "investment image" argument will prove powerful. He also notes that green certificates are still trading at around €53, illustrating that the market is far from convinced a large cut is on the way.

By way of contrast, Ondrich appears to firmly believe all cuts will be implemented on all projects. He points to the current political climate in the region, and what he believes is a determination in Bucharest to respond rapidly to avoid the sort of problems that Prague is still facing. "You can't move in Bucharest without someone telling you what they're preparing for unsuspecting wind investors," he remarks ominously.

Despite admitting it is "waiting for the final version" of the amendment, CEZ insists "any change will be applied only to green producers to be commissioned after the potential change of the law," although it does not back up the claim.

End of the gold rush

However, CEZ, which announced the completion of Europe's largest onshore wind farm - the 600MW FaC - in November, clearly runs the highest risk of all investors. That will hardly cheer its shareholders, who have watched the company's Balkan assets crumple one by one. Following a long fight, Albania withdrew the operating licence of CEZ's local distribution subsidiary early in the year; the Bulgarian regulator is due to decide on a similar move in April.

Ondrich says a retroactive cut in the number of certificates would drop the internal rate of return on FaC from around 20% to just 6%. Taking financing costs into account, the project would then become unprofitable, he claims, and plunge its net present value into the red by around $365m. Bartek, following the CEZ line that only the ceiling will be cut, is less pessimistic. Although he suggests a 50% drop in revenue to around €90m that will still cover the cost of capital, and would only hit the wider group for around 2% of Ebitda, or cash flow.

The Czech giant has no one but itself to blame, insists Ondrich - a regular and trenchant critic of the company - saying that smart investment demands getting the fundamentals right, with subsidies then viewed as the cherry on top. "The Klondike business model is over," he says, "but a smart investor will still be able to make wind work in Romania. It will be much harder, but Romania will get better investors."

CEZ faces Catch 22 in Romania, however, as it also owns a major power distributor there. If wind producers and investors manage to convince Bucharest not to cut incentives, it could look instead to trim the population's electricity bills by lowering tariffs, as just happened in Bulgaria.

All in all, considering the relatively small size of the Czech utility's assets in the Balkans, its struggles across all the region's markets and the ongoing financing difficulties over the expansion of the Temelin nuclear plant at home, CEZ could be tempted to cut and run, suggests Ondrich. "Of course, if the cuts are the deepest, everyone will be looking to sell Romanian wind farms," he says. "Buyers could be local businesses, particularly those that could combine them with industrial assets that need the green certificates, but whoever it is, CEZ would take a hit on the price."

However, as long as Bucharest holds back from making the cuts retroactive and assures investors that the action is a one-off, Bartek says the Czechs will hold onto their Romanian assets, including FaC, which he estimates currently offers double the revenue of the distribution business in the country. "CEZ will still see it as providing stable cash flow from a regulated business," he suggests, "which makes it an attractive hedge against price falls in the wholesale market."

"We haven't thought about sale of our assets in Romania so far," CEZ says, without expanding. So far, anyway.