The EU-Moldova Association Agreement: opportunities for the modernisation of the energy sector

The EU-Moldova Association Agreement: opportunities for the modernisation of the energy sector

The Republic of Moldova signed an Association Agreement with the EU in 2014, which involves closer co-operation on a broad range of subjects, including the energy sector. Most of the clauses concerning this sector are taken from the commitments, already assumed by Moldova in the framework of the Energy Community, which imply a gradual integration into the EU’s internal energy market and adoption of the core of the energy acquis communautaire, namely the ‘Third Energy Package’.

Why does Moldova need such integration and what benefits can it reap? First of all, it is an opportunity to tackle the problem of import diversification of the main energy resources. This critical topic, driven by the need for increased energy security, stems from the simple fact that only 18.3% of required electricity consumption is produced on the right bank of the Dniester river, the rest being imported from Ukraine and the left bank, uncontrolled by constitutional authorities. Nevertheless, the most sensitive and dominant energy security issue is the 100% importation of natural gas from a single source – the Russian Federation. This problem is becoming all the more important at a time of heightened geopolitical risks and uncertainties.

Secondly, the adjustment of national legislation to suit the energy acquis can create a predictable and understandable legal environment for foreign investors. These foreign financial and technical resources are critical for the sector’s modernisation and necessary growth catch-up, capable of compensating the under-investment in capital of the last two decades. Such under-investment exacerbates the performance of the energy sector, resulting in a two-fold discrepancy in energy efficiency between Moldova and the EU, which further undermines the competitiveness of an already feeble economy.

Thirdly, the signing of the Association Agreement can serve as a lock-in effect for the Moldovan authorities, speeding up the lingering reforms in the energy sector, due to a higher intensity of co-operation. This type of incentive is of critical importance for laggard countries like Moldova, which has already missed some deadlines in transposing the commitments within the Energy Community. Also, one of the main collateral consequences of the lock-in effect upon the institutional framework, will be the higher transparency, accountability, and independence of the National Authority for Energy Regulation, which is still suffering from political meddling.

Last, but not least, the liberalisation of the energy market, according to the ‘Third Energy Package’ can bring, not only sizeable benefits to consumers, such as fair prices and more qualitative services, but can also address the topic of further energy diversification.

A microcosm of the situation is provided by the unbundling requirements for Moldovagaz, a vertically-integrated company, which solely controls all activities related to the import, supply, and distribution at national level of natural gas, and can have open access to third companies to the national gas network. The stakes of market liberalisation have certainly been raised with the launch of the first gas interconnector, Iasi – Ungheni in 2014, with the subsequent extension of this gas pipeline to Chisinau by late 2017, through which natural gas from Romania is supplied to Moldova. However, the long-term viability of this, and other potential interconnecting projects, depends on the access to the national distribution network, which is, unsurprisingly, controlled by Moldovagaz. To complicate a delicate situation further, Gazprom owns 50% of Moldovagaz, which is a unique situation, not only in Eastern Europe, but also in the CIS region, where not a single country has ceded control of their gas networks to Gazprom.

Despite that scenario, the signing of the Association Agreement between the EU and the Republic of Moldova opens a unique window of opportunity for the latter to implement sweeping changes in the economy, including radical modernisation of the energy sector. Also, a major benefit for the Moldovan economy will be the lower level of energy risks, due to direct access to European energy infrastructure.

Iurie Morcotîlo, Economist, Analytical Centre "Expert-Grup"