Romania's potential 'junk' downgrade could hit energy sector hard, raising consumer costs

Romania's potential downgrade to 'junk' credit rating status could have far-reaching consequences beyond just increasing state borrowing costs, significantly impacting the entire economy, particularly the energy sector. Large-scale investments in energy production and infrastructure are heavily reliant on long-term financing, making this sector highly vulnerable.

An elevated cost of capital could render new energy projects, from solar and wind farms to electricity grid development, prohibitively expensive. Over time, reduced or delayed investments may limit the growth of production capacities. This pressure could translate into higher energy prices and increased costs for consumers. Dumitru Chisăliță, president of the Intelligent Energy Association (AEI), warns that a 'junk' rating could shift energy from being a "driver of development to the main accelerator of inflation and economic decline."

Chisăliță emphasizes that the issue extends beyond the state's financing costs, affecting the overall investment climate. Countries perceived as riskier must offer investors higher returns, a supplementary cost that permeates all funded projects within the economy. Energy investments are particularly sensitive to this because they involve substantial initial outlays and long recovery periods, often spanning 20 to 30 years. These projects typically require significant external financing through bank loans and capital markets.

The Intelligent Energy Association estimates Romania's current financing cost in the energy sector at approximately 7.6%. A downgrade to 'junk' status could increase the risk premium, pushing this cost to around 9.5-10%. This difference is especially critical for renewable energy projects, which have high upfront costs but low operational expenses. The cost of capital plays a crucial role in determining the price of the energy they produce. Chisăliță notes that capital flows towards lower-risk environments, and a 'junk' rating could deter institutional investors, further exacerbating the situation.

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