Progress on energy security, but important milestones remain

However, this could change with the expiration of the gas transit agreement between Ukraine and Russia at the end of 2024, which could significantly raise the gas prices for the Transnistrian region. To mitigate this risk and reduce dependence on the MGRES plant, Moldova is expanding its electricity generation capacity through the promotion of renewable energy via auctions, and is diversifying its electricity supply through closer integration with its neighbours.

 The role of MRGES in the electricity market

Moldova relies heavily on imported natural gas and oil products for its energy needs. Until 2021, it sourced around 95% of its gas at low prices through long-term contracts with Russia’s Gazprom. However, following the expiration of the contract between Moldovagaz and Gazprom in 2021, right-bank Moldova began to diversify its natural gas suppliers, securing contracts with Romanian, Greek, Hungarian, Polish, Swiss, and Austrian companies, and currently is pursuing deals with Turkey. Despite these efforts, Moldova’s electricity supply is still dependent on and benefiting from relatively cheap electricity generated from Russian gas at the MGRES power plant in the Transnistrian region, which covers between 70% and 80% of Right Banks’s annual electricity demand. The Transnistrian region receives gas free of charge from Russia – an implicit subsidy estimated at an annual average of roughly EUR 360 m between 2017 to 2021. This setup enables the Left Bank to sell natural gas at very low tariffs to households and industries in the region, including MGRES. MGRES uses this almost free gas to produce electricity at very low costs, which it then sells to right-bank Moldova at below-market rates. Nonetheless, the gas transit contract between Ukraine and Gazprom, currently facilitating the free gas supply, expires in December 2024. With Ukraine’s announcement of potentially not renewing the contract, there is the possibility of a disruption in the gas supply to the Left Bank, potentially impacting the electricity market in both banks. If the transit contract ends completely, MGRES would need to seek alternative sources. To analyse the economic consequences of MGRES having to purchase natural gas at market prices, the German Economic Team (GET) has conducted a scenario analysis to assess possible impacts on electricity prices in both the right and left-bank Moldova.

Scenario analysis: impact on electricity prices

Two scenarios were run to assess the impact on electricity prices for the whole of Moldova: the baseline scenario, in which the Left Bank continues to receive almost free gas from Russia, and the market-based scenario, in which MGRES procures gas at European market rates (monthly futures prices for 2024). In the baseline scenario, MGRES remains Moldova’s primary electricity supplier due to its highly cost-effective production of 25-30 EUR/MWh.

However, in the market-based scenario, where MGRES is forced to buy gas at market prices due to an end of the cheap gas supply, MGRES costs would rise significantly. This would substantially alter Moldova’s electricity generation profile, with imports from Romania becoming more competitive than MGRES across all months. MGRES would then serve primarily as a peaker plant when transmission capacity is maxed out.

This shift would result in substantial increases in electricity tariffs: household tariffs in the Right Bank would increase by 27% and by 362% in the Left Bank (albeit from an extremely low level). Industrial tariffs in the Left Bank would go up by 412%, potentially endangering the region’s heavy industries. Overall, the country’s annual electricity costs would increase by EUR 333 m (61%) compared to the baseline scenario. The impact on the Right Bank would be comparatively smaller due to its initially higher tariffs.

While a complete cut-off of Russian gas represents an extreme scenario, alternatives such as renegotiating transit contracts through Ukraine, with Moldova potentially covering the fees,should be considered. This could tend to have less impact on tariffs.

Steps forward: improving electricity supply resilience

Moldova is expanding its generation and transmission capacity to reduce reliance on MGRES. A key project is the construction of the Vulcănești – Chișinău transmission line, which will enable direct electricity imports from Romania. This not only enhances transmission capacity but also bypasses Transnistrian territory, unlike existing transmission lines. However, its completion might be delayed beyond the initially planned 2025. Additionally, the Bălți-Suceava transmission line, aimed at improving connectivity between Moldova and Romania, is expected to be completed by the end of 2027. Alongside improving transmission infrastructure, Moldova itself also has significant renewable energy potential from wind and solar sources. In 2024, the government will launch a tender-based auction system for 165 MW of renewable capacity with scope for further expansion. Effective integration of this capacity, however, requires the development of balancing infrastructure in Right Bank Moldova to minimise dependence on unpredictable energy imports with neighbouring countries.

Conclusion and outlook

Despite recent progress in stabilising Moldova’s energy sector, the end of the gas transit agreement between Ukraine and Russia introduces uncertainty. In an extreme scenario, the end of cheap Russian gas could lead to a substantial increase in electricity prices in Moldova. Thus, strengthening energy resilience remains crucial, focusing on expanding renewable energy and improving transmission infrastructure. As Moldova progresses towards European Union membership, the importance of regional integration and renewable energy increases, not only for energy security but also to meet EU regulations. Compliance with EU carbon pricing mechanisms, such as the Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM), will be essential for the future of Moldova’s energy sector and environmental sustainability.

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This newsletter is based on the Policy Briefing “Energy Monitor Moldova”