Strong interest in renewable energies in Serbia
Authors: Igor Đorđević, lawyer for energy, banking and finance, projects and infrastructure, and Teodora Vujošević, partner at CMS Belgrade
On April 20, 2021, the National Assembly of the Republic of Serbia adopted four energy laws, including the long-awaited law on the use of renewable energy sources. The law comprehensively regulates the most important aspects of the use of renewable energy sources (RES), which were previously regulated by Section V of the Energy Law, but are now regulated in a substantially different way and in much more detail.
With its objectives of environmental protection and climate change mitigation, the law mainly aims to stimulate new investments in RES and increase the share of renewable sources in the total energy produced by creating a modern legal framework and favorable to investments, which will enable the energy transition. and the further development of the Serbian RES sector.
The law explicitly states ban on building hydropower plants in protected areas, recognizing the negative impact of small hydroelectric plants (SHPP) on the environment. However, the law still leaves the possibility for the government to authorize the construction of hydropower plants in protected areas subject to strict regulatory conditions.
In order to encourage new investments in the sector and as a stepping stone to fully market-oriented and subsidy-free projects, the law provides for two incentive systems: a market premium; and a feed-in tariff for certain small projects. The introduction of a market premium system as an incentive (to be achieved through an auction process) is one of the main advances, mainly adopted with the aim of boosting the Serbian RES sector almost non-existent, while simultaneously making the development of RES projects more economical and predictable than ever.
Defined as a form of operational state aid, the market premium is a supplement to the market price of electricity that premium market users deliver to the market and is expressed in euro cents per kWh in the auction process. It can be acquired for all or part of the plant’s capacity and is paid monthly for the electricity that the plant supplies to the grid. The right to a market premium is acquired through a tendering procedure conducted by the Ministry on the basis of the available quotas prescribed by the government.
After its initialization by public call for tenders, the auction process comprises three phases: qualification, call for tenders and selection of the best bids. During the auction phase, participants compete against each other to offer the lowest market premium – the initial amount of the market premium is determined in advance as the maximum incentive purchase price, which participants auctions are not allowed to exceed with their bids. At the end of the qualification and call for tenders phases, depending on their offer, participants are ranked from the lowest amount to the highest amount of the market premium (i.e. the purchase price) and fill the quota in that order. On the basis of the ranking list and the report on the procedure carried out by a separate commission, the Ministry of Mines and Energy makes a decision on the allocation of market bonuses.
The status of preliminary privileged electricity producer (4P) is based on this decision. In the event of acquisition, the investor must deposit with the Ministry a deposit or a bank guarantee, guaranteeing that he will obtain the status of Privileged Producer of Electricity within the time limit provided by law. Upon presentation of a guarantee, the investor signs a market premium agreement with the authorized contracting party (i.e. the guaranteed electricity supplier), while the model is drafted by the Serbian government. To obtain the status of Preferred Producer, a 4P entity must obtain an energy license and be permanently connected to a transmission network, or to a distribution network, or to a closed distribution network. The incentive period during which the market premium is paid to the investor is 15 years, from the first payment of the market premium.
The existing incentives (feed-in tariffs) for the production of electrical energy from RES are only retained for small plants (i.e. plants with a capacity of less than 500 kW and less than 3 MW for wind turbines) and demonstration projects. Non-commercial RES projects that demonstrate new technology and represent significant innovation that far exceeds the highest level of existing RES technology have the status of innovation projects within the meaning of the law governing innovation.
As with market premiums, the right to a feed-in tariff is allocated by the ministry in an auction process on the basis of available quotas prescribed by the government when similar rules apply. Unlike the market premium system, the duration of a 4P status is calculated from the date of issue of the decision to allocate a feed-in tariff, and not from the date on which the decision becomes final and binding. In addition, the guaranteed supplier with whom a producer concludes a feed-in tariff agreement undertakes to balance responsibility, by exempting the privileged electricity producer from it and from balancing costs. On the other hand, with regard to producers entitled to market premiums, the responsibility for balancing will remain with the guaranteed electricity supplier, but only until the organized “intraday” electricity market is launched. . However, the obligation to cover the costs lies with the producers if their production deviates from the planned production by the prescribed percentage. It is important to note that producers of electricity from renewable sources outside of incentive systems also have the right to be exempted from the balancing responsibility and have the right of priority access to the system.
The law provides for the introduction of prosumer (i.e. consumer-producers), which sets out the long-awaited legal framework allowing end users to produce energy for their own needs from RES (e.g. by installing solar panels on rooftops ) by connecting to the grid and selling excess electricity to their supplier. An end consumer will have the right to connect a renewable energy power plant to the internal electrical wiring of their own home or building, provided that the installed capacity of the power plant does not exceed the approved capacity for the home or building. By law, the prosumer has the right to generate electricity for home consumption, to store electricity and to deliver surplus electricity to the grid for sale. For the surplus electricity injected into the network, prosumers are entitled to a reduction in their next electricity bill or to compensation from the electricity supplier. Another novelty of the Law is the Renewable Energy Community, envisaged as a legal entity registered as an association and based on the open and voluntary participation of its members with the main purpose of using RES for the needs of its members. Such a community also has the right to produce, consume, store and sell renewable energy.
The use of renewable energy sources is recognized as being of particular importance for and in the public interest of the Republic of Serbia. In the realization of the public interest, the authorities are empowered to adopt strategic and other documents, programs and plans to achieve the objectives set by law, as well as to provide funds in their budgets for this purpose.
The law also introduces the possibility of launching calls for tenders strategic partnerships for investments in the construction of renewable energy power plants. A public tender procedure for the selection of a strategic partner for the construction of RES objects is based on the government’s decision as to whether:
- the application of the electricity production incentive system determined by law has not provided sufficient new generation capacity for the generation of electricity from RES necessary to achieve the expected growth dynamics of generation electricity from RES and the mandatory national objectives defined by the Integrated National Climate and Energy Plan; or
- new production capacities for the production of electricity from RES are necessary to achieve energy transition objectives and meet the country’s international obligations.
Interestingly, strategic partnership schemes are explicitly excluded from the application of laws regulating public-private partnerships and public procurement. In addition, in order to increase the use of RES, incentives may be given to technologies using new renewable sources, such as green hydrogen.
On a related note, the government has established working groups to draft the required regulations that will finalize the work of creating a modern and much-needed legal framework and, consequently, new investment opportunities in the Serbian renewable energy sector. .
For more information on opportunities in the Serbian renewable energy sector, contact your CMS customer partner or local CMS experts.