This Article, authored by Miloš Vučković and Petar Mitrović, was originally published in Issue 2.1. of the CEE Legal Matters Magazine.
Serbia is a contracting party to the Energy Community Treaty (ECT), signed in October 2005 between the European Union (EU) and nine South Eastern European countries. Since then, Bulgaria, Romania, and Croatia have ceased to be parties upon their accession to the EU and thus are no longer parties to the ECT, while Moldova and Ukraine have become parties to the agreement.
One of the explicit aims of the ECT is to support the development of renewable energy. As renewable energy is still not competitive compared to conventional energy, the development of renewable energy in the ECT countries is heavily dependent on the implementation of support schemes for renewable energy in their legal systems.
Serbia implemented a support scheme for renewable energy in its legal system for the first time in 2009. The initial scheme underwent notable improvements with the adoption of the 2011 Energy Law, the accompanying bylaws which were adopted in early 2013, and model power purchase agreements (PPAs) in the summer of 2013. Renewable generators were, for the first time, given by explicit provisions of the law the right of priority access to the grid and the right to sell the entire quantity of generated electricity to the state-owned purchaser under guaranteed, preferential prices.
Even though the framework was notably improved compared to the initial one, the renewable energy sector has not witnessed any concrete, significant developments.
Why? If we disregard the fact that the framework still faces numerous shortfalls (which are generally mendable), the main reason for the absence of concrete developments in the sector is a lack of confidence from investors in the permanence and reliability of the support scheme introduced in 2011.
Investors in renewable energy develop and operate long-life, capital-intensive projects. Therefore, confidence that a project will be able to generate revenues during its life is essential in order to get it developed.
A PPA concluded between a renewable generator and state-owned purchaser for a period of 12 years provides the main revenue stream for a renewable project; thus, the PPA has to have characteristics which ensure permanence and reliability of revenue.
Primarily, it needs to be concluded at an early stage of the development of a project in order to give investors certainty of the terms by which electricity will be purchased. The PPA should be concluded by the time construction is commenced, at the latest.
As the development of renewable projects is subject to heavy permitting procedures, the PPA should provide reasonable deadlines for the development of a project.
Further, the PPA needs to provide adequate protection for the generator against risks that a generator cannot control, avoid, or minimize. Typical examples for such risks are grid constraints. If a generator is unable to deliver its electricity to the purchaser due to an interruption or restriction of export of electricity onto the grid, the purchaser should be required to pay for the volume of electricity which would have been generated had there been no such interruption or restriction. Other risks generators cannot control or minimise include the risk that a law will change or acts and omissions of the competent authorities will impact the development and operation of renewable projects. The PPA should also provide a mechanism which will allow generators to withdraw from the PPA and to be compensated for their losses, if, without their default, circumstances outside their control occur which make it impossible or unlawful to maintain the PPA. These circumstances include defaults and breaches of the PPA by the purchaser, changes in the law after which the generator cannot be put back in substantially the same economic position. or unlawful acts and omissions of the competent authorities.
Also, considering that the generators will finance a significant portion of the development costs through loans procured in the financial market, the PPA should allow the generator to assign the PPA to lenders providing financing for the project. Furthermore, the PPA should provide a mechanism giving lenders the opportunity to step into or take over a project together with the rights and obligations of the generator under the PPA.
Currently applicable PPA models, which were prepared and published in 2013 on the basis of the 2011 Energy Law, do not provide for the protections discussed above. Consequently, investors have been (justifiably) suspicious of the permanence and reliability of the Serbian renewable-energy support scheme based on the 2011 Energy Law.
At the very end of 2014, the Serbian Parliament adopted the new Energy Law which became applicable starting from January 1, 2015. The new Energy Law laid down grounds for the improvement of the support scheme and, even more important, improvement of currently applicable PPAs. One may hope that these improvements will not remain only on paper, but that they will finally lead to a boost in the development of the renewable energy sector.
By Miloš Vučković, Senior Partner, and Petar Mitrović, Senior Associate
The full article can be viewed online at http://www.ceelegalmatters.com/index.php/legal-analysis-energy/item/2409-supporting-renewables-in-serbia