Investors and bankers believe that Serbia’s draft law on renewable energy sources provides a solid basis for unlocking investments in more than 2 GW of wind power, but that the state needs to make certain changes to enable more projects to get subsidies and to make it possible for those who do not receive incentives to implement their projects on the market.
The draft law, which is currently under public consultation, is in the spotlight among wind farm investors, but also among electricity market operators, because the law and secondary legislation that will be adopted, should create a framework for building a market. In a survey, investors and financial institutions gave the draft law an average grade of 4 out of 5. What else needs to be done for it to receive the highest grade was the topic discussed at a round table titled “Wind industry in Serbia between auctions and the market – 2,000 MW of green energy awaiting a clear signal from the state,” organized by Balkan Green Energy News and moderated by Ivan Gazdić, a partner at law firm CMS Serbia.
Instead of feed-in tariffs, which were awarded as fixed subsidies for a period of 12 years to investors who made it into a 500 MW quota in the first wave of renewable energy investments, the state is now introducing auctions, where investors will bid for subsidies, which will be called premiums.
Given that the work on designing renewable energy auctions, performed by the European Bank for Reconstruction and Development (EBRD), is still ongoing, it is not yet clear what these auctions will look like, what quotas will be awarded, at what pace the auctions will be organized, and what requirements participants will have to meet. However, regardless of the design of the future auctions, one thing is certain: not all investors will be included in the incentives scheme, while the draft law, in its present form, takes into account only winners.
Turković: We are the state’s natural partners in the process of decarbonization and in its efforts to increase the share of green energy
Investors who are expected to invest more than EUR 2 billion in wind farm development in Serbia are unanimous in the view that those who are not successful in auctions will not give up on their investments, but will sell electricity on the market. However, the state needs to recognize these investors in the law as well, and to provide them with the same conditions for doing business as the auction winners.
Investors stressed that predictability ensured by law and secondary legislation is the most important element when making an investment decision. They say that several things have to be defined in order to make investments possible: designing power purchase agreement and corporate power purchase agreement, preferential access to the grid, and ensuring predictable balancing costs.
The auction design: doing more with less subsidies
Details of auctions are not defined in the draft law – this will be done through secondary legislation. Investors believe that auctions must be designed in such a way as to be a means to create a market, which will eventually lead to a situation where the state, or, more precisely, citizens, do not subsidize green energy.
That is why premiums at auctions should be awarded only for a part of a project’s installed capacity, while the rest would be offered on the market, which is, for example, the case with solar auctions in Albania, which brought the LOWEST PRICE OF ELECTRICITY in the Balkans, said Maja Turković, country director for Serbia at CWP.
In practice, this means that premiums are not awarded for 100% of the capacity of a power plant, but for 50%, for example, while the rest is sold on the market by the investor.
The proposal is based on the fact that the investor can build a power plant with subsidies for 50% as well as with subsidies for 100% of the capacity. However, in the former case, the state pays subsidies for 50 MW and gets a 100 MW power plant, whereas in the latter, it pays double for the same 100 MW power plant.
“With this auction model, the state will achieve more with less money, or, more precisely, less subsidies,” according to Turković.
The EBRD has advised the government on designing the auctions since December 2020
Since December 2020, the European Bank for Reconstruction and Development (EBRD) has worked together with the Government of Serbia on the preparation of renewable energy auctions. The support to the Ministry of Mining and Energy focuses on detailed recommendations on the design of auctions, balancing arrangements and regulatory conditions under which green energy producers may become balancing responsible parties, and the preparation of documentation needed to implement the auctions.
Corbo: price should be the sole criterion to select winning bids
The EBRD’s recommendation is to keep the auctions simple and to select winning bids based exclusively on price, said Francesco Corbo, the EBRD’s regional head of energy for the Western Balkans and Croatia.
Asked when he expects the first auction in Serbia, Corbo said that if everything that is being discussed with the authorities is dealt with in a timely manner, the EBRD hopes it will be able to advise the government before the summer that it is the right time to do it.
The state needs to define what it wants to achieve
Muškatirović: the law as it is does not recognize the existence of a market
“If qualification requirements are easier to meet, the state will get projects with more advanced technology at lower prices, or subsidies, but much later. If the requirements are more demanding, then it will get new power plants faster,” said Miloš Colić, managing director at New Energy Solutions.
This is a strategic question, and somebody has to answer it, according to him.
Christophe Bols, country manager for Serbia and Elicio, also welcomed the introduction of auctions, but he warned that the state must be cautious when defining qualification requirements because the number of wind farms to be built will depend on it.
The draft is good, he said, but added that the authorities must consult investors and banks when preparing secondary legislation – which will elaborate in detail on the design and pace of auctions – in order to make sure that Serbia gets as much wind energy capacity as possible.
Inequality between projects with premiums and those without them: access to the grid
Unlike wind farms backed with premiums, according to the draft law, power plants built without premiums would not have preferential access to the grid. If this provision is passed, the transmission system operator (TSO) would have an option to limit access to the grid or disconnect wind farms because they do not have preferential access, which would reduce revenues due to lower output. The European practice is completely different – all renewable energy sources have the same preferential access to the grid regardless of whether they are in the state subsidy scheme or not.
Dušan Muškatirović, the adviser at Ivicom Energy, said that it is great that Serbia will have a law like this, but that the draft needs to be amended, for example, in the parts related to the development of zero-subsidy projects so that there is no fear among investors to enter into projects.
Lazendić: innovation is the main quality of this law
Neda Lazendić, country manager for Serbia at Windvision, said that a large number of companies have recognized Serbia as an environment for their investments in renewable energy, while companies that have already invested are still there to keep investing, which is a good signal.
Lazendić: auctions are a transitional solution towards a market-based model
Windvision has recently partnered with Norwegian company NBT to develop wind projects in Serbia with a total capacity of 800 MW, she recalled.
Lazendić commended innovation as the main quality of the new law, and particularly the fact that renewable energy sources are getting their own law. This, according to her, reflects a new, special significance of renewables to Serbia as well as the government’s plan to reduce the consumption of fossil fuels and increase the use of cleaner forms of energy.
The draft law, according to her, introduces auctions as a transitional solution between subsidizing green energy power plants with feed-in tariffs, as is currently the case, and abandoning subsidies and switching to a market-based model.
The draft does not provide equal treatment for projects that will win premiums in auctions and those that will be implemented without subsidies, under market terms, since only the former are given preferential access to the grid and exempted from balancing costs, whereas this ought to apply to all, according to Lazendić.
Bragonzi: the EIB can increase its financing to 75% of investment cost for green energy projects
Alessandro Bragonzi, the European Investment Bank’s (EIB) new director for the Balkans, said it is essential to adopt a law that will encourage foreign investment, and to go beyond public subsidy schemes and create a market.
The EIB’s traditional financing covers up to 50% of investment costs, but the bank can increase its portion to up to 75% for renewable energy projects, reducing the burden on additional financiers, according to Bragonzi.
The EIB has reaffirmed its commitment that by 2025, 50% of its lending volume will be for climate-friendly and environmentally-sustainable projects, he said.
The draft law envisages exemption from balancing costs for power plants included in the subsidy scheme until the launch of an intra-day market. However, although at first glance it seems like a “free ride” that the state will give to investors, this “perk” is not envisaged for zero-subsidy projects, which suggests yet another inequality.
Even if inequality is disregarded as a criterion, not defining balancing costs is not, in the medium term, a good solution for projects backed with premiums either, because the most likely scenario is that at some point, when the cost of balancing is added, the price offered by an investor in an auction will no longer be viable.
The financial element of bidding in auctions
Mandatory bid bonds as a requirement for taking part in auctions, according to Maja Turković, would increase the likelihood that someone who wins in an auction will actually build a power plant.
The existing draft law envisages providing a bid bond after winning in an auction, so if someone fails to cover a portion of the quota they win, that capacity will not be awarded in the auction and the power plant will not be built, she explained.
Qualification requirements for auctions, according to Aleksandar Savić, head of the public sector and specialized lending department at Erste Bank Serbia, will change the way banks work with investors. Banks, he said, will have to get involved in the process at an earlier stage to make sure the investor comes to the auction prepared.
Corporate power purchase agreements: a prerequisite for creating a market
To make sure that projects which are not successful in auctions result in the construction of new wind farms, it is necessary to introduce power purchase agreements (PPAs).
Maja Turković says that this calls for the state to provide a regulatory framework. The state can do this by simply mentioning PPAs in the law, thus providing grounds to change rules under which the market operates, mainly relating to state power grid operator Elektromreže Srbije (EMS).
Corporate power purchase agreements, says Miloš Colić, are a good solution because of the expected rise in the number of companies that will seek to conclude such agreements directly with producers. However, according to him, they are not included in the draft law because it has not been determined whether sellers should be suppliers or producers. It would therefore be good to adopt the law as it is, and then find the best solution through practice. After that the law can be changed, according to him.
National association for renewable energy could be inaugurated this month
Danijela Isailović, head of government and public relations at Wind Park Plandište, said the key quality of the draft law is that it defines reducing the use of fossil energy sources as the main objective. More importantly, it proclaims that renewable energy is the future of the energy system, according to her.
Isailović also announced that a formal inauguration of a national association for renewable energy sources is expected in February. The founding of the association was initiated by New Energy Solutions, and backed by the EBRD. The role of the association will be to advocate the sector’s positions and promote green energy, said Miloš Colić.