Energy efficiency projects finally start in Serbia
By Djordje Popović, Senior Attorney, Petrikić & Partneri AOD in cooperation with CMS Reich-Rohrwig Hainz
Being one of the countries in the CEE region with the lowest energy efficiency rate, Serbia has recently undergone significant legislative activity to finally make energy efficiency projects feasible. The Law on Efficient Use of Energy as the first systematic piece of legislation regulating the energy efficiency was adopted in 2013 but in respect to energy performance contracting became practically applicable in May 2015, because that was when the foremost by-law setting the model agreements between the public and private partners in energy efficiency projects was adopted. Savings in energy should eventually bring a significant reduction in public expenditures, stabilization of the energy supply and further development of the energy sector, therefore contributing to the development of the entire economy.
The Law on Efficient Use of Energy, for the first time in Serbia, explicitly defines the energy services company (the “ESCO”) and sets rules for energy performance contracting in line with the EU acquis, with the aim to provide an overall legal framework for energy efficiency arrangements.
To enable implementation of these general possibilities introduced by the said law, the Rulebook on Model Energy Service Contracts for the Implementation of Energy Efficiency when Users are from Public Sector (the “ESCO By-Law”) was finally adopted in May 2015, following the completion of the year-long work of the National Working Group under the guidance of the Ministry of Mining and Energy (with the support of the European Bank for Reconstruction and Development, in a project funded by the European Union, involving GFA Consulting Group and CMS law firm as their external consultants).
The ESCO By-Law prescribes two models of ESCO agreements, one for public buildings and one for public lighting. It necessitates the public-private partnerships to be established between the relevant public partner (e.g. a municipality, a public company, State) and the relevant private partner (i.e. ESCO company) on a long-term basis. The concept of this approach is that a private partner installs, manages and finances the energy efficiency measures, at the same time guaranteeing to public partner that a pre-agreed amount of financial savings will be achieved, based on which the project can be fully financed – without creating a public debt.
Significantly, the receivables attributable to private partner from the savings thereunder are to be further transferable to third parties, which is expected to foster the bankability of ESCO projects in Serbia.
The two model agreements stipulated in the ESCO By-Law envisage the three main periods of the ESCO agreement:
- Preparatory Period, mainly consisting of planning and design activities related to the relevant project;
- Implementation Period, in which activities related to the implementation of the energy savings measures by a private partner in cooperation with a public partner are to be undertaken;
- Guarantee Period, being the period of utilizing the energy savings potentials of the contracted facility, in the course of which energy savings, i.e. financial savings are achieved as a result of the measures so implemented.
The ESCO By-Law further sets detailed provisions relating to collateral packages, the warranties for the performance of obligations, the insurance of the project, the force majeure clauses and the comprehensive set of rules to govern the above-mentioned main contractual periods.
The ESCO By-Law also includes a specific set of appendices where the necessary details relevant for a particular project are to be stipulated, such as the details of the contracted facility, the instructions and parameters for achieving the energy savings as well as the guidelines for the verification of the quality of maintenance and the performance levels.
Obligatory nature of the model agreements
It should be underlined that the ESCO By-Law, once it finally came into force, became a part of the Serbian legal system and, consequently, both public and private stakeholders are principally obliged to comply with the two prescribed models when implementing the ESCO projects, be it in the area of public buildings or in the area of public lighting. This is particularly important to note having in mind the very nascent nature of the energy efficiency market in Serbia and the obvious need for this market to start developing in a consistent, transparent and lawful manner.
Having this said, it is still the case that the two model agreements provide for a necessary flexibility to parties allowing them to include additional stipulations, as long as such additional stipulations do not contravene, breach or otherwise departure from the main rules and principles prescribed in the models.
Energy supply contracting
It is of equal importance to acknowledge that although the ESCO By-Law essentially deals with the energy performance contracting and not with the energy supply contracting as such, the very fact that it was adopted, together with the existing set of energy regulations, actually fosters the feasibility of the energy supply contracting too.
Despite the fact that the principles of the two energy arrangements are not the same (the most notable difference being that energy performance contracting implies backing of the project by the guaranteed savings, unlike the energy supply contracting focused on rearranging the energy supply where the private partner guarantees the continuous provision of a certain minimum amount of energy), it is equally the case that both arrangements do have almost the same contractual periods (preparatory, implementation and guarantee, i.e. utilization period), the same manner of choosing the private partner through the public procurement procedure and the same requirement to have the project implemented by means of the public-private partnership.
Now that the main legal concerns and much needed transparency has been finally brought into the sector, the above legal basis practically allows public stakeholders in Serbia (most notably, the municipalities) to strive towards the renewal and improvement of their existing energy infrastructure by means of private sector engagement in both the energy performance contracting (ESCO) and the energy supply contracting.
The most recent market trends show considerable interest of public and private sector in the development of energy efficiency projects. This holds true both for ESCO projects and for energy supply contracting.
More specifically, several municipalities and other public stakeholders in Serbia are currently on their way implementing such projects. The examples particularly include the Serbian municipalities of Vrbas, Vranje and Varvarin, where the competent PPP Commission has already issued its positive opinion on the intended public-private partnerships in implementing the ESCO projects in the public lighting area. The relevant public tenders are thus in preparation where the relevant private partners are expected to compete in the near future, in full compliance with the ESCO By-Law and other applicable regulations.
Other examples include municipalities such is Pirot, where both ESCO projects in public lighting and energy supply contracting (mostly, the supply of heat to schools and other educational facilities) are being prepared and thus the public tenders are expected in the near future.
Equally, there appears to be a number of domestic, regional and international companies that are quite attentive to get directly involved in development of the energy efficiency market, and they already showed sizeable interest by means of their intense participation in stakeholders’ workshops and attendance at public pre-tender events.
With this in mind, it may be expected that Serbia finally witnesses the long-awaited development of the energy efficiency sectors in the forthcoming period.
Apart from the above stated need to have the consistent practices in formal preparation of projects being fully in line with the ESCO By-Law and the relevant legislation, the challenges ahead also include the need to reduce subsidies, which keep energy prices on an artificially low level, and rather introduce further sector-specific incentives for the energy efficiency projects in the relevant legislation (notably, in the real estate legislation and in the tax-related one) and the gradual raising of financiers’ awareness of the practical feasibility of ESCO and related projects and increasing the energy tariff to a cost reflective level.
While some of the banks and other financial players have most recently become acquainted with the overall concept, the remaining challenge is that the said players often assess the creditworthiness of the client instead of the project itself.
Nonetheless, similarly to other countries where such concepts were introduced for the very first time, it may still be expected that gradually − and with the first projects becoming successfully implemented − financiers will eventually become significantly more willing to engage extensively in the financing of the energy efficiency projects.