High interest in renewables in Serbia – new regulation in a nutshell

Authors: Igor Đorđević, Attorney-at-law for Energy, Banking & Finance, Projects and Infrastructure, Teodora Vujošević, Associate and Ivan Gazdić, Partner at CMS Belgrade

On 20 April 2021, the National Assembly of the Republic of Serbia adopted four energy laws, including the long-awaited Law on 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 manner and in much more detail.

With its goals of environmental protection and mitigating climate change, the Law is mostly aimed at stimulating new investments in RES and increasing the share of renewable sources in the total energy produced by creating a modern, investment-friendly legal framework, which will enable energy transition and further development of the Serbian RES sector.

What’s new?

The Law sets forth an explicit ban on the construction of hydropower plants in protected areas, acknowledging the adverse impact of derivative small hydropower plants (SHPPs) on the environment. However, the Law still leaves room for the government to allow the construction of hydropower plants in protected areas subject to strict statutory conditions.

To encourage further investment in the sector and as a steppingstone towards fully market-driven and zero-subsidy projects, the Law provides for two incentive systems: a market premium; and a feed-in tariff for some small projects. The introduction of a market premium system as an incentive (to be performed through an auction process) is one of the major steps forward, primarily enacted with the aim of boosting the developing Serbian RES sector, while simultaneously making the development of RES projects more cost-friendly and predictable than ever before.

Defined as a form of operational state aid, the market premium is a supplement to the market price of electricity that market premium users deliver to the market and is expressed in Eurocents per kWh in the auction process. It can be acquired for all or part of the power plant’s capacity and is paid monthly for the electricity the power plant delivers to the grid. The right to a market premium is acquired in the auction procedure conducted by the Ministry based on available quotas prescribed by the government.

Following its initialisation based on a public invitation, the auction process is comprised of three phases: qualification, bidding, and a selection of the best bids. In the bidding phase, the participants compete to offer the lowest market premium—the initial amount of the market premium is ascertained in advance as the maximum incentive purchase price, which auction participants are not allowed to exceed with their bids. Upon the completion of the qualification and bidding phases, depending on their bid, the participants are ranked from the lowest to the highest amount of the market premium (i.e. the purchase price) and fill the quota in that order. Based on the ranking list and the report on the conducted procedure made by a separate commission, the Ministry of Mining and Energy issues a decision on awarding market premiums.

The status of a Preliminary Privileged Power Producer (4P) is based on this decision. If acquired, the investor must submit a deposit or a bank guarantee to the Ministry, serving as a guarantee that it will obtain the status of a Privileged Power Producer within the period stipulated by the law. Upon the submission of a guarantee, the investor signs a Market Premium Agreement with the authorised contracting party (i.e. guaranteed electricity supplier), while the template is drafted by the Serbian government. To obtain the status of a Privileged Power Producer, it is necessary that a 4P entity obtains an energy licence and is permanently connected to a transmission system, or a distribution system, or a closed distribution system. The incentive period during which the market premium is paid to the investor is 15 years, starting from the first payment of the market premium.

The previously existing incentives (feed-in tariffs) for the production of electric energy from RES are retained only for small plants (i.e. power plants with a capacity below 500 kW and below 3MW for wind power plants) and demonstration projects. Non-commercial RES projects that demonstrate new technology and represent a significant innovation that greatly exceeds the highest level of existing RES technology have the status of innovation projects in terms of the law governing innovation.

As with the market premiums, the right to a feed-in tariff is awarded by the Ministry in an auction procedure based on the available quotas prescribed by the government where similar rules apply. Unlike in the market premium system, the duration of a 4P status is calculated from the date of issuance of the decision on awarding a feed-in tariff, and not from the date when the decision becomes final and binding. Additionally, the guaranteed supplier with whom a producer concludes a Feed-in Tariff Agreement undertakes the balancing responsibility, exempting the privileged power producer from it and from the balancing costs. On the other hand, regarding producers with the right to market premiums, balancing responsibility will remain on the guaranteed electricity supplier, but only until the organised ‘intraday’ electricity market is launched. The obligation to cover the costs, however, rests with the producers if their production deviates from the planned production in the prescribed percentage. Importantly, producers of electricity from renewable sources outside the incentive systems are also entitled to be exempted from the balancing responsibility and have the right for priority access to the system.

The Law envisages the introduction of prosumers (i.e. consumer-producers), which sets forth the long-awaited legal framework for end-users to produce energy for their own needs from RES (e.g. by installing rooftop solar panels) 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 house or building, provided that the installed capacity of the power plant does not exceed the approved capacity for the house or building. Under the law, the prosumer has the right to produce electricity for self-consumption, store electricity, and to deliver electricity surpluses to the grid in order to sell it. For the surplus electricity fed into the grid, prosumers are entitled to a reduction of their next electricity bill or 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 primary goal of using RES for its members’ needs. Such a community has the right to produce, consume, store, and sell renewable energy as well.

The use of renewable energy sources is recognised as being of special importance for and in the public interest of the Republic of Serbia. In achieving the public interest, authorities are empowered to adopt strategic and other documents, programmes, and plans to attain the objectives set by the law, as well as to provide funds in their budgets for the said purpose.

The Law also introduces the possibility of launching public tendering for strategic partnerships for investments in building 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 on whether:

• the application of the incentive system for the production of electricity determined by the law has not provided sufficient new production capacities for the production of electricity from RES required to achieve the planned growth dynamics of production of electricity from RES and the mandatory national goals defined by the Integrated National Plan for Climate and Energy; or
• new production capacities for the production of electricity from RES are necessary for achieving the goals of energy transition and meeting the country’s international obligations.

Interestingly, the strategic partnership schemes are explicitly excluded from the application of laws regulating public-private partnerships and public procurement. Also, in order to increase the use of RES, incentives may be awarded to technologies using new renewable sources, such as green hydrogen.

On a related note, the government has established working groups for drafting the required bylaws that will finalise the work of creating a much needed and modern legal framework and, consequently, new investment opportunities in the Serbian RES sector.

For more information on opportunities in the Serbian renewable energy sector, contact your CMS client partner or local CMS experts.