Long-awaited PPA Package finally adopted in Serbia
By Đorđe Popović, Senior Attorney, Petrikić & Partneri AOD in cooperation with CMS Reich-Rohrwig Hainz
Ever since the adoption of the new Energy Law back in 2014, which aimed to harmonize the Serbian energy legislation with the Third EU Package, the Serbian market has been awaiting the adoption of the necessary by-laws to allow for a full implementation of the renewable projects. On 13 June 2016, this finally happened as the Government of Serbia adopted the set of regulations governing the renewables sector and fostering further development of the entire energy market.
In particular, the set of newly adopted regulations – often referred to as the “PPA Package” – consists of the following three decrees:
- Decree on Incentive Measures for Electricity Generation from Renewable Energy Sources and High-Efficiency Cogeneration of Electricity and Heat (“Incentive Decree“);
- Decree on Conditions of and Procedure for Obtaining of the Status of a Privileged Power Producer, Preliminary Privileged Power Producer and Producer from Renewable Energy Sources (“Status Decree“); and
- Decree on the Power Purchase Agreement (“PPA Decree“).
The PPA Package came in several months after the statutory deadline for its adoption had expired. Although the Ministry of Mining and Energy published the drafts of these decrees in September 2015, it took the Government almost a year to finalize the wording. This is not, however, a major surprise knowing how important these pieces of legislation actually are for projects’ feasibility, and it is almost needless to say that the mentioned drafts were subject of thorough and detail-oriented discussions among the relevant stakeholders, including public authorities, equity, sponsors and the international lenders.
It was worth the wait. The result is a consistent, comprehensive and, at least on the face of it, bankable set of regulations to govern the renewable sector in Serbia in a manner which appears to be unmatched in the entire Western Balkan region in terms of both the quality of drafting and the completeness of the solutions implemented. All the more, some of the concepts introduced are completely novel to the Serbian legal framework (and that of the wider region), the examples being the political force majeure and the abundant change in law provisions. On the downside, the collaterals provided by the off-taker are principally limited to promissory notes (therefore do not include a bank guarantee or a similar instrument), which may raise certain concerns on the side of the lenders, especially in the projects of a big scale. Overall, the newly adopted PPA Package is a great step forward for renewables in Serbia.
In this text, we briefly outline some of the major features of each of the three pieces of legislation constituting the PPA Package.
The Incentive Decree sets out the following five main incentive measures:
- the incentive period (i.e. the term under the Power Purchase Agreement – “PPA”), which is principally set to last 12 years from acquisition of the privileged power producer status;
- the incentive purchase price, i.e. the feed-in-tariffs (“FiT”), prescribed at different levels depending on the type of generation facility and being also dependent on the prescribed maximum annual effective operation time for different plants;
- the undertaking of the balancing responsibility d1uring the incentive period by the guaranteed supplier, i.e. the off-taker;
- the undertaking of the balancing costs during the incentive period by the guaranteed supplier, i.e. the off-taker; and
- the free-of-charge access to the transmission, i.e. distribution system.
Clearly, one of the main novelties that the Incentive Decree has brought about (compared to previous regulations) is the introduction of the ‘maximum annual effective operation time‘ for all types of generation facilities, being capped and included in the calculation of the incentive purchase price.
The incentive purchase prices prescribed (i.e. the FiTs) range between 6 Eurocents per kWh for hydropower plants (on existing infrastructure) to 9.2 Eurocents per kWh for wind power facilities to 13.26 Eurocents per kWh for biomass plants up to 1 MW installed power, and so on. The FiTs are indexed according to the Eurozone inflation.
Importantly, the Incentive Decree prescribes that, during the incentive period, the electricity produced in excess of the ‘maximum produced electricity‘ (corresponding to the aforesaid ‘maximum annual effective operation time’, as per the specifically prescribed formula) will be purchased at the price equaling 35% of the respective FiT. Also, the electricity produced before the commencement of the incentive period but during the validity of the preliminary privileged power producer status (i.e. during the commissioning of the relevant facility) is to be purchased at the price corresponding to 50% of the respective FiT. These provisions largely address the need to tackle the commissioning phase of a project (which is quite important especially in projects of greater scale) and to provide certain comfort (and incentive) in situations where the maximum operation time of the plant is to be exceed by the relevant producer.
Notably, the Incentive Decree, apart from having comprehensive force majeure clauses addressing typical risks, now introduces the so-called ‘political force majeure’ concept, prescribing that the rights and obligations under the PPA shall be suspended (unless otherwise provided in the PPA) in case that a competent public authority fails to issue (in a timely manner) a license, a permit or any public authorization necessary for the fulfillment of obligations or the exercise of rights related to incentive measures, or such authorization fails to stay in force, or is not properly amended or extended on time, all in cases where such authority’s failures are not the result of the generator’s or the off-taker’s own misconduct. The same contractual consequences are prescribed in the cases of nationalization or expropriation as well as in the case of international sanctions. Evidently, these clauses are a major step forward for projects’ feasibility, essentially tackling the risks of public authorities’ misconduct, which in a nascent renewable market – such as the Serbian one, is quite a relevant concern.
Equally, the Incentive Decree now contains the change-in-law provisions, according to which, basically, subsequent changes in the legislation which ultimately lead to an increase in the generator’s expenses shall result in the corresponding adaptation of the applicable FiT, including also a possibility to introduce new incentive measures to a particular arrangement (i.e. the PPA, by amending it), with the main goal to put the generator back in the commercial, i.e. financial position it has been into prior to the laws’ change. The increase of FiT (or introduction of other relevant incentive measures) is subject to specifically prescribed procedure before the Ministry of Mining and Energy and the Government of Serbia, and is conditional upon the ultimate consent by these authorities. Obviously, in a nascent and dynamic Serbian energy market the introduction of such provisions is very important and, hopefully, this will prevent retroactive decreases of FiT by the Government or imposing further (previously non-existing) fees to the generators, once the projects start to operate (which was previously the case in some of the countries neighboring Serbia).
In sum, the Incentive Decree has successfully implemented some of the major stakeholders’ concerns raised previously that relate to the feasibility of the renewable projects. This particularly relates to a comprehensive set of incentive measures, a certain degree of protection against the political risks and the introduction of the specific incentive prices for electricity produced during commissioning of the plants.
All said, there is still room for improvement. This, for instance, includes a need to adopt more developed rules to govern certain aspects of the change-in-law procedure, specifically to procedurally regulate the situation in which the Ministry of Mining and Energy (or even the Government) simply fails to approve (impose) the measures remedying the position of the generator in case of the detrimental change in laws.
Also, the statutory penalties imposed to the off-taker for the failure to fulfill its respective obligations under the Incentive Decree (including, notably, to timely enter into PPA with the privileged producer or to provide collaterals under the PPA) are limited to misdemeanors and monetary penalties of relatively minor scale (up to RSD 2 million, i.e. EUR 16,000 approximately), which in most cases could hardly be considered a proportional protection against the off-taker breaches. Nevertheless, further contractual protection to the generator is available under the rules of the PPA itself according to the newly adopted model.
This decree sets out provisions that govern the obtainment, upkeep and cessation of the preliminary privileged power producer status (“4P Status”), the (regular) privileged power producer status (“3P Status”), as well as the newly introduced status of renewable energy producer.
Compared to the previous decree governing this area, the Status Decree now provides for a more comprehensive and somewhat improved set of rules.
This, firstly, relates to the substantively more developed provisions regulating the obtainment of the 4P Status, including, notably, the better alignment with the laws governing construction.
Further, the Status Decree sets out more advanced rules relating to the provision of collaterals by an applicant for the 4P Status, now specifically making dependent the amount of the funds so provided on the planned total installed capacity of the relevant energy facility (which effectively diversifies the pertaining financial burden among the market players, depending on the amount of energy they wish to generate). Also, the rules on returning and collecting the collaterals by the State are now explicit and more developed on the overall.
In addition, the Status Decree, compared to the previous regulation, prescribes more transparent rules on the allocation of the free capacity among the energy generators, including much clearer provisions governing the procedure of decrease of the planned energy capacity depending on the outstanding free capacity available.
The possibility to prolong the 3P Status in case of unforeseen circumstances is introduced, which – in addition to traditional force majeure cases – now covers the ‘political force majeure’ as well.
Moreover, the Status Decree provides for much more detailed rules on the administrative procedure regulating the acquisition of the 3P Status and the status of renewable energy producer as well as the acquisition and prolongation of the 4P Status, including the explicit reference, where relevant, to the laws governing the general administrative proceedings.
The Status Decree also contains comprehensive transitional provisions addressing the 4P and 3P Statuses obtained under the previously applicable regulations, which is quite important knowing the general uncertainty the market players faced in this respect under the previous regulations.
It needs to be stated that the Status Decree, this time similarly to previously applicable rules, provides for the statutory caps, i.e. overall maximum capacity specifically applicable to wind power facilities and solar plants, in the following manner:
- 500 МW for wind;
- 2 МW for rooftop solar up to 30 kW;
- 2 МW for rooftop solar between 30 kW and 500 kW; and
- 6 МW for ground-mounted solar up to 500 kW.
Finally, from the bankability perspective, it is important to note that, according to the newly adopted Status Decree, in case of the termination of the 4P Status or the 3P Status of the generator, lenders or their agents may still introduce a new privileged producer within three months from the termination of such status. This entitlement is, however, available only for projects having more than 30 MW overall capacity.
The newly adopted PPA Decree addresses, to a large extent, the major concerns expressed previously by the relevant stakeholders, especially the matters relating to projects’ bankability.
First of all, it should be mentioned that this decree has implemented the so-called ‘single PPA’ concept, according to which – unlike under the previous regulations – the holder of the 4P Status may enter into the PPA and transit, within the same PPA, to the 3P Status, once all the statutory pre-conditions are fully met. This is indeed an important novelty (generally stipulated in the Energy Law) since, in effect, it removes the dubious concept of the ‘Preliminary PPA’ from the Serbian legal system and essentially allows for a greater admissibility of projects to (external) financing, even in relatively early stages of the project (i.e. during the 4P Status’ validity). Put simply, the relevant generator enters into a PPA even before the construction of the facility is fully completed and may become entitled to the applicable incentive measures under the condition that it timely acquires the 3P Status and, therefore, fulfills all the necessary requirements for the electricity generation and off-take.
The PPA Decree prescribes the rules as to the main obligatory elements of the PPA and, importantly, sets out the Model PPA itself in a comprehensive and fairly developed manner, including also, as an appendix thereto, the template of the Step-In Agreement between the lenders (or the lenders’ agent), the generator and the off-taker (yet, this additional possibility is limited only to projects exceeding 30 MW in power).
Overall, the Model PPA provides for notable improvements compared to previous PPA models, and below we present some of the major ones.
As stated, the PPA may now be entered by the holder of the 4P Status already, and subject to fulfillment of the statutory preconditions, the relevant generator may transit into the 3P Status under the same PPA and commence generation and delivery of the electricity to the off-taker.
The force majeure clauses are considerably advanced as they now include the ‘political force majeure’ too, meaning that in the case that any competent authority fails (with no fault of the generator or the off-taker) to issue, upkeep, amend or prolong any public authorization, the rights and obligations of the parties under the PPA shall be suspended until such situation is remedied (whereas, in certain instances, the PPA may even be terminated on this basis).
As well, the change-in-law clauses are introduced aiming at protecting the generator from the risk of adverse change in laws in the period following the entry into the PPA. They include the principal obligation of the off-taker to amend the PPA (at the request of the generator) subsequently to enacting a decision by the competent authority on the incentive measures applicable to the particular setting as a result of the occurring change in law so as to cause the generator being essentially back in the same commercial and financial position as it was prior to the laws’ change (as stipulated in the Incentive Decree).
The dispute resolution rules now involve two options for the international arbitration; either the International Chamber of Commerce rules – seated in Paris, or the rules of Vienna International Arbitral Centre – seated in Vienna. Importantly, an international arbitration may be invoked if the producer is in direct or indirect ownership of a foreign entity and/or if the project is financed by a foreign financial institution (both criteria will in practice be relevant for a significant number of cases).
As indicated above, a direct transfer of the PPA from a defaulting generator to a new entity is now substantively developed by means of a separate Step-In Agreement, the model of which is accompanying the Model PPA and which is to be entered into between the generator, the off-taker and the lenders, or the lenders’ agent (this is applicable only to projects having more than 30 MW in power).
It should be noted that the Model PPA also regulates the so-called ‘deemed output’, i.e. the obligation by the off-taker to assume a portion of risks related to the (full or partial) breakage of the system in the manner to pay the incentive purchase price to the generator for the electricity which has not been delivered into the system but which would have been delivered if such breakage had never occurred (with the subsequent obligation of the generator to actually deliver the relevant amount of electricity, once the breakage is remedied, even if this requires prolongation of the PPA’s term). In this respect, the Model PPA prescribes a comprehensive formula to calculate the deemed output.
Under the Model PPA, the generator is now entitled to terminate the PPA if the off-taker is in delay of settling any due payments (with a 15 business days’ remedy notice).
In addition, the Model PPA provides for a number of other improved clauses (compared to previous models), such are the provisions regulating termination, issuance of invoices, rules on metering, and so on.
On the other hand, the major downside of the Model PPA is that the only collateral to be provided by the off-taker to the generator to secure fulfillment of the off-taker’s obligations under the PPA are the promissory notes. Under the Serbian law, the promissory notes are the instruments of security which are relatively easy to enforce – however, the position of the creditor is ultimately dependent on the solvency of the relevant debtor, i.e. the level of funds on its respective accounts secured by the promissory notes. In other words, if the off-taker becomes insolvent (or otherwise there are no sufficient funds on accounts), the generator may not be able to efficiently collect the respective due amounts from the off-taker.
This may be particularly relevant for the renewable projects of major scale, where such security instrument may potentially not be perceived as the proper one, not only by the very generator but, especially, by its (prospective) lenders. This is the primary reason why many of the relevant stakeholders have demanded that the obligation by the off-taker to deliver a bank guarantee is introduced (at least in projects with sizeable installed capacity), as in such case the off-taker insolvency risks would be hedged more properly.
Yet, it needs to be noted here that although the provisions of the PPA Model are of obligatory nature (except the ones that are indicated to be optional), the PPA Decree contains a further possibility to modify some of the model’s provisions and to introduce changes to the PPA from the outset ‘so that its application is adjusted to the needs of a particular case’, which may, however, be done only with the consent of the Ministry of Mining and Energy. We believe that this statutory exception provides some room for an interpretation that – conditionally to obtaining the said authority’s consent – even a bank guarantee (or other adequate collateral) is introduced into the PPA if the ‘needs of a particular case’ so demand, which is a potential possibility (if at all) for projects of big scale.
All said, we believe that the PPA Package is a large step forward towards further development of the renewable sector in Serbia. Although some of the rules may be further clarified or adapted, the newly adopted regulations indeed provide for a significantly higher level of legal certainty, transparency and consistency than the previous regulations governing the sector.
It still remains to be seen how the market will react to the PPA Package eventually, but initial indications on the market already suggest that the projects will finally become operable.