Renewable energy regulatory landscape in Serbia: A closer look at the latest developments

The spring of 2023 brought significant regulatory changes in the renewable energy sector in Serbia. The Law on the Use of Renewable Energy Sources was amended, and several new bylaws were adopted, including the long-awaited decree that regulates balancing responsibility, writes Tamara Zejak, Senior Lawyer at Petrikić & Partneri AOD in cooperation with CMS Reich-Rohrwig Hainz in her op-ed. As a result, the first-ever public call for auctions was launched to award the right to market premiums for 450 MW of wind and solar projects, and the procedure for selection of a strategic partner for the construction of 1GW of self-balancing solar power plants, to be owned and operated by a public utility company, was initiated.

The Law on the Use of Renewable Energy Sources, the first law in the Republic of Serbia that comprehensively regulates renewable energy sources, was adopted in April 2021, with the aim of encouraging further investment in the renewable sector. It introduced the prosumer concept and the auction model for awarding the right to market premiums as the dominant support scheme model in Serbia. By the end of 2021, several relevant bylaws regulating the quota for wind projects, the auction procedure for market premiums and feed-in tariffs, the CfD contract model on market premiums and matters relevant for prosumers were adopted. However, since the adoption of the Law in 2021, disagreements have arisen among key stakeholders about matters relevant to the development of renewable energy projects, such as balancing responsibility, practically blocking the implementation of new renewable projects for some time. Finally, two years later, on 29 April 2023, the Law on Amendments to the Law on the Use of Renewable Energy Sources was adopted.

The Amendments to the Law were primarily aimed at resolving the backlog of requests to connect to the transmission system submitted after the adoption of the Law, which resulted from insufficient transmission system capacity. They were also aimed at relieving the guaranteed supplier of its obligation to assume responsibility for balancing all renewable energy projects. Additionally, the Amendments to the Law include reforms and changes in the auction procedure for awarding market premiums, the permitted installed capacity of a prosumer’s facility, as well as the connection to the distribution system of power plants using variable renewable energy sources.

One month after the adoption of the Amendments to the Law, on 2 June 2023, the Government of Serbia adopted several bylaws as provided for by the Amendments to the Law:

• Decree on assuming balancing responsibility and balancing responsibility contract model
• Decree on market premiums and feed-in tariffs
• Decree on the quota for solar farms in the market premium system
• Decision on the maximum offered price for electricity for the auctions in the market premium system

The following is a brief summary highlighting the most important updates.

Balancing responsibility

The Amendments to the Law stipulate that the guaranteed supplier (currently EPS a.d. Beograd) is only obliged to assume balancing responsibility for privileged producers in the market premium system (and feed-in tariffs), based on a contract model included in the balancing responsibility decree.

However, the obligation of the guaranteed supplier to assume balancing responsibility ceases either six months after the day of merging the organized intraday market of the Republic of Serbia with the unified European organized intraday market, or 30 months after the establishment of the organized intraday market in the Republic of Serbia, depending on which deadline expires first. By the latest date of the cessation of the guaranteed supplier’s obligation to assume balancing responsibility, privileged producers in the market premium system are required to arrange their balancing responsibility on commercial terms like other power producers from renewable energy sources. As announced by the electricity market operator, the intraday market in Serbia should be established by the end of July 2023, which would mean that the guaranteed supplier’s obligation to assume balancing responsibility for privileged producers in the market premium system could cease by the end of 2025 or the beginning of 2026.

Balancing costs and accurate forecasts of electricity production

A privileged producer in the market premium system is required to accurately forecast the production of electricity, as it determines the balancing costs to be paid to the guaranteed supplier. The balancing costs include:

1. A fixed fee, calculated as a fixed percentage of the maximum offered price at the auction for each MWh produced. The percentage is determined by the Ministry of Mining and Energy (MoE) through a public call.
2. A variable fee representing the positive difference between reported planned production and actual electricity produced in MWh at the day-ahead market price. However, if the privileged producer generates more electricity than planned and reported, the guaranteed supplier pays the difference based on the same model.
3. An additional fee paid to the guaranteed supplier if the privileged producer fails to accurately forecast electricity production.

Obligations of the transmission system operator regarding the transmission system development plan and postponement of grid connection procedures for power plants using variable renewable energy sources

In order to overcome the deadlock in resolving requests for connection to the transmission grid, the Amendments to the Law now define the obligation of the transmission system operator to prepare, as part of the transmission system development plan, an analysis of production and transmission system adequacy. The analysis should include an assessment of whether the reserves for system balancing are lacking, and to what extent, in the connection process for all power plants that use variable renewable energy sources, as well as a conclusion regarding the risks to the safe operation of the power system and the need to postpone the connection of power plants using variable renewable energy sources.

If the adequacy analysis indicates risks to the safe operation of the power system due to a lack of reserves for system balancing, the transmission system operator may decide to implement a deferral, which includes postponement of dealing with a connection request until the adequacy analysis shows sufficient system balancing reserves in the power system, allowing all power plants subject to that limitation to be connected to the power system without compromising its safe operation.

Additionally, the Amendments to the Law provide that the postponement of connection to the transmission system does not apply to power plants using variable renewable energy sources if the applicant for the connection:

1. provides new capacity for auxiliary secondary reserve services, which will be offered to the transmission system operator for system secondary frequency and power exchange regulation services, or
2. allocates new capacity for auxiliary secondary reserve services from its existing production capacities, or
3. ensures that another market participant, instead of itself, provides new capacity for auxiliary secondary reserve services.

The regulatory scope for provision of auxiliary services must be at least 20% of the installed active power capacity of a power plant using variable renewable energy sources. If the producer incorporates battery storage, the capacity of that storage must be at least 0.4 MWh/MW of the installed power capacity of the power plant.

The transmission system operator is required to adopt the transmission system development plan, complete with adequacy analysis, within 90 days from the date of the Amendments to the Law coming into force (i.e. by 5 August 2023), while the Energy Agency is obligated to issue consent to the harmonized transmission system development plan within 60 days of the date of submission by the transmission system operator.

Changes to the auction procedure for market premiums

Instead of the previous involvement of the Energy Agency in determining market premiums, the process is now entirely in the hands of the Government of Serbia. For auction purposes, the government determines the maximum offered price for electricity per MWh, while for reconstructed power plants, a separate maximum price that may be offered per MWh for electricity is set. According to the maximum price decision passed by the Government of Serbia at the beginning of June 2023, the maximum offered price for wind projects is EUR 105/MWh, while EUR 90/MWh is set for solar projects.

Furthermore, the Amendments to the Law introduce changes in case bidders participate in auctions only with a portion of a power plant’s capacity. Namely, if an offer for the allocation of a market premium relates to a portion of a power plant’s capacity, that portion must represent at least 70% of the permitted power plant capacity.

Limitation in capacity of prosumers’ facilities

The Amendments to the Law provide that, in order to obtain the status of a prosumer, the installed capacity of the production facility cannot exceed:

1. the equivalent power corresponding to an electric current of 10 A if the connection to the system is not three-phase,
2. 10.8 kW if the prosumer is a household, and
3. 150 kW if the prosumer is not a household.

However, in order to mitigate the consequences of these amendments and address the business sector’s dissatisfaction, the final provisions of the Amendments to the Law stipulate that prosumers who are not households (e.g. companies) may install a production facility of up to 5 MW if they initiate the connection procedure by 1 July 2024.

Prosumers who had obtained that status before the Amendments to the Law came into force are not subject to restrictions on permitted installed capacity.

Limitations of connection to the distribution system for power plants using variable renewable energy sources

In view of the great number of requests to connect to the transmission system and insufficient capacities, investors in renewable energy power plants resorted to splitting large projects into smaller ones that would be connected to the distribution system. In this regard, the Amendments to the Law have limited the maximum capacity of a power plant using variable renewable energy sources to 10 MW per connection.

Strategic partnership and auctions for awarding market premiums for wind and solar projects to be conducted in the summer of 2023

The recent legislative changes have enabled the Government of Serbia and the MoE to initiate two essential processes aimed at fostering the growth of renewable energy projects in Serbia.

First, on 4 May 2023, the Government of Serbia initiated the procedure for selecting a strategic partner for the construction of 1 GW of self-balancing solar power plants to be owned and operated by the state-owned power utility EPS a.d. Beograd. The public call is expected to be published in the early summer of this year.

Second, on 14 June 2023, the MoE published the first-ever public call for auctions to award the right to market premiums for 400 MW of wind and 50MW of solar projects in Serbia. Bids are to be submitted by 14 August 2023. The maximum offered price is EUR 105/MWh for wind projects and EUR 90/MWh for solar projects. The auctions will be implemented electronically in line with the Law and the recently adopted decree on market premiums and feed-in tariffs. The contract(s) with the successful bidder(s), which will be contract(s) for difference in nature, will be concluded on the basis of the market premium contract model adopted by the Government of Serbia in November 2021. The projects eligible to participate in the auctions are those that have obtained an energy permit (for power plants with a capacity of 1 MW and above), location conditions or a construction permit for the power plant, as well as confirmation by the transmission system operator that there is a planning basis for construction of the connection, or conditions for the design and connection of the power plant issued by the distribution system operator. The financial security for seriousness of the bid is to be submitted in the form of a bank guarantee or cash deposit, in the amount of EUR 30 per kW of the offered full or partial capacity of the power plant.

According to the three-year auction plan prepared by the MoE, the next auctions for the allocation of market premiums will take place in the first quarter of 2024, with an auction quota of 300 MW for wind farms and 100 MW for solar power plants, and in the first quarter of 2025, with 300 MW for wind farms and 150 MW for solar power plants. The total capacity (in MW) for which the right to incentives in the market premium system can be obtained over the next three years is 1000 MW for wind farms and 300 MW for solar power plants.

Further steps to be taken by legislators

Two particularly important documents are expected to be adopted by the end of 2023 – the new strategy for energy development and the National Energy and Climate Plan (NECP).

Furthermore, as announced by the MoE, additional amendments to the Energy Law are expected to be adopted by the end of 2023. The changes are aimed at further harmonizing the Energy Law with EU regulations, especially with the Third and Fourth Energy Packages. To that end, the expected changes will enable electricity users who also produce electricity, but are not prosumers, to actively participate in the market. The changes will also introduce the concept of energy poverty, the right of all customers to have more than one electricity supply contract at the same time, detailed provisions on electricity aggregation and storage, etc.

Certain changes are expected in the procedure for connection to the transmission and distribution system. Specifically, the changes are supposed to include the obligation of investors to provide some form of monetary security to the relevant system operator at the very beginning of the grid connection procedure, as a surety for the seriousness of their investment and their commitment to finish the project. It remains to be seen which exact model the MoE and the Government of Serbia will use as a tool to clear up the current situation and help system operators deal with almost 20 GW of pending requests for connection.

Conclusion

The recent regulatory developments in the renewable energy sector will certainly create a stimulating environment for further development and commissioning of renewable energy projects in Serbia. Only through strategic partnership and auctions (if successfully implemented) is Serbia expected to reach a capacity of more than 2.3 GW of new solar and wind power production facilities in the years ahead. Additionally, there are many projects developing on a commercial basis that do not count on incentives. From a regulatory perspective, the key moment for the development of such projects will occur once the current grid capacity issue is resolved and obstacles hindering the integration of power plants using variable energy sources are overcome.