The changes to the legal framework in the area of electricity and renewables made investments in the production of green energy easier, and their number is growing. At the same time, the imperative of decarbonization is pushing Serbian companies to look for new options for the energy supply, and their role will become more active in the coming years. It is now up to the companies to use the market’s opportunities and adapt step by step, panelists said at the Serbian Companies on the Changing Power Market conference.
The Director of SEEPEX Miloš Mladenović announced that the power exchange would establish an intraday market by March of next year to balance almost in real-time.
At a panel called Possibilities for businesses on the Serbian power market, speakers discussed the framework for electricity purchases at the bilateral market and the options for companies to pick a suitable tariff model from suppliers. The surge in prices surpassed even the most abstract expectations so, if the new midterm forecasts are included in the calculations, investors in renewable energy projects can now be more confident in the profitability of their projects even without government incentives, according to the panelists.
Serbia provided a framework for financing the construction of renewable power plants and the sale of their output by adopting a set of energy laws last year, so the industry buying the electricity should now use all the possibilities, the participants said.
The surge in prices amid the energy crisis surpassed even the most abstract expectations, so investors in renewable energy projects can now be more confident in the profitability of their projects even without government incentives
Given that smaller traders and suppliers were practically wiped out as the energy crisis unfolded, state-owned power utility Elektroprivreda Srbije (EPS) took over the activity almost entirely, but with it also the entire burden, as prices for companies have been temporarily limited to EUR 75 per MWh.
Representatives of investors and banks pointed to the potential for EPS to thrive by providing ancillary services for the industry, primarily in flexibility and balancing.
SEEPEX provides reliable benchmark prices, long-term futures
Director of Serbia’s power exchange SEEPEX Miloš Mladenović revealed a plan to introduce a liquid intraday electricity market by the end of the first quarter of 2023. He explained it would enable balancing in a frame that is close to real-time.
The exchange’s benchmark price is reliable and “a key element in the new paradigm” where there will be a shift from long-term power purchase agreements (PPAs) to corporate PPAs, Mladenović said. Among the other options for the industry, he highlighted futures, explaining that they can be used to hedge price volatility.
Such contracts have been on SEEPEX since 2019, and there are even futures with settlements in ten years, but market participants aren’t using them enough, according to the head of the electricity exchange. They should step out of their comfort zone of feed-in tariffs and complete supply contracts, Mladenović said.
Firms to no longer purchase electricity only once per year or two
Darko Milutinović, Director of engineering firm and consultancy M&D UNIT, estimated that the industry would begin to accept the new electricity purchase models within a year. In order to avoid instability, the adaptation to the changes should be conducted in several steps so that the companies would gradually learn their way through them, he warned.
The corporate sector still lacks skilled staff for electricity purchases, but buyers can opt to outsource such activities, which is already formally enabled, Milutinović said. He noted that so far, companies only purchased power once in a year or two, mostly under fixed contracts.
The industry is informed about and interested in investing in solar power under the prosumer model to cover part of its consumption
“It’s not just about how arranged the market is but what the type of the consumer is. Businesspeople don’t have the same consumption profile. The impact of electricity on the final product price is not the same. Some can relatively easily transfer a price jump into the price of their exit product. The companies for which the end buyer dictates whether they would buy the product must think much more about adapting their production to the market than how to adapt electricity purchases,” Milutinović added.
The M&D UNIT chief claims the industry is informed about and interested in investing in solar power under the prosumer model to cover part of its consumption. He also pointed to an example where potential investors from Asia were concerned about securing green electricity supplies for the long term and asserted that it is an essential item, especially for those focusing on exports from Serbia.
Companies need to secure enough electricity from clean sources in market
The panelists also spoke about the availability of renewable electricity. EPS has a package for it, and it supplies companies from its hydropower plants, but at some point, the demand could surpass supply.
Exporters must prepare for the introduction of the European Union’s Carbon Border Adjustment Mechanism, essentially a carbon dioxide tax. They can probably avoid it by consuming electricity from renewable sources. Furthermore, foreign-owned firms follow the climate policy of their parent companies, so it is becoming more and more critical for them to get power supply from clean sources. It also motivates them to install their own photovoltaic units.
WV International is preparing for wind auction
By adopting the Law on the Use of Renewable Energy Sources, the Government of Serbia made a turn in the sector by showing the investors the way forward in the sense of financing and giving them a framework of conditions for implementing projects, Director of WV International Neda Lazendić said. Namely, Lazendić explained that after awarding the initial feed-in tariff quota, which guaranteed the offtake of electricity and the purchase price, investors didn’t know for a long time what kind of a model would be applied next.
The company has been present in Serbia since 2012, working on developing renewable energy projects. At this stage, WV International is preparing to bid with its Alibunar wind farm projects totaling 168 MW for the first round of auctions. WV International plans to install 800 MW of renewables in Serbia in total, dominantly wind and one solar power plant.
CWP leans on market competitiveness in its wind, solar power plant development
Commercial Director of CWP Global Vladan Rankov told the audience that the company is working on a strategy to sell electricity in new market circumstances with no incentives. Its goal is to be competitive regardless of the intermittency of renewable electricity production and the unpredictability of the development process and financing possibilities, he said.
Besides Serbia, CWP Global’s portfolio comprises wind and solar project development in Bulgaria, Romania, and Ukraine. Rankov stressed the company offers long-term contracts with a stable and predictable price.
“The economics of renewables are such that the size of the investment determines the cost of energy production. Thus the costs are known in advance, and they don’t depend on price movement in the energy market. For that reason, such contracts are sustainable in the long term. On the other hand, firms can improve their ESG ratings, which concern social responsibility and sustainable development, by buying green energy,” Rankov stated.
As the dominant supplier, EPS could offer the industry auxiliary services, particularly flexibility and balancing, and get through the transition that way, he added.
Impact of crisis on finances wiped out small, medium-sized suppliers
Head of Market Analysis and Risks Management in EPS Davor Pupovac opined that his company is ready to adapt to the changes. He underscored that it is now the corporate sector’s only supplier as the spike in electricity prices made it impossible for small and medium-sized suppliers to stay competitive.
As in most of Europe, the traditional suppliers took the entire crisis burden upon themselves, Pupovac said, referring to the decision by the Government of Serbia to limit power prices for companies. He pointed to projections that the price at year-end would be EUR 180 per MWh and that it would close 2023 at EUR 150 per MWh.
Price hike made projections meaningless, changed perspective on auctions
UniCredit Bank Serbia and Erste Bank’s subsidiaries in the country have long been among the most active lenders in the renewables sector. In most cases, long-term financing is necessary for projects, and since the lucrative business is still in its early stages on the local level, investors are eager to get support on that side.
Feed-in tariffs were simple for risk assessment and, therefore, for financing, according to Aleksandar Savić, head of public sector and specialized lending in Erste Bank. It is essential for lenders that the income from projects within the agreed period of 10, 12, or more years is constant, as is the price for which the electricity would sell, he stressed.
The prices are unpredictable, as none of the one hundred relevant studies included the possibility of recent developments, Savić pointed out. He raised the issue of the start price at the upcoming auction for wind power plants, EUR 55.7 per MWh, suggesting it may not be attractive enough for investors.
Changes in electricity market propping up financing needs for renewables production
Svetlana Cerović from UniCredit Bank Serbia asserted that there are investors that aren’t waiting for auction premiums. In her words, some intend to sign agreements for 100% of their output while others will sell a part of it in the open electricity market.
Every project will get a different PPA, unlike those under the feed-in tariff mechanism, which had a fixed price for a period of 12 years; she underscored and noted that it makes risk analysis more complex for the bank. Cerović added the energy transition and crisis are significantly increasing financing needs for the production of green energy.
The two representatives of banks also highlighted the significance of how companies act concerning the ESG mentioned above – environmental, social, and governance standards, and told the audience that the results in the field have an increasing effect on finances.