Serbia: New Renewables Incentive Scheme (At Last)

Last Updated: 22 September 2016
Article by Petar Mitrovic

With more than 6-months of delay, the Government of the Republic of Serbia finally adopted the following package of decrees setting out the new incentive scheme for green energy:

  • Decree on the Power Purchase Agreement, ("PPA Decree");
  • Decree on incentive measures for the production of electric energy from renewable energy sources and from high-efficiency cogeneration of electric energy and thermal energy ("FIT Decree"); and
  • Decree on the requirements and procedure of acquiring the status of a privileged power producer, preliminary privileged power producer and producer from renewable energy sources ("Status Decree").

By adopting these decrees, the Government tried to remove the PPA related obstacles for further implementation of green projects under the previous scheme. The specific focus was on improving bankability issues of the scheme. The adoption itself was preceded by a long public debate, with all important stakeholders in the sector taking part in attempts to improve the scheme.

The decrees were adopted on 13 June 2016. They are all published in the Official Gazette of the Republic of Serbia no.56/2016 from 15 June 2016 and came ito effect on 16 June 2016.

1. PPA Decree

The PPA Decree established the PPA model which will be concluded between the green producers and the guaranteed off-taker.

The PPA is concluded for an incentive period of 12 years and is valid from the day of the first reading of the metering equipment- after the day of acquiring the status of the privileged generator – and until the expiry of the incentive period for the Power Plant. The term of the PPA may be prolonged in the event of unplanned occurrence and action of force majeure during the incentive period, which the parties of the PPA may acknowledge by annex, before determining the new date of expiry of the incentive period.

Improvements

The Decree also brought out a significant change and removed the concept of "Preliminary PPA" from the Serbian legal system, prescribing instead a more common concept known as "Single PPA". The concept of "Single PPA" stipulates that the holder of the preliminary privileged power producer status ("4P Status") may enter into PPA, and after fulfilling a number of statutory conditions, it may continue unto the agreement as a holder of the privileged power producer status ("3P Status").

It should be noted that the PPA also prescribes several advanced mechanisms (the real reach is yet to be tested in practice) in the Serbian energy sector regarding force majeure clauses, one of which being the 'political force majeure' and other being "change-in-regulations".

Political force majeure prescribes that if any competent authority fails to issue, upkeep, amend or prolong any public authorisation without the fault of the generator or the off-taker, the agreement shall remain in force, but its legal effects shall be suspended for the period of duration of the force majeure event.

The second mechanism is the change-in-regulations clause that stipulates how the generator may submit a proposal to amend the incentive measures if new regulation is coming into effect after the conclusion, or on the date of the conclusion of the PPA, and has a consequence that represents an increase in costs of the operations for the generator-in order to put the generator in the same financial position it was in under the PPA.

In the occurrence of any disputes, the Agreement foresees two options; a domestic Serbian Court, or an arbitrage in Wien (VIAC) or Paris (ICC), in accordance with the rules of respective arbitrage courts.

The PPA also prescribes that the generator is now entitled to terminate the PPA if the off-taker is in delay of settling any due payments, with previous notice for payment.

The PPA Decree further stipulates a Step-In Agreement as a supplement to the PPA, between the lenders or lenders' agent, the generator and the off-taker, but this is only possible for those projects exceeding 30MW in power. With the Step-In Agreement, the Lenders may name a completely different entity as a generator, if the previous generator defaults on one of his obligations or loses the status of privileged generator. For any disputes arising from this agreement, an option between a domestic Serbian Court and an arbitrage in Wien (VIAC) or in Paris (ICC) is also stipulated.

Shortfalls

The only major downside of the PPA is that the off-taker may provide only promissory notes as collateral for the fulfilment of the obligations under the PPA. Promissory notes are only effective if the debtor has the relevant level of funds secured by the promissory notes in its accounts. However, given the possibility to alter the PPA with previous approval by the Ministry in charge of energy, the generator may request a more certain way to secure the obligations of the off-taker, i.e. through a bank guarantee.

This fact, coupled with the possibility to change the off-taker every five years without the producers or the lenders having any say in it, is expected to be the most significant challenge for the further realisation of these projects.

2. FIT Decree

The FIT Decree stipulates in detail the incentives for the production of electric energy from renewable energy sources and high-efficiency cogeneration of electric energy and thermal energy.

On one side, the FIT Decree introduces some of the previously mentioned clauses, specifically, force majeure, change-in-regulations and political force majeure, but on the other side, the FIT Decree also thoroughly regulates the amount of feed-in-tariffs ("FIT") through introducing a calculation method and the capping of the purchase price. Furthermore, and perhaps even more importantly, the FIT Decree has introduced a maximum annual effective operation time for all types of generation facilities.

If during the incentive period a generator produces an excess of maximum produced electricity previously calculated via FIT Decrees' calculating method, the amount that has surpassed the maximum of produced electricity will be purchased at the price equalling 35% of the FIT. Up to the beginning of the incentive period (i.e. the commissioning period) the same, 'special' FIT is stipulated, with the difference that the preliminary privileged producer is entitled to the incentive price in the amount of 50% of the respective FIT. Considering the fact that in this sector of industry there are a lot of large scale multi-phase projects, regulating the commissioning of the project in this way certainly gives flexible security to all possible generators.

The FIT Decree also considers the currency of the incentive purchase price, manner of payment for incentive purchase and the adjustment of the incentive purchase price for the inflation, as well as the conditions and mode for the exercise of entitlement to incentive measures.

3. Status Decree

The Status Decree prescribes in more detail the requirements and the procedure for the acquisition, duration and termination of the status of a privileged power producer, preliminary privileged power producer, and a power producer from renewable energy sources.

Furthermore, the Status Decree now regulates a more comprehensive and somewhat improved set of requirements for acquiring the status of a privileged producer, including the alignment with the laws on construction.

The new advanced financial security instruments for acquiring the status of a preliminary privileged power producer are also introduced, stipulating in more detail the manner of establishing securities (i.e. via monetary deposit, or a "first call" bank guarantee) including paragraphs regarding the prolongation of the guarantee and the conditions for the activation and return of the financial security instrument.

It's worth mentioning that the Status Decree is also prescribing the traditional force majeure cases as well as 'political force majeure'. The possibility to prolong the 3P Status is also introduced in a way that if any unforeseeable or unavoidable event that is beyond the power of 3P occurs, the term of 3P Status is prolonged for the period that is necessary to remedy the effects of these unforeseeable circumstances.

Moreover, the Status Decree also stipulates- similarly to previously applicable rules- the statutory caps, i.e. the overall maximum capacity specifically applicable to wind power facilities and solar plants. In addition, the administrative procedures regulating the acquisition and alterations of the 3P Status and 4P Status, the status of a renewable energy producer, as well as a request for the prolongation of the 4P Status are thoroughly stipulated.

It is worth mentioning that much needed comprehensive transitional provisions addressing the 4P and 3P Statuses have been obtained under the previously applicable regulations and are also included -a fact certainly of most importance for the existing generators.

***

The PPA Package certainly represents a step forward for green energy in Serbia, but it is yet to be seen whether this is enough for the green energy market in Serbia to bloom.

Karanović & Nikolić plans to organise a panel on the effects of the new scheme in autumn, at which time we believe the market will be in a better position to assess the reach of the new scheme.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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