What do RES investors need to know?

 

The renewable energy sector has opened up a market that will be expanding in the coming years, creating great opportunities for profit for companies of all sizes.

 

The main reasons for that are the lower costs of solar equipment and the installation of systems for production from renewable energy sources, with the simultaneous growth of the price of fossil fuels and electricity.

 

Nevertheless, it is considered that smaller companies find it more difficult to penetrate the industry due to the sheer size of capital investments needed to strengthen their market position compared to larger corporations.

 

Therefore, most renewable energy projects are implemented by large companies. Here are some examples of activities that can serve as a foundation and a springboard for the exponential growth of the profitable business of small companies in the renewable energy sector:

 

– resale of electricity;

– sale or lease of solar panels;

– biofuel production;

– energy storage systems;

– photovoltaic systems;

– consultations and education in this innovative area;

– repairs and maintenance of systems and equipment;

– product research and development.

 

However, state intervention is needed to open the market to smaller players. It is primarily reflected in subsidies and initiatives of the Government of the Republic of Serbia.

 

In this regard, the new law on the use of renewable energy sources (“Official Gazette of RS”, No. 40/2021, hereinafter the “Law“) introduces the possibility of obtaining incentives through the introduction of the status of a privileged producer of electricity from renewable energy sources (a company or an entrepreneur who produces electricity from renewable sources and is entitled to a feed-in tariff or market premium).

 

Incentives of the state are implemented in a certain period through the system of market premiums and the system of feed-in tariffs and relate to the price of electricity, taking balance responsibility, the right to priority access to the system and other incentives prescribed by law.

 

What does that actually mean?

 

System of market premium and balance responsibility

 

Market premium is a type of state aid that is a supplement to the market price of electricity that market premium users deliver on a monthly basis to the electricity system. It is determined in eurocents per kWh in the auction procedure and can be acquired for all or part of the power plant capacity. Participants in the auction procedure whose bids are covered by the decision of the Ministry of Mining and Energy of the Republic of Serbia (hereinafter the “Ministry“) acquire the status of a temporary privileged producer of electricity on the day of the finality of that decision. After a successful auction and the acquisition of the status of a temporary privileged producer of electricity, a contract on market premium is concluded with an authorized contracting party – a guaranteed supplier.

 

During the incentive period, the producer of electricity from renewable sources may have a certain percentage of balancing deviation – the maximum allowed percentage of deviation between the actually produced amount of electricity compared to the planned amount of electricity, without the obligation to reimburse balancing costs. These costs are borne by the guaranteed supplier, which is a balance responsibility for producers from renewable energy sources who are in the market premium system or are outside the incentive system, until the establishment of a liquid organized electricity market. This is another type of incentive for the production of energy from renewable sources. The guaranteed supplier and the producer of electricity from renewable sources conclude a contract on taking on balance responsibility. The guaranteed supplier will presumably be Public Enterprise Electric Power Industry of Serbia.

 

Feed-in tariff

 

A feed-in tariff is a type of operating state aid that is granted in the form of a subsidy purchase price guaranteed per kWh for electricity supplied during the incentive period. This type of incentive is intended only for small plants that are defined as power plants with an approved power of less than 500 kW, ie wind power plants with an approved power of less than 3 MW, and demonstration projects defined as non-commercial renewable energy projects which demonstrate a technology as the first of its kind and represent a significant innovation that greatly exceeds the highest level of existing renewable energy technology.

 

Otherwise, the feed-in tariff is calculated and paid on a monthly basis. After the auction, temporary eligible producers who are entitled to feed-in tariffs, conclude a feed-in tariff agreement with a guaranteed supplier. The Government of the Republic of Serbia, at the proposal of the Ministry, prescribes in more detail the model of the feed-in tariff agreement. Unlike the market premiums, the feed-in tariffs are reflected in the non-existence of the obligation to submit a financial instrument for securing bids for small plants or demonstration projects with an approved power of less than 100 kW, while the rules applied to auctions apply for the rest. The incentive period lasts 15 years from the date of the first payment of the feed-in premium.

 

Power plants that are subject to incentives

 

Incentive measures can be obtained by eligible producers of electricity from renewable energy sources for the following types of power plants:

1) hydro power plant of approved capacity up to 30 MW;

2) hydropower plant on the existing infrastructure of approved capacity up to 30 MW;

3) biomass power plant;

4) biogas power plant;

5) wind farm;

6) solar power plant;

7) geothermal power plant;

8) biodegradable waste power plant;

9) landfill gas power plant;

10) gas power plant from the municipal wastewater treatment plant and

11) a power plant that uses other renewable energy sources.

 

A power plant can be subject to incentives only if it is newly built or reconstructed, but not if it is under construction. Incentives can be obtained for all or part of the power plant’s capacity.

Now that we know what incentives the state offers through the new Law and what types of power plants can be the subject of the same, the question arises, how to get them?

 

Auction procedure

 

In order for a company interested in developing a business model in this sector to be able to receive a subsidy from the state, a market premium or a feed-in tariff, it is necessary to go through an auction procedure. The auction is a novelty prescribed by the Law and represents a procedure in which participants compete in a competitive manner with the offers of the lowest market premium, ie feed-in tariff, so as to fill the quota and gain the right to incentive measures. The auctions are organized by the Ministry, and the first ones have been announced for the end of 2021.

 

The Ministry conducts auctions on the basis of available quotas prescribed by the Government of the Republic of Serbia. The auction procedure is initiated by a public invitation of the Ministry which defines who has the right to submit an application for participation in the auction, available quotas by type and approved power of the power plant, maximum purchase price, manner and form of application for auction, list of documents to be submitted, conditions for qualification and bidding at auction, etc. The procedure consists of three phases: qualification, bidding and selection of the best bids.

 

  1. Qualification is the elimination phase of the auction procedure in which the selection of registered participants is made on the basis of fulfillment of legally prescribed conditions. Only some of them are the energy permit for the power plant, obtained location conditions, the plan basis for the construction of the power plant’s connection to the power system, the financial instrument for securing the offer, which can be in the form of a bank guarantee or a cash deposit, and other conditions.

 

  1. Bidding is a phase of the auction procedure in which the participants selected in the qualification phase compete with their bids according to the criterion that the bid offers a lower market premium in relation to the maximum market premium. Bids that exceed the maximum market premium, ie the maximum purchase price are not considered.

 

  1. The selection of the best bids is the third stage in the auction process. The ranking is performed from the lowest to the highest offered amount, within the given maximum, and the quota is filled in that order. The offer may refer to the entire capacity or part of the capacity of the power plant. When the sum of the capacities of all power plants for ranked bids reaches the level of the prescribed quota, the quota is filled. After filling the quotas, the commission formed by the decision of the Minister in charge of energy affairs compiles a ranking list together with a report on the conducted procedure and submits the documentation to the Ministry.

 

Based on the ranking list and the report on the conducted procedure made by the commission, the Ministry makes a decision on granting the right to market premium, ie a decision on rejecting the right to market premium or feed-in tariff to the participants in the auction procedure which is final and against which it can be initiated a procedure in administrative matters.

 

After the adoption of relevant bylaws in the field of renewable energy sources, it will take time to form a practice regarding the application of the relevant provisions of the Law, and especially regarding the auction procedure that should provide legal and business security to market participants.

 

To conclude

 

Renewable energy is the path of the future for many countries around the world, and is even predicted to be the only possible solution to the ubiquitous problems of global warming and climate change. These trends, accompanied by strong incentives from the Government of the Republic of Serbia, attract more and more market participants, contribute to the growth of the sector and make renewable energy a lucrative investment opportunity for companies of all sizes. The key to long-term business success for small competitors lies in an analytical approach to their first investment. The renewable energy industry encompasses a multitude of business models, products and technical solutions, and ambitious entrepreneurs must be aware of the most cost-effective options for their first investment, but also the need to comply with regulations as the first step on the road to success.