Introducing Auction for Incentivizing Production of Electric Energy from Renewable Energy Sources
Author: Attorney-at-law Pantović R. Đorđe, Law Firm “VUK Tax Attorneys”
Date: 29th July 2021
Renewable energy sources (hereinafter: “RES”) can be divided in two (2) main categories: (i) traditional renewable energy sources (biomass and energy from large hydropower plants), (ii) “new” renewable sources, such as energy of the Sun, wind, geothermal energy, etc.
One of strategic priorities in the energy development in the Republic of Serbia is increase of share in production of electric energy from RES. Hence, for complying with regulations of European Union and defining regulatory framework concerning RES, Serbian National Assembly passed the Law on Utilization of Renewable Energy Sources (hereinafter: the “Law on RES”), on 20 th April 2021. The Law on RES came into force on 30 th April 2021 and one of crucial goals of this Law is in attempt to solve the problem of insufficient increase of RES’ share, by removing main causes that impede their growth. The Law on RES is the first lex specialis in the Republic of Serbia that regulates RES, as this area was earlier regulated by the Energy Law as lex generalis. Law on RES represents a legal framework that should establish legal certainty and stimulate business environment for more dynamic investments in the area of RES in the Republic of Serbia. Additionally, the Law on RES defines that usage of energy from renewable sources is in public interest of the Republic of Serbia and of special significance for the Republic of Serbia. Supervision over implementation of Law on RES will be performed by the Serbian Ministry for Mining and Energy (hereinafter: the “Ministry”).
In accordance with the Law on RES, the incentives for production of electric energy from renewable sources are conducted within certain incentive period through system of market premiums and system of feed-in tariffs, and are referring to the price of electric energy, taking over balance responsibility, right to prioritized access to the system and other incentives defined by the law. Incentives will only apply to newly built or reconstructed powerplants of RES, and not on powerplants that are in construction phase, with the possibility for incentives to be applied to the whole capacity, or just on the part thereof. Privileged producers will have the right to apply only one incentive system for the same powerplant.
Right on market premiums and feed-in tariffs will be acquired within the auction procedure. An
auction, as a novelty defined by the Law on RES, is a procedure where participants compete by bidding
the lowest market premium, or feed-in tariff, fill the quota and acquire right for the incentives. Auction
procedure consists of three (3) phases: (i) qualifications, (ii) competition and (iii) selection of best
offers. Auctions will be organized by the Ministry, which is currently in the process for acquiring
appropriate software, whereas it plans to organize first auctions in last quarter 2021.
Some of the conditions for qualifying, as eliminatory phase of the auction procedure, are existence of general plan for constructing connection of the powerplant to electro-energetic system, acquired energy permit for the powerplant, acquired location conditions as well as financial security for seriousness of the bid.
Competition will be conducted by the criterion which bid contains lower market premium/purchase price/feed-in tariff in comparison to the defined maximum. After the phase of competition, ranking will be performed from lowest to highest bidding amount, within pre-defined maximum, and in that order the quota will be filled. After filling the quotas, Commission that will be formed by the Energy Minister (hereinafter: the “Commission”), compiles a ranking list along with the report on conducted procedure and delivers the documentation to the Ministry. Based on the received documentation, the Ministry enacts a Resolution on conferment or rejection of right on market premium/feed-in tariff to the participants in auction procedure, that is final and against which the administrative dispute can be initiated.
Methodology for determining maximum amount of market premium/purchase price/feed-in tariff will be defined by the Energy Agency of the Republic of Serbia (hereinafter: “AERS”) until the end of December of current year for the following year. The Ministry announces commencement of planned auction, with information on available quotas, maximum amount of market premium/purchase price/feed-in tariff, as well as other relevant information, at least 45 days in advance on its web platform.
The Ministry publishes, for the period of three (3) years, an incentive system plan that will be applied, approximate timeline for auctions, frequency of auctions, expected new capacities from RES that will be in the incentive system, total incentive funds that will be deployed to the privileged producers who obtain right to incentives in the forthcoming period of three (3) years, as well as types of technologies that will be supported within the incentive system, if known. The Ministry publishes incentive system plan by the end of February once in three (3) years, and updates the incentive system plan every year by the end of February in case of data change stated in the incentive system plan.
Temporary Privileged Producer of Electric energy
Temporary privileged producer of electric energy from RES is a legal entity or entrepreneur who in
auction procedure acquired the right to market premium, or right to feed-in tariff and has other rights
defined by the Law on RES.
Participants in auction procedure whose bids on auctions are included (accepted) in the Resolution on conferment of right on market premium/feed in-tariff, acquire the status of temporary privileged producer of electric energy by the day of enactment of said Resolution.
Acquiring status of temporary privileged producer of electric energy commences with finality of resolution of the Ministry, which also triggers an obligation to deliver financial security within 30 days. Next step is that temporary privileged producer of electric energy concludes contract on market premium with authorized party, which will probably be EPS as guaranteed supplier. In case that financial security is not timely delivered, status of temporary privileged producer of electric energy is lost and respective quota remains unallocated until next auction.
Temporary privileged producer of electric energy is, amongst other, obliged to, within two (2) years from gaining this status, obtain final construction permit for powerplant and consent on environmental impact study, or decision that such study is not required, unless he obtained said documentation before gaining this status.
Temporary privileged producer can acquire status of the (permanent) privileged producer of electric energy if it fulfils conditions defined by the Law on RES, which are, amongst other, to obtain licence for conducting energy activity of producing electric energy, that encompasses powerplant for which he acquired status of temporary privileged producer (this license is issued by AERS), that the powerplant is permanently connected to the transmission, distribution, or closed distribution system with approved power for which the powerplant is in the status of temporary privileged producer, and that he obtains usage permit for the powerplant for which he acquired status of temporary privileged producer.
Market premium is a type of operational state aid in the form of a grant on market price of electric
energy that users of market premium deliver in the market. Market premium is defined in Euro Cents by
kilowatt hour within auction procedure, and it is paid monthly for electric energy that powerplant delivers
into the system. After successful auction and acquiring status of temporary privileged producer of
electric energy, contract on market premium will be concluded. Authorized party (which will most
probably be EPS) that will conclude contract on market premium with the user of market premium, will
only be paying market premium to the user, but it will not be purchasing electric energy from the user.
Incentive period lasts for 15 years from the day of payment of the first market premium.
Users of market premium sell electric energy on the electricity market. Market premium can be acquired for the whole capacity or on the part of the capacity of the powerplant. In case that right on market premium is acquired for only a part of capacity of powerplant, electric energy for which market premium is being paid is calculated by multiplying the percentage of capacity of powerplant that is included in the quota, with quantity of electric energy delivered in the system within the accounting period.
If market premium is determined depending on the reference market price, and market price of electric energy that is the base for calculating reference market price is negative, market premium is not paid for the period of negative market price of electric energy.
Government, on the proposal of the Ministry, will precisely determine type, method and conditions for acquiring, realization and discontinuation of right to market premium, as well as the method for determining reference market price. In other words, these matters are yet to be regulated in detail by Government Decrees.
Feed-in tariff is a type of operational state aid in a form of incentive purchase price that is being
warranted by kilowatt hour for delivered electric energy within the incentive period. Concerned system
will be applied only for small plants (powerplants with approved power of less than 500 kW, or wind
powerplants with approved power of less than 3 MW), and demonstration projects (non-commercial
projects from RES in which certain technology is demonstrated as first of a kind, and which represents
significant innovation that considerably exceeds highest level of existing technology for using renewable
sources and has status of innovation project in the sense of appropriate law), which will be additionally
specified by a bylaw. Feed-in tariff will be monthly calculated and paid, based on conducted auction
procedure and available quotas that will be defined by the Government. Additionally, the Government,
on the proposal of the Ministry, determines conditions under which feed-in tariff can be acquired, as
well as the method for acquiring the status of privileged producer. Difference from market premiums is
in absence of obligation to submit a financial security for small plants or demonstration projects with an
approved power of less than 100 kW, while in all other respects the above rules for auctions are applied
After conducted auction, temporary privileged producers that acquired right to feed-in tariffs, should conclude contract on feed-in tariff with guaranteed supplier. Government, on the proposal of the Ministry, will define in detail model of contract on feed-in tariff.
Incentive period lasts for 15 years from the day of first payment of feed-in premium.
Role of Other Market Participants
In order to create legal certainty for investment in RES, transmission or distribution system operators
are obligated to take over the electric energy from RES as a matter of priority, regardless if the
producer is in the incentive system, except when the security of the energy system is endangered.
The guaranteed supplier takes over balance responsibility for RES' producers both in the market premium system and those who are not included in the incentive system, until the establishment of a liquid organized intraday electricity market. Also, the guaranteed supplier takes over balance responsibility and bears the balancing costs in the feed-in tariff system, until the end of the incentive period.
The Law on RES also introduces the institute of prosumer. Prosumer is the end-customer who has connected his own facility for production of electric energy from RES to internal installations, whereby produced electric energy is used to supply his own consumption, and the surplus of produced electricity is delivered to the transmission system, distribution system, or closed distribution system. Prosumer has the right to independently, or through an aggregator:
- produce electric energy for its own consumption;
- store electric energy for its own needs;
- deliver surplus of produced electric energy to the transmission system, distribution system, or closed distribution system;
- other rights and obligations in accordance with the Law on RES and the Energy Law.
Enactment of the Law on RES is a step forward to harmonization with the policies of the European
Union. Fee for stimulating the production of electric energy from RES has not changed since 2015,
which was a financial burden for EPS, that was obliged to buy all energy from privileged and
temporarily privileged producers, such as small hydropower plants, wind plants and other sources. By
changing the incentive fees under the Law on RES, producers of electric energy from RES will be more
exposed to the market, and will take responsibility for developing their own business, while investors
will offer the price at which they will be willing to invest, given the reduction in RES’ technology costs in
After the relevant bylaws regarding RES will be adopted and enter into force, it will be necessary to establish practices for implementation of relevant provisions of the Law on RES, and especially regarding the auction procedure that should provide legal and business certainty to potential market participants.
Our Law Firm will timely and closely monitor all upcoming activities in this area, in order to assist, through its considerable experience and expert analysis, its clients to eliminate all ambiguities and successfully realize investments.