Reducing greenhouse gas emissions (GHG) from the energy sector is critical to mitigating climate change. Studies have shown that the electricity sector will play a key role in this mission, primarily through decarbonizing electricity production, which is heavily dependent on the massive deployment of renewable energy.
Serbia has pledged to decrease GHG by 9.8% by 2030 compared to 1990 levels.
Although deficiencies in data quality and data availability for the GHG inventory (as published by the Energy Community Secretariat) make that data difficult to properly verify and assess, it is clear that the heavy dependency on coal in electricity generation represents one of the main obstacles for Serbia to reach its targets.
Up to 60% of all electricity generation capacities are large-scale thermal power plants. The share of electricity originating from coal in the total mix is even higher – in the last couple of years usually amounting to between 70% and 75%, depending on hydrology.
The historical reliance on coal and deeply rooted (and at the same time deeply wrong) perception that electricity produced from coal is much cheaper than electricity produced from renewable energy sources encourages opposition to closing even the dirtiest plants in the country.
It is clear that this situation cannot last forever. Serbia recognizes the need to make a transition to a more sustainable energy sector and plans to completely phase out the seven oldest and least efficient thermal power blocks by 2024. These blocks annually generate in average 6,000 GWh. This shortfall will need to be covered, ideally from new installed capacities in Serbia rather than from import.
Although Serbia is not yet ready to completely part ways with coal, it has set the deployment of renewables as one of its top priorities.
The previous period was pretty successful for renewables. The incentives package (based on the feed-in tariff) that was finalized in 2016 and improved in 2017 came as the result of strong efforts to create a consistent, comprehensive, and bankable framework for supporting renewable energy. The package managed to achieve the joint goal of investors, lenders, and the Government – a comfortable environment for the growth of renewables projects in Serbia.
The feed-in tariff incentives package expired at the end of 2019. As a result, new projects cannot count on incentives at the moment.
Although Serbia should continue its efforts to reform the sector and make renewables projects sustainable on market terms, at the moment it remains necessary for the Government to make a new incentives package for support to renewables available. Serbia has requested the assistance of the EBRD with the preparation and implementation of a new incentives package based on competitive renewables auctions.
Previous endeavors have shown that the critical factor for the realization of (large-scale) projects is an incentives package that meets bankability criteria. Thus, the new package would need to provide for an adequate allocation of risks among the parties to ensure that the party most able to bear the risk actually does so. Ensuring that the support entity is of adequate creditworthiness, that reasonable deadlines are in place for the finalization of projects, that protection exists in the case of force majeure, and that reliable dispute resolution mechanisms are put in place are critical if we want to see new blades spinning. The creditworthiness of the support entity will draw even more attention than before, considering that the recent experience with (arguably ungrounded) invocations of force majeure provisions under feed-tariff PPAs sent a strong signal that Elektroprivreda Srbije (the current off-taker of green electricity) has serious liquidity issues.
One thing is certain – the new package will envisage a competitive process for awarding incentives, rather than the first-come-first-serve system that Serbia has historically employed. A competitive process would promote cost-efficient development of wind projects by achieving competition among reputable developers, resulting in lower financial burdens for consumers. A competitive process would also provide greater transparency and equal chances for projects.
By the time this article is published, work on the preparation of the new package should have already begun. Despite the general elections scheduled for June, it will be important to maintain the momentum and intensify efforts to have the new package ready by the end of 2020, so that Serbia can organize the first auctions as early as mid-2021. And, in doing so, make a bold step towards transitioning to sustainable energy.
The information in this document does not constitute legal advice on any particular matter and is provided for general informational purposes only.
By Petar Mitrovic, Partner and independent Attorney at Law in cooperation with Karanovic & Partners