Support for Green Electricity in Serbia: A gap in harmonizing with EU energy laws
18 September, 2020
To access the European Union, EU-candidate countries are required to embrace the EU Community acquis within their legislation. This is deployed throughout accession negotiations as a framework of 35 chapters, with Energy as the fifteenth.
The EU energy policy broadly focuses on the energy market, energy supply, network interconnection and fostering energy efficiency, as well as renewable energy sources (RES). This acquis continually evolves—for example, the 2001 Renewable Electricity Directive integrated green electricity targets for the first time into EU legislation and was updated in 2009 and 2018. As part of the ongoing Green Deal, RES targets are currently under revision.
Within this framework, various schemes exist to promote the deployment of renewably sourced electricity. In 2009, potential EU accession candidate Serbia introduced Feed-in Tariffs (FiTs), whereby green electricity producers received a 12-year long fixed tariff per unit of electricity that is fed into the grid without being sold in the power market. The incentive period for each producer began with the acquisition of the privileged electricity producer status where Serbian law prioritizes green electricity.
However, the Serbian energy support scheme legally expired at the end of 2019, leaving Serbian new green electricity producers without support at the beginning of 2020. Despite the government signaling the possible roll out of new schemes, this support vacuum not only represents uncertainty for both investors and renewable electricity producers, but also entails a step back in the nation’s efforts to access the EU.
Serbian road to the renewable energy acquis
Serbian-EU energy harmonization kicked off with the 2002/2003 Athens Memoranda signed between South Eastern European states (SEE). This marked a political commitment towards tailoring domestic energy laws and markets towards an eventual integration into the internal energy market (unfolding within the EU at the time), which focused on liberalizing the gas and power sectors. The Western Balkans, including Serbia, became potential accession candidates during the same years.
In 2005, the EU and SEE formalized the Athens process by creating the Energy Community to enhance the energy acquis beyond EU borders and build a pre-accession mechanism. Parties bindingly pledged to adopt core EU energy legislation and were required to display plans to implement EU directives, including those fostering RES.
The 2009 EU Renewable Energy Directive (RED I) targeted 20% RES in final energy consumption by 2020 and considered support schemes, such as FiTs. Additionally, it outlined calculations for setting the share of RES corresponding to each MS. That year, Serbia introduced FiTs in line with the EU acquis and the Energy Community and formally applied for EU candidacy. The EU granted Serbia the status of candidate country in 2012, thus triggering accession negotiations.
Based on the methodology established in RED I, Serbia ambitiously targeted 27% of RES in final consumption by 2020; its 2013 National Renewable Energy Action Plan (NREAP) detailed that it would include 10% in transport, 30% in heating and cooling, and 36.6% in the power sector. The subsequent 2014 New Energy Law encompassed RES only indirectly as the power sector was experiencing operational changes.
Nevertheless, by 2017, Serbia had only achieved 20.6% RES in total final energy consumption—falling short of their 23% indicative trajectory for that year. The revised 2018 EU Renewable Energy Directive (RED II) laid out more ambitious goals, targeting 32% RES in final energy consumption by 2030. This time, it stressed the role of market-based support policies and grid integration to achieve these goals.
However, against the 2019 indicative trajectory of 35.1% detailed in the NREAP, renewably sourced electricity only reached around 28% of total generation, where hydro dominated with 26.2%, while wind marginally accounted for 2.2% and solar barely figured in with 0.036%. These trends indicate that Serbia is still not on track to meet its NREAP targets—despite doubling green electricity production under FiTs during 2019.
In fact, the 2014-2020 EU Guidelines on State Aid for Environmental Protection and Energy (Aid Guidelines) stated the need for market-based supports to enable green electricity producers’ response to market obligations and signals. These guidelines foresaw a shift from FiTs to an EU-wide Feed-in Premium (FiP) regime, which provides green electricity generators with an additional support sum (premium) on top of the profit for trading each unit of renewable electricity in the market.
These Aid Guidelines also suggest that support should be allocated through competitive bidding, rather than in an administrative setting. In auctions, market participants determine the support level by bidding to produce green electricity: the bidder requiring the lowest subsidy to provide green electricity is entitled to develop the government’s project. Auctions also guarantee grid access and integration of green power producers. Therefore, rather than acting as a support policy, auctions are a mechanism intended to allocate support.
Suggested auction format
Whereas the configuration of auctions is technically and economically complex, its design should address the almost inexistent solar generation capacity; the newly-developed wind capacity; the riskiness of RES investments; and the dominance of one state-owned enterprise within the power sector.
However, although Serbia’s NREAP targets 0.4% solar and 27.4% wind generation capacities in the renewable power mix by 2020, it does not specify the types of solar and wind technologies. Thus, Serbia should first stretch the target of, and introduce a market for, solar generation while also consolidating wind. Second, Serbia should start specifying sub-technological targets for solar PV and solar thermal on one hand, and for offshore wind and onshore wind on the other. Third, authorities should define regional and sub-technological distribution goals. And lastly, auctions must be designed accordingly.
As wind generation is more developed in Serbia and its costs are thereby lower, solar generation does not stand a chance in auctions where authorities do not specify eligible technologies (technology-neutral), or where all technologies are eligible to compete (multi-technology). Hence, in terms of technologic eligibility, Serbian auctions should be technology-specific, where generators bid against projects using the same generation technology. This will target the introduction of a solar market while deepening the market for wind.
In terms of auctioned items, auctions for wind generation should be multi-item. In multi-item auctioning, private bidders overtake project designs and developments to install generation capacities specified by authorities and consequently, bear project risks.
Divergently, since solar generation is nascent in Serbia, solar auctions should be single-item, in which the government overtakes project planning and market participants bid to develop the government’s project. This enables governmental control over conflicts that might arise in the developing solar industry. Given that the government bears the financial risks, the cost of capital decreases for bidders and thus, incentivizes participation and competition.
Moreover, the auction process ought to be a sealed-bid, by which bidders provide their bid information directly to the auctioneer, including the FiPs that they require. Authorities accept different bids according to ascending bid prices until the desired volume of capacity of a generation technology is reached. The simplicity and straightforwardness of this process implies lower transaction costs for bidders, who will not transfer these costs based on the support level that they require.
The value at which winners are awarded support should be a pay-as bid, meaning that each winner obtains the bidding-level support it requested. This would suit nascent or non-mature markets, as both the participants and public will perceive this as fair. Authorities should not use qualitative selection criteria, such as environmental benefits, as this could slow down RES deployment by disqualifying an even greater number of projects.
With regards to pricing, an undisclosed ceiling should disqualify bidders beyond the cap to prevent the use of a dominant market power to drive support prices upwards by bidding strong. This is especially the case for solar, where competition is lower due to immature technologies. Price ceilings should also differ across technologies.
Regarding the support policy itself, Serbian authorities could still be tempted to award FiTs through auctions. While FiTs could benefit the nascent solar power market, ultimately, FiPS will do a better job in integrating green electricity producers from all participating technologies. Therefore, establishing FiPs over FiTs is of upmost significance.
Although initially granting fixed Feed-in Premiums is an option, given that the support level is static, a green generator would bear the full risk of forthcoming power prices since income would still fluctuate accordingly. Therefore, total income will be lower when per unit market prices are low. Besides, optimistic bidders that overestimate future prices will request less support, leading to unprofitable projects.
Overall, a sliding FiPs scheme is more convenient. The support level is equal to the difference between the bid price and average market electricity price for a specific generation technology. At times of low electricity prices, incomes will consist mostly of subsidies; at times of high prices, incomes will consist mostly of market prices. Considering that sliding FiPs are better at securing future income, the risk of bidding for low support levels will decrease. This will be key in making RES projects profitable, especially in the case of emerging solar technologies.
In May 2018, Serbian authorities recognized the obsolescence of outdated FiTs and announced a switch to the FiPs where auctions grant the lowest bidder constructing rights. Nevertheless, they decided to extend FiTs, originally set to expire by 2018, for an additional year. In 2019, the first auctions for wind and solar electricity were expected to take place in 2020.
However, in 2019, both the European Commission’s and Energy Community’s latest assessments stressed that Serbia had insufficiently adopted EU RES directives into their domestic laws and that the country neither guarantees a switch to FiPs, nor complied with the RES acquis and Aid Guidelines.
Furthermore, as FiTs expired on the 31st December 2019, renewable projects that had not secured the privileged power producer status were not entitled to the incentive—including various projects in different stages of development. This situation is further exacerbated by the government’s temporary halt of FiTs payments due to COVID-19 pandemic force majeure, a decision affecting over 260 privileged electricity producers.
However, despite the pandemic, the first practical steps towards future support and granting methods came in May 2020. The European Bank for Reconstruction and Development opened a call for proposals to define the auction-based procurement that should follow the Aid Guidelines. However, no deadlines are mentioned with regards to the auction’s design and the auction launching dates remain unclear.
While this sends a first signal in the direction of a new regime for supporting renewable-based electricity, green power generators still remain in a support vacuum in a country where RES investments are still a risky enterprise.
As the Green Deal is being developed nearly in parallel alongside the conclusion of Serbia’s NREAP, this opens the door for Serbia to increase efforts to catch up in terms of RES legislation and target definitions. To fulfill the energy acquis within the EU accession process, Serbia should first develop a climate and energy strategy in line with ambitions of the EU Green Deal and Paris Agreement. While ambitions should be captured in a future NREAP, adoption of new support mechanisms for renewable energy should also be legislated within the framework of the Energy Community.
In other words, Serbia must strive for—and legally pledge to—climate neutrality and introduce renewable energy targets accordingly. At this stage, fostering green electricity through auctions and FiPs is, at least, an obligation.
Moreover, the Covid-19 pandemic shows that green electricity producers cannot depend on direct subsidies, such as FiTs, since authorities may suspend payments under certain circumstances. This adds a layer of stress on top of decreasing electricity consumption and proving that FiTs are not the way forward. FiPs, on the other hand, would ensure green power producers with a minimal stream of income for selling directly to the market.
Unfortunately, and considering that introducing new legislation takes time, the ongoing support gap will not be overcome in the near future. Solar and wind generators, in particular, lack incentives for at least one year—even assuming if current procedures continue as planned. Therefore, authorities urgently need to design and roll out auctions to procure support policies in the form of FiPs when considering the EU’s path towards decarbonization.
For over 15 years, Serbia has been aligning its energy legislation with the EU energy acquis. While progress continues in various areas of energy policy, legislators and decision-makers need to step up efforts to harmonize renewable energy laws and upgrade RES support policies. Depriving renewably sourced electricity of any support is an act of irresponsibility, not only towards new generators using wind and solar technologies, but also towards RES investors, the public and the planet. Omissions are still an act of non-compliance as authorities fail to introduce policies and mechanisms that foster competition and cost-effectiveness in a timely manner.
Therefore, authorities should launch the first auctions while taking climate neutrality into account. Although the design of auctions should aim to begin the deployment of solar generation and to enhance wind generation, the current pandemic shows that, in the face of unanticipated situations, market mechanisms like FiPs can target the reduction of future income uncertainties.
Delays on the roll out of auctions and the lack of support in any form encircles Serbia’s steps towards EU accession with question marks—both in terms of developing legislation and target fulfilment. Beyond further advancing renewable sources of electricity in Serbia, rolling out auctions and FiPs as part of a new NREAP under the framework of the Green Deal would propel the nation one small step further in fulfilling the renewable energy acquis to access the EU.