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Serbia Prepares for the First Market Premium Auction

Serbia Prepares for the First Market Premium Auction

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Recently, the Serbian Government (“Government“) adopted a Regulation on the Quota in the Market Premium System (“Quota Regulation“), and soon after, the Regulation on Market Premium and Fid-In Tarif (“Tarif Regulation“) and the Regulation on the Model Agreement for the Market Premium for Renewable Energy Sources (“Model Agreement Regulation“). This package of by-laws has been adopted to create conditions for the organization of the first market premium auction in accordance with the Law on the Use of Renewable Energy Sources (“Law“).

The market premium system represents a new type of state aid for energy producers, i.e., a monetary supplement paid to the energy producers when selling electricity. The amount of incentives (maximum market premium), as well as the max market purchase price for electricity, are determined by the Energy Agency (the “Agency“). For now, the Agency has only adopted the Quota Regulation by which a quota of 400MW has been determined for wind farms with a capacity of at least 3 MW, and has determined the maximum repurchase price of electricity of 5.57 Eurocent / kWh.

Considering that the market premium is defined as a two-way floating premium, the Government (Elektrodistribucija Srbije) will pay the premium to the investors when the electricity price in the market is lower than the one realized at an auction. On the other hand, if the market price is higher than the one achieved at an auction, the electricity producer will be obliged to pay premiums. However, having in mind the low repurchase price defined by the Agency, the effectiveness of the system has been called into question.

Not long after the Quota Regulation, the Government reached the Tarif Regulation and the Model Agreement Regulation, which delve into more detail about conditions, procedures and more, regarding obtaining the status of a “temporary privileged producer”.

According to the Law and the mentioned regulations, the entire procedure for exercising the right to market premium involves an auction in which interested producers compete and consists of several stages:

  1. initiating proceedings
  2. qualifications
  3. bidding
  4. compiling a ranking list and filling the quota

Initiation of proceedings

The procedure begins when the Ministry of Mining and Energy (“Ministry“) announces the start of the planned auction on its website. The Ministry is obliged to publish the auction plan at least 45 days in advance, after which a public invitation is sent. This invitation contains more detailed information about the auction. In addition, the Ministry publishes all other necessary information and forms that the participants in the auction fill in and submit in order to participate in the auction, and the auction procedure itself is conducted by a commission appointed by the competent minister. 

Qualifications

Qualifications are the elimination phase in the auction procedure, which confirm whether the participants meet the conditions prescribed by the Law and the public invitation. One of the conditions is a financial security instrument for the seriousness of the offer, i.e. a cash deposit or a bank guarantee, which is paid to a special account of the Ministry. The amount of this security is rather high, at EUR 30 per Kw of the capacity. 

Bidding

This phase consists of participants exhibiting offers and the subsequent competition between said offers. Criteria for a successful bid is the offered price, i.e. premium, meaning a lower market premium / a lower purchase price in relation to the maximum market premium / maximum anticipated purchase price.

Rank list and quota filling

After the bidding, depending on the offer they came up with, the Participants are ranked from the lowest to the highest amount of the market premium, i.e. the purchase price. Filling the quota is done in the same way, and the quota is deemed filled when the sum of capacities of producers from the ranking list reaches the level of the prescribed quota.

The procedure ends with the adoption of a decision on granting the right to the market premium (“Decision“), which is issued by the Ministry after the commission compiles a ranking list and a report on the conducted procedure after which the Agreement is signed. 

Privileged Producer Status

The Participants who successfully finished the auction procedure will obtain the status of a temporary privileged producer on the date of the Decision, conditioned that they provide to Ministry a financial security instrument in the form of a bank guarantee of 60 EUR per kW market premium incentives.

Conclusion

The adoption of this by-law package is indeed encouraging news and signals that Serbia really wants to switch to greener energy by stimulating renewable energy production. However, having in mind the maximum determined repurchase price, and the amount of securities necessary for participation in the incentive program, the question is whether the whole market premium system makes sense and will there be any participants willing to participate in the auctions..

This text is for informational purposes only and should not be considered legal advice. Should you require any additional information, feel free to contact us.

By Milan Samardzic, Partner, and Vuk Knezevic, Associate, Samardzic, Oreski & Grbovic

SOG

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