Legal Briefing

RES-electricity: navigate the regulatory labyrinth

The In-House Lawyer Logo

Eastern Europe | 01 March 2010

The 14 jurisdictions of Central, eastern and south-eastern Europe (CEE and SEE), where Wolf Theiss concentrates its energies, are equally divided between seven members of the EU (Austria, Bulgaria, Czech Republic, Hungary, Romania, Slovakia and Slovenia), and seven members of the Energy Community, established by the Energy Community Treaty in October 2005 (Albania, Bosnia and Herzegovina, Croatia, Kosovo, Macedonia, Serbia and Ukraine). Despite the different memberships, there is a strong interplay between these two communities (the EU and the Energy Community) regarding energy issues, particularly renewable energy.

Renewable Energy in the EU

The EU has made the promotion of renewable energy sources (RES) and the production of electricity from these sources a high priority since 1997, with the publication of the European Commission’s White Paper on ‘Energy for the Future: Renewable Sources of Energy’. The Paper set out an EC strategy and an action plan to double the share of renewable energy from 6% to 12% in terms of gross inland production by 2010. In line with this strategy, the EU adopted:

  • the RES-Electricity Directive 2001 (the 2001 Directive) on the promotion of electricity from RES in the internal electricity market;
  • the Directive on Combined Heat and Power; and
  • the Directive on Liquid Biofuels 2003/30/EC (the 2003 Directive).

The 2001 Directive required member states to take appropriate steps to encourage greater consumption of RES-electricity in conformity with the national indicative targets specified in the annex to the 2001 Directive, but did not put forward a harmonised EU-wide support system. The member states were called on to set national targets for the next ten years, taking into account the reference values in the annex of the 2001 Directive, which are set with a view to reaching a 21% indicative share of RES-electricity in all EU electricity consumption by 2010.

In addition to these national targets, the 2001 Directive called for:

  • the establishment of mutually recognised guarantees of origin for RES-electricity;
  • a reduction of the regulatory and non-regulatory barriers to the increase of RES-electricity production; and
  • the guaranteed transmission and distribution of RES-electricity.

The key change and impetus came with the introduction of mandatory targets for each EU member state by the Renewable Energy Directive 2009/28/EU (the 2009 Directive) on the promotion of the use of RES. The mandatory national targets, which relate to the share of renewable energy (electricity, heating and cooling, and transport) in gross final consumption of energy, are consistent with a target of at least a 20% share of RES in the EU’s gross final consumption in 2020. The 2009 Directive further obliges member states to ensure that at least 10% of the final consumption of energy in transport is derived from RES by 2020.

As with the 2001 Directive, the 2009 Directive does not prescribe an EU-wide support system. Instead, it allows the member states to apply support schemes or measures of co-operation provided for in the 2009 Directive (eg arrangements for statistical transfers of specified amounts of renewable energy, joint projects between member states, joint projects between one or more member states and third countries, and joint support schemes).

National Renewable Energy Action Plans

By 30 June 2010, member states must adopt and notify the Commission of its National Renewable Energy Action Plan (NREAP). The Commission will then evaluate the NREAPs and assess the adequacy of the measures envisaged by the member states for the compliance with the indicative trajectory and the mandatory target for 2020.

Although the 30 June 2010 deadline is still just over two months away, the forecast documents recently submitted by the member states to the Commission provide some indication as to the strategies that they intend to adopt.

As the mandatory national targets are defined in terms of the percentage of renewable energy in gross final consumption of energy, many member states have indicated actions to increase efficiency in their strategy, which would reduce energy consumption.

In its forecast notification, Austria indicated that it can achieve its 2020 target (34% of renewable energy in gross final consumption of energy) through RES in the country itself and, therefore, did not expect to resort to the measures of co-operation provided for in the 2009 Directive.

The Czech Republic adopted the same approach in relation to its 2020 target of a 13% share of renewable energy in gross final consumption of energy. Slovenia expects to be able to achieve its 25% share of renewable energy in gross final consumption of energy by 2020 as compared to 16% in 2005, but has not yet detailed how.

Bulgaria, whose 2020 target is to achieve a 16% share for renewable energy in gross final consumption of energy as compared to 9.4% in 2005, expects to resort to the following renewable energy sources:

  • hydro power (31%);
  • biomass (36%); and
  • a marginal role for wind power (7.5%), tidal energy and sea wave energy.

In its notification forecast, Bulgaria also mentions the potential to participate in joint projects with Romania to develop hydro power plants on the Danube (two plants of 800MW each are mentioned), as well as to explore and evaluate the potential of energy production in the Black Sea.

To achieve its 2020 target of a 13% share for renewable energy in gross final consumption of energy as compared to 4.3% in 2005, Hungary plans to:

‘Increase even more dynamically the use of biomass in the agricultural sector by developing and supporting intensively the production of energy crops.’

Romania is obliged to achieve a 2020 target of 24% share for renewable energy in gross final consumption of energy as compared to 17.8% in 2005. To reach this, it plans to make significant efforts to reach higher levels of efficiency in using biomass (including firewood) and also to develop other renewable sources (including wind power).

Slovakia, which has to increase the proportion of renewable energy in final energy consumption from 6.7% in 2005 to 14% in 2020, expects biomass (mainly), geothermal energy and solar energy to replace fossil fuels in the production of heat. It expects a smaller growth in the use of RES for electricity production.

Italy is one of the rare member states to expressly anticipate in its country forecast the need to import RES-electricity from neighbouring countries, such as Albania, Croatia and Serbia.

Renewable Energy in the Energy Community

One of the principal activities of the Energy Community is the implementation by the members of the acquis communautaire for renewables. This acquis communautaire must be adapted to both the institutional framework of the Energy Community and the specific situation of each member. To date, the acquis communautaire for renewables comprises only the 2001 Directive and the 2003 Directive on the promotion of the use of biofuels and other renewable fuels for transport.

As required pursuant to the Energy Community Treaty, each member state has provided the Commission with its plan to implement the acquis communautaire for renewables.

The 2009 Directive specifically envisages that the measures of co-operation provided between member states will become applicable to the contracting parties of the Energy Community if these countries, by virtue of a decision taken under the Energy Community Treaty, become bound by the 2009 Directive. To date, no such decision has been taken but the Energy Community has set up a Renewable Energy Task Force to define the steps for implementation of the 2009 Directive.

Regulatory Framework for RES-Electricity: the Labyrinth

Subject to these directives emanating from the EU and the Energy Community, each of the 14 countries covered by Wolf Theiss is relatively free as to how to implement them in its national law, which gives rise to a very wide variety of regulatory frameworks for RES-electricity in the region. In some cases, the regulatory hurdles and uncertainties deter investors and developers interested in exploring renewable energy opportunities in CEE and SEE.

In most jurisdictions where there is a promotion scheme for RES-electricity, this takes the form of a mandatory off-take of the electricity at incentivised feed-in tariffs. Some of the applicable feed-in tariffs compare favourably with the feed-in tariffs applicable in other parts of Europe.

For example, in the Czech Republic, RES-electricity producers from solar photovoltaic plants benefit from a tariff ranging between €465 per MWh (when the installed capacity is above 30kW) and €469 per MWh (when the installed capacity is below 30kW). According to the current interpretation of the Czech Energy Regulatory Office (the ERO), the producer is entitled to this tariff for 20 years from when the installation starts to operate, subject to annual indexation reflecting the price index of industrial products.

The promotion scheme in the Czech Republic is relatively unique as the feed-in tariffs, determined each year by the ERO, can only be decreased by a maximum of 5% year-on-year. However, a legislative bill is currently being discussed in the Czech Parliament that would remove this protection of RES-electricity installations where the return of the investment is achieved within less than 11 years. This amendment would make it possible for the ERO to decrease the feed-in tariffs for installations coming into operation in 2011 and beyond by more than 5% every year. The ERO estimates that for solar photovoltaic power plants the feed-in tariffs will drop by 30% in 2011.

In Slovakia, the same types of RES-electricity producers may enjoy a feed-in tariff of €425.12 per MWh for installations with more than 100kW capacity, or €430.72 per MWh for installations with less than 100kW capacity. This tariff is applicable, without revision or indexation, for 15 years from the year the installation was put into operation.

In Romania, there is a green certificate regime, including an obligation on electricity suppliers to purchase a certain number of green certificates, depending on the quantity of electricity supplied to final customers, sanctioned by a penalty of €70 for each green certificate in shortfall. The green certificates are traded on two markets:

  1. a centralised market; and
  2. a bilateral contracts market, where there is a floor of €27 and a cap of €55.

These amounts are subject to annual indexation in accordance with the consumer price index.

As a good reminder of the variety of regulatory frameworks applicable in CEE and SEE, in some jurisdictions there is simply no promotion scheme in place for RES-electricity, for example, Albania (except for small hydro power plants), and Bosnia and Herzegovina (except in Republika Srpska, one of the two entities within the state itself).

Permitting procedures: Applicants beware!

In terms of planning procedures, which relate to land use or physical planning, most of the jurisdictions start with an optional zoning process, but this is mandatory in Albania, Bulgaria and Croatia. The planning process then follows on with the issue of a building or construction and an operation or use permit.

The jurisdictions usually provide national significance thresholds above which an Environmental Impact Assessment (EIA) is mandatory. This tends to be true for significant wind power and hydro power installations. For smaller projects, the competent authority screens individual projects to determine whether an EIA is necessary and the scope of such an EIA.

Project developers should be particularly attentive to the level of authority that would be competent for issuing the relevant permit. For example, in Austria, which is a federal state, the local municipality issues the building permits, but it is up to the federal province to apply the laws regarding EIAs.

Regarding the permitting process under the special law applicable to energy or natural resources, some form of energy permit or licence issued by the energy or electricity regulator is generally sufficient. When required, a concession may relate either to the right to generate electricity (eg in Albania) or the right to exploit natural resources (eg in Bosnia and Herzegovina, Macedonia and Slovenia). A public tender process is usually relevant for the issue of concessions, but this can be applicable for even the granting of a licence, such as the tender process currently ongoing in Hungary for licences to construct wind farms, as well as the terms of the support scheme that the wind farms would be entitled to (including feed-in tariff, duration of support scheme and quantity of electricity subject to promotion schemes).

There is one unique feature applicable in Croatia for renewable energy generally and in Macedonia for wind power that is worth highlighting. In these jurisdictions even the exploration of RES-electricity opportunities is subject to a licence issued by the relevant ministry or the regulatory authority.

Grid connection

The treatment of the issues relating to connection of RES-electricity installations to the electricity transmission or distribution network varies from one jurisdiction to another. Most jurisdictions provide for RES-electricity to have priority access to the electricity grid, but there is no detailed provision regarding the right of this priority.

There is also a wide variety in terms of the rules governing liability and responsibility for grid connection and capacity upgrades, improvements or expansion of the grid, necessitated by the RES-electricity installation. The rules regarding the sharing of these costs are particularly unclear in some jurisdictions.

Very few jurisdictions make special allowances or tolerances in the application of balancing charges to intermittent forms of generation, such as wind power and solar power.

In Slovakia, there is a scheme for the assumption of deviations from schedules submitted for installations with less than 4MW instead of installed capacity. Similarly, Hungary has a relatively wide tolerance allowing deviations of +/- 50%.

Guide to Generating Electricity from RES in CEE and SEE

Equipped with the solid experience of working with project developers, investors, financiers, and, most importantly, national and local authorities to get projects completed in the region, the teams at Wolf Theiss’ offices and its associated law firms have joined forces to produce the Wolf Theiss Guide to Generating Electricity from Renewable Sources in Central, Eastern and South-eastern Europe.

This new book, which was launched in March 2010, is intended as a practical guide to the principal regulatory features of RES-electricity projects in 14 jurisdictions covered by Wolf Theiss. The first part of the Guide presents an executive summary of the regulatory framework applicable in each of the 14 jurisdictions. The second chapter contains an outline of the main forces driving the development of RES-electricity in CEE and SEE.

The regulatory framework applicable in each jurisdiction is described in more detail in the 14 country chapters. To facilitate the reference to the relevant sections, all the country chapters follow a uniform structure, and cover the permitting process (building permits, environmental permits, and concessions or energy permits), RES-electricity promotion schemes, financial incentives, grid connection issues and carbon credits.

As highlighted in this article, in some jurisdictions of the CEE and SEE regions the regulatory framework regarding these aspects of RES-electricity generation is either non-existent or lacks legal certainty, which may deter potential developers or investors. However, with many of the RES-electricity opportunities still untapped and sometimes even unexplored, major energy companies and other project developers continue to show interest in the region.

Over the past few months, the teams at Wolf Theiss have advised on numerous RES-electricity generation projects throughout the region, such as:

  • wind farms in Austria, Hungary and Romania;
  • solar photovoltaic projects in the Czech Republic and Bulgaria; and
  • hydro power plants in the Balkans.

As for the future development of the regulatory framework, it is sometimes easy to forget that the countries covered either acceded to the EU only recently, or are now in the process of acceding or seeking accession. In these jurisdictions, Wolf Theiss is engaged in a constructive working relationship with the regional, national and local authorities, and is confident that the regulatory framework for RES-electricity projects will evolve in the right direction.