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It has now been almost a year since Slovenia’s new Energy Act came into force, substantially amending the previous law and repealing more than 100 regulations.

The reform was needed so as to implement certain EU directives that had been adopted after the previous law was enacted (i.e., Directives 2009/72/EC, 2009/73EC, 2010/31/EU, 2009/28/EC, 2012/27/EU), as well as to bring the law into compliance with decisions of the Slovenian Constitutional Court, which had declared the previous law unconstitutional in relation to certain aspects of the determination and calculation of network charges. 

On a framework level, the new Energy Act provides for a national energy program, the “Energy Concept of Slovenia” (“ECS”), which will be adopted by the Slovenian National Assembly upon the proposal of the Ministry of Infrastructure. The goal of the ECS is to ensure a reliable, sustainable, and competitive supply of energy over a medium-term period of 20 years and a long-term period of 40 years. In the past, it has been argued that Slovenia lacks a clear energy concept. Thus, it is expected that adopting the ECS will be a challenging task for the Ministry of Infrastructure, which has set doing so as one of its top priorities. 

A public discussion on the ECS was held at the National Assembly in January 2015, where industry experts provided their views on the further development of the energy sector in Slovenia. It has been widely agreed that a strategic document is needed shortly. At this moment the preparation of the ECS is ongoing, and it is expected that the program will be adopted by the end of 2015. 

At the public discussion, the Ministry of Infrastructure identified the two main objectives of the ECS: (i) the elimination of greenhouse emissions by 2050 (the long term goal being carbon-free energy), and (ii) the reduction of energy dependence on imports (which currently account for 50% of total use). 

On a regulatory level, the new Energy Act provides for the abolishment of all licensing requirements for – among other things – production, supply, and warehousing. As of March 2014, the Energy Agency no longer keeps a public register of issued and revoked licences and all previously-issued licences automatically expired at that time. 

This abolishment of licences provides a significant relief of the administrative burden entities seeking to conduct energy-related activities in Slovenia faced. However, certain administrative barriers to entering the Slovenian energy market still exist. In particular, in order to conduct energy-related activity on a permanent basis, the competent Ministries still require the establishment of a branch office in Slovenia, notwithstanding the EU-wide application of the freedom of establishment and the freedom to provide services.  

The most controversial provisions of the Energy Act are those related to the requirement that, as of January 1, 2015, each building must obtain an energy-performance certificate if they are sold or leased for more than one year. In Slovenia, the energy-performance certificate is a public document, issued by a certified independent expert, containing information on the energy efficiency of a building and recommendations to increase its energy efficiency. This new requirement faces significant public opposition, as it is expected to result in significant additional costs on average consumers. 

In relation to the electricity sector, the new Energy Act implements the key change brought about by the EU Third Energy Package: the unbundling for transmission network system operators; i.e. the separation of the operator’s generation and supply operations from its network. The EU Third Energy Package provides for three unbundling models, among them the ownership unbundling model. This model provides for a sub-category of state ownership, in which the state retains ownership of both the generation and supply operations in a network, provided that there are separate public bodies exercising control over each. 

As the Slovenian state owns the network operator on the one hand and the majority of the electricity generation and supply undertakings on the other, it unsurprisingly chose this model. The network operator ELES, d.o.o. was removed from the authority of Slovenian Sovereign Holding, the entity managing the state’s capital investments, and is now managed by the Ministry of Infrastructure. Electricity generation and supply undertakings, however, remain under the authority of Slovenian Sovereign Holding.

To conclude, it is important to note that most of the underlying regulations necessary for the operation of the new Energy Act have not been adopted yet. Until their adoption is complete, the regulations under the old legislation apply. The delay in adoption of regulations generates some uncertainty as to the applicability of some of the new Energy Act provisions. As many of the existing regulations are not in compliance with the provisions of the new Energy Act, their enforceability may be limited.

By Markus Bruckmueller, Partner, and Klemen Radosavljevic, Senior Associate, Wolf Theiss Attorneys-at-Law

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Albania has given a high priority to the investments of foreign companies and firms by liberalizing its foreign investment, reflecting this policy with applicable legislation in force. In the process, it has provided a number of basic guarantees and protections for foreign investors. Foreign and domestic firms have equal treatment under the law, and almost all sectors are open to foreign investment, especially the energy sector. Consequently, the actual legislation in the Albanian free market has resulted in increased investments by foreign companies in the energy sector. In particular, with the Concession Law, secondary legislation, and related concession procedures, the Albanian Government has reconfirmed its policy of attracting private investment in the hydropower plant sector.

The energy sector in Albania has always faced serious difficulties in supplying its consumers with electricity because of the full dependence of its power production on hydro resources, coal, and fossil fuels.In the effort to improve this sector during the last few years, Albania has been working to change energy efficiency policy, supporting the use of renewable energy sources, making that a part of the country’s energy strategy. The interest of our country in renewable energy sources is increasing day by day because of Albania’s significant renewable resources potential, due to its favorable geographic position on the Mediterranean Sea.

The Albanian national strategy (2007-2020, regularly updated) is an important document in the energy sector. It analyses and recommends future changes to be introduced in the energy sector in Albania designed to increase the security of the energy supply and to optimize energy resources in order to meet the demand and achieve sustainable economic development in the future. The national strategy has addressed not only classic fossil fuel, coal, and hydro exploitation but also energy efficiency and renewable energy sources, as part of a comprehensive strategy to improve the country’s energy sector. Renewable energy resources have been included to be in close coordination with the objective of efficient exploitation of all energy resources and energy security. It seeks to encourage the use of renewable resources, which will impact not only the safety of supply but also the use of clean energy, including hydro energy, solar panel systems and wind energy, to make possible the maximal use of local resources. Due to the importance that the Albanian government has given to the generation of energy from wind, including it in the Albanian national strategy, a number of private entities have shown interest in investing in wind energy production, and several investors already hold licenses for the construction of wind farms for electricity generation. 

The most important law that provides for the energy sector in Albania is Law no. 9072, titled “On Energy Sector in Albania” and dated May 22, 2003. The law’s purpose is to ensure conditions for a safe and reliable electricity supply through an efficiently functioning power market. The law provides for some privileges to those power producers generating electric power using renewable energy sources, who will enjoy prioritized treatment by the Transmission System Operator. 

The approval of the Albanian market model is an important step towards the consolidation and steady development of the Albanian electricity market. This approval is part of the reform that the Government of Albania has undertaken for the reconstruction of the electric power sector, pursuant to the Law on the Power Sector and the policies of the Government for the development of this sector. The Albanian Market Model has been developed according to the European Union Directives on Electricity and the requirements of the Energy Community Treaty of South Eastern Europe for the creation of the Regional Market of Electrical Power, as ratified by the Parliament of Albania in 2006. Energy policy integration is an Albanian government obligation under the Stabilization-Association Agreement due to the legal framework harmonization. Albania has created a wide legal framework aimed at safe development of actual resources as well as the involvement of renewable energy as an important source.

The Albanian regulatory authority in the energy sector is the Energy Regulatory Entity (in Albanian Enti Regullator i Energjise, abbreviated ERE). This is an independent body, the main competencies of which are the issue of licenses for different activities in the energy sector, regulating electricity fees, and other decisions on relevant policies, including but not limited to prices, cost evaluation, consumer protection, transparency, and nondiscriminatory procedures.

Albania has set up a legal framework and other administrative facilities that are very attractive for investors intending to operate in the energy sector. This is a sector that offers high profits and is the focus of the Albanian government, which is looking to attract serious investors.

By Eris Hysi, Partner, Haxhia & Hajdari Attorneys at Law

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Currently, the Moldovan power system has a generating capacity of approximately 500 MW, and around 3,000 MW if the MGRES and Dubasari hydropower plants (HPP) in self-proclaimed Transnistria are included). Most of this capacity (excluding Transnistria’s power stations) is supplied by combined heat and power plants. The generating capacity of renewable energy power plants in the territory controlled by Moldovan authorities, for which the regulator has approved tariffs, is around only 18.5 MW.

In the Renewable Energy Law no.160/2007 (the “Renewables Law”), the Moldovan Parliament set an ambitious renewables generation target for 2020, namely that their output should amount to 20% of the total energy originating from conventional sources. The target is backed by the favorable climatic conditions in Moldova, especially for sun-powered electricity: the country has up to 3,000 sunshine hours per annum, according to the Moldovan think-tank IDIS-Viitorul. 

Notwithstanding its strong climatic potential for the development of renewables, Moldova’s legal climate, including underdeveloped and somewhat unclear regulations, is not yet sufficient for triggering a boost of renewable power generation in the country. The situation could change quickly, however, as the local Government is eager to improve, and where there is no governmental initiative, the private sector and market economy often does it on its own.

Below is a series of legal aspects to be taken into account when considering constructing and operating a solar power plant in Moldova.

Construction Authorization. Besides the Renewables Law, the core instruments governing the construction of power stations in Moldova are the Electrical Energy Law no. 124/2009 (the “Electrical Energy Law”) and the Governmental Decision 436/2004. Both documents require governmental approval for the construction of power plants with a capacity over 20 MW. The Electrical Energy Law also provides that the Government shall establish the grounds and the procedure for approving the construction of such plants. However, the scope of GD436/2004 appears to be broader than that mandated by the legislature in the more recent Electrical Energy Law. Pursuant to GD436/2004, the scope also applies to plants of a lower capacity; however, GD436/2004 does not define the minimum capacity for its applicability. 

The procedure for authorizing the construction of a power plant under GD436/2004 is rather complex and in particular requires approval by the governmental energy commission. Given the purported inconsistency between GD436/2004 and the primary legislation, the legal significance of the former for the construction of plants of lower capacity, including solar power stations, remains unclear.

Licensing. Electricity generation in Moldova is subject to licensing. A license must be procured when the plant’s installed capacity is at least 5 MW if the produced electricity is designated for public consumption and of at least 20 MW if the produced electricity is for own consumption. The relevant licenses are issued by the National Agency for Energy Regulation (“ANRE”) for a period of 25 years. License holders for electricity generation may not concomitantly hold transmission or distribution licenses.

Access to the Grid. Moldovan law provides for non-discriminatory connection to the power grid and the priority dispatch of electricity from renewable sources as long as this dispatch does not affect the safety of the power system. Connection to the grid is performed on a contractual basis between the transmission/distribution operator and the electricity producer. The transmission/distribution operator issues warranties of the electricity’s origin to producers of renewables generated by plants with a capacity of at least 10 kW.

Feed-in Tariffs. The possibility of obtaining adequate feed-in tariffs is an essential incentive for investment in renewable energy. In this respect, the Renewables Law requires the ANRE to annually approve basic tariffs for electricity supplied from renewable sources. Feed-in tariffs are calculated on the basis of the ANRE’s methodology and approved for each individual producer. These tariffs are to be set by factoring into account the relevant prices existing in the international markets and the possibility of recovering the investments within 15 years, provided that the profitability rate would not exceed twice the profitability rate in the conventional energy sector.

So far, ANRE has approved tariffs for seven photovoltaic plants with capacities between 15 kW and 500 kW; accordingly, the tariffs range between MDL 1.88 and MDL 1.92 per kWh without VAT. 

Electricity Off-Take. According to the Renewables Law, Moldovan renewable energy producers, alongside cogeneration plants, have priority in selling electricity in the Moldovan market. Furthermore, imported electricity generated from renewable sources shall be deemed to be included in the share of electricity generated from local sources if the exporting state has established the same rule.

However, the manner in which that priority is to be exercised is not entirely clear. While the Renewables Law requires electricity suppliers to off-take electricity from renewable sources in proportions set by the ANRE, the Electrical Energy Law empowers the Government to appoint a supplier aimed at off-taking energy from renewable sources, from which local electricity suppliers and eligible consumers would have to buy electricity in to-be-set proportions. So far, the Government has not appointed the off-taker of renewables, nor has the ANRE set proportions for purchasing electricity from renewable sources. As a result, it is not clear at the moment in which volumes/proportions local suppliers must absorb energy generated from renewables.

It will be interesting to see to which extent the new renewables bill that is currently in the pipeline will clarify the above uncertainties and trigger the inflow of investments into Moldova’s renewable energy sector.

By Vladimir Iurkovski, Attorney, and Anna Cusnir, Associate, Schoenherr

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The climate is rough in Estonia. From autumn to spring, strong winds are accompanied by low temperatures and intense precipitation. People have lived in the small maritime country on the Eastern shores of the Baltic Sea for thousands of years and have learned to cope with the climate. They have put the weather into service by, for example, using frozen water bodies as motorways (the longest ice road in Europe is the 26.5 km route between the main land of Estonia and the island of Hiiumaa) and grinding flour in windmills. While recent winters have been mild in Estonia, storms and cyclones have become a common sight. Even though this has caused considerable damage due to floods, people have also benefited from stronger winds. In January 2015, during the cyclone Hermann, a new record for electricity produced from wind power was set at 22% of the country’s consumption. Perhaps this record shows a bright light for the future of energy production in Estonia.

Estonia has promised the European Commission that 25% of its energy will be produced from renewable sources by 2020. While this is above the overall target of the European Union (20%) and the 8th largest figure among the member states, it is not impressive in the context of the Baltic Sea region. Latvia and Finland, the two member states closest to Estonia, have set their targets respectively at 40% and 38%. Sweden, situated just across the Baltic Sea, aims to produce 49% of its energy from renewable sources by 2020. Thus, compared to its neighbors who share the same climate and a similar landscape, Estonia is lagging behind. Considering the favorable winds of Estonia and the abundance of biomass in the country, Estonia could produce a lot more renewable energy with lower costs than other European countries. 

However, there is no need for Estonia to produce renewable energy, as it possesses cheaper alternatives. The country has large deposits of oil shale, an organic-rich rock that can be burned as fuel. The mineral has been used industrially in the country since 1916, and nowadays approximately 90% of the electricity produced in Estonia is from the oil-shale- powered Narva Power Plants. In addition, Estonia is connected through Finland with Nordpool Spot, the largest electricity market in Europe. This allows Estonia to take advantage of the cheap hydro energy of the Nordic countries. Due to the existence of low-cost alternatives, renewable electricity production is only viable with the help of subsidies. 

Renewable electricity has been supported in Estonia since July 2003. While initially the renewable energy production subsidy was fixed, since 2007 renewable energy producers have received EUR 53.7 for each MWh on top of the market price. Highly efficient combined heat-and-power plants have been receiving EUR 32 for each MWh on top of the market price. The market price for electricity has risen steadily in Estonia and currently stands at approximately EUR 43 for each MWh. While the renewable energy target has still not been achieved, the profitability of renewable-energy producers has been deemed too high by some – for example, the internal rate of return of the Iru cogeneration plant is alleged to be 10-12%. For this reason, the government of Estonia plans to amend the support system and support renewable energy through a competitive bidding approach similar to public procurement processes. The companies that show that they can produce enough renewable energy to meet the 2020 target at the lowest cost will win the bid. However, this amendment does not affect producers who are already supported under the present model. Both the existing and planned renewable-energy-subsidizing models were recently assessed to be lawful state aid by the European Commission, as they were deemed to be necessary to reach the renewable energy goals. 

However, there are doubts concerning the proposed renewable energy support plan. Offering different types of aid to different competitors distorts competition. Under the proposed model, existing producers are likely to receive more subsidies from the state for each MWh than new producers. Moreover, renewable electricity subsidies differ across Europe. Even if it would be cheaper to produce renewable energy above the 2020 goal in Estonia than in somean other country, there is no incentive for Estonia to subsidize further production of renewable energy. Despite opening the electricity markets of the European Union de jure, due to electricity subsidies markets are de facto still separated and this creates inefficiency. 

In conclusion, Estonia is well on its way to meet the renewable energy target of 2020 due to the climate, nature, and policies of the country. However, perhaps the country could do even more.

By Aare Tark, Managing Partner, and Sten Ehrlich, Lawyer, Tark Grunte Sutkiene

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In November 2014, the Slovak government approved a new Energy Policy, which sets out medium and long-term policy guidelines for the Slovak energy sector. This strategic document (and the process leading to its adoption) reflects the competing interests in the Slovak energy sector, the willingness of the government to prioritize nuclear energy in the energy mix, and general uncertainties in the sector resulting from prevailing trends in energy consumption, the pace of development of energy technologies, and geopolitical conflicts in regions vital for the supply of primary energy sources to Slovakia.

The Energy Policy is a strategic policy document – prepared and regularly reviewed by the Ministry of Economy – which defines the principal objectives and priorities in the Slovak energy sector for the next 20 years (currently until 2035 with an outlook until 2050). After its approval by the government, the Energy Policy should be reflected in the government’s proposals for new legislation. More specifically, it serves as a basic point of reference in the authorization of new energy installations by the Ministry of Economy.

To a large extent, the current Energy Policy, adopted more than eight years after its predecessor, reflects EU energy policy and sets out the following principles as its basic “pillars”: security of supply, energy efficiency, competitiveness, and sustainability. These principles are then translated into a number of proposed measures, both on a cross-sector basis and with respect to specific areas (e.g., coal, oil, natural gas, renewable energy sources, electricity, heat, transport, research and development, and education and awareness raising).

The policy framework outlined in the Energy Policy is based on forecasts of key consumption indicators (including gross domestic energy consumption, final energy consumption, and electricity consumption). These forecasts provide estimates for several scenarios – all assuming a long-term increase in energy consumption. In light of the falling trends in energy consumption since 2005 (although arguably reinforced by the 2009 economic crisis), however, it remains to be seen whether the actual figures in the coming years will confirm the correctness of the estimates and thus the relevance of the adopted policy priorities.

Among the many topics of the new Energy Policy, the future approach to the energy mix features prominently. In line with the climate change-related objective of achieving a “decarbonized” economy, the Policy places significant emphasis on the current and future role of nuclear power plants. The Energy Policy counts on the completion of two new units of the Mochovce nuclear power plant (with an installed capacity of 471 MW per unit) and contemplates the possibility of a new nuclear power plant construction in Jaslovske Bohunice to be put into operation after 2025 (with an installed capacity of 1,200 MW, although alternatives of 1,700 MW and 2,400 MW are also being considered) and the potential extension of operation of the V2 Jaslovske Bohunice nuclear power plant until 2045 (with an installed capacity of 1,010 MW).

These assumptions regarding the potential development of nuclear energy sources carry several important implications for the Energy Policy. Given the resulting electricity generation overhang, the Energy Policy foresees the need to export surplus electricity, which may require investment in the Slovak electricity transmission infrastructure (and which depends to a large degree on the generation and transmission infrastructure in neighboring countries). A high share of nuclear power plants in the electricity generation mix may also limit the regulation capability of the Slovak transmission system and conflict with the currently guaranteed off-take of electricity from renewable energy sources and co-generation power plants. 

Significantly, the Energy Policy does not count on the construction of large scale gas-fired power plants, as only limited construction of smaller co-generation power plants is expected.

Several policy shifts announced in the new Energy Policy closely relate to the issue of high electricity prices in Slovakia. While ultimately within the powers of an independent regulator, final electricity prices are considerably influenced by support schemes defined by government sponsored legislation, including those dedicated to renewable energy sources, co-generation of electricity and heat, and electricity generation from domestic coal. As a result, the Energy Policy signals certain measures aimed at decreasing final electricity prices, including the phase-out by 2020 of feed-in tariffs for electricity from renewable energy sources, focus on the use of renewable energy sources in the production of heat, and certain efficiency-enhancing changes to feed-in tariffs applicable to the co-generation of electricity and heat. The commitment to support electricity generation from domestic coal remains unchanged.

By Marek Staron, Partner, and Zoran Draskovic, Associate, White & Case

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

It might be the New Year, but the problems in Bosnia and Herzegovina’s (BiH) gas sector are old, cumulative, and seemingly unsolvable. A closed market, underdeveloped infrastructure, and supplier monopoly might sound dissuasive to some, but – at the risk of sounding pretentious – it may be a window of opportunity to others.

Following its obligations under the Energy Community Treaty, BiH had to ensure full opening of the natural gas market as of 1 January 2015. However, all natural gas consumers in the country still remain to be supplied by existing companies at regulated prices. Foreclosure of the market and lack of alternative gas supplies eliminate the possibility for consumers to choose and to change their suppliers. Apart from legal and regulatory reforms in the sector, investments in the natural gas infrastructure should be targeted as a key priority to guarantee secured supplies corresponding to the national consumption demand.

The EU Third Energy Package, which requires, inter alia, a complete opening of the gas market and unrestricted third party access, has to be transposed and implemented without any delay. This will lead to a number of regulatory and corporate reforms, including unbundling of market incumbents, thus establishing an overall framework for the functioning of the market and its regional integration. However, without diversified supplies and actual competition, such a framework would have little or even no practical effect.

Currently, natural gas is imported to BiH by a single external supplier from Russia via the only available transit route (through Hungary and Serbia) and enters the national system at a single entry point in Zvornik. Obviously, such a dependency, at the level of both gas sales and transit capacities, significantly decreases the ability of BiH gas companies to negotiate for more favourable supply conditions, including the gas price and transit costs, and has an overall negative effect on the security of supply.

The recent collapse of the South Stream project and failure of any cooperation initiatives in this regard leaves BiH no other choice than turning back to its European partners in order to gain from ongoing or projected gas infrastructure developments in the region.

Diversifying the natural gas supply to BiH relies on its cross-border connection capacities and access to alternative supply sources and transit routes. In this regard, interconnection with the Croatian gas system is of a crucial importance. Prospective developments should be focused, first of all, on connecting existing infrastructures from Zenica (BiH) to Slobodnica (CRO), and, second, on ensuring the participation of BiH in the Ionian Adriatic Pipeline (IAP) project, including the south-directed Sarajevo-Mostar (BiH)-Ploce (CRO) connection.

Cross-border capacities between BiH and Croatia would ensure access to gas supplies from Central Europe, or at least for alternative transit routes for gas exported from Russia. On the other hand, projected gas infrastructure developments in the region are even far more promising. Participation by BiH in the IAP would allow for an access to the gas market segment to be formed after the commissioning of the Trans Adriatic Pipelines (TAP) project. Moreover, gas traders in BiH would also stand to gain from planned LNG capacities in Croatia and Albania, even if this is seen as a very long-term potential.

Setting aside direct physical connections with neighbouring gas infrastructures, the entrance to the gas markets of Central Europe would allow for virtual gas trading, including spot markets, swaps, and financial trading, thus aiming for far-reaching diversity potential and market liquidity.

Another crucially important aspect is the expansion of an internal gas network, which would ensure an efficient gas penetration to the country. In 2012, supplies through a newly-built distribution pipeline from Sepak to Bijeljina were authorised, and in December 2013 a transmission pipeline from Zenica to Travnik was completed. However, current network developments are localised at the entity level exclusively and the State’s strategy in this regard is still missing, not to mention the absence of a State gas law. This clearly precludes a systemic and economically prudent prioritisation of any developments in the sector.

Eventually, everything comes down to the financing of new projects. Being a non-EU member country, BiH has no direct access to EU energy infrastructure funding under the Connecting Europe Facility (CEF), and the funds cannot be secured by the Energy Community since it has no such financial instruments. Even if several BiH relevant gas infrastructure developments are labelled as Projects of Energy Community Interest (PECIs), any possible instrument for their financial assistance is still only at the level of discussions. Thus, available financing alternatives lie in the creation of an investment-friendly environment, enabling the stakeholders to finance the projects and rely on other international donors.

Whichever of these mentioned options should play out for BiH, the reform of the regulatory and legal framework remains critical as the country’s pre-requisite. The expansion of European gas markets should be a significant push for those reforms that would eventually result in a win-win situation for BiH with much-needed alternative gas sources and, consequently, security of supply on one side, and market opportunities for new players on the other.

By Branko Maric, Managing Partner, Maric & Co.

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In 2012 the EU set its 20/20/20 goal: Cutting greenhouse gas emissions by 20%, increasing the use of renewable energy by 20%, and cutting energy consumption through improved energy efficiency by 20% – all by the year 2020.

Energy performance contracting is an important tool in achieving this goal. By contracting energy service the client is not buying new equipment, installations, upgrades, or refurbishments – the client is buying energy savings. 

Energy service involves the implementation of an energy efficiency project on the basis of an Energy Efficiency Performance Contract (EnPC) under which an energy service company (ESCO), guarantees to the client that the project implementation will result in verifiable and measurable (or estimated) improvement of energy efficiency and/or in savings in energy consumption. 

Energy efficiency performance contracting is a way to refurbish buildings and to upgrade public infrastructures in a budget neutral way. An ESCO finances a project and the client is free of any investment. The ESCO is paid an energy service fee exclusively from savings achieved as a result of its investment – and only if the savings are actually achieved. This is particularly beneficial to public clients because, when ESCO guarantees the energy savings up to the amount of the energy service fee charged to the public client, such fees are not classified as public debt. As a result, public clients build a financial capacity which can be potentially used for other projects. 

Many European countries have come far in developing their energy performance sector, while Croatia is still in an early stage. The first company specialized in providing energy services was established in 2003, and now, more than 10 years later, there are still fewer than 10 ESCOs in the market. The market is relatively small: just over USD 113 million. Due to the financial crisis the market was stagnant between 2008-2010, but since 2013 the market has shown growth. 

The growth has been largely fueled by growing demand (due to a steady rise in energy prices), public awareness of the importance of energy savings, and political will. 

In the 2nd National Energy Efficiency Action Plan of February 2013, the Government set an expected energy saving target of 3,554 GWh by 2020, assuming that every year 1% of the building surface will be renovated – approximately 1.5 million square meters of residential buildings per year until 2020 – which should be realized with an investment volume of USD 339 million/year. At the same time, the public sector has large potential. Most public buildings were constructed between 1945–1990, under building codes enacted before 1987. The assumed renovation volume is around 479,000 square meters per year, which is expected to be realized with USD 108 million/year. ESCOs are expected to contribute significantly to these targets. The majority of energy efficiency projects have been implemented in school buildings, hospitals, commercial buildings, and street lighting refurbishment. The savings have been significant: in schools between 20-30% of the baseline consumption, and in street lighting between 19-47%. 

Clients are contracting the energy service under the Public Procurement Act of 2014 (PPA) and the Energy Efficiency Act of 2014. While private clients are free to contract for the energy service, public clients are required to run a public tender under the PPA and apply MEAT criteria (i.e., the most economically advantageous tender) as the award criteria. The energy service is tendered either in an open or in a restricted procedure. A negotiated procedure or competitive dialogue seems more appropriate as is allows the EnPC to be awarded to the ESCO with the most expertise, sufficient experience, and available financial resources. However, due to legislative restrictions such procedures are rarely used. 

The market has barriers beyond the legislative. ESCOs in Croatia still need financial assistance from the State or other sources because commercial banks are not yet in possession of sufficient expertise and capacities to financially support ESCOs. In addition, the lack of trustworthy and reliable data collected in environmental audits prior to the initiation of projects often discourages ESCOs from applying to a tender or engage in an investment. If ESCOs invest in non-reliable environmental audits, there is a great risk under-achievement and contract failure. 

For these reasons, ESCOs are calling for amendments of the legislative framework to make energy efficiency performance contracting an efficient and leading tool in achieving the 20/20/20 goal. 

By Gregor Famira, Partner, and Marija Musec, Local Partner, CMS Reich-Rohrwig Heinz Rechtsanwalte

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In the past few years Latvia has implemented several support schemes to increase renewable energy’s share of total production as required by EU law. The two main schemes are a mandatory procurement of electricity and a guaranteed payment for installed capacity. The mandatory procurement (feed-in tariff or FIT) is a guaranteed right to sell a certain annual amount of electricity to the public trader for an increased price (exceeding the market price) for a fixed period of time. Guaranteed payment for installed capacity is the right to receive a fixed monthly payment for the installed electric power capacity for a fixed period of time notwithstanding the actual amount of produced electricity. This support was granted to combined heat and power (CHP) plants of high efficiency and producers using renewable energy.

However, in 2011 the Cabinet of Ministers began to implement a policy that disrupts renewable energy producers, investors, and the renewable energy industry as a whole. It did this by implementing several restrictions on them, such as refusing to grant new support; restricting periods of support; imposing new obligations on producers; canceling support to several producers; and miplementing administrative barriers. The main argument for this policy was that the high costs of support had had a negative impact on electricity price for the end consumers.

One of the most recent restrictions was a new tax imposed on renewable energy producers receiving any kind of support (FIT and guaranteed payment for installed capacity). In response to pressure from high electro-intensity consumers the Parliament of Latvia adopted amendments to the Law on Taxes and Duties which introduced a subsidized energy tax from January 1, 2014 until December 31, 2017. The Parliament also adopted a Law on Subsidized Energy Tax.

Although the new tax and related compensation system is still not consistent with the European Commission in terms of state aid rules, collection of the new tax and related compensation to electricity end consumers began in Latvia on January 1, 2014.

The new law stipulates differentiated tax rates, including 15% for natural gas producers, 10% for renewable energy producers, and 5% for plants that supply heat to centralized systems (and various others).

The new tax was applied to revenue received in the form of support, i.e. FIT and guaranteed payments for installed capacity. In particular, the tax covers both the market price for electricity and the amount of support on top of the market price. Thus the actual amount of support is decreased by 15%, 10%, and 5% respectively.

By implementing the new subsidized energy tax Latvia was following the recent experience of Spain and the Czech Republic, although both of these states were in different circumstances and thus had different reasons to implement the tax in different manners. However, both states experienced a common reaction: – litigation proceedings. In addition to claims submitted by energy producers to the international court of arbitration against Spain and Czech Republic.

Latvia experienced a similar reaction. Both producers of renewable energy and producers of natural gas decided to challenge the aforesaid legislative changes, as the new tax and other imposed restrictions significantly decreased their income. Ninety energy companies submitted claims to the Constitutional Court of Latvia regarding the implemented subsidized energy tax. Following these claims, constitutional proceedings were initiated.

Without doubt one of the most important elements for successful energy support policy is ensuring long-term stability for national and international investors in the sector. Rapid or unexpected changes in payment levels or policy structure damage investors’ confidence and significantly impede the pace of renewable energy growth. Thus, both price certainty and policy certainty are important. Unfortunately, this reasoning was not sufficient to stop the legislative changes affecting national and international investors in the energy sector in Latvia.

Energy producers are supporting their claims with arguments that the new tax negatively affects the support received by all energy producers. The right to receive full support is protected by the principle of legal certainty, the principle of proportionality, and the rights to property under the Constitution of Latvia and the European Convention on Human Rights. The Constitutional Court of Latvia accepted these arguments as sufficient enough at first glance in order to initiate constitutional proceedings.

The Constitutional court is preparing to finalize the review of the case in spring or summer this year. Energy producers remain optimistic, as they believe that their arguments are well substantiated and the breach of constitutional law quite obvious.

By Sandis Bertaitis, Partner, and Arturs Caics, Associate, Law Firm Fort

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Lithuania, Latvia, and Estonia, like many other countries in Europe, are facing challenges in the energy sector in three main dimensions: security of energy supply and competitiveness and sustainability of the energy sector.

The development of the gas sector in all three Baltic countries was determined by the same historic and political circumstances, as well as scarce energy resources. After the collapse of the Soviet Union, all three countries had only one gas supplier, Gazprom, which has also partly privatized the gas transmission system operators in these countries. Because all natural gas resources used in the Baltics until the end of 2014 were imported from Russia by Gazprom, the three Baltic countries were not able to satisfy their internal gas demand at competitive prices. The natural gas markets of Lithuania, Latvia, and Estonia were not integrated into the European natural gas markets and therefore remained isolated from the other European Union member states. Consequently, the currently operational cross-border interconnections exclusively allow for natural gas imports from Russia without any other pipeline alternatives for diversified supplies. By the end of 2014, the natural gas markets of all the three countries were absolutely concentrated, i.e. were fully dependent on the single external natural gas supplier, Gazprom.

The situation has led to unreasonably high gas prices in the Baltics and only one supplier with no other alternatives. The market monopoly possessed by the single external supplier of natural gas resulted in unreasonable, discriminatory, and excessive pricing for imports of natural gas. The exclusive market position of Gazprom and its commercial influence upon dominant internal market participants (importers and suppliers) allowed for unilateral marketing and pricing policies without any regard to market-based processes worldwide.

While significantly overpaying for gas, Lithuania has made few important decisions: to go for full ownership, unbundling the gas transmission system operator when implementing the European Union Third Energy Package and developing a liquefied natural gas (LNG) terminal. Both of the decisions were finally implemented in 2014.

The transmission system operator, in which Gazprom had part of the shares, was unbundled from the supply activity, and the shares owned by Gazprom in these companies were bought back from it by the Lithuanian state and state-owned enterprises.

As to the LNG terminal, in the summer of 2012, the Lithuanian parliament adopted the Law on Liquefied Natural Gas Terminal, which provided for the basic legal requirements and principles for LNG terminal construction, activity, and operation. One of the fastest implemented projects in the Baltics, the LNG terminal in Lithuania was launched on December 3, 2014 and now operates successfully. The Lithuanian LNG terminal is based on FSRU (Floating Storage and Regasification Unit) technology provided by Hoöegh LNG. FSRU is permanently moored to a jetty built in the Curonian Lagoon in the southern part of the port of Klaipeda. The LNG terminal is of 4 bcm capacity, enough not only for Lithuanian consumption but potentially by the other Baltic countries. According to the LNG terminal operator’s information, when operating on a full load, the LNG terminal is capable of filling 75% of the whole gas market of the Baltic States.

Thus, following the implementation of these decisions and the launch of the LNG terminal in Lithuania, the situation has changed. Lithuania has ensured the diversification of gas supply sources and is now is one step closer towards the security of gas supply. Based on the adopted regulations, there is a designated supplier, UAB Litgas (a company responsible for LNG supply and trading via the LNG terminal), which has an obligation to import at least a minimum gas quantity necessary for uninterruptedible LNG terminal operation. In the summer of 2014, UAB Litgas has signed an LNG supply contract with the Norwegian company Statoil, which offered the most favorable terms during the tender. Statoil will be supplying annual volumes of 540 million cubic meters of natural gas to ensure the continuous operations of the LNG terminal. The LNG terminal and Statoil LNG supplies will ensure a new gas pricing policy which will be linked to the international markets.

Even though the LNG terminal capacity is enough to serve the Baltic countries, there is still a way to go until the other two Baltic countries can fully benefit from this project. There is still a need for infrastructure development to allow Latvia and Estonia to benefit from the Lithuanian LNG terminal. The underground gas storage facility in Inciukalns, Latvia, could serve as a balancing point for the LNG terminal, however, Latvia must finalize the implementation of the European Union Third Energy Package in the gas sector.

Therefore, regionally, in order to ensure security of supply to all the Baltic States, the situation still requires implementation of joint additional measures by all the three partners.

By Jaunius Gumbis, Partner, and Dovile Greblikiene, Associate Partner, Lawin

This Article was originally published in Issue 2.1. of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.