1. IFC/SECO Cogeneration PPP Regional Workshop - Serbian legal framework Zagreb, 23 February 2011 Ana Calić Turudija Danica Gligorijević

2. ENERGY LAW No explicate regulation of cogeneration Article 4 – Energy policy of Serbia is defined, inter alia, creating environment of use of RES and combined production of electrical and heat energy (cogeneration) Article 84 – privileged producers of electric energy Article 86 – priority right and right to tax, custom and subvention benefits Article 139 – privileged producers of heat energy Article 41- both heat and power productions are considered as activates of public interest (thus could be performed only by public companies or companies to whom such activities are assigned by the contract with the government) Energy License is not needed for cogeneration plants of 1 MW capacity or for internal purposes

3. BY-LAWS Decree on conditions for acquiring of status of privileged producers of electricity (official Gazette of RS no. 72/2009) Conditions for the privileged status Use of RES Production in small electricity plants Simultaneous production of electric and heat power – cogeneration Provided that energy efficiency conditions are satisfied Criteria for evaluation of the relevant conditions If the total annual level of efficiency is higher than minimally prescribed under the Decree The level of efficiency is defined as ratio between total net annual produced energy (both heat and power) and total annual consumed primary energy in Cogeneration plant Request for status of privileged producer is submitted to the Ministry of Energy (currently there are about 10 registered privileged producers, but none for cogeneration – all small hydropower plants)

4. BY-LAWS / 2 Decree on incentive measures for electricity generation using renewable energy sources and for combined heat and power (CHP) generation (official Gazette of RS no. 99/2009) Feed-in tariffs Could be applied by CHP plants with installed electrical capacities up to 10 MW, using renewable energy sources, fossil fuels or fossil fuels combined with some renewable energy sources; EPS is obliged to purchase the power produced by the privileged producer (as defined above) per feed-in tariffs 12 years duration of the agreement

5. DRAFT ENERGY LAW - MAIN NOVELTIES Cogeneration is declared as a separate energy activity; Production and energy and heat are not considered as activities of public interest! Certificate of origin – public document issued by the Ministry (EU certificates valid under reciprocity conditions); Privileged producer – defined under art. 64 also as cogeneration plant of the capacity up to 10 MW under the conditions of efficiency and environment protection;

6. PPP IN COGENERATION Process What is the legal framework, what are the rights and obligations of the parties? Is the choice of private partner free? No Law on Public and Private Partnership Result Certain uncertainty Possibility to apply different laws Possibility to tailor the process ?

7. ENERGY LAW Article 34 and 35 provide for possibility of public tender for construction of energy plants in case the energy stability cannot be achieved through issue of energy permits and directs to application of Concession Law Could be justified ? Not real solution (i) only in case stability cannot be achieved, (ii) only for construction and (iii) does not provide the legal framework but only directs to Concession Law

8. Could be relevant irrespective of the Energy Law Under Article 5 (10) there is a possibility to grant concession for construction, maintenance, use of energetic or other object for the purpose of production, maintenance, transfer and distribution of eclectic or heat energy or their reconstruction, modernization, maintenance and use. But Time consuming process Concession fee? Obligation of the state / state owned company – not envisaged under the Concession law? creation of the concession company – joint venture is not in accordance with the Law (concessioner should create it alone)? NOT A SOLUTION FOR THE SMALL TO MEDIUM SIZE COGENERATION FACILITIES CONCESSION LAW

9. LAW ON COMMUNAL ACTIVITIES The Law on Communal Activities (Art. 4, point 3) defines the following activity as utility activity: 3)production and distribution of steam and hot water is the production, collection and delivery of hot water and steam from remote centralized sources or single sources for hating of residential buildings and apartments as well as business premises, by steam pipe network to the sub-station of the consumers, i.e.to the measurement instrument, including the substation, i.e. Measurement instrument; Thus: If heat is distributed to the general public (including business users) the Law on Communal Activities would be applicable. No mentioning of the electricity providing. No exception for cogeneration

10. WHO CAN PERFORM THE COMMUNAL ACTIVITIES – HEAT DISTRIBUTION? Public communal companies (art. 8) and/or companies with majority state owned capital (51% min) = PPP What is the process of election of the private partner? Establishment of a new joint venture company by state/state owned company and a private investor If to perform the communal activities (heat distribution), JV Company to be organized as public municipal company in accordance with the Law on Public Companies and Public Interest Activities with ration 51:49 Private investor should be selected in a public tender, the process of which is not regulated at all, thus could be subject to internal regulations, respecting in all times principles of transparency but: legal uncertainty - magic circle – all the mentioned laws + privatization /restructuring of state owned company/JV + Public Procurement Law LAW ON COMMUNAL ACTIVITIES / 2

11. PRIVATIZATION / RESTRUCTURING OF STATE OWNED COMPANIES Privatization: governed by the Law on Privatization Privatization should be conducted through the public tender, the process of which is regulated in details (drafts of tender documents, including SPA already exists, minor modifications would be allowed) The time constrains are significant (at least 6 months for the process to be finalized) As a result, private investor would obtain 49% shares in public municipal company, if applicable Social and investment program are compulsory part of privatization package Increase of capital – easiest solution, partially tested in practice (TE TO Novi Sad) Strategic partner is to be chosen at the tender Risk: avoidance of Privatization Law General political consent required – thus applicable for major projects (not for small to medium size facilities)

12. PUBLIC PROCUREMENT LAW Not necessarily for PPP defined as acquisition of goods and services or granting the performance of work by public body, organization, institution, or other legal entailed who are considered as procurators, in the sense of this law…. no really goods or services to be delivered nor work to be performed the aim of PPP is real partnership, so both parties should provide goods/services/work, it is related to joint performance of activities However, the cogeneration facility (JV or company operating the facility) would be considered as orderer and would have to apply the Law on Public Procurement for its acquisitions of goods, services and work related to construction and exploitation of the cogeneration facility (save for cogeneration for own purposes) - Article 84 and 85 of the Law on Public Procurement

13. HOW TO ORGANIZE PPP Similarly as procedural vise, the organization of the PPP is unclear, i.e. not regulated If the form of PPP would be a joint venture, what shall be the corporate structure, capital ratio (save for possible 51+ requirement), duration etc. Again, we are at rather blank space, and the rules are to be set mostly by the partners (private and public). By-laws of the public company must be taken into careful consideration, as there might be the answers as to the consent / authorization requirements and procedures.

14. Due Diligence process of both state owned company and private investor Clear status of the assets (state owned vs. owned by the state owned company) Clear status of the labor force Guarantees for investment / operation of cogeneration facility (legal stability + investments guarantees) PRECONDITIONS FOR PPP

15. CONCLUSION PPP in cogeneration possible but only if there is strong interest of private party and strong governmental support No legal framework save for Communal Activities Law resulting in Insecurity but Possibility to create the process as well as PPP organization Not sufficient incentives under the current energy laws draft law would provide for green certificate

16. Thank you for the attention.