The purpose of a Power Purchase Agreement (PPA) is to set out the terms and conditions for the sale of electricity between a producer (seller) and the take-off entity (buyer), particularly regulating important matters on timing and the initiation of production, the terms of delivery of electricity, payment mechanisms, force majeure clauses and the termination of sales and purchases. The PPA represents a crucial project document in a renewables project. Accordingly, the structure and scope of the PPA are of the utmost significance for renewables investors, particularly institutional investors and other lenders financing these projects.

Having the most recent Serbian PPA models published in July this year, the following paragraphs endeavor to a provide short analysis on the current status and discussions on this topic.

Features of a bankable PPA

Speaking in general terms, a project can be deemed as bankable when the proposed structure of the project, its specific features and the relevant project documents satisfy the lender and provide justification for financing the endeavor. The decision whether a PPA is deemed as bankable or not depends on a simple test conducted by the lenders: will this PPA support the project in a manner that will guarantee revenue and consequently, repayment of the loan.

The separate features and clauses supporting this and contributing to a good, bankable PPA are numerous: the security of performance of the buyer is very important in this sense; the clauses on the performance of the producer and the technical details on delivery are also quite important; right of curtailment (right to order the reduction or cessation of electricity delivery) and the related compensation mechanisms are clauses that a banker would like to see in a PPA.

The default and termination of a PPA are also very important segments. The change in law is also much discussed, and moreover a required clause. In this sense, a bankable PPA should feature a clause that prevents amendments to the applicable law from influencing the terms of the agreement during its duration.

Lenders focus on all of these clauses very closely, since these are crucial point in the decision whether to lend money or not.

PPAs Models in Serbia

The Serbian Ministry of Energy adopted the official PPA model and Preliminary PPA, based on which privileged power producers will be able to utilize incentives for green electricity (i.e. the feed-in tariff) on 16 July 2013[1].The PPA and Preliminary PPA have been adopted months after the first drafts were prepared and published by the Ministry in March of this year. Months of vivid discussions amongst stakeholders to get the best possible models (specifically in terms of bankability) took place. Even though these model agreements represent a step forward, the first impressions are that they do not address the main concerns of financiers and investors in the sector. The main reason for this is the fact that the laws and regulations themselves (which regulate the content of the PPA and Preliminary PPA) are such that they do not provide for optimal solutions to investors and that consequently the model agreements cannot fully meet the investors’ needs at this moment.

Announced Energy Law amendments

Considering the importance of the matter,  Karanovic & Nikolic hosted an interactive working breakfast on energy financing and PPA in Serbia on 17 September 2013. During the panel discussion, Assistant Minister from the Ministry of Energy, Development and Environmental Protection, Dejan Trifunović, discussed the recent activities of the ministry and the efforts that they are making towards putting a fair, balanced and transparent regulatory framework into place in order to support foreign and domestic investments, particularly in the renewables sector.

He announced amendments which will soon be made to the Energy Law and which should address some of the main concerns of financiers and meet the requirements of investors in the sector. He also spoke of the possibility of a foreign investment fund entering the Serbian market in the near future, in order to help the investors in wind energy which have problems with financing.

Also commenting on behalf of the ministry, Special Advisor to the Minister for Energy, Development and Finance, Mr. Ljubomir Aksentijevic commented that the ministry is doing its best with the regulatory framework that is in place and although commercial financers are willing to finance small and medium projects, international financial institutions have yet to finance large investment projects. In an effort to remedy the lack of participation in this respect, the special advisor urged these institutions to come forth and in an official capacity provide the ministry with their objections to the existing documents and legislation.

Dimitar Dimitrovski, a legal specialist with the Balkan Renewable Energy Program of the International Finance Corporation, also spoke at the event and presented his experiences on the topic and the position of institutional investors in renewable projects throughout the region, while Ms. Maja Turković, an independent expert, and former spokesperson of Serbian Wind Energy Association (SEWEA), gave her input and perspective as an investor. She spoke of the problems and obstacles she has experienced in project development in Serbia.

At the highly interactive discussion, it was concluded that although much has been done, the most significant accomplishments remain ahead. The next step will be legislative changes and the implementation of the EU’s 3rd energy package, which is planned for the end of 2013/ beginning of 2014.

We are looking forward to the first draft of the Energy Law amendments – it was announced that this document should be made public during the first half of October 2013. Changes to the Energy Law in this direction should enable further amendments of the Model PPAs in the sense of their bankability.