Montenegro has launched its first auction for the award of market premiums (cash compensation) for the construction of solar power plants, opening a new chapter in the energy transition - the transition to market competition in the development of renewable sources. The auction offers private investors the opportunity, with state support, to build new solar capacities across the country, on the condition that they offer the lowest price per megawatt-hour of electricity produced.
The tender for the first auction is open until November 10th of this year, and includes a quota of 250 megawatts for solar power plants with a capacity of at least 400 kilowatts, which can be built anywhere in Montenegro. Investors compete by offering the price at which they are willing to sell electricity, with the highest allowed price being 65 euros per megawatt-hour, while those who offer lower prices will have an advantage. The state concludes a market premium contract with the selected bidders for 12 years, during which it guarantees them payment of the difference between their offered price and the market price, but only if the market price is lower. If the market price rises above the agreed price, the investors will return the difference to the state, which makes this model more financially sustainable and safer for the budget.
Although the market premium mechanism is designed to reduce the burden on the budget and consumers, the Ministry of Energy does not yet have a precise estimate of how much the state could pay in subsidies, nor what the potential revenues from producers could be over the life of the contract. The reason is that the amount of support will depend on the specific prices offered at the auction and the movement of market electricity prices in the coming years, while production from supported projects is expected only from 2028.
"The funds needed to finance the incentives from the first round of the auction are not planned in the medium-term budget documents because the projects are expected to be online between 2028 and 2030," the Minister of Energy told "Vijesti". Admir Šahmanović.
At the same time, the Ministry says that the state and citizens could ultimately realize direct financial benefits from this model, because in periods when the market price of electricity is higher than that offered at the auction, the difference is returned to the budget.
"During the 2022 energy crisis, France raised more than eight billion euros from renewable energy producers through this model," Šahmanović said.
Tender response to EU requirements
The Ministry of Energy said that the goal of the first auction for the allocation of market premiums for solar power plants is to provide a transparent, competitive and economically efficient support mechanism for investments in renewable energy sources.
"This model allows the market to determine the lowest possible support price, thereby protecting the public interest and minimizing fiscal risk. The auction is being organized now because all prerequisites have been met - the regulatory framework is in place, there is significant investor interest, and the energy strategy and goals within the framework of EU obligations require the integration of new RES capacities. The total capacity envisaged in this round of the auction is 250 MW, for solar power plant technology," said Šahmanović.
"Vijesti" asked whether an estimate could be given of how much the state could pay in total from the budget to support these projects during the duration of the contract.
"The Law on the Use of Energy from Renewable Sources stipulates that the system of incentives for the production of electricity from renewable sources will be financed by traditional fees for end consumers of that energy and from the state budget. The Ministry of Energy, in cooperation with the Ministry of Finance, intends to harmonize and prepare a by-law in the coming period that will more closely regulate the method of collecting and financing the costs of the incentive system. The market premium is a two-way market premium (so-called CfD - Contract for Difference), which means that in the calculation intervals in which the price of electricity on the reference market is higher than the price offered by the producer in the auction process, the producer pays the difference between the two prices back to the state. In this way, the state has also ensured significant savings during the incentive period, which lasts 12 years, and a mechanism by which the money collected from producers will be used to finance the incentive system and relieve the necessary funds that should be provided by the budget or by fees from end consumers," said Šahmanović.
He cited the example of France, which during the 2022 energy crisis collected more than eight billion euros from RES producers (as a return under the CfD mechanism), which is the practice in other European countries where the state benefits and the funds are returned to the budget.
First grid connections in 2028
Electricity production from 250 MW solar power plants supported through this auction could replace, says Šahmanović, approximately 437.000 tons of CO2 emissions per year and achieve savings in production costs of between 10,9 million euros (in 2030) and 13 million euros per year (in 2039), compared to the same amount of energy obtained from lignite. He says this shows that the incentive system is beneficial for the state and would result in overall savings for end consumers.
"This incentive system will be financed by a combination of funds from the budget and fees collected from end consumers, with all funds collected by the state from privileged producers being directed towards financing the incentive system and reducing costs. The funds needed to finance incentives from the first round of the market premium auction are not planned in the medium-term budget documents at this time, because the projects that will be included in the first round of the auction quota are expected to be in operation and on the grid between 2028 and 2030, which are the legal deadlines for their construction and connection," said Šahmanović.
The ministry explains that the annual production of 250 MW of solar power plants depends on the utilization factor, which for solar power plants in Montenegro is approximately 18-20 percent, depending on the location, slope and efficiency of the equipment.
"With 20% plant utilization, the 250 MW capacity of solar power plants is estimated to produce around 440,000 MWh of electricity. However, the exact capacity of the power plants that will fall within the available quota of 250 MW for this round of the auction, and therefore the total annual production from these power plants, will be higher and will be known after the bids are ranked and quotas are allocated to the best-ranked projects," said Šahmanović.
Reducing electricity imports
According to him, the new capacities, which will be provided through this auction, will significantly replace the necessary quantities of electricity that had to be provided from imports until now. All projects that will be granted the right to incentives after the auction procedure will be built and connected to the electricity grid in accordance with all the conditions and requirements of the competent network operators, which is a prerequisite that projects must meet in order to qualify for participation in the auction.
"New production can significantly contribute to reducing imports, especially in the summer period when solar production is highest and consumption is high due to tourism and cooling. Increasing domestic production strengthens energy security and resilience to market shocks. Also, with timely investments in the grid and flexible resources (e.g. batteries, hydroelectric power plants, demand management), projects can also contribute to grid stability," said Šahmanović.
The infrastructure necessary for connecting new facilities for the production of electricity from renewable sources is regulated by contracts between investors and network operators, with many projects, according to the minister, currently in the development phase and which are potential participants in the auction, already having concluded contracts for the construction of the connection infrastructure and connection and are progressing in the implementation of these contracts and works.
"According to the current rules, the investor bears the costs of connection to the nearest point of the network. The system operators (CGES and CEDIS) bear the costs of any systemically justified network strengthening, which are financed from their development plans and regulated revenues. The assessment of total investments in the network infrastructure depends on the locations chosen by the investors, but it is expected that the regulator (REGAGEN), in cooperation with the operators, will monitor the plans and include the necessary investments in the medium-term development documents," said Šahmanović.
"Vijesti" was unable to obtain comments on the topic regarding the first auction for the award of market premiums from private investors who are already present in this business on the Montenegrin market.
Foreign investors from Serbia are also targeting Montenegro
Danijela Isailović, manager of the Association "Renewable Energy Sources of Serbia", told "Vijesti" that two rounds of auctions have been held in Serbia so far.
In the first round, investors competed for a quota of 400 MW for wind power plants and 50 MW for solar, while in the second round, the competition was for 300 MW of wind and 150 MW of solar.
"The first round showed extremely high competition among investors in the wind energy sector, while the quota for solar, although small, was not met, which indicated a lack of serious investors in the solar energy sector. The second round brought great competitiveness in both categories and low purchase prices. Our members are very satisfied with the auctions that were organized and the premiums achieved. The electricity purchase contracts that they signed with Elektroprivreda Srbije for 15 years make the projects bankable and suitable for obtaining loans. I expected greater efficiency in project implementation and faster construction," said Isailović.
According to her, so far only one wind farm (PE Pupin), the winner of the auction, has been completely built and put into operation, Crni Vrh and Čibuk are under construction, while there are projects from the winners of the first and second auctions that have not even begun construction.
"There are indications that foreign investors who are present in Serbia and have participated in auctions will do the same in Montenegro, given that they are developing large solar power plants. Our members are also present as consultants, contractors, professional supervisors and equipment distributors and will certainly be interested in participating in the implementation of projects. The auction model, created with the support of the EBRD, is applied in Montenegro, as in Serbia. The regulation was prepared by EBRD consultants according to a similar model, trying to introduce the principle of transparency and long-term security. I believe that there is currently no better model than the auction for large investments in either Serbia or Montenegro, and that all investors with ready projects will enter the race," Isailović emphasized.
In this sense, he expects foreign investors who have been operating in Serbia for a long time to appear.
"I believe that competition will result in low bids and a very low purchase price, which will mean cheap green energy for the citizens of Montenegro," said Isailović.
They are also developing projects on private land.
"Vijesti" asked the Ministry of Energy why it was decided to hold the auction without pre-defined locations, but rather for investors to propose land for the construction of solar power plants themselves.
The Minister explained that for the first auction, they proposed announcing a quota for unspecified locations because there are a significant number of projects that investors present in Montenegro are developing on private land and that already meet the conditions for qualification in the auction.
"In this way, the available quota can be filled by more than one project and significantly greater RES production capacity can be provided. The location-neutral auction model also allows for greater competition, as investors choose optimal locations in accordance with available land, insolation and connection possibilities," said Šahmanović.
He stated that this avoids awarding incentives to only one project and the obligation for the state to conduct complex and lengthy land identification and transfer procedures.
"This approach is a preferred practice and has already been applied in several countries in the region and the EU with good results," Šahmanović pointed out.
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