Introduction 

A PPA (power-purchase agreement) is a long-term agreement between buyers and sellers of electricity. By signing a PPA, the purchaser purchases a specific volume of green electricity over a fixed period, generated by a renewable source such as a photovoltaic (PV) power plant. 

As regards Croatia, the PPA market started to develop rapidly in the recent years. New regulations are being adopted and the sector of renewable energy sources is constantly changing. This article is about challenges that RES projects in general, and PPAs in particular, currently face in Croatia and the future perspective.

PPAs have become incredibly popular due to the increased interest of businesses looking to reduce their carbon footprint on one hand and as a means of securing the financing of a subsidy-free RES project on the other hand. The renewable developer secures a buyer for green electricity, while the customer reduces its CO² emissions and secures its long-term electricity costs. On a broader level, PPAs are benefiting the environment as they are enabling that more clean energy is added to the grid and that the reliance on fossil fuels is reduced. There are a few advantages of PPA, but the main value for a customer (an off-taker) is the defined price of the electricity during the duration of the PPA.

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Challenges for RES projects in Croatia, in particular for PPAs

When talking about challenges of PPA projects, topics that frequently arise are the connection to the grid and the mode of selling electricity to end customers under the PPA.

Apart from that, RES projects are in general subject to challenges stemming from the lack of harmonisation of laws, spatial planning, and rules for protection of environment and nature. 

For example, the Act on Renewable Energy Sources and High-Efficiency Cogeneration and the Electricity Market Act are not aligned with the Construction and Spatial Planning Act. Construction and spatial planning regulations do not accompany new rules in the energy sector which promote swifter development of power plants. Also, the practice of local authorities in issuing construction permits for RES plants is divergent and so is the practice in processing of applications with similar requirements and conditions. Additionally, some spatial planning maps contain an unclear delineation of boundaries for the construction of RES projects. 

In relation to the environmental impact assessment, the biggest obstacle is the excessive duration of procedures before local authorities and a lack of prioritization in applications, where significant RES projects are mixed with small local projects without setting priorities.

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Connection to the grid

When talking about PPAs, the currently most discussed topic are the rules for connection to the power grid. Energy producers are currently confronted with the Rules for connecting to the transmission network (adopted by HOPS, the Croatian operator of the transmission system, in July 2023) (the “Rules”) which according to experts prolong the already burdensome process of issuing permits for RES projects for almost two years. 

Even though under the revised Renewable Energy Directive from September 2023 all construction permits should be issued within a period of two years, under the new Rules the investors have to wait 90 days for a study on the connection possibility (EMP), additional five to eight months for the optimal technical connection solution study (EOTRP), and between 9 and 12 months for obtaining the electric energy consent (EES) (the condition for obtaining a location permit). And it is only after that period that the request for the building permit can be submitted.

Other criticized provisions of the new Rules are:

• HOPS has the right to exclude a RES plant from the grid at any given time if any provision of the Rules or the agreement on connection to the grid is breached, which creates uncertainty for the investors and financial institutions ready to finance RES projects;
• The Rules introduce restrictions on transmission of electricity, so investors cannot be sure when and how much electricity they could deliver to the grid; and potentially the most important, that
• The data on the state of the transmission grid (a prerequisite for connection to the grid) can be requested only once a year, in a very short timeframe between 1 May and 15 May. If the request is submitted outside that period, it will not be processed. 

Considering the obligations which the revised Renewable Energy Directive imposes on member states, and the pressure from the interested parties (investors, associations and the Croatian Chamber of Commerce), it may be expected that the Rules will be amended in a way that would foster the development of RES projects.

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Selling electricity to end customers under the PPA

From the PPA perspective, under the current setup the producers cannot sell electricity directly to end consumers (companies or natural persons) without including registered electricity suppliers. A renewable energy producer, in addition to the PPA with an end customer, must conclude an electricity market participation agreement with HROTE, the Croatian energy market regulator, by which it will establish itself as an electricity producer on the market. Currently, end customers can be supplied only through registered suppliers, so an electricity producer will have to create a type of a tripartite relationship with HROTE and an end customer in order to sell electricity to the end consumer. As this mode of operation is an obstacle for the development of electricity production and the sale of electricity on the basis of PPAs, there are constant discussions to amend the existing regulatory framework to abolish the rule that end customers can be supplied only through registered suppliers. 

Additionally, when comparing different PPA models, the Lease model implies certain specifics. Considering that permits during the construction and operation of a PV power plant will need to be issued to a specific permit holder, it will have to be determined to whose name a particular permit should be issued. From the perspective of the Lease model, it might be possible that a certain permit will need to be transferred/newly issued to the lessee of the plant. Croatian energy regulations do not regulate the transfer of energy approvals/permits. The procedure for the transfer of a particular permit will depend on the competent authority. Even though this has not yet been regulated, with the increased interest for PPA lease models, new rules specific to the energy sector will probably be introduced.

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The way forward

After a period of stagnation there is again movement on the Croatian energy market and the interest in the development of RES projects has significantly grown. Due to that, new regulations are being adopted and the sector of renewable energy sources is developing. For example, the Ordinance on simple and other structures and works was amended on 1 January 2024 and introduced a new provision following which investors do not need to obtain a building permit for a PV power plant intended for electricity production with an installed capacity below 10 MW, if it is built on the land for which the investor has resolved land rights. By this, the development of RES, i.e. PV projects with a capacity below 10 MW is simplified.

To have more renewable projects and more PPA contracts in the future, it is important to remove barriers in HOPS’s Rules and to amend the regulatory framework so that the development of RES projects becomes simpler and less burdensome and that end customers could be supplied directly from energy producers. 

Different solutions are discussed, e.g. adoption of a specific law (lex specialis) for the preparation and implementation of RES projects, priority for applications for energy permits and introduction of clear criteria to avoid divergent practices in the processing of applications with similar requirements and conditions.

This shows, the market is quite dynamic and the potential on one hand and the growing interest on the other will most probably result in the further development of the current state for the benefit of both the investors and consumers