Month: March 2023

Although the regulations enabling the establishment and operation of energy communities entered into force 16 or 10 months ago, in the Republic of Croatia there are still no energy community has been established according to these regulations despite the great interest of citizens and NGOs that strongly promote them. The reason is, obviously, in regulations that neither reflect the spirit of the EU reference directive nor adequately format the modern market of so-called civic energy. The current rules are not aligned with the characteristics of modern renewable energy supply and demand. In particular, it should be noted that the existing aforementioned regulations place citizens of the Republic of Croatia in a somewhat subordinate position in relation to citizens of other Member States with regard to the possibilities and potential of using and sharing renewable energy within energy communities. The aim of this article is to point out the complexity of the operation of energy communities and to encourage the competent ministries to program a specific combined financial instrument of the EU specifically for energy cooperatives.

INTRODUCTION

Citizen energy communities are business formations in which citizens come together to exploit the benefits of self-generated renewable energy less business costs. Although the term “energy communities” is generic, a real community will take one of the possible legal forms: cooperatives, associations, foundations and the like. Considering the whole business activities that are expected in the life cycle of an energy community whose framework is determined by the Electricity Market Act, the most likely legal form will be a cooperative, i.e. the energy community will be established and operate according to the regulations governing the establishment and operation of cooperatives. Unfortunately, for the time being, it will not be possible to establish itself as a company in the Republic of Croatia, although Directive (EU) 2019/944 also makes such a legal form possible.

Although the purpose and purpose of the association of citizens, public authorities and entrepreneurs is to share their own energy, it is possible to expect in real life business activities ranging from the exclusive sharing of energy produced (which implies that the members of the cooperative have already carried out activities of setting up systems for the production and/or storage of energy) to the association due to investments in renewable energy production facilities, sharing in demand response (members of the energy community invest in facilities through a formed legal entity and then share and manage the energy produced). Therefore, the structure and scope of business activities can be quite complex, so the future members of the energy community are asked about its optimal organization, economy, management and financing.

By transposing the aforementioned EU Directive into domestic legislation, the Republic of Croatia accepted the idea of energy communities as a socially justified and desirable instrument of energy transition. If this is true, then public policies should also be articulated in such a way as to facilitate and encourage the establishment and operation of such business formations with available resources. Moreover, energy communities could also be an effective instrument and measure in the framework of accelerating the deployment of renewable energy as foreseen in the recently adopted Regulation (EU) 2022/2577. Acceleration One of the resources could be the Multiannual Financial Framework 2021-2027, especially in the part related to financial instruments of the European Union, namely combined financial instruments with a non-repayable component to encourage the preparation and establishment of energy communities and a repayable debt component to partially settle the capital value of the project.

ENERGY COMMUNITIES IN THE EUROPEAN UNION

In recent years, the EU has increased its climate and energy ambition and has recently committed to reducing it by 55.% net greenhouse gas emissions by 2030. A key mechanism for the implementation of these objectives is the energy transition towards renewable energy sources. With the adoption of the Renewable Energy Directive (RED I) in 2009, the EU set an overall target of 20% the share of energy from renewable sources in final energy consumption by 2020. It was significantly revised in 2018. (RED II), setting a new EU target of at least 32% the share of renewable energy sources in final energy consumption by 2030. RED III aims to create a fully integrated energy market, which also creates space for innovation on both the electricity grid and the market. In order to achieve this objective, significant investments are needed in decentralised energy sources, such as photovoltaic or wind power plants, energy storage, electric vehicles or heat pumps, and all kinds of smart energy solutions designed to control and manage household energy consumption in order to make efficient use of Europe's electricity infrastructure. However, in addition to investments in physical infrastructure, it is equivalent to finding new organisational, production and economic forms in the context of wider decentralization and democratization of energy consumption and production processes.

Energy communities are one of such new innovative organizational forms, and in most EU organizations that are not primarily focused on commercial business. Although they are engaged in economic activities, their primary purpose is to provide social, economic and environmental benefits to the community, not to generate profits. The EU legislative framework knows two types of such structures: citizen energy communities (CEC) and renewable energy communities (REC). Both communities can bring together citizens, local authorities or small companies, but only the REC can bring together small and medium-sized enterprises (SMEs). While the CEC can produce and use a combination of renewable and non-renewable energy sources, the REC is dedicated exclusively to renewable sources. Moreover, the REC often also have a local context: communities should be organised in close proximity to the renewable energy projects they own or develop. As a type of community-driven initiative, the CEC and REC play a key role in social innovation by reflecting a fundamental change in consumer behaviour. Traditionally, passive consumers become co-owners of renewable energy sources and promote a socially just model of energy so-called prosumerization (energy production and consumption). Through the context of local energy sharing, for example, owners of photovoltaic plants share their generated energy with community members who cannot afford such plants or do not own adequate installation areas. Energy communities provide wider and more democratic access to renewable technologies also for community members who do not have own funds to invest in RES (endangered social groups, pensioners, etc.). It is expected that approximately 264 million European citizens by 2050 join the energy market as self-generators (prosumers), producing up to 45% renewable electricity. However, there are also numerous problems, primarily with the transposition of EU regulations for CEC and REC, which creates great differences in the possibilities of implementing civic energy projects and creating energy communities. An example is given in Figure 1 with an illustration of the scale of the problem.

Figure 1: Proportion of transposition of EU regulations

Source: https://www.rescoop.eu/ – transposition of EU regulations into national legislation.

The EU proposes to ensure that by 2025 at least one renewable energy community is established in each municipality with a population of more than 10,000 people. It will also support Member States in implementing the common self-consumption framework and the energy community. The Just Transition Fund (JTF), which is the EU's funding tool for regions dependent on fossil fuels and greenhouse gas intensive industries, should complement the 2021 revision of the RED, financially supporting energy communities across Europe.

This is not only a financial challenge, but also an organizational one. It requires the active participation of end-users and citizens. Energy communities can make a huge contribution in this regard. As stated in the recent EU State of the Energy Union Report, at least 2 million people in the Union are already involved in more than 7,700 energy communities, and engagement is on the rise. Energy communities in the EU have contributed with 7% Nationally installed RES capacities – estimated at 6.3 GW.

The number of communities is very variable, but ultimately the number of communities is not so important but the number of active members. Differences are significant, for example the largest Belgian community Ecopower has more than 65,000 active members, with huge production, management and financial strength where they actively participate in the energy markets, while German communities are typically smaller and have about a hundred members, but are associated with aggregators that form virtual power plants and take on complex functions of management and trade. A good example is Next Kraftwerke from Germany, which brings together fifteen thousand producers and small communities, and currently has a capacity of over 11,000 MW and actively traded with more than 15 TWh energy.

Table 1: Number of active energy communities in Europe

Country	Number of active energy communities (2020)
Germany	1750
Denmark	700
Netherlands	500
United Kingdom	431
Sweden	200
France	70
Belgium	34
Poland	34
Spain	33
Italy	12

Source: https://energy-communities-repository.ec.europa.eu/support/toolbox/energy-communities-overview-energy-and-social-innovation_en (17.1.2023.)

For a better understanding of the problems of energy communities in the EU, it is convenient to introduce a matrix view that recognizes the 4 organizational archetypes involved in the processes of energy production and trade and the 4 dimensions that affect the realization of each of these archetypes. Table 2 illustrates the interrelationship between them and the interactions are now more clearly visible. Each dimension has an impact on archetypes, but some influences are more significant, for example, the social dimension is most pronounced in cooperatives, and the least present in aggregators because they act on different bases.

Table 2: Dimensions and Archetypes of Energy Communities

In 2019, a survey was conducted by the European Commission among the EU Member States that are the main benefits of establishing energy communities. The most important values identified by Member States relate to the renewable aspect of the Energy Community project:

• Boosting the local economy and investing in renewable energy sources;
• Reducing end-consumer bills;
• Guaranteed production and consumption of green energy in local communities;
• Easy access to renewable energy for all consumer groups and not only for the privileged;
• Use of local resources for plant construction and energy production;
• Access to new sources of capital through direct engagement of individuals;
• Local energy management and optimisation;
• Peer-to-peer trading;
• Self-generation and self-consumption for a wider range of users;
• Changing existing paradigms, introducing new principles such as demand response – Demand/Response;
• Development of new services, such as charging electric vehicles;
• Ownership and democratisation of natural and productive resources;
• Access to new sources of capital through direct engagement of individuals;
• A different approach to the development of the distribution network (distributed).

It can be concluded that there are still significant technical, social, regulatory and economic differences in the EU and the processes of change are too slow in many Member States (Croatia is a good example). But the process of energy transition and expansion of energy communities is unstoppable.

ESTABLISHMENT AND BUSINESS OF ENERGY COUNTRIES

Although, on the basis of existing regulations, it is possible to establish an energy community, e.g. an energy cooperative under the regulations governing the establishment and operation of cooperatives, their operation, i.e. operation, will not be possible. The reason is, most likely, banal, and concerns the operational ability of the operator of the Croatian energy system to recognize and process the sharing of energy produced by an energy cooperative. In addition, the existing limitation of the number of members of an energy cooperative to those connected to the same transformer station reduces such business to a level of pointless inefficiency. This inefficiency stems from the disproportion of the costs of sharing the current surpluses of energy produced and its equivalent availability and the effects of shared energy. In this regard, it is also necessary to limit the operation of energy cooperatives in accordance with the rules of non-profit organizations. This restriction brings significant uncertainties into the operation of an energy cooperative because the regulations governing the operation of cooperatives allow the generation of surplus revenues over expenditures. This excess of revenue over expenditure may be generated by the energy community, for example, through the sale of aggregated energy on the market. Such a possibility is permitted by the provision of Article 26.11. Therefore, it is lawful for an energy cooperative to sell, through an aggregator, the energy produced on the market. It will generate revenue on this basis. Also, energy sharing for charging electric vehicles owned by cooperative members will most likely refer to a certain price, so this part of energy will also be recorded as income of the energy cooperative. The same impact on revenues will also be made by the energy produced shared with the non-production or storage members of the energy cooperative, the passive members of the cooperative. Sharing energy with such members would most likely not take place without the assigned value, price. The value of this energy will be recorded as revenue. In addition, an energy cooperative that invests on the assets of its members by settling capital costs from other debt sources of financing will most likely, in the period of repayment of debt sources, collect certain fees from its members for the purpose of settling due liabilities on the basis of long-term debt sources of financing. The question to be answered is related to the accounting and tax treatment of such transactions.

On the other hand, the operation of an energy cooperative is not a cost-free operation. These are costs such as capital investment, plant maintenance costs and replacement of worn-out parts, management costs, interest, etc. Therefore, it is a relatively complex business system that will be difficult to maintain in the circumstances of equal income and expenditure.

What, in nature, does it mean to set up and operate an energy cooperative? What processes are we talking about here?

These are processes that can be structured according to the following units:

Preparation of the energy cooperative

• Communicating with interested citizens, businesses, public authorities;
• Organization and implementation of a workshop in order to inform future members of the cooperative about the upcoming activities, the goals of the cooperative, the aim is to achieve the establishment of the cooperative, the basic activities they will engage in, the manner of regulating mutual relations, the cost of establishment and others;
• Workshop conclusions, follow-up and information on the establishment of an energy cooperative.

Establishment of an energy cooperative

• Organisation of the inaugural assembly;
• Drafting of the agenda;
• Drawing up the rules of the cooperative;
• Keeping the Assembly and Minutes;
• the possible establishment of a supervisory board;
• Forming documentation for notarial certification;
• Organisation of membership deposit;
• Registration of the cooperative in the Commercial Court Register;
• Registration of cooperatives in the register of business entities of the Croatian Bureau of Statistics;
• Registration of cooperatives in the Register of Cooperatives and Cooperative Associations of the Croatian Cooperative Association;
• Opening of the business account of an energy cooperative;
• Creation of the energy cooperative's web (website).

Establishment of energy infrastructure

• Testing and measurement of an existing installation;
• Structure of installations;
• Connecting the plant.

Energy Community Business

• Records of energy sharing;
• Periodic reporting of energy produced and shared.

Only the basic processes are listed. Each of them entails additional activities. Operational business may also include processes such as: design organisation, drafting of contracts between investors and contractors, obtaining offers from contractors, financing organisation, organisation of supply and installation of plants, supervision of works/installation of plants, testing of plants, organisation of obtaining authorisation to operate plants, management of energy cooperative accounting, organisation of processes when excluding existing and involving new members, preparation of periodic financial reports, design of the IoT network of sensors for monitoring energy consumption, management of the IoT network of sensors for monitoring energy consumption, organisation and implementation of periodic meetings of the assembly and supervisory board, organisation of aggregation for the purpose of selling surplus energy, organisation of preventive and reactive maintenance of plants, connection of energy cooperatives, etc.

Without specifically entering into the organisation and operation of energy communities in which entities have merged with already installed installations for the production and/or storage of the energy produced, energy communities whose operational operations are preceded by investment activities could be organised and financed as shown in scheme 1:

Scheme 1: Establishment, financing and operation of an energy cooperative

Source: Authors.

An energy cooperative (1) shall be established by at least seven founders (2). The purpose of establishing the cooperative is the individual production of renewable energy (5), its sharing among the members of the cooperative and, possibly, storing surplus energy and charging electric cars. Independently of the founder, the energy cooperative can also be joined by members (6) who will not invest in plants but buy / take over surpluses of energy produced at a lower price than that from the grid, and higher than the producer price from photovoltaic/battery plants. Investment in energy facilities of energy cooperative can be financed from commercial sources (3) and EU financial instruments (4). Given the complex structure of the establishment and management of an energy cooperative, the cooperative may use the services of specialised experts for the establishment and business management of energy cooperatives (7).

CHARACTERISTICS OF EU FINANCIAL INSTRUMENTS FOR ENERGY COMMUNITIES

In addition to non-repayable support, from the Multiannual Financial Framework 2021 – 2027, financial instruments (repayable instruments) in the form of debt, guarantee and equity (equity) source. The most important feature of financial instruments in MFF 21-27 is the possibility to combine non-repayable grants (grants) with repayable grants (debt, guarantee and equity). instruments. In general, the procedure for obtaining financial instruments is significantly simpler than the procedure for obtaining non-repayable grants.

Financial instruments are products of European funds with terms more favourable than commercial substitutes. The purpose of financial instruments is the efficient development of cohesion policy. For economically eligible projects, financial instruments shall assist implementation and shall always be returned to the provider. What is particularly important is the imperative that financial projects are used in projects that generate revenue or savings, which renewable energy plants certainly belong to. As renewable energy generation projects generate savings as the difference between the unit price of grid electricity and installations and the reduction of greenhouse gas emissions, partial financing of energy community based projects with a price below the market price of funding sources could be economically rational and socially acceptable.

While, in general, the purpose of financial instruments is to enable projects to be enhanced with commercial content by increasing the likelihood of long-term sustainability, the purpose of financial instruments for energy communities could be to achieve societal benefits due to lower energy costs, increased affordability, reduced risk of adverse effects of climate change, unburdening of the electricity transmission and distribution system, increased GDP and contributing to greater prosperity for citizens.

The main features of the financial instruments under MFF 21-27 are as follows:

• They must not be used to refinance existing contracts, but to support any type of new investment in line with the underlying policy objectives;
• Support to final recipients for investments in tangible and intangible assets and working capital that are expected to be financially viable and for which sufficient financing from market sources is not available;
• Only for investments that are not physically completed or fully implemented at the date of the investment decision;
• They can be combined with grants in a single FI operation and under a single contract. In this case, the rules for FI apply;
• Grants shall not be used to reimburse support received from financial instruments;
• VAT is an eligible cost for FI and the rules for grants apply in combination with the grant;
• Financial instruments are granted by the managing authority (e.g. MRDEUF) or may be entrusted to the EIB or HBOR;
• The value of the grant in the same operation shall not exceed the value of the financial instrument.

Unlike the so-called non-combined financial instruments so far, the current combined can be: a grant in combination with a debt instrument, a grant in combination with a guarantee instrument, a rebate debt financial instrument (performance-based grant), a technical assistance grant combined with a financial instrument and similar combinations. In order for financial instruments to be available to beneficiaries, the ministry responsible for the economy shall identify the need and the ministry responsible for EU funds shall program. If we accept the social justification and the need of financial instruments for faster establishment and development of energy communities, basic prerequisites for programming will be created.

Given the current legal framework, relatively small installed capacity of photovoltaic power plants and even smaller batteries, an appropriate difference between the prices of electricity from the grid and photovoltaic plants with a tendency to increase this difference and the limitation of the energy community to the same transformer station, it is possible to expect a relatively large number of newly established energy communities in the next five years. But there is also a noticeable risk that such relatively uneconomic small communities may not be established, so such a legal framework can be considered established to slow down the production and sharing of civic energy. Since such a regulation is not in line with EU policies in this area, a change in the regulations in this section is also to be expected. In the event of changes to the regulations that would extend the establishment of energy communities instead of the same transformer station to more than one, settlement or region, the number of newly established energy communities could exceed 200 in the next 5 years of an average installed capacity of more than 100 MW of total annual energy output of approximately 100 GWh of energy. Thus, it could be a significant number of citizens involved in self-generation, a significant reduction in energy costs, a reduction in greenhouse gas emissions of approximately 10 000 TCO2 and an adequate relief of the electricity system. Approximately €130 million of total funding will be needed to achieve the roughly estimated market described. Total sources of funding could consist of own equity, debt and other debt sources. Part of other debt sources could be the financial instruments of the EU. The inclusion of EU financial instruments could increase the propensity to include other sources of financing due to the reduced overall investment risk. This also raises the issue of the characteristics of EU financial instruments in terms of maturity and the structure of the combined instrument consisting of a non-repayable grant and a loan. Possible features are shown in Table 2:

Table 2: Possible features of a combined EU financial instrument for energy cooperatives

Source: Authors.

According to the author, based on the analysis of numerous investment projects in rooftop and terrestrial photovoltaic power plants, the share of the non-repayable grant could be up to 15% (to cover the costs of setting up a cooperative, developing projects, etc.) and a loan of at least 85%In order to ensure the liquidity of the operation of the project (energy cooperatives), i.e. the condition under which, from the savings achieved, the due liabilities to the defendant debt sources of financing (commercial loan and EU financial instrument) are fully settled, the repayment period should be no less than 10 years. The share of EU combined financial instruments in total sources of financing could be at least 50%.

CONCLUSION AND RECOMMENDATIONS

The current legislative framework is certain is not conducive to the establishment and operation of energy communities; regardless of their legal form. Limiting to one transformer station is an insurmountable obstacle to the development of energy communities. Eliminating this restriction would create assumptions for the establishment of a significant number of energy cooperatives across the country. Given the significant investment needs in energy plants of energy cooperatives, the inclusion of combined EU financial instruments in the structure of total sources of financing would significantly accelerate the development of this new market, and such opportunities exist in the MFF 21-27.

Given the complex operation of energy cooperatives, the development of the market of specialized services in the field of establishment and management of energy cooperatives is also expected.

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