Author: Damir Juričić

Summary

Recently, a contract was concluded in Croatia for the supply of a photovoltaic plant as an availability service. It is a contract under which the contractor delivers the availability of the facility in accordance with the availability standards set by the contracting entity. The contractor is obliged to purchase the plant, install, test, purchase and install finance and maintain a certain number of years (mainly up to 10 years). Life-cycle costing (LCC) was used in the contractor’s procurement process[1]) set out in Articles 287 and 288 of the Treaty on the Functioning of the European Union; of the Public Procurement Act. Since Croatia has not yet developed the practice of using contracts for the supply of the availability of plants, appliances, machinery and equipment, as well as the application of life-cycle costing criteria, this text considers the basic characteristics of the contract itself, the standards of availability, co-financing and the effects of capital assistance on the amount of compensation and the recording of transactions in the accounts of the contracting authority and the contractor.

1. Introduction

Public buyers can procure public investment projects (construction and non-construction – plants, equipment, appliances, etc.) in different ways. Each method has different effects on transparency, durability of quality in the life cycle, price, financial sustainability, availability of public service delivered by the project to citizens, etc. The most commonly used procurement method (or procurement model for public investment projects) by contracting authorities is traditional procurement of works. Under this procurement model, the contracting authority enters into a works contract with the contractor and pays for the delivered works from its own (budgetary) sources or from other sources of mainly debt financing. An important feature of this procurement model is that the contracting authority maintains the construction or installation throughout its life cycle by taking over the predominant part of the overall risks of the construction or installation during its life cycle.

Another model increasingly used by contracting authorities in the developed world is the purchase of the availability service of a building or plant. The difference of this procurement model for public investment projects is that the contracting authority does not only procure works, but also related maintenance. Therefore, in the case of the availability service procurement model, the works and maintenance are inextricably linked. Availability is understood as the obligation of the service provider of availability to keep the building or installation in its available (functional) condition in the contract period, which is usually between 20 and 30 years for buildings and between 5 and 15 years for plants. The contracting authority shall not pay for the works performed but shall periodically, during the contract period, pay for the availability services provided if, during the accounting period (month, quarter, half-year or year), the building or installation was available. In this sense, the service provider of availability, in addition to construction and maintenance, most often assumes the obligations of financing the construction of a public project.

One of the reasons for the more frequent application of the service availability procurement model is the specialization and more efficient organization of the delivery of public services. Indeed, contracting authorities are specialised in the delivery of public services (for example, education, medical treatment, illumination of public spaces, use of renewable energy, security, defence, etc.). Their core business is not to operate buildings or facilities (for example, schools, hospitals, public lighting, renewable energy plants, police and fire brigades, military buildings). They therefore assign the care of buildings and installations to specialised private sector entities which, through contracts for the supply of the availability of buildings or installations, engage in construction, maintenance, financing and, often, management. They will only pay for the use of buildings and installations and only if they are available to them for the delivery of their public services for which they exist.

Recently, for the first time in the Republic of Croatia, a contract was concluded for the supply of the service of availability of a photovoltaic plant. It is a contract between a municipality and a private entrepreneur under which the entrepreneur is obliged to draw up the project documentation of the plant, obtain permits, supply and install a rooftop plant owned by the municipality, purchase and install finance and maintain the plant for an appropriate number of years in a way that produces renewable energy continuously. If the facility is available (functional) in the manner specified by the agreed standards, the municipality will pay an availability fee for the previous month.

Each model of procurement of public investment projects has advantages and disadvantages, and the task of public management is to determine whether the advantages are greater than disadvantages and in such a comparison process choose the one with which the highest probability of achieving value for money can be expected. Table 1 presents the advantages and disadvantages of the public project procurement model as an availability service:

Table 1: Advantages and disadvantages of the availability service procurement model

A great advantage of the application of the availability service procurement model is the achievement of the client's business situation in which the administration activity is focused on the delivery of a public service, and not on the construction or installation itself as a prerequisite for the delivery of a public service. When concluding an availability service contract, the public administration does not spend time and capacity for continuous maintenance of buildings and installations, but exclusively on the quality of the delivered public service and communication with users of the service delivered to citizens by the construction or installation. The construction or installation is carried out by an entrepreneur whose main business is that. The consequence of such a business situation (business model) is the transfer of the predominant part of the risk of a public project to an entrepreneur with the compensation of a premium for transferred risks (availability fee), which is expected to achieve a higher value of public services for the money paid. In addition, if the contract stipulates that the implementation of the project (capital value) is financed by an entrepreneur, then the contracting authority does not borrow or pay the capital value from the budget at the beginning of the implementation of the project, but successively in the contract period, from the operational budget, in the contract period. The data on the capital value of the project and the operating costs, as determined in the public procurement procedure, represent market values and as such are of great value in the preparation of future similar public projects. Databases with market values will contribute to reducing the risk of exceeding the budget of future projects, exceeding the implementation period and increasing the likelihood of achieving the planned effects. As a more experienced entity is involved in the preparation, implementation and use, contracting authorities with insufficient administrative capacity will be able to implement more complex public projects. However, in the near future, it will be of great importance that all the energy produced is from the municipality, which will allow it to form energy communities and freely share the energy produced with other public authorities, citizens and businesses.

However, since the availability contract is long-term, its preparation will be more complex. Also, since the contractor assumes a predominant part of the risk of the project, its preparation of the bid will require the engagement of a competent team that has its financial value. In the preparation process, all operators face several new terms such as: Allocation, risk identification and quantification matrices, availability service standards, life-cycle or total cost of living, payment mechanism, etc. This does not mean that these terms and analyses should not be used in works procurement procedures. Moreover, they should, but contracting authorities do not use them. For the preparation of such contracts, experts who possess the knowledge and skills sufficient to carry out the complete preparation process are needed.

2. Characteristics of the availability contract

The contract for the supply of the availability, in particular the availability of the photovoltaic plant, regulates the relations between the contracting authority (municipality) and the contractor (undertaking). The areas most frequently covered by the contract are: definitions of terms; introductory remarks; the definition of an installation; definition of the availability of installations; the rights and obligations of the parties; availability charge; calculation, payment and adjustment of the availability charge; the duration and modifications of the contract; financing, refinancing and co-financing procedures; termination of the contract; final provisions; attachments and the like.

The preliminary remarks determine the ownership of the property on which the installation is installed, the number of metering points, data on the conducted public procurement procedure, the power of the installation, the right to use renewable energy produced, etc. The concept of installation should be clearly defined in the contract. These are the obligations of preparation of the main project, obtaining electro-energy approval, procurement of plant parts and installation on the roof, maintenance, periodic inspections, obtaining approval for permanent operation, testing and the like. A particularly important part of the contract is the precise definition of the meaning of the concept of availability, i.e. the description of the status of an installation that may be available, partially available and unavailable. In the event of an availability condition, the contracting entity shall pay the availability fee in full. In the event of partial availability, a reduced fee will be paid, while in the event of unavailability, the payment of the fee will be suspended until the facility is restored to availability. The contract should provide for the risks assumed by the contracting parties, which are most often described in the so-called risk allocation matrix.

The defined compensation, given the long-term nature of the contract, is most often adjusted for inflation. The adjustment for inflation is carried out periodically according to the selected index, and the most commonly used is the harmonised index of consumer prices published by the Croatian Bureau of Statistics. A particularly important part of the contract is that relating to termination, the so-called termination clauses. Termination clauses shall set out the grounds on which the parties may terminate the contract related to the consequences of terminating the contract depending on the grounds. Since most often the contractor is obliged to finance the project, it is necessary to specify the obligation of financing and the rights and consequences of refinancing during the term of the contract. It is also important to define here the mechanism, the procedure in case of payment of a grant (capital aid) and the related reduction of the availability fee. The contract ends with a list of annexes, the most common being availability standards, a risk allocation matrix, a life-cycle cost projection, proof of ownership, etc.

3. Availability standards

Establishing trust and transparency in customer-contractor relations is crucial for the operationalization of the availability service, and in this context it is necessary to establish a platform that will enable verification of contract elements and agreed availability indicators. Availability in the solar industry refers to the technical ability of solar systems to produce energy in a given period.

3.1. What are standards?

Availability standards are the basic measure of reliability and efficiency of solar systems. The specifics of sustainable energy sources should also be noted here, which is that, in addition to the availability of the energy production systems themselves, we also have the challenge of the availability of "energy sources". In traditional systems for generating energy (thermal power plants, aggregates, etc.), we can assume that if fuel is provided and available, the system will ensure continuous energy production in accordance with the installed power of the plant. In other words, production interruption occurs mainly due to failures or fuel switching[2] . In the case of sustainable energy sources (RES – solar and wind), this is, in nature, the statistical availability of energy products.[3]. An example of RES availability is shown in Figure 1, where seasonality of supply is clearly visible, both on an annual and daily basis. Therefore, it is essential for availability to have very precise information on energy sources and the establishment of a correlation between the availability of energy products and the energy produced by the installation.

Figure 1: Availability of RES

Another critical component necessary to determine availability is the availability and reliability of the energy network to which the installation is connected. The functioning of the photovoltaic plant must be aligned with the parameters of the energy network defined by HOPS (for large installations) or DSO (for smaller installations). Network parameters are defined by maximum voltages, frequency stability, etc. and, if the installation or network is not harmonised, the safety systems shall shut down the installation until the parameters are brought back into regular ranges. This can be a significant challenge, and can be seen in Table 2, which shows the lost production at one photovoltaic plant on the Croatian Littoral. In this case, the cause of the plant failure was too high network voltage at certain phases (voltage higher than 253 V), which caused the automatic shutdown of the plant.

Table 2: Lost production in the PV plant due to over-voltage of the network

The third key component of plant availability is the quality of the system itself, which consists of a large number of components[4] – each with its own level of reliability.

Scheme 1: Overview of photovoltaic plant system components

The quality of the plant begins with the design, which includes the selection of quality components, optimal installation of solar panels, and ensuring proper cooling and protection from adverse weather conditions. Solar panels, inverters and other parts of solar systems must meet certain quality standards to ensure long-term and reliable operation. One of the quality indicators may be certificates issued by relevant industry associations or international organisations.

Monitoring and control systems play a significant role in ensuring optimal operation of solar plants. Automation and remote monitoring systems enable quick problem identification and remote control of the system. Monitoring the performance of solar systems helps to identify and solve problems that may affect availability. Monitoring standards typically include measurement and analysis of energy production and monitoring of equipment performance. Finally, regular maintenance can have a major impact on the long-term and efficient operation of solar systems. Maintenance standards usually include regular cleaning of solar panels, inspection and testing of equipment, and replacement of parts that have reached the end of their lifespan. It is important to note that standards may vary depending on the region, technology and type of solar system, and availability management often requires an integrated approach that includes technical, operational and management strategies.

3.2. Why are standards the most important part of a contract?

Linking the standard to the contractual obligations of the service provider is essential to ensure that the supplier of the availability service meets certain quality, safety or any other relevant standards specified in the contract. The first step is to clearly define the standards that will apply to the service delivered. These may be industry standards, legislation, international standards or internal standards applied by the organisation. It is necessary to specify what specific requirements standards set and how these requirements will be integrated into the provision of services. For example, there may be a standard that specifies the necessary indicators or reporting obligations to the competent control authorities, some organisations have internal safety standards, for regular equipment maintenance or for staff training. Safety standards are particularly important if contracting authorities are public institutions (kindergartens, schools, hospitals) with specific requirements. Open communication between the customer and the service provider about the standards and their application is essential, i.e. that both contractual partners understand the expectations and obligations.

The operational implementation of standards is usually established through an availability monitoring platform that allows assessment and monitoring. Where standards are subject to changes or updates, it is necessary to ensure the flexibility of the contract and the platform that will allow for adaptation to new versions of the standards. The monitoring process may also include regular audits, performance reports or other evaluation methods. It is good practice to immediately identify the consequences of contractual non-compliance with the set standards. This may include punitive measures (penalties), procedures to correct problems or, in extreme cases, termination of the contract.

3.3. The need to establish a clear and transparent measurement system

Partner trust ensures that reliability measurements are transparent, which includes analysing and monitoring system or process performance to determine how often and to what extent it fulfils its functions without downtime or failures.

The first step in selecting and designing the system is certainly defining and harmonizing expectations between the client and the supplier. In doing so, it is important to understand the technological and financial effects of standardisation on the final price.[5].  Expectations materialise in the form of key performance indicators (KPIs) that allow measurement of reliability, such as downtime or maintenance intervals. In order to determine the KPI correctly and realistically, critical points in the system or key components that have the greatest impact on reliability should be identified, as well as failure scenarios or problems that could affect the reliability of the system.

The next step is to select the appropriate measurement method for each identified critical point or component, and what exactly we monitor (time of operation of the plant before the next failure, analysis of the causes of failures, maintenance monitoring, etc.). The collection of data for the purpose of measuring delivered standards should certainly be automated wherever possible in order to minimise human error and ensure data consistency.

An automated availability monitoring platform allows regular analysis of the collected data and identification of patterns, trends or potential system availability delays. This is done through reliability reports that provide an overview of key KPIs and performance indicators, and compare actual results with set (contracted) reliability targets. If there are discrepancies, the reasons are usually investigated and strategies for improvement are developed. Reliability measurement often requires an integrated approach involving technical, operational and management aspects. Regular monitoring and adjustment of measurement methods is essential to maintain a high reliability of a system or process.

3.4. Platform for Determining the Availability of a Photovoltaic Plant

Reliability measurement of a photovoltaic plant involves the use of various components and devices in order to properly monitor and evaluate the performance of the system. As already emphasized in the introduction to the chapter, the platform must ensure the measurement of a whole range of internal and external parameters, for which specific sensors and measuring equipment are used. Electricity generation, system efficiency and other key indicators shall be monitored by the energy generation and network quality monitoring components. For example, inverters convert direct current (DC) produced by solar panels into alternating current (AC) used in households or connected to the electricity grid. Monitoring the operation of the inverter helps to identify energy conversion problems. Voltage controllers and power monitoring systems ensure the optimal operating point of solar panels, which helps to increase the efficiency of the system. Current meters and sensors monitor the flow of electricity through the system, helping to identify deviations or problems with electricity (voltage or frequency).

The integration of these components enables systematic monitoring and analysis of the performance of photovoltaic plants, helping to maintain a reliable operation and identify potential problems in time. Today, monitoring and management of the photovoltaic plant via remote access is mandatory, which facilitates diagnostics and interventions in case of problems. A block diagram of the system used to monitor the agreed parameters of the installation which is the subject of this Article is shown in Schema 2:

Scheme 2: Structure and interrelationships of the Availability Monitoring System components

Finally, it should be emphasized the importance of algorithms for the analysis of data used to interpret data collected from different sensors and devices and for the identification of samples or anomalies that may indicate the unavailability of the plant.

4. Application of life-cycle costing (LCC) criteria

The provisions of Articles 287 and 288 of the Treaty on the Functioning of the European Union (TFEU) provide: The Public Procurement Act gives contracting authorities the possibility to assess the eligibility of tenders submitted by economic operators on the basis of information on life-cycle costs. This is useful information because the costs of a public investment project are determined not only by its capital value but also by various costs over a long period of use. When the client purchases the works, he maintains the building or plant and pays the maintenance costs. When purchasing a building or installation as an availability service, it does not maintain the building or installation but pays an availability fee which includes the purchase value, maintenance, financing and other costs depending on the contract and risk allocation.

It follows from the nature of the life-cycle costing criterion that it is not logical to apply it in cases of procurement of works other than for information purposes, since the risks and obligations arising from the declared in-service costs are assumed not by the tenderer but by the contracting authority. It is therefore logical that this criterion will be used mainly when applying the availability procurement model, in which case the tenderer assumes the obligations and risks for the costs declared. If the actual costs are lower than projected, the bidder will make a profit, and if they are higher than projected, the bidder will make a loss or lower profit than the one he planned when submitting the bid. This mechanism is also the basis of the meaning of economic ownership that is on the side of the contractor in the availability service procurement contract.

Life-cycle costing is usually an integral part of the most economically advantageous tender. In the procurement documents, the contracting authority shall oblige interested economic operators to indicate, for that purpose, in a given table, the values of the costs and risks which they assume and for which they will charge, inter alia, an availability charge during the contract period. The costs so indicated shall be reduced to their present value in accordance with a single discount rate published by the contracting authority in the procurement documents. On the example of life-cycle costs in Table 3, their present value at a discount rate of 5% it amounts to €269.213 per year and this value will be assessed.

5. Co-financing and impact of capital assistance in case of acquisition of an availability service

The procedure for co-financing or awarding capital assistance in procedures for the procurement of works is generally clear to contracting authorities. The procedure usually comes down to the pre-financing of works and the payment of capital aid upon completion of works. The amount of pre-financing is often used to settle the remaining principal of the pre-financing amount.

However, in the case of availability contracting, the procedure is somewhat different. Two variants are possible. In the first variant, the contracting authority publishes the amount of capital assistance and the method and time of payment, as a result of which tenderers offer their offer of availability allowances, including in the calculations the payment of capital assistance. The second variant will be implemented in cases where contracting authorities do not know the amount of capital assistance at the time of publication of the procurement, but count on a high probability of granting capital assistance. The second method procedure consists of the following processes: (i) the projection of the total costs in the contract period (tender of the winning bidder), (ii) the calculation of the financial rate of return of the FRR(C) project based on the availability fee and costs offered in the contract period, (iii) the calculation of the increased rate of return of the FRR(C) project after the simulation of the capital assistance disbursement, (iv) the calculation of the reduced fee in the period after the capital assistance disbursement. These steps will be illustrated by calculations:

(i) The successful tenderer submitted a projection of its costs during the contract period

In the procurement procedure, economic operators attach a table with a projection of the expected construction and maintenance costs. The data in this table provide the basis for applying LCC as one of the most economically advantageous tender (MEAT) criteria:

Table 3: Projection of costs in the contract period

(ii) Calculation of the financial rate of return of the FRR(C) offer

The procuring entity shall include in the cost projection table, which is an integral part of the contract, the contracted fee projection resulting in the calculation of the financial rate of return of the FRR(C) project bid:

Table 4: Calculation of the FRR(C) offer

The successful tenderer offered a monthly availability fee of EUR 4,655. When this remuneration (the bidder’s revenues) is included in the projection, it results that the financial rate of return of the FRR(C) project is 7.22.% annually.

(iii) Calculation of the impact of the disbursement of capital assistance (increase in the financial rate of return of the project)

The payment of capital assistance, in addition to the projected operating costs and the agreed availability fee, represents additional, extra income for the contractor. This means that its financial rate of return for the project will increase. In the case of the example and with the capital assistance of 100,000 euros paid in January of year 3, FRR(C) will increase from the nominal value of 7.22% 29.96% yearly as shown in Table 5:

Table 5: Increase in FRR(C) due to disbursement of capital assistance

In principle, capital assistance is granted to the client in order to achieve the financial sustainability of the project or affordability in the implementation of a public investment project. Therefore, capital assistance should act neutrally on the enforcer. All benefits of capital assistance are allocated to the client and this principle should be maintained when contracting the availability service.

(iv) Calculation of the reduced compensation for the period after the capital assistance has been paid

Once the capital assistance has been disbursed, a new (reduced) value of the availability allowance should be established. The criterion of equalization of FRR(C) of the contractor to the value before the payment of the grant will be used, and in the case from the example this value is 7.22% annually. Thus, the availability fee for the period between the disbursement of the capital assistance and the end of the contract should have the value with which the contractor will achieve a project return rate of 7.22.%:

Table 6: Calculation of the new availability allowance due to the disbursement of capital assistance

In the period from February 3rd year until the end of the contract, the monthly availability fee will be reduced from EUR 4,655 per month to EUR 2,534 per month. With the new availability fee and capital assistance paid, the contractor will achieve a FRR(C) of 7.22 by the end of the contract.% annually.

6. Registration of the transaction on the accounts of the client and the contractor

One of the specificities of the transaction that is the subject of this text is the separation of the so-called legal and economic ownership. The legal owner is the one who is registered in the ownership documents while the economic owner of the project is the one who exploits the property and gains benefits and bears the risks of the business. The question arises as to how to record such transactions in the accounts of the contracting parties. The source for the records is ESA 2010, paragraphs 20.287 and 20.288[6]. If the transaction separates ownership into legal and economic ownership, then the assets and liabilities will be gradually established (recorded) in the accounts of the contracting parties with the aim that at the end of the contract the contracting authority becomes both legal and economic owner. Recommendations from ESA 2010 are adapted to Croatian regulations in the area of budget and budgetary accounting. Entries in the accounts of the contracting parties are possible as shown in schemas 3 and 4. By way of illustration, the capital value of the assets is assumed to be EUR 1,000, the annual availability fee to be EUR 130, the annual depreciation of EUR 100 and the market value of the plant at the end of the contract to be EUR 600.

Scheme 3: Recording of the transaction in the contractor’s accounts

The contractor is obliged to obtain the necessary sources of financing for the purpose of settling the capital value of the project (1). During the exploitation of the project (use period), the contractor successively delivers an invoice to the client for the service of plant availability provided (2). The executor calculates the depreciation of the investment on someone else's property (3) and closes the receivables from the collected account (4).

Scheme 4: Recording of the transaction in the client's accounts

The contracting entity, being the legal owner of the plant, records the plant off-balance sheet at capital value[7] (1). During the term of the contract, off-balance sheet items will decrease by 1/10 of the purchase value of the plant each year (1a1, 1a2,...1a10). From the current (operational) budget, it records successively, as it receives a periodic invoice for the availability service obtained, on expenditures and liabilities (2). Payment of invoices closes obligations (3). Upon maturity of the contract at market (estimated) value, the plant will be recorded in the accounts of non-financial assets and social capital (4).

7. Concluding observations

Procurement of the service of availability of facilities, devices or equipment to contracting authorities could be an acceptable procurement model because there is a high probability of achieving better value for money, procurement does not have to be recorded in the public debt, there are generally no initial payments and administrative supervision and records are significantly simplified during the contract period. This should be complemented by the benefit for those contracting entities that do not have the administrative capacity to acquire more complex facilities, devices or equipment.

This text presents the possibilities of applying life-cycle costing (LCC) criteria, the procedure of co-financing capital assistance contracts and the procedure of recording transactions in the accounts of clients and contractors.

Authors:

• Prof.dr.sc. Davor Vasiček, University of Rijeka, Faculty of Economics and Business. davor.vasicek@uniri.hr.
• dr.sc. Damir Juričić, University of Rijeka, Support Center for Smart and Sustainable Cities. damir.juricic@uniri.hr.
• M.Sc. Damir Medved, University of Rijeka, Support Center for Smart and Sustainable Cities.damir.medved@uniri.hr.

[1] Eng. Life Cycle Costs.

[2] An interesting example is the Krško nuclear power plant, which has refuelling cycles every 18 months – most of the time it operates at practically nominal power.

[3] Source: https://www.nature.com/articles/s41467-021-26355-z

[4]Source: https://www.researchgate.net/publication/331968857_Reliability_Availability_and_Maintainability_Analysis_for_Grid-Connected_Solar_Photovoltaic_Systems_Accepted_for_publication_in_energies_Mar_22_2019 (11.11.2023.)

[5] For example, if you want to achieve more than 99.99% availability of the system during the year may require the installation of additional redundant systems and a repeated increase in the cost of the lined up (is such functionality really needed?)

[6] https://ec.europa.eu/eurostat/documents/3859598/5925693/KS-02-13-269-EN.PDF/44cd9d01-bc64-40e5-bd40-d17df0c69334 (8.11.2023.)

[7] In the procurement procedure, each tenderer shall report the capital value of the installation in the life cycle cost projection table.

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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

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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