Category: Expert texts

Summary

In relation to climate change, as a society, we act at a slow pace. The effects of climate change have become a daily reality. Guidelines, directives, agreements from various global and European organisations have been in place for decades. More and more often the question arises: what we can do ourselves, locally, as a closer community, as a neighbourhood, to contribute to actions that could slow down the devastating effects of climate change.

This text explores the possibility of associating citizens, the local public sector and entrepreneurship into citizen energy communities (ECG) in order to contribute to the achievement of environmental, social and governance (ESG) objectives as soon as possible. The question arises as to how the ECG could contribute to achieving the ESG objectives? It seems that it is precisely legal entities, current or future ESG reporting entities, that could achieve the goals in the energy community with their workers.

1. INTRODUCTION

There are numerous examples of inadequate human behaviour in history, behaviour often referred to as “behaviour to the benefit of one’s own harm”. There are various psychological, sociological and economic reasons for this, but often the incentives to change behavior come too late, so the consequences are more tangible and ubiquitous. A recent example is “climate change”, where decades have elapsed in debates as to whether there are or are the fruit of fiction, erroneous scientific assumptions, and whether what should be done or continue to be done in this regard as before. Regardless of the causes, we are witnessing above-average summer temperatures, short-term weather disasters with devastating effects, more frequent occurrences of floods or droughts, etc. People are becoming aware of such changes because they are part of their daily lives and, therefore, they are asking their governments for immediate actions and measures to make it easier to live in ‘new normal’ circumstances.

As a society, we act in slow motion. The measures that are now being implemented as a matter of urgency have been used as definitions in various UN and EU directives and agreements for decades. SDG program the UN 2030 Agenda and EU regulatory frameworks such as the The European Green Deal detail the necessary measures and ensure the financing of the transition towards sustainable investment and development to ensure that by 2050:

• No net greenhouse gas emissions;
• Establish economic growth that is not dependent on the use of carbon-footprint resources; and
• No person or region will be left behind in this transition.

Figure 1: SDG Objectives UN

Source: United Nations.

But as it usually happens, the key motivator for more noticeable changes will be a material benefit like Larry Fink, CEO Black Rock (otherwise an organisation that manages financial assets worth more than $10 trillion), ’We are not dealing with energy efficiency because we are "green" – but because it is profitable’ One of the recommended mechanisms for achieving the stated goals is the ESG regulation of the European Union. ESG regulations are designed to foster transparency, sustainability and ethical business practices. They aim to ensure that companies assess and disclose environmental, social and governance (ESG) factors that influence climate-related risks, sustainable business practices and compliance with regulatory standards, while not being a burden but an opportunity to improve their business.

2. ESG

What is ESG and what impact it has on all of us. ESG is an abbreviation of English words Environment, Society, Governance  It is based on the concepts of sustainable development, that is, establishing a balance between economic, social and environmental requirements in order to meet the needs of the present without jeopardizing (limiting) the possibilities of future generations. Equilibrium is not trivial because a whole range of criteria should be harmonized, which are usually presented as 3P (People, Planet, Profit) illustrated in Figure 2:

1. People – these indicators include social indicators such as community maturity, education, equality, social resources, health, quality of life, etc.;
2. Planet – includes indicators on natural resources, water and air quality, energy production and rational consumption, space management and uses of available land;
3. Profit – includes indicators covering economic activities, business profitability, economic development, investments, etc.

So, it is a complex optimization because it is necessary to find answers to a number of questions - how to ensure the development and well-being of people without destroying the environment and biodiversity, is further economic development at all feasible on the principles of exploitation of natural resources and unlimited consumption, or are there rational alternatives such as more intensive use of the principles of the circular economy? Finally, can profit generated by economic activities be distributed more fairly and enable more transparent reinvestment in sustainable development, especially in poorer environments. 

Figure 2: The concept of sustainable development and key issues

Source: Authors.

As pointed out in the introduction, the existing problems are global. No community can be isolated or secure. Therefore, joint action in optimization processes is needed. Without balance and mutual respect, progress will not be possible (without profit, there is no sustainable development, but it cannot be at the expense of people and the environment).

2.1. Meaning of ESG

The application of the ESG principles in companies can bring tangible benefits, so they should not be seen as an administrative burden, but as an opportunity for a transition with added value. It is possible to achieve numerous direct savings (lower consumption of raw materials, energy products, water, waste disposal, etc.), provide more favorable sources of financing or lower taxes due to the application of the ESG principle, but also indirect benefits such as a better reputation of the company or a market brand. The importance and great availability of financial instruments of the European Union for the purpose of company transformation, development of new products or services based on sustainability should not be diminished, which is an opportunity to conquer new markets. 

In the context of the Republic of Croatia, there is a high degree of compatibility of ESG goals with strategic goals defined by the National Development Strategy (NRS 2030), which is important because it has an impact on concrete development plans and the availability of funding sources such as NRRP 2021-2026 or ESIF 2021-2027. Most tenders have introduced ‘green’ scoring that assesses, for example, energy efficiency, the use of energy from renewable sources or the reduction of CO2 emissions, but also the establishment of appropriate policies, processes and systems to control environmental, social and governance challenges, with a focus on systemic approaches.

The implementation of ESG principles is different for individual organizations, but in most cases it is necessary:

1. Internal analysis of the organization's compliance with applicable ESG regulations;
2. Identification of strategic risks for the organization if ESG principles are not met;
3. Defining organizational goals for ESG application and transformational roadmap;
4. Application of ESG principles in the organization's business processes;
5. Evaluation and certification and
6. Reporting and promotion of results.

Different scientific research[1] prove a direct link between the application of the ESG principles and better business and financial results of the organizations that implemented them (better return on investment, lower capital prices, better perception of the organization by consumers and potential investors). Therefore, it can be concluded that investing in the implementation of ESG is not a cost and administrative burden, but a great opportunity to invest in the future of the organization, the development of new products and services, and ultimately its increase in profitability and benefits for employees, owners or shareholders.

2.2. Reporting on ESG measures

With more than 2,400 ESG regulations worldwide, it is clear that sustainability reporting is becoming a vital part of corporate compliance. In particular, the European Union has been at the forefront of these initiatives by introducing comprehensive ESG regulations that have far-reaching implications for companies operating under its jurisdiction. Understanding and complying with these regulations means not only complying with EU and national regulations, but also an opportunity to improve business, set standards for corporate responsibility and align with investors' and consumers' expectations. In general, for the understanding of ESG measures within the European Union, two regulations adopted in 2024, which regulate this area in detail, are crucial.

Corporate Sustainability Reporting Regulation

Corporate Sustainability Reporting Regulation[2] (Corporate Sustainability Reporting Directive – CSRD) marks significant progress in European Union legislative action, which aims to improve and broaden the scope of ESG reporting requirements for entities operating within the EU. This regulation is essential to foster a culture of transparency. It focuses on assessing the impact of all business activities on people and the environment. It aims to standardise and simplify ESG reporting across different sectors, ensuring that companies adopt sustainable business practices and address climate-related financial risks. The CSRD mandates comprehensive disclosure of ESG factors, such as data on carbon emissions, waste management, diversity and inclusion, workers’ rights and governance factors. By facilitating access to essential ESG data, the directive supports financial market participants and clients in making informed decisions, thereby integrating sustainability considerations into business strategies.

For those who are familiar with the Non-Financial Reporting Directive (NFRD), the CSRD is a revision and improvement of the existing rules on non-financial reporting. These “original” regulations only require large companies to publish their ESG results and do not go into the depth and detail required by the new reporting directives. The CSRD will extend the reach to a wider set of large companies, as well as listed SMEs and eventually non-EU companies and subsidiaries operating in the EU. Requirements will enter into force in a gradual timeframe depending on the classification of the company:

• 30 June 2023: The European Commission adopts a first set of reporting standards;
• January 2024: large listed companies (those with more than 500 employees) will have to monitor and collect ESG data under the CSRD (reporting year 2025);
• January 2025: each company that meets two of the following three criteria must monitor and collect ESG data under the CSRD: 250 workers, EUR 50 million in revenue or EUR 25 million on the balance sheet (reporting year 2026);
• January 2026: the date of entry into force of a law that will require most small and medium-sized enterprises (10-250 workers) to start reporting (reporting year 2027);
• January 2028: the effective date of compliance with the CSRD by third country companies (European subsidiaries of non-European companies with a turnover above EUR 150 million).

Sustainable Finance Disclosures Regulation (SFDR)

Regulation on disclosure of information on sustainable finance[3] (The Sustainable Finance Disclosure Regulation – SDFR) a European Union regulation is mandatory requiring financial market participants (FMPs) and financial advisors to disclose information on ESG risks and opportunities of their investment products. The most significant aspect of this legislation is that fund managers have to report quarterly detailed, quantitative data on behalf of their portfolio companies. The SFDR has three main objectives:

1. Elimination of greenwashing;
2. Liability for sustainability claims made by FMPs;
3. Improving the transparency of sustainable investment products in the European financial sector.

To meet these objectives, the SFDR will require two levels of disclosure in relation to the integration of sustainability risks and opportunities into their investment decision-making process. Level 1 requires FMPs to disclose whether and how sustainability risks are taken into account in their investment decision-making process. FMPs must also explain the likely effects of sustainability risks on the returns of the financial products they offer. This publication became mandatory in March 2021. Level 2 requires FMPs to disclose the principal adverse impacts of their investments on sustainability factors. This level of disclosure requires adherence to the regulatory technical standards (RTS) on ESG and became mandatory in January 2023. In June 2023, adherence to the Adverse Effects Principle (PAI) under the RTS also became mandatory. The PAI disclosures shall include details on sustainability risks such as greenhouse gas emissions, water consumption and impact on human rights. A detailed analysis of these regulations goes beyond this text, so we will focus on practical examples of how to achieve ESG goals, and how citizen energy communities can help in this context.

From all the above, it can be concluded that cooperation between companies and their employees within citizen energy communities can represent achievable possibilities of multiple benefits: workers in own production of renewable energy and achieving savings in self-consumption, and companies supplying renewable energy at lower and stable prices and achieving ESG targets.

3. ENERGY COMMUNITY OF CITIZENS

Citizen Energy Communities (ECECs) are business formations in which citizens, public authorities and entrepreneurs come together to benefit from the production, sharing and consumption of self-generated renewable energy.

3.1. Basic characteristics of citizen energy communities

They have been introduced into the legal system of the European Union by Directive (EU) 2019/944 of the European Parliament and of the Council since 5 June 2019. Introduced into the legal system of the Republic of Croatia through (partial) transposition of the Directive into the Electricity Market Act[4] (ZTEE) October 22, 2021.

The establishment, organization and operation of the ECG in the Republic of Croatia is determined by several regulations, the most important of which are: ZTEE, Law on Renewable Energy Sources and High-Efficiency Cogeneration (ZOIE)[5], Ordinance on licenses for performing energy activities and keeping a register of issued and withdrawn licenses for performing energy activities (Ordinance on licenses)[6], Ordinance on general conditions for the use of the network and the supply of electricity (Ordinance on general conditions)[7], Decision on the amount of fees for performing activities related to the regulation of energy activities (Decision on fees)[8], Law on Associations[9] / Cooperatives Act[10] and the Act on Financial Operations and Accounting of Non-Profit Organizations[11].

Entities affiliated to the ECG are allowed to carry out several activities[12]:

• Production of (renewable) electricity;
• Electricity supply;
• Power management;
• Aggregation;
• Energy storage;
• Energy efficiency;
• Charging of electric vehicles;
• Other energy services in accordance with the rules governing individual electricity markets.

It is important to point out here that all these activities may be carried out exclusively for members of the ECG. The most important and most mentioned service is the sharing of generated energy. What does that mean, in nature? In technical terms, it is not a question of one member directing its excess generated energy to another member. Excess generated and currently unspent energy of the member who produces energy with his plant is directed to the power grid. Another member who currently has a higher consumption than the production (or does not produce energy at all) settles its needs from the electricity system network. Energy sharing is “virtual” and takes place on an accrual basis through so-called “sharing keys”. At the end of each billing period, the distribution system operator shall distribute the excess generated energy among the ECG members using sharing keys. This calculation will be visible on the account of each ECG member, based on information on the use of energy from the grid and on the use of energy from ECG members distributed through the sharing keys.

Adjusting the ECG energy sharing keys with members of different characteristics (dynamics of production and consumption, purchase price of energy from the grid, capacity to take over surplus energy produced within the ECG, etc.) is particularly important because the optimal operation of the ECG will depend on their values. Optimal operation is understood here as an equal distribution of benefits and costs among ECG members.

3.2. Establishment and operation of EZG

The energy community of citizens is a business formation. According to the Directive, its legal form may be “... an association, a cooperative, a partnership, a non-profit organisation or a small or medium-sized enterprise, as long as such an entity may, acting in its own name, exercise rights and be subject to obligations;[13]However, as interpreted by the Ministry of the Economy (MINGOR)[14] the legal form is exclusively an association. Assuming that this interpretation is in the spirit of EU regulations and ZTEE, EZG is established in accordance with the Associations Act. The beginning of the establishment of the ECG is marked by the gathering of a group of citizens, public authorities and companies (or a combination) around the intention of establishing the ECG. The next step is to convene the founding assembly of the association where the founding members are present. The inaugural meeting shall adopt:

• Decision on the establishment of the association;
• Decision on the name of the association;
• Decision on the adoption of the statutes of the association;
• Decision on the election of representatives to the governing bodies of the association;
• Decision on the appointment of persons authorised to represent;
• The decision on the choice of the liquidator and
• Decision to initiate the procedure for entry in the Register of Associations.

In addition to these decisions, it is necessary to prepare a list of the founders of the association, an invitation to the founding assembly and minutes. All documents should be certified by the president of the association.

The statute of the association should include the objectives, areas of activity and activities of the association. The specificity of the energy community association are economic activities related to the provision of Article 26.11. ZTEE. Furthermore, the statute should cover the treatment of membership in the association, the resolution of disputes and conflicts of interest, the bodies of the association (e.g. assembly, president and deputy president, secretary, etc.), the manner of acquiring and disposing of property and the dissolution of the association. The statutes shall be signed by the president of the association and certified by the competent county administrative department for general administration. If the establishment of the association is carried out legally, the administrative department will issue a decision on the registration of the association in the Register of Associations of the Republic of Croatia. The expected period for these activities is between 1 and 3 months.

The establishment and registration of the association completed the first administrative step towards the ultimate goal of a functional energy community. The second step is obtaining a permit to perform the energy activity of organizing an energy community of citizens. This permit is issued by the Croatian Energy Regulatory Agency – HERA. This is a much more complex process than the founding of the association. The provisions of point 8 The Licensing Rules set out the documents and evidence that the Energy Community must collect and submit to HERA in order to obtain a licence to carry out energy activities:

• Application form for the issuance of a licence for the performance of energy activities;
• Extract from the Register of Associations of the Republic of Croatia;
• Constitutive act;
• A list of all members in the citizen energy community, showing for each shareholder or member data on (i) the type of legal or natural person, (ii) the place of residence, (iii) the percentage share in membership and actual control, (iv) the actual percentage share in membership or actual control of the citizen energy community;
• Statement by the responsible person that medium-sized and large enterprises do not have effective control over members of the citizen energy community;
• Extract from the relevant register by which the applicant proves that the citizen energy community operates on the basis of the law governing the financial operations and accounting of non-profit organisations;
• Evidence of technical qualification: (i) proof of ownership or of the right to use the premises, (ii) a description of the energy sharing information system, (iii) current contracts with other legal entities that have an impact on the technical qualification of the applicant, (iv) a three-year development and investment plan, (iv) conditions for participation in a citizen energy community;
• Evidence of professional competence: (i) an organisational chart, (ii) a list of employees, (iii) current contracts with other legal entities that have an impact on professional competence;
• Evidence of financial qualification: BON-1 and BON-2;
• Declaration of no criminal record.

Thus, a whole series of documents in which the content can be interpreted differently, so the help of those who have passed the process of obtaining a permit for energy activity will come in handy. The expected period for the implementation of this activity is between 4 and 7 months.

Once an ECG licence has been obtained, the third and final step to operational operation remains — practical energy sharing within the ECG. For this step, according to the statements of individuals from HEP ODS, we will have to wait until the end of 2024. Indeed, as pointed out above, energy sharing is a billing process and is managed by the distribution system operator. On the basis of the energy delivered to the grid by all energy generating members, the billing of off-takes and inputs in the billing period and the defined keys handed over to the distribution system operator, the operator shall draw up a shared energy matrix for each billing period for each member. However, before directly sharing energy within the ECG, it is necessary to improve measurement systems, collect data on the production and consumption of energy of members and calculate the best value of sharing keys in order for the association to operate in accordance with the regulations governing its business. At least 6 months should be set aside for these activities.

The citizen energy community is not a passive business entity. With the commencement of the activities for which it was established, various administrative and technical activities should be carried out on a continuous basis in order for it to become and remain a viable business entity. These are activities related to the fact that the legal form of this formation of associations and activities of performing energy activities. In this regard, account should be taken of the members' records, the inclusion of new members and the exclusion of existing members. It is necessary periodically to convene, prepare and conduct assemblies of society. It is necessary to create and administer a website in order to inform members and the general public about the situation in the community in a timely manner. Every transaction should be business-recorded, so it is necessary to take care of timely and legal keeping of business books. In this regard, the activities of reporting and submitting periodic financial reports are also related. Account should also be taken of the needs of existing and new members in terms of investment in technical capacities, for example the installation of renewable energy generation and storage facilities such as photovoltaic plants, vertical wind power plants, batteries, etc. Recently, there has been a growing public debate about the maintenance of facilities, so the professional and timely organisation of such activities will be of benefit to members. On the other hand, in technical terms, it is necessary to continuously monitor energy sharing flows and enable community members to report on energy sharing and payments at the end of each billing period. As these are numerous combinations, it will be important to organise a specific and situation-specific payment, i.e. the execution of shared energy payment transactions. These are specific computer programs for which continuous and reliable operation should be ensured. Finally, the markets in which the ECG participates are constantly changing, both from a technical and technological point of view and from a legislative and administrative point of view, and it is therefore necessary to inform members of those possibilities. Monitoring the development of these activities is of great importance because new technologies can contribute to aligning the consumption profile with the dynamics of energy production. The implementation of various artificial intelligence technologies in the business processes of EZG can contribute to the efficiency of work and the achievement of the purpose of the existence of an energy community.

4. EXAMPLES OF GOOD PRACTICES

In order to explore the relationship between citizen energy communities and environmental, social and governance (ESG) criteria, several factors need to be taken into account. Energy communities are groups of people or organisations that come together to produce, consume and manage energy locally, often focusing on renewable sources. They aim to increase energy efficiency, reduce greenhouse gas emissions and provide economic (and financial) benefits to the community. The ESG objectives are compatible with the objectives of joining the ECG.

Experience confirms this, as energy communities often promote renewable energy sources (sun, wind, etc.) that directly contribute to reducing the carbon footprint. Promoting local energy production can reduce dependence on fossil fuels by aligning with environmental sustainability objectives in ESG criteria. Energy communities also create new local jobs, contribute to the availability of cheaper energy and contribute to increasing the resilience of local populations to energy or financial stress. The ECG contributes to energy equality by giving communities control over their energy sources by aligning with the social aspect of the ESG. The third component of governance is also important – energy communities often act on the principles of democratic governance and community participation. This increases transparency, accountability and inclusive decision-making of ECG members by aligning with the ESG governance criteria.

Information on individual cases where citizen energy communities have been successful can provide insights on how to meet the ESG criteria. Examples may include community solar projects, cooperative-owned wind farms, etc. Unfortunately, since there are no operational ECGs in the Republic of Croatia yet, it is necessary to inform oneself on examples from the world.

Larsmo Vindkraft Oy, Finland

Larsmo Vindkraft Oy  set up by private individuals in the Larsmo area near Kokkola, Finland. The community's goal was to fund the exploration of wind potential and eventually build a wind farm in the region. This initiative was launched by a local resident interested in sustainability and renewable energy. The project has successfully promoted the local production of renewable energy, reduced CO2 emissions and encouraged the involvement of citizens.

Cooperative Lohtaja, Finland

In the early 2000s, the Lohtaja cooperative emerged as a solution for outdated heating systems on fuel oil in Finnish rural rural communities. The cooperative focused on using wood chips as a heating source, which was more cost-effective and environmentally friendly compared to oil. This initiative not only reduced heating costs, but also promoted the use of local renewable sources, aligning with environmental and social ESG criteria by improving energy security and supporting local economies.

Karise Permatopia, Denmark

Karise Permatopia is an eco-village in Denmark that focuses on sustainability in all aspects of its business. A community of 90 houses in a row is energy self-sufficient. It uses a geothermal heating system that is powered by locally produced renewable energy. It also owns and operates a wind turbine that contributes to the energy needs of the community and feeds charging stations for electric cars. This project is a good example of a holistic approach to sustainability that covers environmental, social and governance aspects.

Dindgen, Germany

In Dingden, Hamminkelna County (27,000 inhabitants), a civic volunteer initiative established to support the operation of a public outdoor swimming pool, is now using public rooftops to produce photovoltaic energy. The proceeds from the sale of electricity allow the company to financially support the municipality to ensure the maintenance of the pool. Dingden Outdoor Swimming Pools Society (DingdenFreibad-Verein Dingden e.V.) has 3,100 members (as of March 2019) and was established in 2000.

These examples illustrate how small energy communities and citizen initiatives successfully implement ESG-compliant projects, demonstrating environmental sustainability, social benefits and good governance practices.

In addition to examples of forming citizen energy communities in cooperation with cities and public authorities, experiences of active involvement of companies are also interesting, for which achieving ESG goals is particularly important. Achieving these goals, practice shows, is easier in cooperation with the local community, more specifically, by establishing the ECG. An example is the implementation of a programme in which a company assists its workers in the operations of supplying and installing photovoltaic installations on the roofs of their homes and then participates in joint energy sharing. It follows from practice that such initiatives and cooperation are a good way to achieve environmental, social and governance objectives. Here are a few arguments for this assumption:

Environmental impact

By encouraging the installation of photovoltaic installations, companies promote the use of renewable energy, which directly reduces the carbon footprint of workers in their homes and companies. This initiative also helps to increase the overall use of renewable energy in the community by contributing to environmental sustainability goals. Finally, companies can make efficient use of surplus energy, reducing dependence on non-renewable energy sources and promoting a more sustainable energy ecosystem.

Social impact

Supporting workers in the supply and installation of photovoltaic plants can reduce energy costs in their households, contributing to their financial well-being as well as to the satisfaction of work in the company. This initiative can serve as a model for other businesses and communities by demonstrating the benefits of using renewable energy and encouraging wider deployment. By implementing such programs, companies increase awareness and knowledge of renewable energy among their workers, but also across the community.

Impact of management

Sharing surplus energy with workers at competitive prices demonstrates a commitment to fair and ethical business practices. Such initiatives show a tendency to involve workers and other stakeholders by fostering a sense of community and participation in achieving a common purpose. Companies can highlight this programme in their ESG reports, demonstrating their commitment to sustainability and responsible management practices.

From the above it is worth highlighting a few guidelines. Firstly, it is important to ensure that the process of sharing excess energy is transparent and fair, with adequate prices that provide equal benefits and costs to all stakeholders. Secondly, activities should always be aligned with local public policies and regulations to avoid risks arising from non-compliance. Thirdly, it is important to provide support and training to workers on how to install and maintain photovoltaic plants, all in order to achieve optimal operation of the initiative. A good example in identifying such initiatives can be Google. It has developed a program for the establishment of renewable energy production systems through which it supports workers in the adoption of renewable energy solutions, including assistance in the installation of photovoltaic plants. Programmes based on crowdfunding principles that help workers and residents to establish energy communities at affordable costs and with the support of local authorities and/or companies could also play a significant role in the procurement of facilities.

In conclusion, the implementation of various programs to support and assist workers in the establishment of photovoltaic plants within citizen energy communities is in accordance with ESG principles and objectives. They promote environmental sustainability and support social well-being. Such initiatives can position companies as leaders in corporate responsibility and sustainability.

5. CONCLUSIONS

International practice, features of ESG and EZG and trends guided by domestic and EU regulations in the field of climate and environment, increasingly direct the attention of public and private management to the possibility of achieving ESG goals by cooperating with their workers in the form of citizen energy communities. Such cooperation can have a positive impact on the satisfaction and greater involvement of workers in achieving the strategic objectives of the company, but also the benefits of the company from supplying renewable energy at reduced and stable prices. Consequently, such cooperation can have a positive impact on ESG reports and reduce business risks.

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[1] https://www.sciencedirect.com/science/article/pii/S221484502200103X

[2] https://eur-lex.europa.eu/legal-content/HR/TXT/HTML/?uri=CELEX:32022L2464

[3] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R2088&from=EN

[4] NN 111/21, 83/23

[5] NN 138/21, 83/23

[6] NN 44/22

[7] NN 100/22

[8] NN 38/22

[9] NN 74/14, 70/17, 98/19, 151/22

[10] NN 34/11, 125/13, 76/14, 114/18, 98/19

[11] NN 121/14, 114/22

[12] ZTEE Art. 26.11.

[13] Point 44 of the introductory starting points.

[14] Report on the conducted consultation with the interested public on the Proposal of the Law on Amendments to the Law on the Electricity Market with the Final Proposal of the Law (PZ 516).

Views: 48

Summary

Despite the fact that the Member States, through their legislative and institutional framework, encourage the establishment and operation of citizen energy communities (ECECs), in the Republic of Croatia, such an impression is acquired, the situation is the opposite. The regulations governing the operations of EZG, despite one amendment, do not create a fertile ground for the growth and development of EZG in Croatia. This text lists the factors from the current regulations that could act as a stimulus and disincentive to the growth of this market in the Republic of Croatia and tested the possible operations of EZG with the aim of verifying the possibility of achieving the interests of community members by association.

1. INTRODUCTION

The Renewable Energy Directive (RED II, RED III) and the Internal Electricity Market Directive (IEMD) introduce the concept of ‘citizen energy communities’ (ECCs), which aim to involve citizens, public authorities and small and medium-sized enterprises (SMEs) as a support and one of the instruments of the energy transition.

The European Union (EU) legislative framework enables energy communities to carry out various activities (production, sharing, supply of renewable electricity, storage, aggregation, development of energy efficiency services and charging of electric vehicles) that can contribute to achieving the objectives for which they are established, as well as objectives related to their cost-effectiveness and long-term financial sustainability. In other words, the framework of regulations contributes to the understanding of the ways and possibilities of achieving the interest of involving the aforementioned entities in citizen energy communities[1].

Legislation contained in the legislative framework governing the establishment, operation and promotion of citizen energy communities (mainly: Clean Energy for all Europeans, European Union Strategy for Energy Renovation, Renewable Energy Directive (RED II), Electricity Market Directive, EU Solar Energy Strategy and similar) highlight several more important objectives that are believed to be easier and faster to achieve by encouraging citizen energy communities are:

1. Increasing renewable energy sources;
2. Improving energy efficiency;
3. Democratisation of the energy sector;
4. Social inclusion and protection against the risk of energy poverty;
5. Supporting the transition towards sustainable energy.

The structure of these goals and the importance of citizen energy communities in achieving them is illustrated in schema 1:

Source: Energy Research and Social Science Journal.

Citizen energy communities can be effective instruments for achieving the goal of increasing renewable energy sources because they encourage citizens to participate in the production, consumption, storage and sharing of renewable energy. More energy communities, more members of energy communities, greater maximum power of an energy community, the possibility of connecting energy communities are directly related to the amount of renewable energy produced. Within the energy community, citizens can share an embroidered experience for energy efficiency, its improvement and wider application. Citizens - members of the energy community could be interested in such activities because the applied energy efficiency measures can contribute to the realization of their economic and financial interest. Energy communities enable citizens – members to actively participate in the production and disposal of produced energy with less dependence on energy from standard, traditional supply routes. Energy communities in particular can contribute to achieving the goal of social inclusion because, in specific organizational formations with the local public sector, they can provide affordable energy to citizens at risk of energy poverty and thus become an important factor in reducing negative extrenali, such as public costs of treatment from diseases caused by inadequate heating and cooling of housing. Energy communities can stimulate innovation and investment in renewable energy sources and their sharing, which could contribute to achieving the goal of supporting the transition to sustainable energy, especially because the entire system of production, sharing and monitoring of optimal consumption of renewable energy is based on modern digital technologies.

However, citizen energy communities will exist within a specific national economy only if citizens, companies and public sector entities find their social and financial interest in joining such business formations. It is even more important to align the interests of these potential members of energy communities because the interests may be different and often conflicting. For example, the interests of citizens can be (i) a lower price of electricity, (ii) protection against the risk of an increase in the price of electricity, (iii) a greater financial benefit from producing and sharing the energy produced over one’s own needs. Businesses may have interests in (i) dispersion of the risks of electricity supply routes, (ii) protection against the risk of an increase in electricity, (iii) lower electricity prices. The interests of public authorities may have a so-called non-financial character such as (i) reducing greenhouse gas emissions or (ii) contributing to reducing energy poverty. In each of the above cases, the driver of the involvement of entities in citizen energy communities will be the achievement of the stated interests. If entities assess that joining energy communities will not achieve their interests, or if the legislative and institutional framework acts as a disincentive creating costs that diminish their interests, the establishment of energy communities will most likely not occur. This also leads to measures that policy makers of the energy communities market should apply in order for the market to be established and growing.

2. ORGANISATIONAL OPPORTUNITIES OF THE EC WITH DIFFERENT ECONOMIC FEATURES

Energy communities do not represent a single organisational structure. They can be organized within several options depending on the specific interests of its members both in terms of the process of investing in production capacities and in terms of meeting the set goals. Thus, for example, the ECG can be organised as a community of active members sharing energy surpluses with each other. The second option is a combination of active and passive members within the household category, the third option is a group of active members with one passive member from the enterprise category, while the fourth option could be a combination of one active member – a local self-government unit and a number of passive members – citizens at risk of energy poverty. Every organizational opportunity has an impact on the business economy of EZG and its members.

Option 1 includes active members – self-generated household customers who share surplus energy among themselves. The method of participation is shown in schema 1:

Scheme 1: ECG organised as a group of active household members

Source: Authors

Under option 1, ECG members invest individually in a renewable energy plant and come together to share energy surpluses. The role of the legal entity EZG (in this case, the association) is to provide the infrastructure for energy sharing. Members shall cover the operating costs of the association by means of a membership fee.

Scheme 2: ECG organised as a group of active and passive members

Source: Authors

Unlike option 1 where all members are active (produce and consume the energy produced), option 2 also involves passive members (take over energy surpluses). The role of the association is equal to that of Option 1.

Scheme 3: ECG organised as a group of active members with one passive from the category of entrepreneurship

Source: Authors

Option 3 is a combination of active members from the household category and one entrepreneur whose demand for renewable energy exceeds all the surpluses produced. In this case, any surplus ends with the passive member – the entrepreneur.

Scheme 4: ECG organised to reduce the risk of energy poverty

Source: Authors

Option 4 is a special case in which the focus is not on the financial statement of economy, but on the social one. Here, the benefits are expressed as positive externalities. Under this option, one active member (usually a public law entity – LSGU) produces renewable energy for passive members – citizens at risk of energy poverty.

3. FACTORS OF ECONOMICS OF ENERGY COMMUNITIES OF CITIZENS

The establishment, organization and operation of citizen energy communities in the Republic of Croatia is determined by several regulations, the most important of which are: Electricity Market Act (ZTEE)[2], Renewable Energy Sources and High-Efficiency Cogeneration Act (ZOIE)[3], Ordinance on licenses for performing energy activities and keeping a register of issued and withdrawn licenses for performing energy activities (Ordinance on licenses)[4], Ordinance on general conditions for the use of the network and the supply of electricity (Ordinance on general conditions)[5], Decision on the amount of fees for performing activities related to the regulation of energy activities (Decision on fees)[6], Law on Associations[7] / Cooperatives Act[8] and the Act on Financial Operations and Accounting of Non-Profit Organizations[9]. These regulations regulate in detail the operation of citizen energy communities, but certain characteristics can significantly affect cost-effectiveness, financial sustainability and the achievement of interests of entities that engage in energy communities. It is about the following:

1. Total installed capacity of renewable energy plants

Under Article 51.3 of the Code of Civil Procedure. ZOIE stipulates that the total connection power of all installations installed in EZG may not exceed 500 kW. Article 51.4 also provides that a final customer with a connection power of less than 20 kW may install an installation of up to 20 kW. A maximum plant power limit of 20 kW may be acceptable because citizens generally have technical limitations for the installation of installations of such power (roof area). However, the limitation of the total power of all installations in ECG is a significant limitation at least according to the criterion of the possibility of achieving economies of scale. Relatively small communities, and those with a maximum capacity of 500 kW certainly are, will most likely be in a suboptimal sharing regime. Suboptimality is understood to mean the greater part of the energy produced that is not distributed but fed into the grid. The higher the installed capacity of the ECG, the greater the number of members, the greater the number of passive members (ECG members exclusively taking over current energy surpluses) and the sufficient number of active members (energy producing members), the greater the likelihood that any excess energy generated will be demanded. In this case, the capacity, i.e. the installed capacity of the plant in the ECG, significantly affects the cost-effectiveness of the ECG and all its members individually.

2. Definition of the term “sharing” of energy between members

In the Croatian energy communities market, the term ‘sharing’ is mentioned in numerous regulations governing this area. But for the purposes of articulating business processes, this term does not have any meaning. In this sense, it is not clear whether the term “giving” of excess energy (surrender of excess energy without financial compensation), “compensation” of surpluses and deficits of energy (surrendering and taking over excess energy at production or grid prices), “sales” of surplus energy at prices accepted by members of the community (contract-based financial transaction) or what else. Without a clear definition of this term in financial terms, it is not possible to determine the economy or financial viability of a merger transaction into an ECG.

3. Operating costs - Compulsory recruitment of workers

The provision of point 8.8.b of the Addendum to the Ordinance on Permits stipulates that professional competence is proven by a list of employed workers and/or members of the citizen energy community and/or shareholders in the citizen energy community who perform tasks in the energy activity of organizing the citizen energy community. For the purposes of determining the economics of the ECG, it is necessary, before the financial implications, to clarify the concept of ‘energy activity of organising a citizen energy community’. Why is this important for the economics of the ECG? It is important because the financial and economic implications of a particular business structure arise from the performance of the activities of that structure. It would be inferred from the provision cited that, in carrying out the activity for which he was employed, that worker organises (founds and assists in the business) of other ECGs and receives from the service sold, ECG (association) income from which it finances the activities for which it was established. This is a contradiction because the activities for which the ECG is established (in legal form, for example, associations) among others are the production and sharing of renewable energy as defined in the provision of Article 26.11. ZTEE. Therefore, the economics of EZG stems from the continued pursuit of its activities, and it is not logical that these are activities of “organising EZG” but energy sharing. The question that follows is also that relating to the work that the employed person is supposed to perform. Modern energy communities are mostly reduced to the operation of computer programs that allow energy sharing. It is therefore not entirely clear what the function of a permanent employee in the ECG would be other than a (substantial) increase in the operating costs of the ECG and a contribution to reduced economy.

4. Participation of medium and large economic operators

Article 26.2 ZTEE stipulates that ECG members may be citizens, local self-government units, micro and small enterprises. Medium-sized and large enterprises shall not be members of the ECG. This factor can have a strong impact on the economics of EZG. Indeed, it is not clear why a medium-sized and large company, the activity of which is not linked to energy activities and which meets all the participation criteria for micro and small enterprises, should not at least be a passive member of the ECG with the intention of absorbing excess energy. It is precisely in small energy communities, and they are the only option arising from the regulations governing the ECG area, that the participation of entities that are able to take over all surpluses of energy produced above current demand is of particular importance for cost-effectiveness. This is so-called ’son’s, i.e. business systems with high energy needs. Such 'syncos' are essential to reduce the possibility of redirecting excess energy to the grid.

5. Surrender of excess energy to the grid

Surrender of surplus generated and undivided energy to the grid is a factor that affects the cost-effectiveness of the ECG, and its impact on the cost-effectiveness depends on the purchase price of the supplier. It is governed by the provisions of Articles 51.5 and 51.8. ZOIE. Since the final purchase price also depends on the ratio of consumed and delivered energy in the billing period, this system of calculating the price of delivered energy into the grid can be a significant incentive for individual final customers with their own production to be included in the ECG and increase the profitability of their own plant.

6. Costs of founding a community

The Decision on fees stipulates that for issuing a licence for performing energy activities, the applicant is obliged to pay the competent Agency (HERA) the cost of[10] from 995.42 €. This high value of compensation has a negative impact on the cost-effectiveness of the ECG. The amount of the fee is all the more strange because the legislator obliges the members of the EZG (association) to operate in accordance with the law governing the financial operations and accounting of non-profit organisations. By comparison, companies engaged in profitable energy activities such as the production of oil, gas and other forms of energy or the transport of energy, pay a fee for performing an energy activity in the value of 1,990.84 € or 1,493.13 €. Thus, the value of the remuneration for profitable energy activities is slightly higher than the remuneration paid by activities that are legally bound to non-profitability.

7. Relationship between grid prices for different categories of members and plant energy prices

Different categories of customers procure electricity from the grid at different unit prices. Final customers with their own production, on the other hand, are supplied with energy at unit prices from the installation through the installation of renewable energy plants. The economics of the plant and, consequently, of citizen energy communities, depends on the difference in prices from the network and the plant. A smaller difference, caused by low and often non-market prices from the network for certain categories of customers, will have an impact on reduced cost-effectiveness, reduced interest in investing in plants and reduced interest in joining the ECG. A smaller difference in combination with higher subsidies will affect the increased interest in investing in individual plants, but less interest in joining the ECG. On the other hand, in a situation of lower, non-market grid energy prices, allowing medium and large enterprises with higher grid purchase prices compared to population category purchase prices could compensate for the reduced interest in joining the ECG.

8. Exemption from income tax and value added tax

The exemption from payment of income tax and value added tax when procuring an installation is a stimulating factor in the economics of the ECG because the greater part of the revenues from distributed energy remains with the member of the ECG – a natural person. The higher residual revenue contributes to the higher profitability of the plant. The exemption of the purchase value of an installation from the obligation to pay value added tax also has a similar effect.

9. Subsidising the purchase price of electricity

Subsidizing the price of electricity for the category of households and other legal entities, i.e. creating circumstances of non-market electricity prices for one part of the population is another factor that strongly affects the economics of EZG. In combination with other factors (for example banning the participation of medium and large enterprises at least as passive members) it acts as a complete disincentive to create a market for citizen energy communities. Non-market, subsidised electricity prices contribute to abstaining citizens from investing in ECG. On the other hand, subsidizing the capital value of photovoltaic plants, after the abolition of the obligation to pay value added tax, is socially unacceptable because direct subsidies with VAT exemption, the profitability of already profitable investments further increases. With this system of subsidies, citizens who do not have enough disposable income or who do not have the technical ability to install a photovoltaic plant give part of their income to richer citizens to be even richer. Perhaps a fairer solution for all citizens would be an increase in grid energy prices, which could be an incentive to invest in renewable energy plants as well as an incentive to join the ECG with the permission that both medium-sized and large companies can become (passive) members of the ECG. In this way, all the members of the company and the ECG benefit from: citizens who do not participate in the production of renewable energy do not direct part of their income to citizens who will be even richer, citizens who have sufficient disposable income will have an interest in investing in plants and joining ECG, medium and large enterprises whose purchase price from the network is significantly higher than the prices for citizens will have an interest in taking energy at higher prices than the purchase prices for the household category, citizens who do not have the technical capabilities to install plants will be able to use the capacity of other members. Consequently, the purchase of renewable energy plants will not be subsidised by citizens with lower disposable income, but by medium-sized and large enterprises.

4. MODEL AND IMPACT SIMULATION

The cost-effectiveness simulation was prepared by comparing four options: (i) a self-produced customer not included in ECG (Option 1), (ii) a group of self-produced customers included in ECG sharing 90% total pre-produced energy at prices equal to grid prices, while the remaining 10% delivers energy to the grid due to ECG inefficiency caused by low capacity (Option 2), (iii) a combination of active and passive members in which all excess generated energy over the consumption of active customers is distributed to passive members at grid energy prices for the household category (Option 3) and a self-generated group of customers who share the excess generated energy with passive members – entrepreneurs at a price of 30% higher than the purchase price of grid energy for the household category (Option 4).

Measuring economy[11] is implemented by an indicator of the financial rate of return of a project that includes savings and operating revenues and costs. Savings are represented by a form:

where:  Si saving i-th possibilities, Efi the energy from the i-th facility; and GP annual energy consumption of the member. The financial rate of return of the project (investment) is given by the form:

where they are Ii the value of the investment of the i-th option, c the unit price of grid energy; k reduction coefficient of the price of energy from the grid in case of energy input to the grid, price of energy sharing between members, energy fed into the grid, energy taken from the grid, annual operating costs of i-th possibility, annual cost of membership to the ECG, financial rate of return of the project (investment) of the member, i Option 1 to 4 and j planning horizon (lifespan) of 25 years.

The simulation is based on the following assumptions:

• Community members are in the system of balancing downloaded and committed energy with the grid (net-metering);
• Community members invest in their own renewable energy plants;
• The function of the ECG is to provide a service of energy sharing and control of energy flows;
• EZG is a non-profit organisation and achieves non-profitability by equating operating expenses with membership fee income;
• In the case of an installation producing less than its annual energy consumption, the member shall purchase the difference from the grid at legally regulated prices;
• In the case of generating more energy from installations than the annual energy consumption, the member shall sell the surplus to the grid at legally regulated prices;
• Members have different purchase prices of energy from the grid and find interest in agreeing the price at which energy sharing will be carried out.

The simulation explores circumstances that would encourage active community members to install higher-than-own-consumption capacity facilities and thus contribute to the achievement of the fundamental social objective of increasing renewable energy sources. The outcomes of these options are shown in Graph 1:

Chart 1: Dependence of FRRC on plant capacity in different organizational capabilities of EZG

Source: Simulations by the author.

Increasing the capacity of the ECG member's plant directly affects the financial rate of return until equalization of the plant's capacity in (annual) production[12] energy with (annual) consumption. This rule applies to all options shown. The financial rate of return of an individual member will depend on the parameters described above. Under option 2, when 90% distributes surplus energy between members (active and passive) at prices equal to the price of grid energy for the household category, and 10% energy fed into the grid at prices determined by regulations due to the inefficiency of small ECG, the increase in the capacity of the plants of active members over self-consumption will contribute to the reduction of the FRRC. A slightly higher FRRC can be expected if all excess energy is shared among ECG members at prices equal to the price of grid energy for household category (option 3), but in this case active members do not have an incentive to increase their production capacity because the FRRC does not increase with the increase in plant capacity over self-consumption. The only case in which active members could have an interest in increasing generation capacity above their own energy consumption is described by a curve under option 4 involving passive members – undertakings willing to value shared energy above the grid price – still less than their purchase price for grid energy. Under this option, passive members might also be interested in using the technical capacities of active members to install their renewable energy plant on their remaining free space capacities.

From the analysis of options presented above, it could be concluded that the presence of entrepreneurs, i.e. the category of electricity customers whose purchase prices are higher than the purchase prices of energy for the household category, is crucial for the ECG economy. In such a case, all members could have an interest in increasing renewable energy production capacity beyond their (annual) consumption. Under this option, the legal person EZG could, in view of the restrictions on profitability, operate in accordance with the law and the members of the EZG (active and passive) could pursue their interests by joining the ECG.

5. ENERGY SHARE TECHNOLOGY

The question of trust

The exchange of goods, including energy, in the case of the ECG implies the confidence of all actors in the validity of the transactions carried out. In this context, it is critical to establish platforms and measurement methods that will enable the monitoring of all activities in the ECG both accrual/statistical and in real time with regard to the types of services potentially provided by the ECG to users.

Recently, it has been proposed to introduce a methodological framework to establish Digital Trust.[13] based on interoperability and open standards. Given the strong resonance and wide acceptance, it is possible to expect the rapid implementation of these or similar concepts in the energy sector, more specifically, the support of the ECG.

Studies on the perception of new technologies or policy changes often reveal that citizens are uncertain about their sources of information and do not trust stakeholders to act in a way that is acceptable to them.[14]. Case study on the Croatian island of the Union within the framework of the EU Horizon project insulae made it clear that without a transparent approach and education of all stakeholders, the establishment of an ECG would not be possible. The change of the consumption paradigm in which consumption follows production implies a significantly higher degree of confidence of all actors, but also automation of the management of energy flows.

In addition to this local level, the state level is also crucial, where sometimes decisions can be taken that are not fully in line with economic, social or development interests. Two sometimes divergent approaches can be found here. The first is the so-called liberal. It often presupposes self-regulation of the energy market – market participants, guided by their own interest, will contribute to the matching of energy supply and demand. The state will, in this case, protect the participants from monopolies. However, the reality of the market sometimes deviates from this assumption[15].

According to this approach, national states, acting within their own borders, can make political decisions that could prevent the rational and sustainable development of the energy system in the long term, while blocking the development of, for example, civic energy. Such a possibility may stem from the view that nuclear energy is an ecological source. 

Given the uncertainties about which long-term objectives will be combined with short-term means and with this combination to mitigate the effects of the crisis, a decision to democratise energy flows, increase the resilience of local energy systems and create opportunities for a fairer distribution of the ‘energy cake’ can certainly be acceptable.

Because of the emphasis on individuals who take responsibility for the consequences of their behaviour and because of the considerable uncertainty about what the future holds, any public engagement policy must include an element of “trust” – public trust in technology, science, policy makers and business, really in each other.

Technological infrastructure components ECG

The establishment of transparent energy sharing within the ECG involves various technical aspects to ensure efficient production, distribution and use of energy resources. But contrary to the usual thinking that ends up on solar or wind power plants, it is not only about sharing, but perhaps more importantly, creating a whole range of new services that can synergistically have a great impact on the energy stability of the system at both local and national level.

In this context, it is important to distinguish the components and components of the ECG technology systems:

1. Energy production systems renewables are components such as solar photovoltaic (PV) installations, wind turbines, biomass boilers or generators, small hydropower plants or combinations thereof, depending on the resources available and the energy potential of the local environment. Such production components are mandatorily monitored and operated by platforms for real-time performance monitoring and optimisation of renewable energy systems. This may include SCADA (Supervisory Control and Data Acquisition) Systems or IoT (Internet of Things) remote monitoring and control devices. If the platforms are integrated with the national energy system or aggregator, there is an opportunity to generate additional revenues through participation in the electricity markets[16].

• Energy storage solutions are components such as battery energy storage systems (such as lithium-ion batteries), pumped hydro storage, gravity energy storage, flywheel energy storage or thermal energy storage systems supported by battery management systems (BMS), energy management software (EMS) or distributed energy management systems (DEMS) to manage energy storage operations, optimise charging and discharging cycles and maintain system stability. It is estimated that the energy storage service will potentially be a significant source of revenue for the ECG[17].

• ECG microgrid infrastructure is a component whose main function is the division of energy within the community. The microgrid enables localised energy production, distribution and consumption, increasing resilience and reducing ECG's dependence on centralised network infrastructure. It can be virtual (in the case of small energy communities whose members are directly connected to the distributor's network) and then consists exclusively of components that enable the acquisition and processing of metering data through smart meters. The second variant is a ‘real’ microgrid consisting of converters, transformers, switchyards and distribution lines to create a localised network infrastructure (usually within larger industrial zones, large campuses, islands or remote settlements). Mandatory includes SCADA systems, distributed energy management platforms or microgrid controllers to optimize and coordinate network operation in real time. The Analytical and Measurement Infrastructure (AMI) for real-time monitoring of energy consumption patterns enables timely decision-making. The development of such microgrids generally increases the resilience of the energy system and can therefore be a potential source of revenue[18] for EZG. In this context, a new potential EZG service is also emerging – reactive energy compensation. Reactive power, often referred to simply as “reactive energy”, is an integral part of electricity that oscillates between source and load without performing any useful work. Unlike active power (measured in watts), which is responsible for performing useful work in devices such as heaters, bulbs or electric motors, reactive power (measured in volt amps reactive, VAR) does not directly contribute to these tasks, but is necessary to maintain the voltage level and ensure the stability of the electrical network. In electrical systems of alternating current (AC) reactive power occurs due to the phase difference between the waveforms of voltage and current. Reactive power is required to establish and maintain electromagnetic fields in inductive (e.g. motors, transformers) and capacitive (e.g. capacitor) devices. The impact of reactive power in the ECG microgrid can be significant and is primarily related to local voltage stability and power quality. Proper reactive power management ensures voltage stability, so there is an opportunity for microgrids in which solar power plants with modern inverters predominate to participate in reactive energy compensation processes at both local and higher levels.  In summary, while reactive power alone does not contribute to useful work, its monitoring and management are key to maintaining voltage stability, improving energy quality, ensuring efficient operation of community microgrids and generating additional revenue on this basis.

• Energy trading platforms (Peer-to-Peer) within the framework of the ECG, which allow residents and businesses within the community to buy, sell or exchange surplus energy directly with each other. Blockchain or other decentralized technologies are commonly used to facilitate secure and transparent energy transactions while maintaining privacy and data integrity. They consist of a secure communication network (such as Ethernet, Wi-Fi or mobile networks) to connect platforms where smart contracts have been implemented to automate energy trading agreements and ensure secure and transparent transactions[19].

• Network interconnection and the regulation ensures the interconnection of the ECG network with the wider electricity network (optional – can be considered when connecting isolated microgrids).  In this case, network connection control systems are also installed to manage network interactions, frequency control and island operations.

Energy sharing

The concept of ‘sharing’ of energy should be clarified from the outset. Within the ECG there is no physical energy sharing (except in some special cases of isolated communities), in other words the excess energy produced by one ECG member is always fed into the distributor's network, and the other ECG member always takes energy from the distributor's network. Therefore, energy sharing is exclusively an accounting category and boils down to the netting of committed and consumed energy of all ECG members. Typically, this calculation is the responsibility of the distributor to whom the ECG only has to provide the so-called sharing key. The sharing key may be static and shall be provided in advance — where the distribution of ‘surplus’ energy is fixed or dynamic where, at the end of the billing period, all data on real production and consumption between the members of the community are provided to the ECG operator and the terms of distribution are determined.

In the previous context, the key element of trust is the establishment of a metering infrastructure based on smart meters, and a platform for the collection and processing of metering data, which, in addition to the function of reporting ECG members, will also have the function of providing metering data to the local distributor, and in cases of larger communities, possibly billing consumption and invoicing. In a further perspective, the platform can also be part of the already mentioned Peer-to-Peer systems for energy trading and connection to aggregation services. In accordance with the Electricity Market Act, unverified near real-time consumption data should be available to the final customer at no additional cost, through a standardised interface or through remote access. In order to avoid additional costs and possible different interpretations of measurement results, it is recommended to use standardised smart meters from a local distributor to which communication devices are connected via a P1 interface, i.e. Mbus protocol, depending on the manufacturer and type of advanced meter. Communication devices are intended exclusively for communication with the user interface of the meter, and data is sent from the meter to the device and further to the EZG platform where their processing and visualization is performed. In other words, the whole process is completely automated and takes place autonomously without the need for external intervention by the operator.

It is therefore completely incomprehensible to require (thus technically, the economic authors have already commented in the previous chapter) a regulator to hire “workers who perform tasks in the energy activity of organizing a citizen energy community” because it is really not clear what this person should do.

Open Networks and Transactional Systems

Open transaction network[20], in the broadest sense, refers to a network system where nodes – which may be computers, individuals or organisations – can freely join and interact without a centralised control body. This decentralised approach allows for a dynamic exchange of information and resources. Open networks are characterised by their horizontal connectivity, which facilitates unlimited and non-hierarchical interactions between nodes. It is this characteristic that distinguishes open networks in which equal and open communication prevails, from the centralised control mechanisms present in most today's platforms in the energy sector. Open transaction networks often use widely accepted protocols and standards such as Beckn protocols[21], which ensures that different nodes can communicate and collaborate seamlessly. This interoperability is essential for the collaborative potential and operational resilience of open networks.

Open networks are characterised by a set of different features that together foster a collaborative, efficient and inclusive environment and thus become essential for the development of transaction platforms within the ECG. Within the framework of the North Adriatic Energy Community, technological testing of OTM through Beckn-sandbox pointing to the great prospects and potential of development for the ECG platforms. The aim is to establish mechanisms for the control of energy flows (production and consumption), their measurement and collection by the stakeholders involved. But unfortunately, this is another example where the latest technologies are available, but HR legislation is catastrophicly lagging behind, so we currently do not have an operational EZG, let alone that rules have been defined that should be incorporated into OTN infrastructure. It remains hoped that the mentioned and other researches on which various institutions and associations are working will help legislators in adopting better laws and ordinances. 

Source: World Economic Forum - Centre for Trustworthy Technology[22].

The central feature of the open network lies in its facilitation of improved cooperation. This is achieved through a decentralized structure, where each node or participant can contribute, collaborate, and even break away without the need for central control by an authority. Such a setting in itself supports a more participatory approach, allowing for a diverse range of contributions and interactions. Furthermore, open networks are characterized by their scalability and adaptability. They are designed to handle an increasing number of nodes and connections efficiently without a significant loss of performance. This scalability ensures that open networks can accommodate a wide range of applications, from small projects to large, complex systems.

Transparency is a central principle that permeates open networks. Transparency in operations and protocols fosters trust among users and stakeholders, which is essential for the effective functioning of the open network. Finally, open networks often show a certain degree of self-organization and emerging behavior. They can adapt and reconfigure in response to changes in their environment or in the behavior of their nodes, leading to innovative solutions and their organic growth.

6. CONCLUSIONS

From the analysis carried out and the results of the simulation it follows that the current legislative and institutional framework for energy communities in the Republic of Croatia is significantly disincentive to more frequent establishment of ECG. The high fees for issuing authorisations for energy activities and the ban on including medium-sized and large enterprises at least as passive members of the community result in a rational decision by the owner of the renewable energy plant to produce energy for its own needs using its own plant and with a reservation regarding its inclusion in the ECG. Also, such a customer with its own production will install a capacity plant up to the amount of its own consumption. There will be no interest in increasing capacity because higher capacity, counting on the revenues from the feed-in, will not generate greater financial benefits.

The analysis has shown that there are no significant technological barriers to the establishment of platforms that will enable the operational work of EZG, and new initiatives such as digital trust or open transaction networks guarantee that such platforms will be credible, reliable and affordable for end users.

The only organizational form of the ECG that is rational to organize is the ECG in order to protect against the risk of energy poverty, in which public bodies are targeted to achieve a negative financial impact by providing energy at lower purchase prices than the price of energy from the grid.

Therefore, it is a recommendation for policy makers regulating the establishment and operation of the ECG to allow the inclusion of medium-sized and large enterprises that could achieve with household citizens win-win state of play maximising the objective of EU public policies - increasing renewable energy sources.

---

[1] ClientEarth (2022) Enforcing the rights of energy communities – Overview of judicial and non-judicial mechanisms at EU and national levels, October. (https://www.clientearth.org/latest/documents/enforcing-the-rights-of-energy-communities-overview-of-judicial-and-non-judicial-mechanisms-at-eu-and-national-levels/)

[2] NN 111/21, 83/23

[3] NN 138/21, 83/23

[4] NN 44/22

[5] NN 100/22

[6] NN 38/22

[7] NN 74/14, 70/17, 98/19, 151/22

[8] NN 34/11, 125/13, 76/14, 114/18, 98/19

[9] NN 121/14, 114/22

[10] 7,500 kn / 7.5345 kn/€ = 995.42 €.

[11] The term “investment economy” should not be confused here with the indicator “economy coefficient”.

[12] The production parameter is more acceptable than the power of the plant because it also includes insolation in a certain area.

[13] Digital Trust Framework (weforum.org)

[14] https://insulae.wp.fsb.hr/wp-content/uploads/sites/18/2022/08/7257_The-Challenges-od-Digitalization-at-Unije-Island_LR.pdf

[15] https://lpeproject.org/blog/energy-price-shocks-and-the-failures-of-neoliberalism/

[16]478811981.pdf (core.ac.uk)

[17] https://energy.ec.europa.eu/topics/research-and-technology/energy-storage/recommendations-energy-storage_en

[18] https://www.sciencedirect.com/science/article/pii/S0378778821001900

[19] https://energyinformatics.springeropen.com/articles/10.1186/s42162-022-00235-2

[20] https://www.weforum.org/agenda/2024/03/open-transaction-network-shift-technology-transform-economy/

[21] https://becknprotocol.io/

[22] Open-Transaction-Network.pdf (c4tt.org)

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Summary

It is estimated that there are approximately 11 % the population of the European Union, 54 million Europeans, is affected by or at risk of energy poverty. It is a phenomenon that affects not only vulnerable citizens but also everyone else indirectly due to the increase in negative externalities. Therefore, numerous documents at European Union level call on public administrations across Europe to engage meaningfully and systematically in order to protect many citizens from the growing trend of energy poverty.

In this text, the authors propose a mechanism for the association of vulnerable citizens with public bodies within citizen energy communities, and on the example of the city of Rijeka they show the indicative values of such a public policy.

1. INTRODUCTION

In recent years, we have witnessed a multitude of global health, economic and eventually energy crises, and although EU citizens may seem to have been less affected than the rest of the world, Eurostat shows that this is not the case. A significant part of the population is in direct danger of energy poverty. Energy poverty is a situation in which individuals or households do not have access to sufficient amounts of energy resources, such as electricity or heat, to meet their basic needs.[1]. Energy poverty can be caused by economic reasons (poor economic situation in the country, unemployment, etc.), arising from inadequate housing conditions, high energy costs or lack of quality energy infrastructure in the settlement or the entire country. One should also note the problem of the lack of education of the wider population on topics related to new energy sources or on the efficient use of energy, which often prevents them from improving their current situation.

Energy poverty can have serious social and health, quality of life and overall well-being consequences. People facing energy poverty may have problems warming their home during the cold months, which can lead to health problems, especially among the most vulnerable groups of the population, such as children and the elderly.

Many countries and NGOs recognise the importance of tackling energy poverty in order to improve citizens' quality of life and achieve sustainable development. This includes providing financial assistance, improving the energy efficiency of residential buildings, developing affordable energy sources and implementing energy efficiency education programmes. In this context, citizen energy communities are particularly important, enabling energy exchange in addition to production, and assistance to vulnerable people is often present as one of the important goals of their work.

The EU Commission has recognised the importance of energy communities and specifically addresses them through several articles of recently adopted recommendations to combat energy poverty[2]. These recommendations represent a strong incentive to resolve a number of obstacles that are incomprehensibly embedded in the Croatian interpretation and transposition of RED II directives, which completely prevents the development of energy communities in the Republic of Croatia.

Specifically from the EU COMMISSION Recommendation 2023/2407 (of 20 October 2023) on energy poverty, we can highlight the following points that underline the role of energy communities but local government (cities and settlements)[3]:

(35) Renewable energy is more advantageous for consumers if they can directly access. Collective self-consumption schemes can overcome the limited capacity of households affected by energy poverty to access renewable energy and become active as consumers while producing electricity (so-called ‘prosumers’). A prosumer participating in collective self-consumption schemes brings greater non-financial benefits, such as increased autonomy, new skills and social inclusion of the individual, and trust and interconnectedness for the community.

from EU COMMISSION Recommendation 2023/2407

(36) Collective self-consumption schemes include Energy communities and energy sharing systems. The Commission supports the ongoing effective implementation of Union legislation on energy communities by Member States and proposes specific provisions on energy sharing. Municipalities[4] play an important role in making collective self-consumption schemes open and accessible to households affected by energy poverty, especially in cases where market entry would otherwise imply financial requirements, and in complex administrative procedures and costs.

from EU COMMISSION Recommendation 2023/2407

It can be noted that the EU Commission in the aforementioned recommendations gave very clear direction to address energy poverty and support energy communities, but unfortunately according to the experience so far, it will take a long time before this turns into a Croatian operation.

2. ENERGY SOCIETY IN THE STATES OF THE EUROPEAN UNION

Energy poverty is a challenge in many Member States of the European Union[5] (EU). Although levels of energy poverty may vary between countries, there are common factors and initiatives applied at EU level to combat this problem. Paradoxically greater heating problems arise in southern Europe, but recent[6] research indicates that the key problem is the lack of adequate insulation of facilities and the fact that the price of energy products is almost identical throughout the EU, but the affordability or financial strength of households in the north of the southern EU is significantly different.

Figure 1: Percentage of EU households that can heat a dwelling

In general, the two dimensions are critical when analysing the problem of energy poverty and have the greatest impact on the status of vulnerability – ownership of real estate and the type of energy product used for heating, which is also the largest single expenditure. Namely, by consulting the available EU statistics[7] (Table 1) is a noticeable vulnerability of almost one third of the population of the EU, with the most vulnerable being users of social housing, owners of buildings, and the least tenants. The result is also interesting due to the fact that it clearly indicates the cost that owners have to maintain their facilities (maintenance is ignored due to lack of funds) and possibly increase the energy efficiency of the facilities they own, so if there is no investment in improvements, the costs for heating increase and thus enter the risk zone. Analyses that would take into account the type of building – for example, family houses opposite multi-apartment buildings are unfortunately not available, but it can be assumed that the costs of energy renovation per m2 are significantly higher for detached buildings than for row buildings or multi-storey buildings. 

Table 1: Inadequate heating and inability to pay bills (2018)

Another critical component is the technology and type of energy source used for heating. The table shows the type of energy that is most common in several selected countries and shows great differences that are conditioned not so much by the degree of technological development, but also by some social or historical reasons (the example of Greece, which is highly dependent on fossil fuels, Bulgaria, where electricity is predominant primarily because of several nuclear power plants built during socialism, or Croatia, where the extreme use of biomass (wood, pellets, briquettes) is simple due to the wide distribution and local availability of such energy products). This can immediately be correlated with the previous table where it becomes clearer why the average Greeks (although with a higher GDP per capita) are more at risk than Croats or Portuguese. The type of energy product also determines the possibility of its substitution, if the energy product is electricity. then it can be relatively easily replaced with energy produced from sustainable energy sources (photovoltaic power plants or wind power plants) and in combination with energy communities it is possible to ensure a relatively simple distribution of surpluses. However, it should be noted that the replacement of energy products or heating technologies must be carried out together with the energy renovation of the building, otherwise the planned savings will not be achieved and the reconstructed heating will not be able to meet the needs of users (a good example is the replacement of heating with conventional radiators and a heating oil boiler with low-temperature underfloor heating and heat pumps).    

Table 2: Energy products used for heating in selected countries

A rapid transition to green energy will not be possible without state support and must be carried out in phases in order to reduce the harmful side effects for vulnerable energy consumers and avoid a situation where the energy transition increases energy poverty. In other words, vulnerable energy consumers need support to compensate for higher energy costs. However, these subsidies put additional pressure on budgets and create additional deficits, which on the other hand reduces the scope for increasing social expenditure.

In 2009, a European project investigating the link between poverty and energy efficiency estimated that between 50 and 125 million people in the EU were at risk of energy poverty (EFP). Energy poverty directly affects the health of about 34 million people and is a major problem throughout the European Union. However, while health is often used as a justification to address EFP, definitions, EFP measurements and corresponding health consequences are often different and vaguely defined. The health impact of EFP is likely to be complex and there are many potential covariates affecting health outcomes, making it difficult to measure and separate and thus verify correlations.

Despite the rather clear impact on citizens' health, it seems that the EFP is often more processed in energy, financial and economic disciplines than in public health. Increase in the number of deaths during winter in the EU[8] is indicative, although the impact of the global Covid-19 pandemic is not negligible. Ultimately, the solution to the problem lies in the balance between the speed of the energy transition, the proper distribution of the burden of the transition to all stakeholders and special care for vulnerable groups in order to avoid unnecessary additional deaths of EU residents.  

Figure 2: Increase in the number of cold deaths in the EU

In the Republic of Croatia, energy poverty has not been clearly defined, nor have general criteria or methodologies for determining energy poverty been established so far. However, it is interesting to introduce energy poverty as a term in the Energy Efficiency Act, without any description of how it is determined, how it is measured, and how to avoid or solve it. There are no clearly defined criteria covering broader categories of energy vulnerability of households than the existing (and narrow) criteria to help vulnerable households meet their electricity costs. The definition of an energy vulnerable household in the Regulation on criteria for acquiring the status of vulnerable grid energy customers does not take into account all aspects of vulnerability and the status of vulnerable energy customer should apply not only to electricity but also to other forms of energy (e.g. heat).

Furthermore, it is not clear which ministry should be responsible for this issue (Ministry of Labour, Pension System, Family and Social Policy or Ministry of Economy and Sustainable Development), so there is no more specific responsibility for defining and implementing measures. Consequently, Croatia currently does not have a system in place to monitor energy poverty, which is why there is no clear insight into the actual situation of energy-vulnerable households, but according to established practice, the funds are "helicopterly" distributed, creating long-term damage to all participants in the energy transition. Only survey data shown in Figure 1 are available, which clearly show the vulnerability of Croatian households.

Chart 1: Inability to pay energy bills in the past 12 months

In the Republic of Croatia, similarly to the entire European Union, almost 50 % uses final energy consumption for heating and cooling, of which 80 % in buildings. In the case of Croatia, it is evident that greenhouse gas emissions caused by heating are significantly higher than in Norway, for example, primarily due to the difference in building insulation (Graph 2). The long-term strategy of mobilizing investments in the renovation of the National Building Fund of the Republic of Croatia by 2050 provides some potential solutions to improve the energy envelope of buildings. In line with the proposals put forward, three key energy renovation programmes are expected to be adopted for the period 2021-2030 for residential buildings, single-family houses and public buildings.

Chart 2: Greenhouse gas emissions from heating and cooling per capita

According to the Strategy, the Croatian national stock of residential buildings consists of 762,397 buildings (multi-residential and family houses), while the non-residential building stock consists of 124,924 buildings (commercial and public). Energy efficiency and characteristics of buildings, as well as their energy consumption, are largely determined by the construction period, but also by the widespread problem of inadequate maintenance of buildings. In the Republic of Croatia over 90 % The housing stock is privately owned[9] House 73 % and apartments 27 %), in other words, the entire burden of the energy transition is on the backs of financially well-exhausted citizens. In this context, the availability of new technological solutions at affordable prices is favorable (for example, a photovoltaic power plant in combination with a heat pump costs less than a smaller family car), and if the co-financing of the renovation of the energy envelopes of buildings in combination with the sharing of energy surpluses through energy communities is resolved, it is rational to expect that the risks of energy poverty in the Republic of Croatia could be reduced.

2. ENERGY COMMUNITIES IN THE REPUBLIC OF CROATIA

Energy communities are not-for-profit business formations established for the purpose of sharing and storing renewable energy generated within a community. The initiative for the existence of citizen energy communities stemmed from Directive (EU) 2019/944, and operations in the Republic of Croatia are regulated by energy regulations and regulations governing the operation of non-profit organisations. The purpose of citizen energy communities stems mainly from climate trends, so that the small-scale production of renewable energy contributes to the reduction of greenhouse gas emissions, reduces the price of electricity and achieves a stable price in the long term. Of course, there are co-benefits related to the purpose, and they are mostly related to the relief of the national electricity system and the reduction of the need for electricity imports. The subject of energy communities derives from its regulations of permitted activities: production of renewable energy, storage of energy produced, energy efficiency activities, energy supply, management of energy consumption, aggregation, etc.

Citizen energy communities may have different business models that mostly depend on the procurement model of the facilities and devices used to perform the activity. Which business model the energy community will choose will depend, among other things, on the situation on the date of its establishment. For example, citizen energy communities whose members already own energy generation and/or storage facilities will be steered towards a business model where the energy community itself provides services to its members in the area of sharing and recording of shared energy and demand response services. On the other hand, energy communities whose members are only planning to invest in installations could choose a business model in which a legal person of an energy community invests in installations on the assets of its members. The third option of a business model may be a combination of the above with the ambition to develop installations in available public areas. Such a business model will be preferred by members who have available areas owned, but do not have the technical ability to invest, for example due to the protection of urban units or construction constraints.

It is particularly interesting here to draw attention to the business model, that is, the possibility for one group of community members to use the capacities of surfaces owned (roofs, gardens) by other members. This is because, under this business model, individual members of the community invest in plants whose production capacity exceeds their needs in order to share the excess energy produced with members of the community who do not have the technical ability to invest in production capacity, but are willing to pay for that part of the energy produced. Thus, here, a monetary value is assigned to shared energy as compensation for the use of other people's capacities for the purpose of overcoming the technical constraints of a community member who pays for shared energy.

In the wake of this last business model, a whole range of options and opportunities open up in the market for energy produced within citizen energy communities. One of these opportunities is the great potential of energy communities in contributing reducing energy poverty citizens in need.

One of the objectives of public policies regulating activities aimed at reducing energy poverty of citizens is to increase the availability of cheaper energy to those citizens whose income is not sufficient to meet the costs of the total energy needed in a year. Due to a lack of income, citizens give up a part of the total energy needed, which can be a cause of health damage, and consequently an increase in public costs of treatment. In order to overcome the income restriction, public authorities usually subsidise part of the income of these citizens. However, such a measure is often time-limited and the non-permanence of the subsidy contributes to the additional uncertainty of the subsidy recipient. Overcoming this uncertainty while achieving the objectives of sustainable increased availability of cheaper energy is possible through the mechanism of bringing together public authorities (on the one hand) and citizens in need (on the other) in energy communities where public authorities produce renewable energy on their assets, which they make available to citizens in need at a reduced price or free of charge. Such a solution also carries the assumptions of long-term implementable public policies due to the very nature of photovoltaic plants. The possible structure of the organisation and procurement is shown in schema X:

Scheme 1: Organisation and financing of energy communities to reduce energy poverty

Public authorities (municipalities, cities) (3) invest in renewable energy plants for sharing within the citizen energy community. Facilities (2) can be procured (1) as works or as an availability service (PVaaA[10]). In both cases, the renewable energy produced is owned by the public body and is therefore free to share it (4) with citizens (6) through an energy sharing system (5) within the energy community. The monetary amount of the shared energy shall be determined by the public authority.  Depending on the material and social condition of citizens (members of the energy community) it can be from 0 €/kWh to its producer price (approximately 4-6 €c/kWh). Of course, here should be added the cost of using the distribution and transmission system.

By implementing public policies related to contributing to the alleviation of energy poverty in the proposed way, the following objectives of public and private interest could be achieved:

• Increasing the health of citizens by increasing the affordability of the required annual amount of energy;
• Reducing the cost of treatment;
• Increase the number of working hours;
• Reducing greenhouse gas emissions from renewable energy production;
• Reinforcing trust in the opportunity to live in solidarity.

Therefore, these are tangible goals that can contribute to a better relationship between the price and quality of public services, but also to strengthening trust in public institutions.

3. OPPORTUNITIES FOR THE PUBLIC POLICY OF CONTRIBUTION TO REDUCE ENERGY SYROMAGE OF CITIZENS

Public policy of contributing to the reduction of energy poverty of citizens can be implemented by installing photovoltaic plants for the production of affordable electricity for citizens who cannot afford sufficient amounts of electricity for their annual needs, that is, for citizens who are at risk of potential inability to afford the required amount of electricity for annual needs. The policy could be implemented in the following ways:

1. Installation of photovoltaic installations on the roofs of citizens in need;
2. Installation of photovoltaic installations on the roofs of public buildings and/or public areas owned by public bodies;
3. Combining the installation of photovoltaic installations on the roofs of public authorities, public areas and the roofs of citizens in need.

The first way implies the activities of the city or municipality related to investment in the installation of photovoltaic plants on other people's property (roofs of private buildings). This option will be implemented by concluding a roof rental contract under which the city or municipality will rent the roof of a private building and install a renewable energy plant. In accordance with the regulations governing the electricity market, the energy produced will be divided among occupants of a multi-dwelling building according to a certain key, preferring occupants in need. The advantage of this option is the status of self-generation in which case the energy provider (city or municipality) does not need to connect with the energy user (citizens in need) in the energy community. The disadvantage could be the complex procedure of contracting the installation process, the organization of energy sharing in the form of a group of jointly acting end customers and the complex process of monitoring and managing the process.

The second is based on the assumption that the city or municipality installs photovoltaic installations on the roofs of buildings owned by them. These can be general public buildings, public buildings that are not in any public function or use (abandoned complexes), public parking lots in open areas and the like. The condition for sharing the energy produced to citizens at risk of energy poverty is their connection to the energy community of citizens. This is a possibility regulated by the regulations governing the electricity market. While there are currently outstanding issues in the implementation of energy communities, they are expected to be adequately addressed in the coming period. The advantages of this method, assuming the practice of functional establishment of the energy community, is a relatively simple procedure of implementation of installation of the plant as well as energy sharing. Citizens in need appear as some kind of passive members of the energy community in the role of customers or users of renewable energy. The shortcomings are believed to be temporary and mainly relate to the currently unclear demands that the legislator places on members of energy communities.

The third way is more complex and refers to the combination of the previous two. It is about installing photovoltaic plants on the roofs of publicly owned buildings, public areas and on the roofs of private buildings inhabited by citizens in need. The processes of establishing a functional system within this possibility are complex, and the advantages are mainly related to the possibility of using larger capacities of produced renewable energy. Weaknesses mainly stem from the multiplication of the complexity of procedures and management risks arising from such complex procedures.

4. POSSIBILITY OF PROCUREMENT OF PHOTONAPON FACILITIES FOR ENERGY COMMUNITIES OF CITIZENS

Assuming the awareness and readiness of the community to contribute to reducing the risk of energy poverty of a part of the citizens, contracting authorities (providers of cheaper or free renewable energy to citizens in need), in the decision-making process on articulating, adopting, preparing and implementing public policies to reduce the risk of energy poverty of citizens will face the question of the possibilities of procuring renewable energy plants. Of course, there is always the possibility of traditional procurement of works, but recently the practice of procuring such plants as an availability service has been developing.

In the context of the procurement of works, the contracting entity (city, municipality) concludes a works contract under which the contractor is obliged to acquire and install the installation. The cost of the works performed will be paid by the client from his own budget sources or from other debt sources within the capital budget. Maintenance and management of the facility will be the responsibility of the client.

Unlike the procurement of works, the procurement of the availability service of a photovoltaic installation is carried out by means of an availability contract.[11] (PVaaA). The availability service provider does not participate in the project exclusively at the installation stage, but also for a longer period of use of the facility. The contractor is responsible for the functionality (availability) of the installation in order for the contracting authority to use the energy generated by the operation of the installation. For the availability service delivered, the contracting entity shall pay, if the facility is available, an availability fee. Payments of availability fees shall be recorded in the operational budget of the contracting entity.

In terms of co-financing from EU sources (capital aid or grant, debt financial instruments), these procurement models have the same status with the difference that in the case of the procurement of works, capital assistance will reduce the purchase price of the installation, and in the case of the procurement of the service of availability, the availability fee.

5. EVALUATION OF INVESTMENT IN THE ENERGY COMMUNITY OF CITIZENS IN THE PURPOSE OF REDUCING ENERGY SIROMATIA ON THE EXAMPLE OF THE CITY OF RIJEKA

In order to illustrate the volume of investments in energy communities of citizens whose purpose is to reduce energy poverty or protect against the risk of increasing energy poverty of citizens, the authors have prepared a framework analysis of the structure and volume of required investments in the city of Rijeka based on publicly available data and estimates of the authors. Attention is drawn to the fact that this analysis is indicative and that for the purpose of establishing public policy and its implementation it is necessary to prepare amendments.

The structure of the assumptions and their estimated values is shown in Table 3.

Table 3: Structure of assumptions for estimating the volume of investments in the city of Rijeka

Legend: Min (minimum estimated value), ML (most likely value), Max (maximum estimated value), E (expected value).

Considering publicly available data on the population in the city of Rijeka and data on citizens at risk of energy poverty, it is estimated that there could be between 7 and 8 thousand citizens at risk of energy poverty in the city of Rijeka, that is, citizens who cannot or can barely afford a sufficient amount of energy in a year. To sustainably protect these citizens from the risk of energy poverty, investment in installations is estimated to range from €15.5 million to €17.6 million. The implementation of this public solidarity policy could cost between 700,000 and 1 million euros per year for all citizens of Rijeka. Of course, the implementation of a policy to protect citizens from the risk of energy poverty should start with a pilot project with a sample of, for example, 500 citizens. The capital value of such a pilot project could range from 1 to 1.5 million euros, i.e. the average annual budget expenditure could range from 50 to 80 thousand euros. The public area required for the implementation of the pilot project (public ground areas or roofs of public buildings) is estimated to be in the range of 1800 to 2100 m2.

5. CONCLUSIONS

The Citizen Energy Communities Mechanism could be an effective instrument for public policies aimed at reducing the risk of energy poverty for citizens. Different options of the procurement model of renewable energy plants enable public buyers to quickly implement this public policy without engaging initial budgetary sources of financing. On the example of the city of Rijeka, it is evident that the pilot project, which would include about five hundred citizens who are most at risk of energy poverty, would cost all citizens of Rijeka negligible in relation to the benefits that vulnerable citizens would have from the implementation of such a public policy. It remains to be believed that local public management will also accept this or a similar initiative.

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[1] https://energy.ec.europa.eu/topics/markets-and-consumers/energy-consumer-rights/energy-poverty_en (15.12.2023.)

[2] https://energy.ec.europa.eu/news/commission-publishes-recommendations-tackle-energy-poverty-across-eu-2023-10-23_en (18.12.2023.)

[3] https://eur-lex.europa.eu/legal-content/HR/TXT/HTML/?uri=OJ:L_202302407 (18.12.2023.)

[4] We see here an inadequate translation of the original English text of the recommendations – a much more appropriate translation would be the local self-government units consisting of cities and municipalities

[5] https://ec.europa.eu/eurostat/web/products-eurostat-news/-/DDN-20200120-1 (15.12.2023.)

[6] https://www.euronews.com/green/2022/12/09/europes-energy-crisis-in-data-which-countries-have-the-best-and-worst-insulated-homes (17.12.2023.)

[7] National indicators – European Commission (europa.eu) (17.12.2023.)

[8] EPAH_Energy Poverty National Indicators Report_0.pdf (europa.eu) (15.12.2023.)

[9] https://ec.europa.eu/eurostat/cache/digpub/housing/bloc-1a.html#:~:text=Houses%20are%20most%20common%20in,and%20Malta%20(both%2057%20%25) (15.12.2023.)

[10] PVaaA - PhotoVoltaic as an Availability – the contracting authority procures the availability of the facility. The supplier installs the installation on the property and keeps it available for the contract period. For the Availability Service, the Client pays an Availability Fee. More about this in D., D.; Medved, D. (2023) Acquisition of plant, device and equipment availability services, Tim4Pin No 12.

[11] PhotoVoltaic as an Availability. More about this model in: Juricic, D.; Medved, D. (2023) Acquisition of plant, device and equipment availability services, Team 4 Pin, number 12.

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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.

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[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

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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