A decade of energy projects in Croatia

CEELM: What types of energy projects have kept your team most busy over the past 10 years? How has this evolved over the past decade?

Tom: MTG Law Firm is recognized as an energy specialist, dealing with all energy-related matters. As such, we have had the opportunity to handle a wide range of energy-related matters, both in terms of sectors and types of work.

In renewable energy, the focus until 2021 was on projects that had already been developed or were at a very late stage of development and had PPAs with the Croatian Energy Market Operator (HROTE) under a fixed feed-in tariff model. These projects were mainly looking for financing, refinancing or M&A (both on the seller and buyer side).

In 2021, energy market regulations underwent significant structural changes. New challenges have emerged that have shifted our focus back to complex regulatory issues and advising on new investments, now focusing on all phases of the development itself, such as spatial planning, land ownership, grid connection issues, energy and construction permits, public procurement, EPC contracts, O&M contracts, various PPAs, etc.

In addition to renewable energy, over the last decade we have worked on various other types of conventional energy mandates, such as oil and gas activities, including PSAs, but also on new areas such as shaping policies on energy efficiency, renewable energy and waste management.

As part of EU activities, we regularly carry out conformity checks for the European Commission and report on the transposition of various energy directives.

CEELM: If you looked back at the last 10 years, what were the most intense periods for you and your team and what factors do you think led to them?

Tom: The most intense period has been the last few years, since the change of the regulatory framework in 2021. In addition to our regular, ongoing energy-related workflow, there has been an increase in mandates related to navigating the new and complex regulatory framework. Namely, the introduction of the new Electricity Market Act in 2021 required the adoption of a whole set of new secondary regulations. However, these new regulations were introduced with a delay of more than two years, leaving projects developed during this transitional transition period on a highly uncertain legal basis. Finally, when the new Energy Approval Regulation, a key document for new investments, was adopted in July 2023, further uncertainties arose, e.g. in relation to investments on mixed private and public land. Therefore, we focused on guiding our clients during the development of their project, financing or M&A activities through the uncertain regulatory framework. Furthermore, we actively participated in the public consultation phase of the relevant regulations, as a clear regulatory framework is crucial for the development and transformation of the energy market.

CEELM: How have energy project profiles changed over the last decade and what trends do you observe in terms of energy project categories and investments?

Tom: Croatia follows global trends in switching from traditional oil and gas production to electricity generation, with particular emphasis on renewable energy sources.

In terms of renewable energy sources, the old feed-in tariff system focused on combined heat and power plants (CHP) because of the additional bonuses awarded for the efficient use of heat generated in cogeneration. The heat was mainly used to dry biomass, which in turn was used as fuel for the power plant or in nearby greenhouses. Now the focus has shifted to solar energy, while wind energy is still just as attractive. New technologies enable the construction of hybrid wind turbines and photovoltaic farms, which allows for the complementary use of wind and solar sources. The sun shines during the day, while the wind blows irregularly, and both phenomena are seasonal, so combined use ensures a sustainable energy supply.

Another noticeable trend concerns the legal framework for agro-solar projects. A new regulation aims to facilitate the development of agricultural solar power plants, which will benefit both the energy and agricultural sectors.

Additionally, due to energy market dynamics, we have seen a shift towards power purchase agreements (PPAs) and a shift towards market-based energy transactions.

CEELM: What new expectations do you see in the energy sector in terms of customer needs, and which aspects do you think have become less important over time?

Tom: In terms of customer needs, there is a demand for corporate/commercial PPA advice and negotiation support. The transition from a state-guaranteed long-term PPA with a feed-in tariff (FIT) to private flexible corporate PPAs negotiated and concluded with private buyers on market terms is an obvious trend in Croatia. Previously, PPAs consisted of a non-negotiable model contract provided by HROTE under the terms set out in the Secondary Regulation. So, in the old system, entering into a PPA was more similar to the licensing stage than to contract negotiation, i.e. if a producer met certain legal requirements, they received a PPA that was the same for everyone. Now, this new market trend has emerged and we can see that more private producers want to enter into PPAs with other private buyers. Moreover, this trend is going the other way, as large corporations want to participate in the green transformation and meet their ESG requirements by procuring electricity from renewable sources and also obtaining guarantees of origin (i.e. an electronic document confirming the origin of energy). Naturally, this move towards corporate PPAs is also in line with EU Renewable Energy Directive which calls on Member States to remove all barriers to corporate PPAs.

Our law firm MTG was one of the sponsors of the first and second regional conferences organized by RE-Source Croatia dedicated to the development of green PPA contracts, which took place in 2023 and 2024 respectively. The topic is complex and rapidly evolving, resulting in many different PPA structures and possibilities. Therefore, it is important for us to stay ahead of the trends in order to properly guide and support our clients.

CEELM: From a legislative/regulatory perspective, what are the main recurring challenges your team has encountered in facilitating energy transactions and projects?

Tom: The main challenge was to cope with the regulatory uncertainty, as critical secondary legislation was missing for more than two years. A key element of the regulation defining the price for grid connection (and further grid upgrades) has still not been adopted. Without this critical financial contribution, it is impossible to continue development. The entire sector is now eagerly awaiting the decision on the fee. It is estimated that around 1,300 megawatts of projects with a total investment value of around €1.2 billion are on hold in Croatia due to the significant regulatory delay.

CEELM: What’s next for the energy sector? What do you think will be the most important point of a similar interview in 10 years and how do you foresee the industry developing?

Tom: We expect further development of the Croatian electricity market in line with REPowerEU initiatives and the emergence of new market participants, from producers and suppliers to aggregators and energy storage facilities. Croatia is currently in the process of adopting new legislation that is key to the reform of the electricity market. Active customers should now be able to purchase electricity on the market and enter into physical PPAs directly with producers. This is a departure from the traditional system, where end customers were limited to purchasing electricity only from regulated suppliers. In addition, new market participants will emerge, such as citizen energy communities and renewable energy communities. Both can include individuals, local authorities, municipalities and small businesses, allowing them to participate collectively in the market to meet their energy needs (or sell electricity that has been generated but not consumed within the community). We expect the green transformation to continue and energy markets to further evolve and become more inclusive.

Marohnic, Tomek & Gjoic is the Energy Practice Leader for Croatia at CEE Legal Matters for 2024 – find out more here.