Financing CHP and district heating in Central and Eastern Europe

Power generation and heat distribution equipment in parts of Central and Eastern Europe (CEE) is in urgent need of refurbishment and replacement, but public finance is limited. Jim Campion argues that private equity will have a significant investment role to play here in the next decade. Indeed his company, EnerCap, has established a CHP private equity fund.

Figure 1. Age distribution of Poland’s power plants by fuel Source: IEA 2010

In the past two years EnerCap has identified significant potential deal flow for investment in CHP plants, predominantly for district heating, at sizes ranging from a few MWe through to large-scale combined cycle power plants. Following further research, the potential for private equity for this sector (in CEE) became apparent, which has led to EnerCap now developing what we believe to be Europe’s first dedicated CHP private equity fund.

The CEE countries of the European Union have extensive district heating (DH) networks, with high percentages of the population served by these networks. For instance, half of Poland’s population is connected to district heating, according to Euroheat & Power. This is essentially a positive legacy of the centralized planning of the Soviet era. This compares with 8% in France and less than 1% in the UK, although Scandinavian nations have comparable networks.

However, the energy and heating infrastructure is extensively ageing and requires multi-billion-euro investment over the next decade to avoid shortages in electricity and heat, particularly in the cold winter seasons experienced in most CEE countries.

Figure 1 outlines the age distribution of Poland’s generation assets, which is consistent with most of the CEE region. Notable also is the recent addition of ‘other’ renewable energy, predominantly wind in this case.

The growth in renewable energy in CEE, although welcomed, creates further stress on the networks due to its intermittent nature and poor medium-term forecast to delivery correlation.

With the need to increase energy efficiency and carbon reduction it would be a major missed opportunity not to invest in upgrading the power production with modern, clean and efficient CHP plants and refurbish the DH distribution infrastructure. The residential housing stock is commonly very poorly insulated and often not individually heat metered. The new EU Directive for Energy Efficiency due later this year aims to address these issues and hopefully will stimulate investment in the full cycle of efficient energy production and consumption.

EnerCap estimates the CEE region will require well in excess of €30 billion ($36 billion)in capital investment in the energy and heat industry in the next decade. Where will this capital come from?


Many of the DH schemes and old generation plant are owned by municipalities that lack funds for this level of investment. EU structural funds have met some of the immediate needs to stabilize the DH infrastructure, but this only scratches the surface. Pan-European utilities have acquired many of the larger DH schemes in the last decade, and have made significant investments, but due to the wider economic issues, and the financial consequences of changes in nuclear policy in other countries, are now finding themselves more capital constrained.

The sovereign debt crisis continues to reverberate across Europe, and national governments are likewise constrained in what infrastructure capital or stimulus they can provide the energy industry.

We expect international financial institutions, such as the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) will continue to be catalyst investors in infrastructure across the CEE, but substantial private capital will need to be invested alongside their investments.

Can private equity fill this funding gap? Can cogeneration assets in the CEE region be an attractive investment for private equity?

A well-conceived CHP scheme has some attractive fundamentals:

  • long-term, secure revenues through power purchase agreements and heat sales;
  • revenue is substantively disconnected from the general economic cycles, unlike investments in other sectors such as retail, property or manufacturing;
  • long life asset (20″30+ years) with proven technology and predictable service costs;
  • positive geo-political drivers for energy efficiency and carbon reduction;
  • baseload generation, with operational flexibility, is an asset in a market where intermittent renewable energy is increasing;
  • far less reliant on government subsidies than other carbon reduction energy sources (especially solar);
  • one of the lowest cost routes for carbon abatement.

As one pension fund manager recently stated, CHP is like a commercial property asset, but with a guaranteed permanent tenant. It is critical from an investor’s perspective that the commercial risk of the heat consumer is clear. Municipalities in most cases are considered secure, but commercial heat users need to be highly stable, long-term consumers or CHP plants risk being stranded within their economic life. Regulation of heat pricing also needs to be well understood and factored into the investment equation.


To achieve secure returns from secure revenues obviously requires stability of margins, which puts a clear focus on fuel supply contracts and as much parity as possible between fuel supply indexing and revenue. This is often the most challenging aspect of financing a CHP project, whether gas-, coal- or biomass-fuelled. The gas supply market is particularly volatile, going through significant market changes across the CEE ” driven by deregulation, privatization and pipeline infrastructure improvements widening the supply base potential.

In the CEE region, memories of the 2009 Russia/Ukraine gas supply crisis are fresh. The security of energy supply through gas storage, duel fuel systems and alternative fuels is a significant issue in national energy strategies. To some extent, district heating CHP systems are protected against supply disruptions, as evidenced in the 2009 crisis, where domestic heat sources were maintained with demand reduction being managed through industrial consumption control and changing sources of electricity generation. Indigenous fuel sources are also playing an increasing role, such as unconventional gas, biomass, biogas, hydro and other renewables.

Biomass CHP (woodchip/straw) offers significant potential, and looks attractive in markets like Romania with significant amounts of biomass economically available with firm long-term price indexing possible. Biogas distributed CHP also has significant potential in large agro-economies such as Poland. In the case of biomass and biogas projects, from an investor’s perspective, commercially secure fuel supply contacts are critical. Investors and banks will need to have long-term price certainty, and developers typically propose projects on short-term market pricing, common in the wood supply industry.

Figure 2. GDP Growth forecast 2012 Source: Eurostat 2012

The maturity of the wood supply industry for dedicated biomass in the CEE region is an issue. It can often be difficult to compete with other nearby co-firing projects that can purchase on short-term contracts as they depend less on the biomass fraction.


As an indication of the size of the immediate investment potential, we are monitoring and engaging in CHP projects across the region that will require more than €3 billion of capital expenditure to construct. The shortage of capital enables a fund manager to be highly selective on its project investments and to pursue projects that will give acceptable risk adjusted returns and confidence in long-term operating margins. To attract institutional investors into a dedicated CHP fund in the CEE region at this time, given the regional and international financial climate, a fund manager will need to demonstrate double-digit net yields over the life of the fund.

A country’s specific exposure to currency risk needs to be well understood, but with a view to the longer term, given the life of the assets.

A typical investment would be €15″30 million of equity per project, either independently or with suitable co-investors, where appropriate on larger projects. An infrastructure-focused fund will invest in projects either fully permitted or in the final stage of their development, or in operating assets where value can be added. Investment in platform companies that would aggregate smaller CHP projects (distributed generation) may also appeal, providing it is underpinned by operating assets and carries limited development overhead and risk.

It is impossible to discuss investment without considering the Euro economic crisis we are in the midst of today. Indeed by the time you read this article you may be heading to Greece on vacation armed with the Drachmas you found at the back of the drawer!


Many believe the traditional geographic demarcation of ‘West’ and ‘East’ Europe to group countries economically within the EU is no longer relevant. The disparity in economies in the West is now so apparent, as it is in the East. For example, Poland’s national debt and GDP growth compares very favourably with that of most of Western Europe ” see Figure 2. Is Romania a safer investment today than Spain, Italy, Portugal and Ireland?

The agency credit ratings of our primary target counties (Poland, Czech Republic, Slovakia and Romania) have been positively stable through the recent turmoil. Few of the CEE states’ economies suffered the excesses common amoung Western states, and many have better foundations for long-term competitiveness and economic growth.


At EnerCap, we believe there are good grounds to be optimistic for energy infrastructure investment in CEE, with particular focus on CHP. The investment need is immediate and substantial, with real social impact in some regions if heat systems are not upgraded. This asset class can be an attractive investment for private equity when correctly developed and executed.

Investing in the region does require a local presence, in-depth understanding and expertise. The ability to select projects from development partners, structure them to secure project debt on appropriate terms and then correctly execute and oversee the EPC contracts are essential. A proactive approach to asset management and high quality operation and maintenance provision over the investment term is a prerequisite to achieving the income goals of any fund investing in this sector.

We expect private equity will have, by necessity, a significant role to play in upgrading the energy and heating infrastructure across the CEE in the next decade.

Investing in clean energy in Central and Eastern Europe

As a leading investors in clean energy in Central and Eastern Europe (CEE), EnerCap has good insight into the evolution of the energy industry in the region. The firm constantly monitors which sectors are gaining momentum and which are in decline due to legislative changes, capital constraints, energy capacity requirements and the region- and country- specific eco-political environment.

EnerCap’s first private equity fund (EnerCap Power Fund I) was raised in 2007 and has been primarily invested in wind and solar, with other development investments in biomass and gas CHP. The fund owns project assets in Poland, Czech Republic, Slovakia and Croatia and is expecting to soon close its first project investment in Romania. EnerCap has a multinational investment and asset managementteam based in Prague with presence in other key cities of the region.

Jim Campion is a partner with EnerCap Capital Partners, Prague, Czech Republic. Email:

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