Home / Publications / Emerging Europe M&A Report 2021/2022 / EnerCap Capital Partners: 15 years of clean energy...

EnerCap Capital Partners: 15 years of clean energy investment in CEE

From its base in Prague the management team at EnerCap Capital Partners (EnerCap) has been investing in renewable projects across CEE for more than 15 years. Set up to act as the general partner to EnerCap Power Funds (EPF), a specialist private equity fund focused on clean energy investments in the region backed by the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB), EnerCap acquired a portfolio of wind and solar power projects across Croatia, Czech Republic, Poland and Romania. Now in the process of disposing of its final assets and closing its books, we ask the fund’s four founding partners to reflect on the fund’s history and the development of renewable energy in emerging Europe.

EnerCap started investing in renewables in CEE in 2006. What brought you to start this venture?

George Formandl (GF): Back in 2006 we were mostly focused on mid-market commercial real estate investments via our company Kilcullen Kapital Partners. We had some successful deals teaming up with foreign investment funds, which inspired us to start our own fund. At about the same time, we began to see many opportunities in renewables in the region. We weighed the pros and cons of continuing in a competitive real estate market or trying to become pioneers in raising the first private equity fund in the region for renewable energy. We definitely weren’t ready at the time for the path we embarked on, but we were very entrepreneurial and eventually convinced the EBRD and EIB to back our fund. From there, other investors signed on and we were able to raise almost EUR 100m for the EnerCap Power Funds (EPF).

Did the opportunities in the region live up to your expectations?

Shane Woodroffe (SW): Following the closing of the EPF in late 2007, the next two years were difficult given the general absence of project debt financing and the turbine manufacturers still having full order books from the run-up to the global financial crisis (GFC). Indeed the first windfarm that we built in Poland had high construction costs, however, we were able to improve upon this with future windfarm investment as prices fell and the turbine order books started drying up. Moreover, the developers of projects in the region, off the back of inflated prices pre-GFC, continued to demand high premiums for selling fully developed projects – and these expectations improved for us as we continued to invest. There were certainly plenty of investment opportunities for the EPF across the CEE region but, as the committed capital would only go so far, we decided to limit the investments to just four countries, Poland and Romania (both Green Certificate schemes) and Czech Republic and Croatia (both feed-in tariffs). Poland was the most mature of these markets and took some 42% of the EPF’s invested capital.

What were some of the typical challenges in developing renewable energy assets in CEE in the early years?

SW: Between 2009-2013, when the EPF was investing, developers of renewable energy projects were still learning and there were substantial gaps between what meets local requirements and what is an internationally investable proposition. This was most evident on environmental and social matters where fully permitted projects, marketed as ready-to-build, actually required an expanded environmental impact assessment including a minimum 12 months of environmental surveys and data collection – usually for birds and bats, with a particular focus on any at risk species. Fortunately, we did not suffer the same fate as a competing windfarm in Croatia which found itself in the middle of a Natura 2000 site post-accession into the EU!

How have regulatory and legal changes affected the market?

Alastair Hammond (AH): The question might be better put: “Where were there no regulatory or retroactive legislative changes which did not negatively affect the market?” Following the GFC, many governments in the region looked at ways of reducing the cost of energy for consumers (homeowners and businesses). At the same time, they also wanted to support major industries (often government owned, or key regional employers) which were operating in difficult circumstances, such as state-owned utilities, coal and gas, large energy intensive manufacturing such as aluminium, or automotive production. Once Spain decided to renege on its feed-in-tariffs, and Italy followed suit, and with the EU more interested in shining a light on State aid, the governments of Central and South Eastern Europe one-by-one introduced retroactive changes to existing projects and pulled any existing support for new projects. 

Jim Campion (JC): The only constant in recent years has been change – but investors seek a stable legislative environment to support investment in long-term infrastructure assets. Support schemes were necessary to underwrite the early adoption of renewables, driving down the cost of the technology to be market competitive. The frequent state interventions and retroactive changes that Alastair referred too, however politically expedient, created uncertainty and boom-bust cycles, effectively increasing the risk premium and cost of capital in many markets.

As the market matured to where renewable energy is market competitive, without support, governments started to lose some direct control of the rate of renewable build and the pace is now governed by consumer demand – particularly through the growth in Corporate Power Purchase Agreements (CPPAs). Regulatory issues remain influencing factors, such as rights and process for grid access, planning consents, balancing markets and energy storage, all of which can be investment constraints. With the current high commodity price environment with record power prices, commercial demand for new renewable generation is growing exponentially and in many markets energy regulators and grid operators (commonly state-owned) are struggling to manage this rapid change without compromising network performance.

The development of Renewable Energy Sources (RES) in CEE is often linked to this constant change of regulatory and incentive regimes and the boom-and-bust cycles this resulted in. Do you think we have now left this behind us? Is this still off-putting for investors?

SW: With the EPF, the projects acquired and invested in during the 2009-2013 period enjoyed legislated support, as mentioned by Jim, either through feed-in tariffs or green certificate systems. At that time, renewables also benefitted from priority access to the electricity grid and often escaped balancing risk. The legislated support provided a good underpinning of the debt financing that was needed to make a project happen. The downside, as came to pass, is that we were making 15-to-20 year investment decisions against four-to-five year political cycles. The reality was that the newer EU member states from the CEE region saw the drive to decarbonising their power systems as too expensive and a risk to jobs, as Alastair explained, which hitherto had been enjoying cheap electricity, and which threatened to move abroad. The subsequent retrospective legislative adjustments that we suffered to the EPF’s investments in the Czech Republic, Poland and Romania meant that our investors, alongside others who suffered similarly, lost faith in investing in RES projects in the CEE region.

Fast forward to today and with renewable electricity in resource rich countries providing the lowest cost of energy, undercutting incumbent fossil-fuelled sources, RES projects may have been stripped of earlier protections but are still able to compete on a level playing field. For example, there is no supporting tariff or priority of access to the grid and RES projects now have full responsibility for balancing their output, which can be quite expensive in certain countries such as Romania. Yet solar power in southern sunnier countries or wind projects in the more northern windier countries are providing cheaper electricity than unsubsidised fossil fuel generation. However, for new RES projects seeking debt financing and which are in search of long-term buyers of their future electricity generation, project sponsors have essentially swapped sovereign risk for corporate risk under CPPAs.

Whilst corporate buyers today are still learning how to buy intermittent electricity from RES projects, the great news is the roll-out of financial CPPAs which open up a much larger international array of potential buyers, rather than projects being limited to domestic buyers. With political risk ostensibly out of the picture, and RES projects competing and winning against other sources of electricity generation, investors are rapidly returning to the sector. This is being accelerated by investors withdrawing from companies linked to fossil fuels and seeking clean energy investments. 

How have the deals changed from when you acquired your projects to now when disposing of them?

SW: That is certainly an easy question from a debt perspective. Only our Czech and Croatian windfarms escaped debt restructurings, all of EPF’s other projects investments had to go through a debt rescheduling to reprofile the debt service to the new (lower) revenue stream, which led to longer debt repayment profiles. Extended ongoing legislative uncertainty in some countries, particularly for our Czech solar power projects and Romanian windfarm investments, meant that we had to hold these projects well in excess of what was envisaged until a stable legal regime would permit a sale. The project investments that have been exited to-date have, except one, met the target cash multiples of the EPF, however the internal rate of return was depressed due to the longer hold periods.

Which country has been most successful for you? Is there a particular project that you are particularly proud of having been involved in?

SW: For me, our 42MW windfarm in Croatia was particularly pleasing. It had a long and complicated development period as certain domestic laws kept changing throughout the development cycles meaning some project development aspects had to be repeated or done differently, but it was eventually financed and successfully constructed. As an investment, it delivered very well against its investment case, although it seems to have enjoyed better wind years with its new owner! It was especially my favourite because Croatia was the one country where the EPF did not experience retrospective legislative amendments, making the sale of the project more straightforward, and it was near some of the most beautiful coastline in Europe which always made site visits enjoyable!

How do you compare the roles of strategic and financial investors in the development of renewables in CEE? How have the players changed? Do EnerCap see further opportunities in the region?

JC: All European utilities have been transitioning from carbon-based generation to renewables over the last decade or so, although most in the CEE region have done so somewhat belatedly. Some have been particularly active in the development and acquisition in renewable assets. The incumbent electricity supply businesses are facing many challenges and discontinuities, particularly with the forecast growth in CPPAs where contracts are direct between independent power producers and consumers, in various forms, bypassing to some degree the traditional supply businesses. For the larger utilities building a captive base of renewable generation gives them long-term security and a useful tool for retention of large consumers. They are also the primary route for renewable energy for retail consumers.

A growing pool of large infrastructure fund investors are competing with utilities for assets in development, construction and operation. These funds are attracted to the opportunity to invest in generation assets that are long-term contracted to creditworthy corporate partners and are not reliant on the vagaries of state support. Typically these institutions will invest in a platform business developing a pipeline of opportunities in a region and, for the larger projects and corporate consumers, these funds can be more agile and commercially competitive. Substantial capital is being raised by these funds – from pension managers, insurance companies and sovereign wealth – for this strategy. 

In fact, we at EnerCap have been courted by a number of large institutional investors looking to benefit from our regional expertise, with the aim of building a pan-CEE/SEE regional platform business to invest substantial equity (>EUR 400m) in new build renewables and storage. I’m pleased to say we have recently reached agreement in principle with a renowned global fund, with whom we are already active and will make a formal announcement in early-2022. We are focussing on large-scale wind, solar and storage projects in late-stage development, and also relationships with large consumers where we can partner on projects across the region.  

In which countries in CEE do you see opportunities now?

GF: Outside of Poland, there has been a real lack of renewable build-out in the CEE region in the last decade due to various overriding and country-specific factors.  Therefore, we see long-term opportunities across the region, but many markets still have barriers ranging from political to grid capacity to legislative. In the short term, we see Romania as a promising market which is now attracting a lot of attention, although other smaller Balkan countries are also interesting depending on your risk appetite. Our own local Czech and Slovak markets are also emerging from slumber, particularly for solar.

Do you expect the current energy prices for consumers to have an impact on the development of renewable resources in CEE?

JC: Absolutely. Until recently commercial and industrial consumers were procuring renewable energy as part of their sustainability goals and were paying a premium over brown power for the benefit. Currently renewable PPAs can be contracted below wholesale prices and the consumer can achieve long-term price certainty. Not having fuel commodity prices to consider has benefits; the cost of power was previously a variable over which consumers had no long-term certainty or control, impacting budgets and strategic planning.

There is now a watershed of corporate demand which is stimulating development and attracting capital. We are seeing significant activity from proven renewables developers and new entrants, commonly from land-owning or commercial real estate backgrounds.

With ESG high on the agenda of global infrastructure, and PE funds keen to invest in renewable assets, will smaller regional investors still play a role in renewables in CEE?

SW: Not only did the EPF bring fresh capital and renewables experience to the CEE region, it also demanded certain standards reflecting its international limited partners. Rather than saying we forced “western” requirements onto the CEE region, I would say that we lifted the bar and improved development standards and the supporting infrastructure. For example, in the early years not all banks subscribed to the Equator Principles which is an international minimum standard for environmental and sustainability matters. I think that would be different now and there is increased awareness of what is required to attract international capital, especially as the projects are getting larger and need increasing amounts of capital, necessitating investment from outside CEE. Smaller, regional investors still have a role to play but external capital is needed – which will benefit from local experience and relationships.

The transformation of the “energy mix” is a key element of reaching the “fit for 55” goals (the EU's target of reducing net greenhouse gas emissions by at least 55% by 2030) what are the main challenges for CEE countries in this respect?

JC: It’s all about managing the greater adoption of weather-dependent energy and keeping the grid reliable, particularly under low wind conditions in winter. There are challenges in interconnectivity between neighbouring countries, long term storage solutions (where we currently have a technology gap, bar traditional pumped hydro), active demand side management (made commercially attractive), smart devices and, in my view, smart and efficient use of gas generation and waste-to-energy as a necessary evil for transition. There is plenty for governments across the region to address.

AH: One of the main challenges facing CEE countries is to reduce the reliance on coal-based electricity generation and heating, and to transition to low-carbon alternatives. However, understandably, governments and generators have concerns about passing the full cost onto the consumers. 

Strategically, there are also genuine concerns over energy security, particularly where there could be an over reliance on Russian gas, either already or if required as a transition fuel. CEE countries face many of the same challenges that apply to Western European countries, although they are mainly starting from further back. This includes upgrading transmission networks and building or improving country interconnectors. 

Storage is another big issue. In the UK there was nearly 2GW of installed utility scale battery storage built by the end of 2021 (and there is nearly 20GW in planning), compared to single digit MWs of battery storage installed in CEE’s largest markets – Poland or Romania. This discrepancy fuels concern about a widening of the East-West gap. The EU has committed nearly EUR 150bn in support for member states to achieve “fit for 55”, which offers unprecedented opportunities to transform CEE energy and industrial sectors and enact targeted reforms aimed at helping close this gap. However, it is crucial that CEE countries make up lost ground and continue to attract, and in many cases, restart investments in green technologies, which western countries are already benefiting from.

To reach the “fit for 55” goals, countries will likely depend on foreign investment. What can countries do to create a competitive environment for clean energy investors?

SW: As the penetration rate of RES in the CEE countries reaches 20-30% and beyond suitable grid access and stability are becoming key, as Jim mentioned earlier. For example, I believe that there are some 20GW of RES projects in Romania currently in development and seeking grid access, yet the current transmission system is only capable of absorbing another 6GW without further investment and strengthening works.  I believe that the electricity grids, originally designed for large central, but stable, electricity generation units require substantial investment, and if possible increased interconnection with adjacent countries.

Countries should prepare their grid systems for accepting additional RES generation and have a fair and transparent system for identifying and awarding new grid connection capacity so that developers and investors know where to target. For the countries in the CEE region, this will likely require external financial support, possibly from the EU’s Modernisation Fund. Additionally, as energy storage will become part of the electricity transmission system to facilitate more renewable energy, countries should update their grid rules so that storage can provide grid stability services whilst not being subject to use of system charges for both the charging and discharging cycles.

We would like to thank George, Shane, Alastair and Jim for their insights. Renewable energy investment in emerging Europe almost doubled in 2021 from 44 to 81 deals with a fourfold increase in value and remains one of the sectors to watch in 2022.

Further reading:

Time for trans­ition: En­ergy M&A 2022
While world lead­ers have been gath­er­ing for COP meet­ings for dec­ades, what made COP26 per­haps par­tic­u­larly not­able is that the private sec­tor also gathered in force, and with a com­mit­ment and de­term­in­a­tion to be a key driver in the de­car­bon­isa­tion of the world’s eco­nom­ies.  In pre­vi­ous years, there have been mur­mur­ings from vari­ous cor­por­ates that to make so­cial or en­vir­on­ment­ally driv­en in­vest­ment de­cisions may not align with their fi­du­ciary duty to act in the in­terests of share­hold­ers. As share­hold­er act­iv­ism has driv­en the de­bate in­to board­rooms from above, this at­ti­tude is rap­idly re­vers­ing dir­ec­tion. While re­turns are gen­er­ally seen as lower in the clean sec­tor com­pared to, say, the oil & gas sec­tor, be­ing in­ves­ted in the green trans­ition is in­creas­ingly seen as a key route to pre­serving and pro­tect­ing share­hold­er value. At the same time, vol­un­tary and man­dat­ory cli­mate re­lated dis­clos­ures are align­ing the drivers for in­vestors across the board so that cap­it­al is in­creas­ingly driv­en by the met­rics they pro­duce.  This is be­ing re­flec­ted in, among oth­er things, the plum­met­ing cost of cap­it­al for green in­vest­ments. At the same time high car­bon in­tens­ive in­vest­ments, such as coal based pro­jects and busi­nesses, are strug­gling to se­cure fund­ing, with many fa­cing in­solv­ency. In­vest­ments in the en­ergy trans­ition, a key part of the green trans­ition, will prin­cip­ally take the form of M&A. The out­come of COP26 and the mo­mentum it has gen­er­ated means that European deal­makers in the en­ergy sec­tor will be even busier in 2022. Europe leads the world in the en­ergy trans­ition and the race to net zero is driv­ing near-re­cord levels of deal­mak­ing – not­ably in wind and sol­ar photo­vol­ta­ic gen­er­a­tion.At the same time, the en­ergy trans­ition is both ex­pand­ing and frag­ment­ing the en­ergy sec­tor. For many, it has tra­di­tion­ally been fo­cused on en­ergy gen­er­a­tion. The trans­ition is bring­ing to the fore less vis­ible tech­no­lo­gies. Everything from tra­di­tion­al hy­dro­power to grid-scale bat­ter­ies, elec­tri­fic­a­tion of trans­port and hy­dro­gen. It is also bring­ing in­to the mix sec­tors that have not tra­di­tion­ally been fo­cused on en­ergy, such as in­dus­tri­al de­car­bon­isa­tion, ship­ping and min­ing for the nat­ur­al re­sources needed for the en­ergy trans­ition. In par­al­lel with this, there is a huge and grow­ing story around en­ergy trans­mis­sion and dis­tri­bu­tion. Elec­tri­city net­works will need to ex­pand massively to fa­cil­it­ate elec­tri­fic­a­tion and new tech­no­lo­gies. They are also be­com­ing smarter with the use of di­git­al tech­no­logy to op­tim­ise the way power is dis­trib­uted, traded and con­sumed. Fur­ther, new types of net­works may provide in­vest­ment op­por­tun­it­ies for those look­ing for stable long term as­sets, such as hy­dro­gen and car­bon net­works.Against this back­ground, tra­di­tion­al fossil fuel-based play­ers are de­car­bon­ising their op­er­a­tions. For the oil and gas ma­jors, this means ac­quir­ing or sig­ni­fic­antly en­han­cing their cap­ab­il­it­ies in re­new­ables, in­clud­ing wind, sol­ar and hy­dro­gen, while sim­ul­tan­eously di­vest­ing se­lec­ted car­bon-in­tens­ive as­sets in re­sponse to mount­ing ESG pres­sures. This may be one of the reas­ons why 50% of re­spond­ents in our study point to dis­tress-driv­en deals as a top sell-side driver.Change is en­dem­ic in the en­ergy sec­tor, but the cur­rent trans­ition makes the years since lib­er­al­isa­tion of en­ergy mar­kets in the late 1980s seem al­most steady-state in com­par­is­on. Des­pite the mo­mentum and push for cap­it­al to be in­ves­ted in the en­ergy trans­ition, there re­main obstacles, not least the lim­ited pipeline of good qual­ity in­vest­ment op­por­tun­it­ies, con­tinu­ing con­cerns over lock­downs and COV­ID-19 vari­ants, fin­an­cing dif­fi­culties arising from po­ten­tially un­stable long term rev­en­ue streams and di­min­ish­ing rates of re­turn. Not­with­stand­ing these chal­lenges, our study finds that en­ergy sec­tor M&A will in­creas­ingly be an en­gine driv­ing cap­it­al in­to pro­pos­i­tions that match so­cial and polit­ic­al am­bi­tions for the green trans­ition. Key find­ings  En­ergy re­mains a premi­um as­set class for most in­sti­tu­tion­al in­vestors, with its per­form­ance dur­ing the pan­dem­ic and im­petus from COP26 fur­ther en­han­cing its at­tract­ive­ness75% of en­ergy com­pan­ies are con­sid­er­ing an ac­quis­i­tion and/or di­vest­ment in 2022Along­side premi­um as­sets, in some sub­sect­ors there are un­der­val­ued tar­gets driv­ing buy-side activ­ity, with sellers shed­ding dis­tressed as­sets as the sec­tor shifts in re­sponse to the en­ergy trans­ition45% think COV­ID-19 will be a ma­jor M&A obstacle in 2022, but this re­mains a flu­id situ­ation that can change rap­idly
CMS Ex­pert Guide to hy­dro­gen en­ergy law and reg­u­la­tion
 Hy­dro­gen guide – in­tro­duc­tionThe im­port­ant role that low-car­bon hy­dro­gen will play in de­car­bon­ising our en­ergy us­age is be­com­ing in­creas­ingly widely re­cog­nised. Its ver­sat­il­ity and broad range of ap­plic­a­tions render it uniquely placed to re­duce emis
Car­bon mar­kets and COP26
After six years of ne­go­ti­ation, COP26 re­solved one of the out­stand­ing is­sues of the Par­is Rule­book when it reached a con­sensus on a glob­al car­bon mar­ket mech­an­ism.Art­icle 6 of the Par­is Agree­ment set...
The im­pact of COP26 on the en­ergy sec­tor
What does the Glas­gow Cli­mate Pact mean for busi­nesses? What about the many oth­er ini­ti­at­ives an­nounced at COP26? And what’s next, as gov­ern­ments con­tem­plate a cru­cial dec­ade for cli­mate change?  
CMS Ex­pert Guide to re­new­able en­ergy law and reg­u­la­tion
Down­load our ded­ic­ated "Re­new­ables guide" pdf by click­ing on the link be­lowRe­new­ables guideIn­tro­duc­tionThis guide in­cludes con­tri­bu­tions from some of the most act­ive law­yers in the re­new­ables sec­tor across the globe. 2020 has been a year of un­pre­cede
En­ergy Trans­ition: The evolving role of oil & gas com­pan­ies in a net-zero...
After an ex­traordin­ary year of health and eco­nom­ic chal­lenges, the glob­al oil and gas sec­tor has an es­sen­tial role to play in the eco­nom­ic re­cov­ery. The same could how­ever be said of any eco­nom­ic re­cov­ery and ex­pan­sion over the past 100 years – dur­ing this time oil and gas com­pan­ies have provided most of the primary en­ergy that has fuelled huge eco­nom­ic growth. But this time does look dif­fer­ent. The oil and gas sec­tor will power eco­nom­ic re­cov­ery not just through oil and gas ex­plor­a­tion and pro­duc­tion, but also (and per­haps counter-in­tu­it­ively to some) through fa­cil­it­at­ing the trans­ition to a lower-car­bon eco­nomy and even­tu­ally a net zero fu­ture. This re­port presents a wide-ran­ging re­view of the role of oil and gas com­pan­ies in that fu­ture.
Drive to go green boosts in­vest­ment in clean en­ergy
Re­new­able en­ergy in Cent­ral East­ern Europe | Emer­ging Europe re­port 2020/21

Interview with

George Formandl,

George Formandl

EnerCap Capital Partners

Shane Woodroffe

Shane Woodroffe

EnerCap Capital Partners

Alastair Hammond

Alastair Hammond

EnerCap Capital Partners

Jim Campion

Jim Campion

EnerCap Capital Partners