In this article, Apricum Senior Advisor Dr. Florian Sieber and Vice President Corentin de Ricaud consider the implications of the EU’s little-discussed July 2021 ‘Fit for 55’ legislative package to deliver carbon neutrality by 2050. They highlight the opportunities for renewable energy investment, particularly in coal-dependent Southeastern Europe (SEE). These exist vertically along the value chain from generation to cross-border trading, and horizontally across clean energy sources ranging from solar and wind to biomass and hydrogen.

What are the key proposals of Fit for 55?

The package consists of 13 climate, energy and transport-related proposals and policy initiatives to bring Europe’s legislation in line with the ambitious targets agreed in the European Green Deal (and written into the European Climate Law) for the clean energy transition to be implemented by 2030. Like some other EU legislation such as GDPR, it demonstrates global leadership, which global businesses would do well to note as its impact may travel. For now, Fit for 55 is only a proposal subject to further negotiation and approval.

The new initiatives garnered the most attention:

  • An EU Forest Strategy to improve the quantity and quality of EU forests, ensure sustainable use of biomass and the planting of 3 billion trees by 2030
  • Carbon Border Adjustment Mechanism (CBAM) to prevent ETS circumvention
  • A Climate Action Social Facility to support vulnerable and low-income households by covering passed-on carbon costs
  • Proposed ReFuelEU Aviation Directive, introducing targets for renewable fuels and synthetic aviation fuels from 2025 onwards
  • FuelEU Maritime Directive aimed at a common EU regulatory framework to increase the share of renewable and low-carbon fuels in the fuel mix of international maritime transport from 2025 onwards

It also contained numerous revisions tightening existing policies, including the ETS (carbon trading), hidden fossil subsidies in conventional fuels, renewables quotas, state emissions targets from buildings to agriculture, land use, energy consumption, vehicle standards, alternative fuels infrastructure and energy product taxation (details in the appendix). It is a comprehensive and radical proposal requiring major industrial shifts across the EU.

What does Fit for 55 represent in practice for industries and companies?

The current proposal will materially impact several industries, particularly carbon-heavy industries and the transport sector (including aviation and maritime shipping). To meet the ambitious EU targets, companies will have to exploit the full renewable potential within the EU and tap undeveloped sources.

For each industry and company, it will be crucial to find the right mix of new products, new processes and renewable energy solutions to minimise extra costs from greenhouse gas (GHG) emissions as they transform their business operations to comply. There is no “one-size-fits-all” solution, each industry and each company must find the best fit for its needs.

Having said that, one thing is for sure: there will be higher demand for renewable energies in each member state. Fulfilling the Fit-for-55 targets will require accelerated development and expansion of power generation from renewable energy sources combined with storage and the efficient utilization of climate-neutral gases like green hydrogen, green ammonia or biomethane as energy carriers.

Sizeable potential for renewable energy investment in SEE

Increased demand and the lower cost of renewable energy will intensify the search for attractive projects and investment opportunities. Poland, Czech Republic, Romania and Bulgaria’s coal reliance accounts for a quarter of the EU’s power sector emissions. BNEF identifies halving these four countries’ emissions as a EUR 45B investment opportunity.

The impact could also be profound in Southeastern Europe, which has underdeveloped renewable energy generation and has protected its (often state-owned) coal-related industries, which dominate power generation. The EU’s Just Transition Mechanism has EUR 18B of direct funding available to support this change. IRENA argues that most of the clean energy potential is still untapped, with >100 GW of cost-competitive wind and solar PV opportunities in the SEE region, mainly in Romania, Bulgaria and Croatia[1]. Hungary and Greece also offer ample opportunities for wind and solar PV investments.

Each country has its own regulatory framework and incentive systems. Some are less developed, but all will continue evolving in line with EU policy.  Some strong development pipelines are already emerging. Grid congestion is a common bottleneck, but pinchpoints vary by country. As a result, Apricum strongly advocates using first-class local partners in addition to its own experience to derisk these opportunities. Understanding unreported items like project history, team experience and even avian migratory patterns can be critical to correctly evaluating opportunities.

The strong regional agricultural bias also creates a large volume of unused biomass and waste available for bioenergy generation (slurry, manure, straw, agricultural waste, animal fats), especially in Hungary, Northern Croatia and Romania. This biomass and waste can be used for biogas-based power generation, the production of biomethane/renewable natural gas (including bio-LNG and bio-CNG as fuel for trucks, buses or ships) or the production of other advanced biofuels (e.g., cellulosic bioethanol).

Options to consider: Serve own markets in the SEE countries or export within the EU

Two key questions for any project are of course: where is the market and who are the customers. The first answer is rather trivial: on the one hand the renewable energy projects will supply the SEE countries’ own markets – helping the companies with their GHG reduction obligations, in particular, in the cement industry, fertilizer manufacturing, steel production, oil refining, utilities, transport and shipping. This is particularly important for multinational manufacturers. Investments in renewables that ultimately contribute to the decarbonisation of the aforementioned industry sectors should fit nicely into the larger national energy and climate strategies of the respective states and will help the states to comply with their GHG reduction targets. Those investments also have positive side effects, e.g., reduced LCOE, which increases competitiveness and ultimately demand.

There is another interesting angle here: the opportunity for cross-border energy trading. Fit-for-55 continues the strong push in the EU for unification of renewable energies and renewable fuels in the EU, both on the sourcing and on the marketing side. This started several years ago on the power side with the introduction and acknowledgement of guarantees of origin plus the related certificate trading framework. Under RED II it is currently extended to renewable gas. And in the future, there will likely be a comprehensive certification scheme across all renewable energy sources and energy carriers.

The envisaged result is clear: an open and transparent certification system along the supply chain in the entire EU to cover all sorts of renewable energies and all types of renewable and recycled fuels. It does not matter where the renewable energy or renewable fuel has been produced within the EU – once it has come into existence and has been certified in one member state, it can be brought to the market in any other member state and parties may enjoy the full commercial benefits of cross-border arrangements, e.g., through virtual and physical contract settlements or certificates that can be traded independently from the product. This is a good example of attractive commercial set-ups enabling opportunities for value generation at all steps along the value chain.

SEE investment opportunities for industry players focused on energy transition

The conclusion is that the countries of the SEE region will likely be attractive investment areas – not only for wind and solar park developers and renewable energy companies, but also for companies with a focus on the energy transition, for energy companies seeking diversification of business lines, for energy intensive industries and for integrated supply/trading companies to secure physical access to low-cost renewable energy sources, among others.

Traditional O&G, trading and utility companies have an advantage: they can utilize their existing capabilities for joint venture formation, offtake, structuring, project finance, project developments, logistics & infrastructure, risk mitigation (especially towards merchant market exposure), trading expertise and even existing assets to enter the SEE region or expand their footprint with strategic investments in key infrastructure accompanying the energy transition.

How Apricum can support in realizing investment opportunities in the SEE region

With our in-depth knowledge of renewable energy and cleantech industries as well as of the SEE region and its markets, Apricum is an experienced and comprehensive advisor on current developments and future opportunities.

We offer a spectrum of services in transaction advisory (e.g., M&A, debt and equity fundraising, due diligence) and strategy consulting. This blend enables us to support incumbents or newcomers seeking comprehensive advice in market entry and horizontal diversification.

With our financial, technical and commercial expertise, we help clients navigate complex commercial set-ups in often unfamiliar environments. Through our knowledge and excellent network, we translate and help overcome local hurdles, analyze the industry and country-specific value drivers, and negotiate the best deal with the local developer / partner.

Recent case study: DD and M&A mandate in Southeastern Europe

Apricum recently supported a global energy and commodity group on a due diligence and buy-side M&A and DD mandate for a multi-GW early development portfolio of wind and solar across three SEE countries. We sourced, managed and challenged a multinational team of legal and technical advisors to run a fast-track project by project assessment and undertook a valuation based on various methodologies. As a result of Apricum’s involvement, the client rapidly understood three challenging new markets and submitted a winning risk-mitigated offer based on a tailored deal structure.

On this project, our combination of industry expertise, structuring experience, cultural agility, project management skills and extended network was instrumental in providing value-added advice to a client approaching a new region and embracing new strategic investments in renewable energy.

For more information or enquiries, please contact Apricum Managing Partner Nikolai Dobrott.

Appendix: Fit for 55 Policy Revisions:

  • Revision and expansion of the EU Emission Trading Scheme (ETS)
  • Revision of the Energy Tax Directive covering electricity as well as other energy sources with the aim that taxation is based on energy content and environmental impact, which also means that hidden subsidies for conventional fuels (e.g., ship diesel) through lower taxation are largely closed
  • Revision of the Effort Sharing Regulation assigning strengthened emissions reduction targets to each member state for buildings, road and domestic maritime transport, agriculture, waste and small industries
  • Revision of the regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF)
  • Amendment of the Renewable Energy Directive (RED), requiring among other things, a separate quota for renewable fuels of non-biological origin (RFNBOs, e.g., renewable hydrogen and hydrogen based synthetic fuels) as a mandatory portion of the transport sector fuels mix
  • Amendment of the Energy Efficiency Directive (EED), setting a more ambitious binding annual target for reducing energy use at the EU level and almost doubling the annual energy saving obligation for member states
  • Amendment of the regulation setting CO2 emission standards for cars and vans
  • Revision of the directive on the deployment of alternative fuels infrastructure, proposing now mandatory deployment targets for electric vehicle charging stations and hydrogen fuel stations as well as LNG fueling infrastructure for road transport vehicles and maritime ports
  • Revision of the Energy Taxation Directive to align taxation of energy products with climate policies

[1] Source: IRENA, Joanneum Research and University of Ljubljana (2017), Cost-Competitive Renewable Power Generation: Potential across South East Europe, International Renewable Energy Agency (IRENA), Abu Dhabi; IRENA (2020), Renewable energy prospects for Central and South-Eastern Europe Energy Connectivity (CESEC), International Renewable Energy Agency, Abu Dhabi

Author:

Dr. Florian Sieber

Senior Advisor

Florian Sieber is an expert in strategy, project delivery and M&A in the energy and cleantech sectors. Based in Hungary, Florian has deep expertise in corporate strategy, structuring and delivering cross-border commercial transactions and complex multi-disciplinary projects. He has led and executed M&A transactions in more than 15 countries around the world.

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Co-Author:

Corentin de Ricaud

Vice President

Corentin de Ricaud is one of Apricum's senior finance experts and has over 10 years of experience acquired through key roles at financial institutions and energy and infrastructure companies, where he worked on project finance and M&A transactions in the power and renewables sectors.

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