Lithuania consistently puts its money on combined heat and power plants – Opportunities for construction companies and power producers

​In a nutshell:

The Lithuanian energy policy aimed to increase the share of renewable energy in the total energy consumption by 2020 to at least 23 percent. This expansion target was reached already in 2014. Since then, increasing this target any further has been the subject of much debate. While in the previous years the further expansion of on- and offshore wind power was debated, now mainly the high-volume auctions for base-load combined heat and power plants have been making the headlines. No end to this trend is in sight.

Background

After the 2009 shutdown of the biggest nuclear power plant in the region, Lithuania from power exporter became power importer overnight. The country is now extremely dependent on the Russian gas, which  increased the worry about the Lithuanian energy security especially when the Ukrainian crisis broke out. In addition to the reduction of CO₂ emissions, which Western European countries expect to achieve through the use of renewable energies, the Lithuanian energy policy makers have particularly focused on breaking the country's dependence on Russian gas.

Lithuania promotes renewable energy with the help of various instruments. Characteristic of the Lithuanian subsidy instruments is the competition between the individual types of energy production and the capping of incentives under a quota regime. The Renewable Energies Act stipulates the targets for the expansion of various types of renewable energies (wind, solar, biomass and hydro) by 2020.

• Wind power: at least 500 MW;
• Solar power: at least 10 MW (exclusive of small-scale power plants with an installed capacity of up to 30 kW);
• Biomass: at least 105 MW;
• Hydro power: at least 141 MW.

In the medium term, however, an amendment to the Renewable Energies Act and, thus, an increase in the quotas can be expected. Moreover, there could be a free capacity to allot, if a power plant which was already granted incentives is not put into operation within the time set down in the power production license and if, therefore, the power plant project owner loses the license along with the guaranteed feed-in tariff. However, also the acquisition of project companies with already guaranteed feed-in tariffs is a very attractive solution.

Here come combined heat and power plants

Wind power still has the greatest share in the Lithuanian renewable energies. And it will remain an important pillar of the Lithuanian renewable energy production – currently, an increase in the installed (onshore) wind power capacity from 500 MW to 750 MW is being debated. The offshore production is also being the subject of much debate.

Nevertheless, under the lee of this debate a new pillar is forming. In the recent months several high-volume auctions for combined heat and power plants have caught international attention.

Especially at the municipal level, there is a great need for modernising the existing power plants in Lithuania. Biomass is particularly advantageous here. The term biomass refers to phytomass (plants) as well as to zoomass (animal material) which can be found in great amounts in bio-waste and excrements. Biomass power plants coupled with combined heat and power are especially attractive in Lithuania, because many rural communities have a well-developed district-heating network, even if the infrastructure is generally bad. This opens up opportunities for renewable power producers with efficient and innovative technologies.

German know-how in demand

On 12 July 2016 after a one-year auction the bids for the construction of a combined heat and power plant in the capital city of Vilnius were accepted. The power plant is planned to have a capacity of 227 MWth and 88 MWe. It should consist of two combined heat and power plants (one using waste and another using biomass) and produce 1.627 TWh of heat and 0.817 TWh of electricity per year. With an investment volume of about EUR 190 million, it was the largest auction held since Lithuania gained independence. A consortium consisting of Germany's Steinmüller Babcock Environment, Poland's Budimex and Lithuania's UAB Kauno  will handle the construction of the waste-to-energy plant, with a transaction volume amounting to EUR 149.65 million.

A similar project is currently carried out in Kaunas, Lithuania's second largest city. It should be finished by the end of 2019. The power plant's planned capacity is approx. 24 MWe and 70 MWth. It should burn approx. 200,000 tonnes of communal and industrial waste a year and, therefore, supply 40 percent of Kaunas' heat requirement.

Germany's Baumgarte Boiler Systems was selected to build a waste incineration boiler. The total volume of the project is approx. EUR 150 million.

State aid allowed – further projects more probable

The Vilnius project is financed by the European Investment Bank via the European Fund for Strategic Investments (EFSI) and by Lithuanian state aid amounting to EUR 150 million.

Therefore, the state aid was reviewed by the European Commission – and finally approved. Pursuant to the EU state aid rules, member states may, under certain conditions, grant aid for high-efficiency cogeneration installations. The European Commission held that the Vilnius project increases energy efficiency and should lead to energy savings of 40 percent. Therefore, the EC came to the conclusion that the state aid would not unduly distort the competition and that it was compliant with EU legislation.

The approval of the state aid may lead to further combined heat and power plants auctions of this size in Lithuania.

Acquisition of existing combined heat and power plants – German enterprises as power producers

In the past year, a sensation was caused also by the acquisition of three combined heat and power plants by Danpower Baltic UAB, a joint venture of Danpower GmbH, which is a heat supplier and contracting company, with Lithuania's Geco Investicijos UAB.

The total generating capacities of the acquired boiler plants are 120.8 MWth. Two of the heating plants supply Vilnius annually with approx. 300 Gwh of heat fed into the grid of Vilniaus Energija, the communal district heating grid operator.  The third heating plant is in Kaunas, Lithuania's second largest city, and feeds annually approx. 200 GWh into the grid of Kauno Energija, also a communal district heating grid operator.

An interdisciplinary M&A-Team of Rödl & Partner Lithuania was a buy-side adviser to and represented Danpower Baltic UAB in this acquisition transaction.

The objective of the transaction was to acquire the already existing project companies and, especially, the granted feed-in licenses together with the guaranteed feed-in tariffs. As Lithuania still highly depends on imported gas and gas prices are going down all over the world, Lithuania's energy prices went down, too. Due to guaranteed feed-in tariffs, the existing power plants are a lucrative acquisition target which is sure to bring returns.

Conclusion

The need for cost-effective supply of energy is high in Lithuania, especially in rural areas. After the expansion of wind power in recent years, the production of electricity using combined heat and power plants as a technology capable of providing baseload power has now experienced a significant boost. High-volume auctions can be also expected in the coming years. Moreover, companies may seize new opportunities arising from acquisitions of the existing power plants. In this process, guaranteed feed-in tariffs promise sure returns. In recent years, especially German companies have had positive experiences in this area.