Legal Publications

Despite geopolitical tensions, fears of recession and strong inflationary pressures across the EU, as well as the fiscal tightening needed to contain them, M&A in the CEE region has remained reasonably buoyant. Findings from the CMS Emer­ging Europe M&A 2023/24 report, published in cooperation with EMIS, demonstrate the resilience of the Emerging Europe deals market as activity holds firm against a backdrop of geopolitical tensions and strong inflationary pressures. Welcome to the 2023/24 edition of the Emerging Europe report.

As the world economy increasingly embraces the push towards decarbonisation, Europe has actively sought to place itself at the vanguard of the discussion on energy trans­ition. Op­por­tun­it­ies to deploy capital abound as power sources switch further towards offshore and onshore wind, solar, heat, hydrogen, battery storage, new networks, carbon capture, and industrial decarbonisation. The latter brings an interface with other sectors such as technology companies (with power hungry data centres a particular focus), real estate, low carbon transport and decarbonisation of industrial processes such as cement, glass and steel production. As much as it is difficult, complex and highly political, the energy transition is also a huge business opportunity. To reach net zero by 2050, the International Energy Agency (IEA) estimates that global investment in clean energy alone will need to increase from the USD390bn in the first half of 2023, to USD 1.3tn in 2030. Many commentators worried that Russia’s invasion of Ukraine would put back the transition and shift Europe back towards fossil fuels. While it appears to have resulted in a renewed political focus on energy security it has also laid bare the financial and political consequences of relying on oil & gas imports, giving further impetus to renewables as a secure form of energy. Europe has also sought to be a leading light on the concept of “reaching net zero”, with the European Union (EU) having set out its ambition, back in 2019, to become the world’s first major economic bloc to be climate-neutral by 2050. This has added momentum to energy investment and M&A over recent years – 2021 and 2022 saw the second and third highest annual aggregate values of Western European M&A in the sector on record, at USD 59.8bn and USD 53.7bn, respectively, bested only by the anomalously high total of USD 89.4bn logged in 2018. Energy M&A in the region has been more subdued in 2023, but our survey demonstrates that energy executives are gearing up for a more active dealmaking period, with most expecting more opportunities and anticipating increased levels of investment in the year ahead. Capital looks set to continue to flow primarily to renewable energy projects and related assets, with solar and batteries topping the list of attractive subsectors among our respondents. Consistent with this, South West Europe takes pole position as the most promising region for investment opportunities. But there are thorns among the roses. Our respondents are cognizant of the challenges in the energy market, with supply-chain volatility and commodity price increases emerging as a prominent concern. This is unsurprising after a period of dislocation following the pandemic and amid a time of rising global demand for renewable products and commodities. Persistent inflation and elevated interest rates, combined with an uncertain macroeconomic outlook, are raising investors’ concerns, with financing risk (including the increased cost of financing) also coming to the fore for respondents. Overall, while some sense a recent softening of the market due to these fundamentals, our survey paints a picture of steadily improving investor sentiment in Europe’s energy sector, laying the foundations for a busier period ahead for M&A activity.

Newsflash 

Legal and Regulatory Framework

The year 2022 started with various challenges, including rising inflation and energy prices. Then the Russian invasion of Ukraine added yet another one. Nonetheless, the M&A market in emerging European countries proved to be extremely resilient. The region saw M&A activity maintain a steady pace, though deal values were notably lower. Also, variations could be observed across territories and sectors. While 2022 brought a unique set of challenges, dealmaking largely compared favourably to pre-pandemic levels. Welcome to the 2022/23 edition of the Emerging Europe report.

The Austrian federal government has drafted the Renewable Energy Act (EWG, Erneuerbare-Wärme-Ge­setz), which is expected to contribute to making Austria climate neutral. The draft EWG bill aims at switching the heat supply of buildings to renewable energy sources and providing so-called ‘qual­ity-as­sured’ (i.e. decarbonised) district heating by 2040 through the gradual prohibition of the burning of fossil fuels. The EWG will also regulate the installation of heating systems in new buildings as well as the conversion of heating systems in existing buildings. The draft, which will likely not be passed before January 2023, contains the following points. Residential and non-residential projectsThe installation, conversion and extension obligations for heating systems envisaged in the EWG bill will be of crucial interest to project developers since it will cover all kinds of existing and newly constructed buildings, both residential and non-res­id­en­tial. Ban on fossil heat transfer media in new buildingsThe bill’s main innovation is a comprehensive ban on installing oil, coal and gas heating in new buildings from 2023. Such a ban has been in force for central oil and coal heating since the Oil Boiler Installation Prohibition Act 2019 (ÖKEVG, Ölkesselein­bau­ver­bots­ge­setz). According to the draft, from 1 January 2023 the ban will extend to cover existing decentralised heat supply systems running on oil and coal as well as gas heating systems. The ÖKEVG is to be replaced by the EWG. Decommissioning requirement for central heating systems existing buildingsThe law centres on the decommissioning requirement for central heating systems in existing buildings. Natural gas heating systems must be decommissioned by 2040, and oil, coal and liquified petroleum gas (LPG) heating systems must be decommissioned by 2035. In addition, buildings with central heating systems running on oil, coal or LPG will be particularly affected since building owners must decommission heating systems earlier than this depending on the system’s year of construction. According to the current draft, central oil heating systems built before 1980 must be decommissioned by 2025, while newer systems must be gradually decommissioned by 2035 (as part of the successive decommissioning requirement). This will mean significant additional costs since existing fossil-fuel systems must be de-installed and converted to other systems. Those costs must be carefully considered for buildings already in operation and for project planning and contract design, especially when determining the purchase price of real estate. Renewable energy requirement for central heating systems in existing buildingsIf a central heating system in existing buildings is renovated, improved or renewed, it must either be converted to a system using use renewable energy sources or the building’s heating supply can be switched to quality-assured district heating. Consequently, as of 1 January 2023, central heating systems not running on oil, coal or LPG any more may not be replaced with another fossil heating system. The heating system to be replaced must be decommissioned. The EWG offers some flexibility. For example, the replacement of old systems will not be required and a switch to district heating and other alternatives is also possible as explained below. Developers are encouraged to take the renewable energy requirement into account for their projects, both in planning and contract drafting. For repairs, refurbishments and improvements to fossil-heating systems, the costs of removing and disposing of old systems and installing new ones must be weighed against a possible switch to district heating (for which the bill provides technical exceptions).  Conversion requirement for decentralised systemsExisting decentralised plants running on oil, coal or gas will be treated more strictly. They must be converted to centralised non-fossil fuel plants by 2035 or, if operated by natural gas, by 2040. Operating a building will only be permitted if the building is heated with renewable energy sources or quality-assured district heating. For decentralised natural gas heating systems, this only applies if the building is located in an area, which already has quality-assured district heating or where this will become available by 2035. If this is the case, individual units (e.g. flats, offices, shops) must be connected to this central system within five years. If this conversion has not taken place in a building, this must be taken into account in project planning and cost planning. In individual cases, it must be examined in more detail what exactly "quality-assured district heating" means and how a real estate investor can determine this or check whether "it will have district heating by 2035". It is also not clear whether tenants can insist on a certain changeover or, conversely, oppose it. According to the bill, further regulations are to be expected for those natural gas-based systems that are not covered by the renewable energy requirement, the successive decommissioning requirement and the requirement to convert decentralised systems. Therefore, another draft to address the phase-out of fossil gas heating systems in existing buildings will appear soon. However, these natural gas plants will also have to be decommissioned by 2040. Energy Outlook – is green gas the future?According to the draft, declared objectives of the EWG include the expansion of district heating and the conversion of heat supply to renewable energy sources or quality-assured (i.e. decarbonised) district heating. According to the draft, energy from renewable gas falls under energy from renewable energy sources and is therefore a means of decarbonising district heating. The explanatory notes to the bill refer to the use of green gas for the latter in addition to waste heat utilisation, heat pumps, geothermal energy and biomass. As a result, heating systems that are operated with renewable gas are exempt from the decommissioning requirement for central heating systems. Pending regulations on natural gas heating absent from the EWG will not change this either. Green gas plants can be operated beyond 2040. Authors: Thomas Hamerl, Dr. Johannes Hysek, Karl Weber-Wois­etschläger 

This CMS Guide is designed to shine a light on the wide variety of energy saving laws in selected CEE countries by explaining the most important legal measures and helping you to discover where your opportunities might lie. Political and legal framework Energy transformation requires building up new energy sources and that takes time. Saving energy, however, is the quickest and cheapest way to address the current energy crisis, which is mainly caused by Russia’s invasion of Ukraine. Reducing energy consumption cuts households’ and companies’ high energy bills. Building on the “Fit for 55” package of proposals and completing the actions on energy security of supply and storage, the European Commission’s REPowerEU plan put forward a set of five actions, the first of which is energy saving. Union law sets forth mandatory saving goals for Member States but leaves them plenty of leeway to choose between a variety of measures. Applicant countries and many others have passed energy savings laws and targets too – offering additional flexibility. As a framework, the Fit for 55 package and the European Climate Law (REG 2021/1119) sets out a binding, irreversible reduction of anthropogenic emissions. By 2030, 55% of the net GHG (greenhouse gas) emissions compared to 1990 must be saved. By 2050, the mandatory net zero emission goal must be achieved. Regulation 2022/1032 requires that member states fill their gas storage facilities to at least 80-90% or that they store at least 35% of their average annual consumption in European storage facilities. Reducing consumption over the years reduces the filling obligation. Since August 2022, obligatory reductions in gas consumption apply to EU member states (Regulation 2022/1032). The core innovation of this regime is the Union alarm that can be triggered by the European Council if there is a material risk of grave gas supply shortages, extraordinary gas demand or a national alarm pursuant to Directive 2017/1938 in at least five Member States. Once a Union alarm has been triggered and for as long as it remains in force, member states must reduce their gas consumption by 15%. There is a partial exception if this would otherwise cause an electricity crisis in the respective member state. However, the steering measures to be taken and whether certain groups of gas consumers are granted more favourable conditions remain at the member state’s dis­cre­tion. Re­gard­ing electricity, Regulation 2022/1854 on an emergency intervention to address high energy prices aims to reduce electricity consumption by 10% and ease the pressure on electricity prices through revenue caps. Again, Member States are free to choose the appropriate measures to reduce gross electricity consumption and meet the 10% target. Additional rules apply to the fuel consumption of trucks or the energy consumption of district heating/cooling. The CMS Guide The result of these regulations concerning energy saving has been the in­tro­duc­tion of a wide variety of energy saving laws in individual states; and many more measures are still to come. This CMS Guide is designed to shine a light on these regulations by explaining the most important legal measures and helping you to discover where your opportunities might lie. For each jurisdiction, the guide is structured into: (1) a country overview,  (2) national relief measures for high energy prices,  (3) na­tion­al/re­gion­al/com­mun­al energy savings measures, and  (4) energy storage status and incentives. The following measures have been chosen by the states represented in this  guide:  sub­sidies to end-consumers (Austria in general for energy prices; Croatia for gas con­sump­tion), price caps: electricity (Croatia for households, undertakings and certainpublic consumers; Ukraine for house­holds),re­duced VAT rate (Croatia, North Macedonia), tax incentives to privately store gas (Ukraine); exemption from steering measures for privately storing gas (Aus­tria),sub­sidies to compensate for high energy prices (Bulgaria and Slovakia, in Slovenia for enterprises, in Türkiye for agriculture) and energy saving measures: (Croatia for SMEs); the reallocation of EU funds to support energy consumers (Slov­akia); sub­sidies for energy storage solutions (Austria, Bulgaria and Ukraine) or for heat producers (Ukraine),energy efficiency measures incl. digitalisation (Bul­garia),re­duced hours of electricity or heating supply (North Macedonia) or of gas supply (Slov­akia),re­duc­tion of energy consumption by the public administration (Austria, North Macedonia, Slovenia), andobligations on gas storage operators to feed gas into the grid (Austria, Slovakia) or to supply heat producers at preferential prices (Ukraine). rewards for voluntary reduction of gas and/or electric en­ergy con­sump­tion (Slovenia)educed permitting requirements for PV and wind plants (Türkiye).

In June 2022 five experts on hydrogen met at the CMS office in Vienna to exchange their views on the prospects of hydrogen as part of the energy trans­ition. Earli­er in the same month, Austria presented its new hydrogen strategy based on four pillars: Climate Neutral Hydrogen, Efficient and Focused Hydrogen Use, Hydrogen Infrastructure, and International Part­ner­ships.  Hy­dro­gen is increasingly seen as one of the critical components of the energy transition. Every day brings news about cooperation agreements, start-ups, new technologies, infrastructure projects, and storage solutions. But to what extent is the hype about hydrogen justified? Is the legal framework sufficient and fu­ture-proof? To coincide with the recently published Austrian hydrogen strategy, a panel discussion with five distinguished experts took place in our CMS premises. After a short introduction from Marco Selenic (CMS Aus­tria), Hamead Ahrary (Head of the Hydrogen Division at VERBUND AG), Andreas Indinger (Head of the Center for Research and Innovation at the Austrian Energy Agency), Dalia Majumder-Russell (Partner at CMS UK), Ewald Perwög (Head of Sustainable Energy Solutions at MPREIS Warenvertriebs GmbH), and Werner Trabesinger (Head of Quantitative Products at Pexapark) shared their experience of successful hydrogen projects. Furthermore, the REPowerEU plan and its effects on the RED 2 was discussed in detail. What sort of legal background does the industry require to build and operate the necessary infrastructure? What conditions are needed for a European hydrogen economy to de­vel­op? Pan­el­ists:Ewald Perwög, MPreis - Head of Sustainable Energy SolutionsHamead Ahrary, Head Of Hydrogen Division VERBUND AGAndreas Indinger, Head of Center Research and Innovation Austrian Energy AgencyWerner Trabesinger, Head of Quantitative Products PexaparkDalia Majum­der-Rus­sell, Partner, LondonThe discussion was moderated by the heads of the CMS RRH Energy & Climate Change Group, Maria Orlyk of CMS Ukraine and Thomas Hamerl of CMS Austria.

A guide for large energy users Across Europe there is a clear and consistent trend for large scale commercial and industrial users of electricity adopting on-site power solutions. This is the result of a range of factors, in­clud­ing:re­new­able on-site generation being one of the most clear-cut ways to help “green” a site’s electricity supply and help the com­mer­cial/in­dus­tri­al user achieve their climate change targets;on-site power solutions having the ability to provide resilience of electricity supply during times of system outage or con­straint;avoid­ance of the network and policy charges typically associated with electricity taken from the grid; andthe commercial opportunities from leveraging flexible on-site power solutions to reduce consumption from the grid and/or to export electricity onto the grid. However, while such opportunities mean that on-site power solutions are often an attractive option, on-site projects will generally come with a complex array of legal options and considerations. These range from:the fundamental point that such projects inherently involve participation in a typically heav­ily-reg­u­lated arena (and often the backdrop of a set of regulations rapidly evolving to keep pace with the sector), toa range of pro­ject/agree­ment structures and parties (without a “cookie cutter” approach) involved in project ownership, operation and electricity sale and purchase, with significant co-dependence between such parties, toa government policy context that (while at face value often pro-green) is often increasingly concerned about grid and policy charges being avoided through these types of project and wishes to see all market participants paying a perceived fair share of such costs. In this guide we provide an overview of these challenges and opportunities in Europe, with a view to assisting you in reviewing, upfront, the key issues often associated with on-site power solutions of this nature. 

CMS Guide

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