Transparency is not a decoration. It is a mean to strengthen and test purpose, the distribution of benefits, and resilience to risk of a capital project
RES Foundation continued its work with media representatives on understanding and analysing technically, financially and operationally complex energy projects supported public debt with the involvement of international financing institutions, bilateral and multilateral donors.
The initial workshop introduced an analytical framework for examining such investments from the perspective of the public interest. It focused on several fundamental questions: What problem is the investment intended to solve? How was the proposed solution selected? Which alternatives were considered? Who finances the investment, who receives its benefits and who bears the financial, technical and operational risks? Four case studies from the fields of energy efficiency, district heating, renewable energy and household energy support were used to demonstrate how these questions can be applied in practice.
Based on the feedback received after the initial workshop, RES Foundation organised individual follow-up sessions with interested media representatives. This format allowed more focused follow-up discussions during which each participant was able to concentrate on the specific topics, documents and unanswered questions most relevant to their work.
1. From the value of an investment to its financial feasibility
During the follow-up sessions, RES Foundation provided additional information on how the financial feasibility and wider costs and benefits of energy investments can be assessed. Attention was paid to actual long-term effect of investments on public finances, the financial position of a public utility and the price paid by final users.
The discussions covered several connected elements:
- the initial investment cost and the sources of financing;
- the terms and responsibility for repayment of public loans;
- the treatment of grants, subsidies and other forms of public support;
- ownership and accounting treatment of newly constructed infrastructure and equipment;
- depreciation and the cost of capital;
- expected changes in fuel, electricity, maintenance and system-loss costs;
- the allocation of technical, market, supply and operational risks;
- the financial consequences of delays, lower-than-expected performance or the unavailability of an expected energy source;
- the comparison of the proposed investment with technically viable alternatives.
Participants also discussed which documentation is needed to verify the assumptions behind a project. Depending on the nature of the investment, this may include a feasibility study, a financial model covering the full implementation and operating period, technical and environmental documentation, financing and implementation agreements, asset-transfer arrangements, projected energy balances and contracts defining prices, performance obligations and risk allocation.
For long-term energy investments, the existence of a financial model is particularly important. Such a model should make it possible to identify the assumptions on which the expected results depend and to examine how the outcome changes when fuel or electricity prices, energy production, construction costs, interest expenses, operating costs or other key parameters differ from the original estimates. The supporting material prepared for the sessions noted that long-term investment projects should be accompanied by a financial model, a description of the principal parameters, agreements regulating implementation and pricing principles, and a technical description with a sustainability analysis.
2. Can a publicly financed investment increase the price of heating?
One of the central questions examined during the sessions was whether borrowing for new district-heating infrastructure will necessarily result in higher heating bills.
The main conclusion was that a loan does not automatically lead to an increase in the price paid by users. The outcome depends on how the investment is financed, who repays the loan, who owns and records the new assets, how grants are treated, and whether the investment produces operating savings large enough to offset new depreciation, financing and capital costs.
An investment could place downward pressure on the price of heating if it substantially reduces fuel consumption, electricity costs, maintenance expenses, network losses or other operating costs. However, it could place upward pressure on the price if those savings are smaller than the additional costs arising from depreciation, financing, operation of new equipment and the return recognised on regulated assets.
The national methodology for setting district-heating prices is based on a regulated “cost-plus” approach. In principle, the price may cover justified variable and fixed costs, depreciation, a return on regulated assets, other revenues and corrections from previous periods. The competent local authority approves the price and is expected to examine the supporting data, documentation and justification of the submitted costs.
However, the final effect on users cannot be understood only by looking at the formal tariff. If loan repayment is covered directly from the national or local budget, users’ bills may not increase immediately, but the public cost still exists and is borne through the budget. Similarly, subsidies can prevent or postpone a tariff increase while transferring part of the financial burden to taxpayers.
The timing and accounting treatment of new infrastructure are also important. If new equipment is transferred to a public utility and recorded as its asset, depreciation and potentially other capital-related costs may become part of the future price calculation. If the asset is not recorded promptly, the immediate financial position may appear more favourable, while costs related to asset use, maintenance and eventual replacement may be understated or deferred. If the asset is recorded at a later stage, its effect may appear in the price only after the investment has already entered operation.
3. Key questions discussed with media representatives
The individual sessions considered how media representatives could obtain and assess evidence needed to answer questions such as:
- Who will legally and economically own the new equipment and infrastructure: the state, a local authority, a public utility or another entity?
- By which decision or agreement will the assets be transferred, and when will they be recorded in the relevant balance sheet?
- Who is responsible for repaying the loan, and from which source will the repayment be made?
- How will grants and other non-repayable contributions be treated in the accounts and in the price calculation?
- Will depreciation and a return on the new assets be included in the district-heating price?
- What reductions in fuel, electricity, maintenance and network-loss costs are realistically expected?
- Are the projected savings based on measured data, verified technical assumptions or only preliminary estimates?
- Is there a financial model showing the expected effect of the investment on the price of heating over its full operating life, and will that model be publicly available?
- Where an investment depends on an external or private source of heat, how will the purchase price be determined and adjusted over time?
- Who guarantees the quantity, quality, temperature and seasonal availability of the supplied heat?
- Who bears the cost if the expected source is temporarily or permanently unavailable?
- What reserve capacity is required, how frequently is it expected to operate and who pays for its fuel and maintenance?
- Which alternative technical solutions were examined, and on what basis was the selected option assessed as more suitable or cost-effective?
- Which institution independently checks whether the expected solution is less expensive, more reliable and environmentally preferable to the available alternatives?
These questions demonstrate why the announced investment amount, by itself, is not enough to determine whether a project is financially sustainable or beneficial to users. A meaningful assessment requires information about the complete life-cycle cost, expected savings, financing conditions, ownership structure, contractual obligations, risk allocation and available alternatives.
4. What can be concluded, and what remains open
The sessions produced several general conclusions applicable to large energy investments financed wholly or partly through public borrowing.
First, the price paid by users, the cost borne by the public budget and the financial effect on the public utility must be examined separately. A project may avoid an immediate increase in the heating bill while still creating a substantial public expenditure or long-term liability.
Second, the expected reduction in operating costs must be compared with all new costs over the full life of the investment. Fuel savings alone do not demonstrate financial feasibility if the analysis excludes electricity consumption, maintenance, depreciation, reserve capacity, financing expenses or future replacement costs.
Third, grants can improve the financial result, but their effect depends on how they are allocated and accounted for. It is therefore necessary to establish whether a grant reduces the amount to be repaid, the value of assets included in the tariff calculation, the public utility’s financing obligation or some other component of the investment.
Fourth, projects that depend on an external industrial or commercial source require particular attention to contractual risk. The financial result may depend not only on construction costs but also on the future operation of another entity, the agreed price of energy, guaranteed delivery, indexation clauses, reserve supply and the allocation of risk if production stops or technology changes. Finally, several important questions remain open where the relevant financial models, contracts, asset-transfer arrangements and detailed technical assumptions are not publicly accessible. Without those documents, it is not possible to reach a reliable conclusion about the future price effect, the distribution of costs and benefits or the party that ultimately bears the principal risks.
5. A more focused approach to complex public investments
The three follow-up sessions confirmed the value of an individual and topic-specific approach to technically and financially complex energy investments. The format enabled participants to move from general questions about project relevance and transparency to more precise examination of costs, contractual arrangements, financial assumptions and potential consequences for public budgets and final users.
The purpose of this work was not to provide a predetermined assessment of individual investments, but to strengthen the capacity to ask verifiable questions, identify missing information and distinguish expected benefits from assumptions that still require evidence.
Through these activities, RES Foundation continues to develop an analytical framework that can help media representatives and the wider public understand how major energy-transition investments are selected, financed and implemented, and how their long-term financial, environmental and social consequences can be independently assessed. This work forms part of RES Foundation’s broader activities aimed at strengthening public accountability and transparency in the planning and implementation of the energy transition in Serbia.
A good project stands up to good questions. Good questions help make good energy possible.