KAUNAS DISTRICT HEATING UPGRADE

The operation consists of the financing of a three-year investment programme concerning the upgrade and extension of the district heating networks in Kaunas city and several other, smaller municipalities, including the modernisation of existing and construction of new heat generation assets.

The objectives are to maintain and expand the district heating systems, decrease distribution losses and improve the reliability of heat supply through the modernisation and extension of the grids, and installation of new and modernisation of existing renewable heat generation units.

The Project contributes to the InvestEU objective of the development of the energy sector in accordance with the Energy Union priorities. EIB financing will allow the promoter to upgrade and extend the heating network and install new and modernise existing renewable heat generation assets located in Kaunas city and Kaunas district municipalities in Lithuania. The project contributes to the decarbonisation objectives as stated in the National Energy and Climate Plan for Lithuania which sets a 90% biomass target for the district heating sector by 2030.

The financing of this project will contribute to EU and Bank's priority objectives on energy, on climate action and cohesion priority regions. Such investment is crucial to improve security, energy efficiency and flexibility of heat supply and meet existing and future demand for heat and hot water. The project addresses number of market failures: Low-carbon heat projects reduce carbon and air pollution externalities, low-carbon technologies contribute also towards increasing security of supply by reducing dependency on imported fossil-based energy. Security of supply can be considered as a public good.

The project is expected to have an excellent economic justification, excellent rated broader social benefit and generate additional employment in construction. The capacity of the promoter is considered appropriate for the proposed project.

The EIB loan plays a key role in ensuring the funding of the project. The long tenor of the EIB loan (15 years) is well in line with the economic life of the underlying heating assets and it is perfectly suited to finance investments with long payback period such as the Project implemented by the promoter. The funding of similar maturities is not available on the Lithuanian debt market. Customised terms such as flexible drawdown over the long availability period are of value to the promoter because of the multiannual Project's implementation period. The EIB involvement will send a strong signalling effect to the commercial banks that EIB is standing by to support the decarbonisation of the Lithuanian heating sector. EIB would not be able to provide such type of financing, or not at the same quantum, without the support of InvestEU.

The investment programme includes numerous sub-operations from installation of biomass-fired boilers to the modernisation and extension of district heating grids. As such, it may include components that fall under Annex II of the Environmental Impact Assessment (EIA) Directive (2011/92/EU as amended by Directive 2014/52/EU), which requires the competent national authority to determine the need for an EIA. The investments are expected to have limited environmental impact, at this stage the promoter does not expect any EIA requirements for the investments. The environmental and social due diligence will focus on the Promoter's capacity to implement the program in line with the EIB's environmental and social standards and requirements. As the project includes the investment in biomass-fired boilers among other schemes, the assessment will concern also the sustainability of biomass.

The promoter has to ensure that contracts for implementation of the project have been and will be tendered in accordance with the applicable EU procurement legislation, Directive 2014/25/EU, as well as Directive 92/13/EEC, as interpreted by the Court of Justice of the EU, with publication of tender notices in the EU Official Journal, as and where required.