Many European countries need to transition their heat supply to more climate-friendly and greenhouse gas-reduced technologies. This is essential to achieving the European targets for climate neutrality by 2050.
The conversion and expansion of heating (and cooling) infrastructure, particularly in relation to district heating networks and generation plants, is one of the largest investment sectors and, at the same time, a key priority for many European countries. The heating transition therefore creates far-reaching opportunities for market entry and expansion, as well as investment opportunities for private investors in the heating sector.
The legal frameworks in the European heating sector vary greatly. Consequently, investments must be assessed and implemented in very different ways. The Bird & Bird Heat Transition Series therefore aims to provide an overview of the current legal regulations, challenges and developments for private investors in the heating sector across selected countries.
Why is the Czech Heating Sector Attractive to Private Investors Right Now?
Czech and European Climate Targets
The overarching framework for Czech Heat Transition is set by European law: the European Climate Law, the EU Emissions Trading System and the “Fit for 55” legislative package together establish binding targets for the expansion of renewable energies in the heating and cooling sector and for the development of efficient district heating and cooling networks.
At the national level, the Czech heating sector remains one of the most fossil-fuel-intensive parts of the economy. In 2024, domestic coal and natural gas accounted for 76.2% of heat produced and supplied. The sector is undergoing a gradual transformation towards full decarbonisation, contributing to the EU’s greenhouse gas reduction targets and improving air quality in urban agglomerations. The challenge is considerable, but so is the commercial opportunity it presents.
A Sector of Significant Scale — Across All Heating Modes
The Czech Republic is characterised by one of the largest and most developed heating infrastructures in Central Europe, significant structural change driven by regulatory pressure, and a substantial pipeline of public funding available to co-finance the transition. The Czech heating market is large and structurally diverse, with district heating alone serving nearly 1.7 million households via approximately 7,500 km of backbone distribution networks, i.e. roughly 40% of the population. The transition is under way across all heating modes simultaneously.
Each segment presents distinct investment dynamics:
- District heating — serving nearly 1.7 million households via approximately 7,500 km of backbone networks — faces the most immediate transition challenge, driven by the coal phase-out and rising EU ETS costs.
- Individual gas heating — serving a comparable number of households — will face increasing pressure as gas loses its role as a bridging fuel, creating demand for retrofit solutions and alternative technologies.
- Heat pumps — currently covering 4.3% of households — are set to grow substantially in both the individual building and district heating segments, supported by regulatory incentives and falling technology costs.
- Biomass and alternative fuels — already an established component of the Czech heat mix — offer further expansion potential, particularly in areas with abundant forestry and agricultural residues.
The total costs of decarbonising district heating alone through to 2030 are estimated at CZK 200 billion (approximately EUR 8 billion), with the HEAT programme under the Modernisation Fund allocating CZK 100 billion (approximately EUR 4.1 billion) to support the transformation. Not many European markets offer a similar degree of scale, urgency and public co-financing support.
Structural Drivers Creating an Investable Opportunity
Several structural features of the Czech heating market are now working together to produce an attractive environment for investment.
Regulatory pressure and coal phase-out deadlines. The key task for the district heating sector is to minimise the use of coal by 2030. CO₂ emissions from district heating plants covered by the EU ETS amounted in 2023 to approximately 9.4 million tonnes of CO₂, equivalent to 20.2% of total emissions from ETS-covered sectors in the Czech Republic. Plant operators must purchase allowances for their CO₂ emissions, creating a hard investment timeline that is already running.
Public funding at scale. The Czech Modernisation Fund has so far allocated CZK 100 billion to the HEAT programme for district heating decarbonisation, with further dedicated funding available for individual and building-level investments in renewable heat. The availability of co-financing at this scale materially improves project economics and enables blended finance structures that attract long-term institutional debt alongside grant support.
A mature infrastructure base with an identified replacement pipeline. Unlike greenfield markets, the Czech heating sector benefits from decades of accumulated infrastructure (networks, generation sites, customer connections) that provide a ready-made platform for technology substitution rather than construction from scratch.
A growing role for private capital. The scale of required investment substantially exceeds what municipal utilities and public bodies can finance alone. Cooperation models between private investors and local authorities, ranging from minority and majority shareholdings to joint ventures, are gaining in importance. The Czech district heating sector, where major international energy companies such as Veolia are already active, is structurally open to private capital.
Emergence of heat pumps and industrial waste heat. Heat pumps and industrial waste heat recovery are among the fastest-growing segments of the Czech heat transition, with heat pump supply into district heating projected to grow from negligible levels to potentially a third of all district heat by 2040. The HEAT programme’s 60% support rate for heat pump installations and strengthening regulatory incentives for waste heat recovery provide an enabling framework for early-mover investors.
A clear long-term decarbonisation pathway. Modelling by the Czech Heat Association projects coal’s share of district heat production falling to zero by 2040, while renewables — including biomass, heat pumps, geothermal and solar thermal — grow to 77.6% of total supply by 2050. This trajectory, underpinned by EU and national law, gives investors a high degree of certainty about the direction of the transition.
Practical Examples: The Investment Pipeline in Action
The following examples illustrate the range and scale of transactions already under way in the Czech heat transition, demonstrating that the transition is not merely a policy aspiration but an active investment reality.
Teplárny Brno — Biomass CHP, Brno
Teplárny Brno has commenced construction of a biomass-fired heat source at its Brno-Sever site, with total investment of CZK 2.4 billion (approximately EUR 99 million) (excluding VAT). The project is co-financed through a Modernisation Fund subsidy of CZK 1.661 billion (approximately EUR 68.5 million), with the remainder financed via a long-term EIB loan with a 15-year maturity — demonstrating the viability of blended finance structures combining grant support with development bank lending for biomass-based district heating projects.
ČEZ / Energotrans — Steam-Gas CHP, Mělník
At the Mělník heating site (one of the largest in the country) ČEZ’s subsidiary Energotrans is replacing its coal-fired infrastructure with a new steam-gas combined cycle source (266 MWe / 183 MWt), scheduled for commissioning in 2029. The Modernisation Fund is providing investment support of CZK 7.26 billion (approximately EUR 299.4 million) (over 50% of total project costs), supplemented by a 15-year electricity market premium. The scale and structure of this project illustrate the sophisticated project finance structures now achievable in Czech district heating.
ČEZ — Waste-to-Energy Facility, Mělník
Alongside the gas CHP project, ČEZ has contracted for a waste-to-energy facility (ZEVO) at the Mělník site, with operations expected around early 2028, reflecting an emerging trend towards diverse, resilient heat source portfolios at major network hubs.
Veolia Energie ČR — Full Decarbonisation, Karviná
Veolia Energie ČR is undertaking a comprehensive decarbonisation programme at its Karviná district heating plant, with a second-phase investment of CZK 9.4 billion (approximately EUR 387.6 million) planned to eliminate coal use entirely by 2029, involving a multi-fuel boiler (TAP and biomass), a new steam turbine and a supplementary gas CHP unit. This project demonstrates the appetite of major international energy companies to commit substantial capital to Czech district heating decarbonisation.
SYNERGYS — Geothermal Energy and Integrated Systems, Litoměřice
The SYNERGYS project near Litoměřice represents one of the most innovative developments in the Czech heat transition. The site functions as a research and demonstration facility integrating shallow and deep geothermal wells, underground seasonal heat storage, photovoltaic generation and green hydrogen technology — with the objective of testing how these technologies can be combined into an integrated, largely zero-emission local energy system. This project is a pioneer for deep geothermal district heating in the Czech Republic. Geothermal energy’s role in Czech district heating is projected to grow substantially, from a negligible 76 TJ in 2022 to 2,599 TJ by 2030 and 7,500 TJ by 2050, making it one of the fastest-growing heat source categories in the sector’s long-term transformation scenario.
The Funding Landscape: Unlocking Capital at Scale
A particularly notable feature of the Czech heat transition, and a major attraction for private investors, is the availability of substantial public funding to de-risk decarbonisation investments.
The Modernisation Fund — HEAT Programme
The Modernisation Fund, financed from EU ETS revenues and administered by the State Environmental Fund (SFŽP), is the primary instrument supporting district heating decarbonisation. The HEAT programme supports the reconstruction or replacement of heat sources involving a fuel switch away from fossil fuels — covering biomass and biogas, heat pumps and geothermal energy, waste heat recovery, and gas CHP in combination with renewable or innovative sources — as well as the modernisation of distribution networks.
The most recent call (HEAT 1/2025) had an allocated budget of CZK 8.041 billion, with support rates of up to 60% of eligible expenditure for heat pumps and geothermal installations, up to 45% for other renewables and waste heat recovery, and 30% for network modernisation.
Gas CHP support is permitted only in combination with innovative or renewable sources, ensuring the programme drives genuine decarbonisation rather than simple fossil fuel substitution.
For investors, the HEAT programme significantly improves project economics and reduces technology risk — as demonstrated by the EIB’s involvement in the Teplárny Brno transaction, a pattern we expect to continue as further calls are launched.
Operating Support — CHP Auctions
The Czech Republic also provides operating support for heat from renewable sources and for electricity from high-efficiency CHP, delivered through competitive auctions for installations above 1 MW. The first two auctions (concluded September 2024 and March 2025) secured a combined 2,534 MWe of supported capacity, with further auctions anticipated.
This operating support mechanism provides a significant revenue certainty layer for CHP-based district heating investments, improving their bankability and attractiveness to long-term institutional lenders.
The Regulatory Framework for Heat Transition Investors
Core Legal Framework
The Czech district heating sector is governed primarily by the Energy Act (Act No. 458/2000 Coll.), which establishes the licensing regime for heat production and distribution. Operators must hold a licence issued by the Energy Regulatory Office (ERÚ), which also sets the heat price regulatory framework applying a cost-of-service model — allowing regulated operators to recover prudently incurred costs including a return on capital, providing a degree of revenue stability for investors.
Favourable Structural Factors
District heating networks are typically local monopolies: customers have limited ability to switch to alternative suppliers. Heat supply contracts may be concluded for periods of ten years (in practice, usually longer), leading to stable supply relationships, reliably secured demand and predictable cash flows. Some municipalities have also introduced mandatory connection and usage requirements, creating additional security of demand.
Decarbonisation Regulation and Emission Limits
The Air Protection Act (Act No. 201/2012 Coll.) implements EU emission limit values for large combustion plants and sets a de facto timetable for the coal phase-out in the district heating sector. Many of the large coal-fired heat sources currently operating in the Czech Republic will be required to cease or significantly curtail operations before 2033, and in some cases earlier. This creates both urgency and opportunity for investors, as the transition timeline is not discretionary.
Target greenhouse gas emissions from district heating systems per unit of heat delivered will progressively decline: to 150 g/kWh from 1 January 2026; to 100 g/kWh from 2035; to 50 g/kWh from 2045; and to 0 g/kWh from 2050 — giving investors a clear long-term view of the emission performance required of their assets.
Due Diligence Considerations
The ERÚ cost-of-service pricing model provides a stable and transparent framework for cost recovery, including a regulated return on capital. However, as with any regulated infrastructure sector, the scope for tariff adjustments is defined by the regulatory framework, and price changes must be substantiated in accordance with ERÚ methodology. Investors should therefore incorporate careful tariff scenario modelling into their investment due diligence to ensure alignment between projected returns and the applicable regulatory parameters.
The ongoing regulatory drive towards decarbonisation is accelerating the replacement of conventional fuel-based generation, creating a substantial pipeline of asset modernisation and technology substitution opportunities. At the same time, the growth of decentralised heating solutions — notably individual heat pumps — is reshaping demand patterns in certain areas, opening new market segments for investors positioned to serve both district-level and building-level heating needs. Investors who factor these structural trends into their asset planning and portfolio strategy at an early stage will be well placed to capture value across the evolving Czech heat market.
State Aid and Public Procurement
Investments supported by the Modernisation Fund are subject to EU state aid rules, requiring compliance with applicable block exemptions (in particular GBER) or individual Commission approval. This requires careful attention to aid intensity limits, eligible cost definitions and cumulation rules.
Where public bodies are involved, public procurement obligations must be observed — including any tendering requirements triggered by structural changes to existing contracts. Prices agreed must be in line with market rates so as not to constitute state aid. For investors, this means that transaction structures involving public counterparties or publicly funded assets require early assessment of procurement exposure, and that the commercial terms of any resulting arrangements should be demonstrably arm’s length.
Foreign Direct Investment Screening
As in other EU Member States, foreign investors in Czech energy infrastructure, including district heating assets, are subject to FDI screening under the Czech Act on Screening of Foreign Investments (Act No. 34/2021 Coll.), which implements the EU FDI Screening Regulation. District heating is classified as critical infrastructure, meaning that acquisitions by non-EU/EEA investors are subject to a notification process and may, in certain cases, be subject to conditions or limitations. The screening process is well established and, with appropriate planning, can be integrated smoothly into transaction timelines. The question of whether a notification obligation arises should be addressed at the earliest possible stage of deal planning to ensure an efficient process.
Merger Control
In addition to FDI screening, merger control must be considered in transactions involving Czech district heating assets. Czech merger control is governed by the Act on the Protection of Competition (Act No. 143/2001 Coll.). A notification obligation arises where: (a) the combined aggregate net turnover of all merging undertakings in the Czech Republic exceeded CZK 1.5 billion (approximately EUR 62 million) in the last accounting period, and the net turnover of each of at least two of them individually exceeded CZK 250 million (approximately EUR 10 million); or (b) the net turnover of at least one undertaking exceeded CZK 1.5 billion (approximately EUR 62 million) and the net turnover of another exceeded CZK 250 million (approximately EUR 10 million) on a relevant product market in which their activities overlap. In transactions involving larger district heating operators, particularly those serving major cities, these thresholds may well be reached, and the question of merger notification should be assessed alongside FDI screening at the outset of deal planning. Where EU-level turnover thresholds are met, jurisdiction will lie with the European Commission rather than local authorities.
Key Transactional Considerations
Ownership Structures
Czech district heating assets are owned by a mix of municipal entities, large domestic utilities (notably ČEZ) and international energy companies (including Veolia). A variety of ownership models are in use, from joint ventures between municipal utilities and private shareholders to purely private or purely municipal companies. State and local law, as well as concession or consortium agreements, may stipulate specific conditions including licensing requirements and approvals for the use of public roads for pipe-laying.
Deal Structure
In practice, transactions involving Czech heating assets are structured almost exclusively as share deals. This is primarily because the ERÚ operating licence, heat supply contracts and other regulatory approvals are tied to the operating entity rather than to individual assets, making an asset deal impractical in most cases. Energy projects in the Czech Republic are therefore typically developed within a dedicated SPV, which can then be acquired by way of a share deal while preserving full licence and contractual continuity. Where a straightforward share deal is not feasible (for example, because the relevant assets sit within a larger corporate group) the typical approach is to effect a demerger or other corporate transformation under Czech law, enabling the successor entity to retain the licences and contractual relationships by operation of law. Asset deals, while conceptually available, are for these reasons rarely encountered in Czech energy M&A.
Transfer of Heat Supply Contracts
Heat supply contracts often have particular economic significance. Their term, price clauses and extension options significantly determine the value and predictability of the heating network. The assignability of existing contracts upon a change of ownership and the applicable regulatory framework for tariff changes must be carefully diligenced as part of any transaction.
Municipal or contractual pre-emption rights and change-of-control clauses — which may trigger specific rights upon a change of ownership, including termination rights — can significantly influence the transaction. Early identification and proactive engagement with these provisions during deal structuring enables investors to develop tailored solutions that preserve transaction value and facilitate a smooth ownership transition.
Project Finance Structures
The availability of Modernisation Fund subsidies has catalysed more sophisticated project finance structures in Czech district heating. The Teplárny Brno and Mělník transactions demonstrate that blended structures — combining public grants with long-term EIB or commercial bank debt — are achievable and increasingly the norm for larger projects.
Legislative Outlook
The Czech heat transition regulatory environment is evolving rapidly in a direction that appears broadly favourable to private investors. Key developments to watch include the following.
- Mandatory municipal heat planning legislation. Czech policy discussions are advancing the concept of requiring municipalities to prepare binding heat supply plans, drawing on the German Wärmeplanungsgesetz model. Such plans would identify priority decarbonisation corridors and designate areas for district heating expansion — creating a structured, plan-led framework for directing private investment.
- Continued HEAT programme funding. Further calls under the Modernisation Fund HEAT programme are expected as ETS revenues continue to accumulate. Between 2030 and 2040, a further minimum of CZK 70 billion (approximately EUR 2.9 billion) will need to be invested in district heating transformation.
- Revision of heat price regulation. ERÚ has signalled interest in reviewing the heat price regulatory framework to better accommodate the capital expenditure profiles associated with decarbonisation investments — changes that could materially affect returns for distribution network investors.
- Post-2030 technology deployment. After 2030, natural gas will remain the primary fossil fuel in district heating but will need to be progressively replaced. Small modular reactors (SMRs), biomethane, hydrogen and large-scale heat pumps (drawing on rivers, wastewater treatment plants and geothermal sources) are the principal candidates, with heat pumps potentially supplying nearly a third of district heat by 2040.
Conclusion
The Czech Republic’s heating sector brings together scale, established infrastructure, regulatory pressure to decarbonise and meaningful public funding support. The investment pipeline spans biomass, gas CHP, waste-to-energy, heat pumps and geothermal, encompassing both district heating and the individual building segment, and is already active and growing. For investors prepared to engage with a regulated infrastructure sector undergoing fundamental technological change, the Czech heat transition presents a strong opportunity.
Bird & Bird’s Czech and European energy teams advise across the full range of heat transition transactions, from M&A and project finance through to regulatory strategy, public procurement and state aid. If you are considering an investment in the Czech heating sector, or have questions about the regulatory framework and funding landscape in the context of a specific transaction, please do not hesitate to get in touch.
For further information, please contact:
Lubomír Brecka, Partner, Bird & Bird
lubomir.brecka@twobirds.com
