Q&A – Alcazar Energy: Risks and opportunities in the Western Balkans

A lack of investment has meant that the growth of renewable energy in the Western Balkan countries has been significantly slower than in Western Europe. Countries like Serbia, Montenegro and North Macedonia are still heavily reliant on coal, oil and natural gas.  

Alcazar Energy aims to change that. The fund manager focuses on acquiring, developing, and building new renewable generation in emerging markets. The company sees attractive growth opportunities here, driven by the implementation of the EU's Carbon Border Adjustment Mechanism (CBAM). Through its $490 million (£361m €423m) Alcazar Energy Partners II fund, the firm has made a significant push in this region and expects to become one of the largest independent power producers (IPPs) here.  

Through its latest fund, Alcazar expects to mobilise circa $2 billion of foreign direct investment, including project finance, into its target markets. inspiratia sat down with Daniel Calderon, co-founder and managing partner at Alcazar Energy, to discuss the challenges and opportunities the company sees in the Western Balkans and mitigating risks to drive more investment into these markets.  

Alcazar's mandate has primarily focused on emerging markets like Montenegro and Serbia. What opportunities do you see there in the energy transition space?

Alcazar only focuses on growth markets, rather than characterising them as simply "emerging markets". What we do is we find markets where renewable energy is just not where it could be. 

If you take a step back and look at the level of penetration of renewable energy across OECD countries in Europe or the US, it is very healthy. You also have a very healthy amount of institutional capital being invested in not as many projects. You can typically find more money than projects. 

That is the reason we started Alcazar Energy 12 years ago, and now there is an even stronger case for it. There are several countries where you do not have anywhere near as much capital as you need them to be able to meet the renewable energy targets that they have in place. 

Additionally, you have regions like the Western Balkans, where the cross-border adjustment mechanism comes into place from next year [2026], under which everything they export into Europe will be taxed.  

In the case of countries like Serbia, North Macedonia and Montenegro, these countries are heavily dependent on coal. Those economies will suffer as a result of this mechanism. 

Directly investing in renewable energy will not only lower the cost of the carbon taxes at the border, but it will also create additional jobs and lower the cost of electricity, because wind is substantially cheaper than conventional power in those regions. 

Indeed, there has not been enough institutional capital in these markets. What broader factors need to change for this to shift? Do policy changes need to be made?

So many of these countries already have the building blocks in place to have bankable projects in them, whether you are looking at Jordan, Montenegro, North Macedonia, Serbia, etc. You have power purchase agreements (PPAs) and regulations that allow you to bring renewable energy into them.  

When institutional investors look at emerging markets, they worry about a number of things. One factor is soft currency – if the local currency goes down, the investor will suffer. To solve this, we sign all of our PPAs in dollars, so that guarantees that we will have revenue in a hard currency. 

Investors are also worried about political risk - whether something political could happen that affects their investments. Across the board, we have always implemented political risk insurance. We are well-known to the political risk insurance underwriters. 

They also worry about construction delays, so we take EPC turnkey guarantees from a bankable investment-grade guarantor. They guarantee that construction will finish on time, and that our plants will have a minimum production level at the end of that construction period. 

We have operational guarantees that ensure that during the initial years of operation, the minimum level of operational efficiency is achieved; otherwise, we get additional financial payments. 

In these kinds of markets, are there any challenges in signing PPAs in dollars? Is there enough of a demand?

You would be surprised. We are currently going through a geopolitically tumultuous time, where energy security has become relevant for a number of factors. One of which is that you do not have to import wind or solar from other countries, as these are local in the countries where we operate. 

Additionally, this mechanism I mentioned before is essentially a carbon tax on exports. Because of these, many private and global institutions see an urgency for foreign direct investments to provide more renewable energy. 

For our projects in the Balkans that are set to begin construction late this year [2025], we have received a strong number of offers for offtake agreements. These came from North America and Europe, from investment-grade offtakers, offering agreements in a hard currency for an acceptable period of time. 

We see a very healthy PPA market, which is expected to become stronger due to the need for energy security. 

Your portfolio has primarily been focused on onshore wind and solar projects. Do you see battery energy storage systems (BESS) playing a role in these markets?

Battery storage has come a long way in terms of cost. We are considering adding BESS to a number of our projects at the moment. It has become a lot more affordable and proven. Some of the issues that were there several years ago with chemical leakage are now not happening, and the EPC companies are able to provide better guarantees. 

Typically, what you will see is that in countries where renewable energy is only starting, and accounts for less than 5% of the mix, energy storage is less necessary. Energy storage becomes more important once countries are closer to where Europe is in terms of renewables penetration. 

At that level, the network starts to benefit from having storage, as that allows you to manage the intermittency in a better way. If the local regulations are well-structured, BESS can be a very good proposition for investors and an even better thing for the local government, because you are then able to manage the grid more efficiently and sustainably. 

Alcazar Energy is a fund manager, however, it focuses on developing projects directly, rather than investing through a portfolio company. What is the rationale behind that?

Through our most recent fund, we raised $490 million, and with that, we are able to build about $2 billion worth of projects.  

When you enter into these kinds of growth markets, you cannot arrive and find a wind farm that is ready to build with the engineering, ESG and community standards that you need a project to have in order to secure long-term financing from parties like the World Bank, EIB, EBRD, etc. 

You have to acquire projects at a really early stage and do the development work yourself. That is where Alcazar is a little different. If you visit our offices, we have the typical employees who you see in a private equity fund, like the finance and underwriting teams, etc. But the other half of the office is filled with environmental experts. Our ESG and wind development teams are quite large.  

You really need to do that extra work early on to understand if the project is financially viable. 

Of your various target countries, which ones do you expect to be the most active in the near term?

Several regions are very exciting and need a lot of energy. In the Western Balkans in particular, we are set to start construction on the largest wind farms in Montenegro and North Macedonia this year [2025]. We also completed a third acquisition in Serbia for a pipeline of 968MW. On top of this, our team is doing additional wind development.  

We think it is very likely that we will be one of the largest, if not the largest, pure renewable energy IPP in that region. These are countries that have terrific economies, that are well interconnected with Europe, and that have wholesale markets that are very healthy. 

I am very excited not just about the value of the projects that are being built, but also the fact that these projects can make a little difference. It can really help accelerate the energy transition in countries that are a little bit early on in that process.