Co-published project finance guide: Germany


Making the switch P


Salans’ Bernhard Gemmel and Peter Mayer discuss Germany’s shift from nuclear to renewables energy


roject financing in Germany has undergone fundamental change in the past 12 months. The country is pushing the development of its huge


offshore wind energy resources, but implementing these policies is far from straightforward. In addition, the mix of equity and debt investors has changed, and there are new public private partnership (PPP) schemes and EU-wide initiatives to consider.


IFLR: How has the country’s shift from nuclear to renewable energy progressed over the past 12 months? PM: Work in the energy market last year


was largely determined by this shift. After Fukushima, the German parliament moved rather quickly to change the country’s energy production from being based on nuclear to renewables. But this has raised certain obstacles that the country is now dealing with. For example, offshore wind-parks are at the


top of the renewables development agenda, it’s a natural resource that offers huge potential to produce electricity. But there is a huge deficit in the availability of grid connections. Especially as the current must flow from offshore the country’s northern border, to the south where most of the energy will be consumed. BG: The grid connection is really the


technical problem. Even if equity is available for the project, there is the time issue. In Germany the grids had to be separated – unbundled – due to cartel laws, which left new players responsible for the grid connection. Sometimes these players are private equity funds that have invested their clients’ monies in the grid companies. And they are now faced with this huge challenge to fund and build these grid connections in a limited amount of time. PM: There have also been shifts in the solar


industry. Feed-in tariffs are cut on a monthly basis, and are based on when a photovoltaic plant is connected to the grid. That’s the lock- up date that determines which monthly feed-in tariff will apply. It means the longer it takes to get connected to the grid, the less attractive the subsidies. BG: Solar used to be a very successful


industry here, with banks very interested in financing these assets. But the dropping feed- in tariffs have placed substantial pressure on solar equipment producers, project developers


74 IFLR/December/January 2013


and project managers. They are under tremendous pressure and there have been a number of insolvencies. There will be more consolidation to come in the next months, with new market players from China and other Asian countries.


IFLR: How has this impacted the funding of these projects? PM It has become more difficult to obtain


financing from banks, as they are more careful now. They pay much more attention to legal documentations than they did three or four years ago, when they were happier to provide loans to photovoltaic project developers.


IFLR: Which provisions are they paying more attention to? PM: For instance, the banks have become


more sophisticated on one of the more complex legal situations regarding the ownership of the photovoltaic plant. In principle, German real-estate law doesn’t recognise the separation of ownership of land from the ownership of buildings erected on the land. Offering a bank the plant as collateral for a


loan doesn’t help them if the landowner in fact takes ownership of the plant, by virtue of the fact it is erected on their property. There are certain mechanisms that prevent the unification of property with respect to the photovoltaic plant and the banks have learned to focus on the relevant documentation. Of course this is a rather complex real estate matter, but in my experience, banks have been paying more attention to this apparently – especially as before they didn’t worry to the same extent about loans defaulting. The same problem can arise in other


onshore sectors, wind for example, but photovoltaic plants have been the most active recently.


IFLR: The offshore wind sector has been a great focus, of late. Are there any trends in the risk allocation of these projects? BG: There are in relation to the financing of


these very big offshore wind projects. Earlier this year there were two large size closings involving $1 billion-plus debt financing. Those closings only happened because of the involvement of multilateral financial institutions as lenders – either European Investment Bank (EIB) or Germany’s KfW–


who had absorbed risks that the commercial banking market wasn’t willing to take. That is a very clear trend this year – these large-scale projects could only be achieved with, if you like, EU or German taxpayer-monies being involved. And then the private banks would follow in the consortium. So there are two clear trends in relation to


this sector: the unsolved connectivity issue described earlier, and financing requiring an indirect subsidy, if you will, by a state-backed bank.


IFLR: Is Germany becoming Europe’s leader in terms of renewable energy, and what examples is it setting for the rest of the region? PM: It has the ambition to do so. And I


think it offers the potential to set an example not just on the environmental side but by also showing that it is economically interesting to pursue the shift to renewable energy. But the shift has come about very suddenly, and now the country faces the technical obstacles – such as the grid connectivity problem. It has become a very political issue, as the government initiated the shift and now they are under a bit of pressure to pursue it. It’s on the daily agenda. Also, it’s worth noting that we have an election next year. But the pressure to make the shift


successful, I believe, will eventually create innovative project financing ideas. On the technical side, Germany is still a high-tech country, and this is true on the manufacturing as well as asset development side. So it offers lots of potential for the country. BG: In addition, the political momentum


to make the shift from nuclear to largescale renewables will incentivise institutions like KfW and EIB to continue to make those projects financeable. I think that’s a trend: it’s obvious that German political parties will push in that direction through either loan participations or EIB’s new project bond initiative.


IFLR: You mentioned before that private equity and other funds have been investing in grid companies. Have you witnessed any other changes to the mix of project financiers? BG: For existing midscale projects in


onshore wind – and also to a certain extent other renewable sectors like solar and biomass – we have seen new players buying into these as secondaries. Insurance funds are one of these new


players. A leading German issuer, for example, is currently buying into onshore wind plants. Many insurers are sitting on money and their traditional investments – in government bonds for example – aren’t creating the yields the insurance funds need. So you see insurance company funds taking a better look


www.iflr.com


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19