Germany: Opportunities and challenges

Author: | Published: 1 Oct 2009
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The more recent attempts made by government and industry in many countries around the globe to reduce the emission of greenhouse gases and the further development of clean and green technology has led to significant growth in the global renewable energy markets. The German Federal Government, perhaps more so than governments of other countries, is promoting the development of renewable energy sources. Increasingly, more wind farm projects are being developed in Germany. In turn, the investment volume in relation to wind farm developments is set to increase and investments are likely to be made not only by the major national and international utility companies, but also by strategic and financial investors and other utility companies at a municipal level.

There are certain limitations on the growth of onshore wind farms in Germany as a means of developing the renewable energy sector. This is due to the shortage of land available that has both the necessary wind conditions and meets the country's strict zoning law requirements. But the development of offshore wind farms will present opportunities for further growth of renewable energy projects in Germany, although such development of offshore wind farms is not without its own significant challenges.

Development goals

Pursuant to recent amendments to the Renewable Energy Sources Act (EEG) the German Federal Government has set goals of increasing the proportion of renewable energy to at least 30% of the total electricity distributed in Germany by 2020, and 50% of total electricity distributed by 2050. It is predicted that by 2030, 25% of all electricity in Germany will be produced by wind farms, and of the total energy produced by wind farms, it is envisaged that offshore wind farms will contribute 15%.

At the time of writing, 21 proposed offshore wind farms in Germany have been given approvals to proceed. To date, only the first turbines of the Alpha Ventus wind farm project in the North Sea consisting of 12 turbines have been put into operation in August 2009. The volume of offshore wind farm energy is, however, expected to surge with a further four offshore wind farms currently under construction. By 2025 the overall investment in the offshore wind farm sector is expected to be between €32 and €75 billion.

Recent changes to the energy regulatory framework in Germany will promote the future development and growth of offshore wind farm projects. However, in light of the current global financial market conditions and the uncertainty in relation to some of the inherent project risks associated with offshore wind farms, the financing of such investments is still likely to face a number of challenges. So it is expected that the first offshore wind farm projects will be developed and financed by the major utility companies on a corporate funding basis. The market also expects that in the years to come a large amount of investments will be funded on a limited-recourse project financing basis, which will attract national and international financiers.

Guaranteed feed-in tariff

The off-take risk associated with offshore wind farm projects is addressed by the EEG, which provides a guaranteed feed-in tariff. The operator of an offshore wind farm is granted the right to connect the offshore wind farm to the nearest public grid and to sell the electricity to the grid operator at the fixed guaranteed feed-in tariff.

The guaranteed feed-in tariff is payable for a period of 20 years. During the first 12 years of operation the tariff is set at 13.0 cents per kilowatt per hour (ct/kWh). For offshore wind farms commissioned prior to January 1 2016, a higher tariff of 15.0 ct/kWh is applicable. For wind farms located at a distance of more than 12 sea miles offshore and at a water depth of more than 20 metres, the period of the guaranteed feed-in tariff will also be extended by 0.5 months per full sea mile of distance extending beyond 12 sea miles and by 1.7 months for each additional full metre of water depth. For the remainder of the operation period, the base remuneration is set at 3.5 ct/kWh.

For offshore wind farms commissioned after December 31 2009, the guaranteed feed-in tariff (and the upsides mentioned above) decreases, as from the year 2015, annually by 5%.

The operator of an offshore wind farm will also be entitled to sell electricity outside the regulatory framework of the EEG, for example via the European Energy Exchange or the over-the-counter market. Should an offshore wind farm operator decide to sell the generated electricity into the market, it is obliged to notify the relevant grid operator with a one-month notice period and then to do so for at least a period of one month. During this time, the operator is not entitled to receive the guaranteed feed-in tariff provided for under the EEG.

Environmental impact

In order to construct and operate an offshore wind farm in Germany, a developer must obtain a licence from the Federal Maritime and Hydrographic Agency (or any other competent local authority if the wind farm is located in territorial waters). In the case of several applications for a particular licence, the licence will be granted to the first applicant to provide all of the necessary documentation, in order to prevent the blocking of all available offshore wind farm slots.

Before a licence is granted, developers must conduct an environmental impact assessment of the proposed offshore wind farm, focusing on the physical, biological and human impacts of the offshore wind farm. Offshore wind farms may not only affect the fauna beneath the surface of the water, but can also have severe consequences above sea level. Mapping of the flight of birds will have to be carried out in order to be certain that typical flight patterns do not cross the path of proposed turbine locations. Depending on the location, consideration also needs to be given to humans in the area, most specifically to visual and noise pollution.

The licence to construct and operate an offshore wind farm is granted in respect of a specific offshore wind farm project and does not attach to a specific person or entity, which means that the licence can be transferred by the original licence holder to third parties. This may also enable the operator to grant step-in rights to financiers of an offshore wind farm project.

Construction risk

The market considers construction risk (including the risks associated with delays in completion and cost increases) to be one of the major issues affecting the bankability of offshore wind farm projects. The risks associated with construction of offshore wind farms on time and within the budget are high. The technology risk relating to the foundation and the turbines is considered substantial, particularly as the market is demanding larger turbines that are not currently proven on completed projects.

Such construction and technological risks are even more applicable to offshore wind farm projects in Germany, as the proposed offshore wind farms are often located in areas where the water depth is greater than at similar sites in Europe. Furthermore, access to the site for maintenance and service is often limited due to adverse weather conditions.

As expected, the weather is an important risk factor associated with the success of offshore wind farm projects. The weather will be the subject of wind distribution studies that form the basis for forecasting the potential cash flows to be derived from the offshore wind farm during commercial operations. In addition, the weather will affect the performance of the construction (including testing and commissioning) of the offshore wind farm. While planning the various phases of construction and setting the completion timetable, delays resulting from adverse weather conditions have to be taken into account. Delays are likely to occur and need to be dealt with by adequately sizing the required cash reserves and building in sufficient buffers into the construction schedule. The parties will also have to decide on a case-by-case basis which party bears the weather risk and whether this is subject to change during the various phases of the construction of the project.

Another issue is the interface risk associated with construction, the extent of which will largely depend on the underlying contractual framework for construction.

Large infrastructure projects of a similar scale often deal with interface risks by engaging one construction contractor to engineer, procure and construct (EPC) on a lump-sum, turn-key, date-certain basis.But such construction arrangements for complete offshore wind farms are still rarely seen. It is still common for larger offshore wind farm projects to have a number of construction contractors rather than an EPC contractor taking single point responsibility. The contracts are typically disaggregated as follows:

  • a contract for the supply and installation of the wind turbine generators and the supervisory control and data acquisition system;
  • a contract for the construction of the foundation for the wind turbine generators and other miscellaneous civil works for the development (such a contract being similar to a typical EPC contract);
  • a contract for the cables from the wind turbine generators to the sub-station including relevant work for the construction of the offshore sub-station (such a contract being combined with the foundation contract in some projects); and
  • a contract for the installation vessel.

As a consequence of sub-contracting the construction work to a number of contractors, the developer is left with the interface risk, including the risk of delay and disruption between the various contractors. To manage this risk, a detailed interface schedule needs to be set up regulating the main points of interface between the various contractors, laying out the responsibilities of the parties and introducing consolidation provisions for the resolution of related disputes between the contractors. Financiers of the project are also likely to request the involvement of specialist contractors with the necessary experience and track record. During the construction phase, active interface management under the close supervision of a technical adviser appointed by the financiers will need to be implemented.

In the current market environment, the construction and operation of an offshore wind farm also heavily depends on the availability of the necessary installation vessel. Ideally, the wind turbine contractor assumes this risk. But wind turbine contractors may be reluctant to assume this risk given the growing demand for offshore wind farms and the limited supply of installation vessels appropriate for installation of offshore wind farms and the risk of extended procurement due to weather and interface delays.

So it is worthwhile considering whether the construction of an installation vessel should also form part of an offshore wind farm project, with the option to market the installation vessel for other neighbouring offshore wind farm projects. If the installation vessel was to form part of the offshore wind farm project, the financiers are likely to require that the installation vessel is owned and operated by a separate special purpose vehicle. This vehicle then assumes the risk of any unexpected liabilities associated with the operation of the installation vessel.

Grid connection risk

For any offshore wind farm that commences construction prior to 31 December 2015, the grid operator is required by law to provide grid connection at its own cost and at the time when the offshore wind farm becomes operational. If the grid operator fails to do so, it can be held liable for damages incurred by the developer for not being able to connect the offshore wind farm to the grid. By implementing this requirement, the German Federal Government has taken a significant step in making offshore wind farms in Germany bankable and so minimised the risk associated with the availability of, and the investment costs relating to, the grid connection.

This requirement, however, challenges both the grid operator and the developer of an offshore wind farm. The investments necessary for the connection are large, leaving the grid operator to make a reliable assumption about whether and when the offshore wind farm will be operational. The German Federal Network Agency issued a position paper in April 2009 pursuant to which grid operators are required to make available the grid access at the time and in the required capacity when the offshore wind farm is operational. In particular, the grid operator must undertake to provide the necessary grid access once the developer is able to demonstrate that:

  • it has obtained the required permits for the offshore wind farm;
  • it has carried out the necessary subsoil investigations for all facilities;
  • it has set up a feasible construction schedule and has entered into preliminary purchase orders for the main components; and
  • it has obtained a financing commitment.

In practice, the timely availability of the grid connection can only be achieved by a constant flow of information between the developer and the grid operator in relation to progress of the project. Milestones and a road map should also be established to ensure a timely connection to the grid. While not necessary under German law, the parties are likely to enter into a grid connection or a grid usage agreement setting out the details of the grid connection and associated liabilities.

Once the grid connection has been established, the grid operator is required under the EEG to off-take the electricity generated by the offshore wind farm. In cases of defects or any other failure of the grid connection, the grid operator is liable for any damages which arise as a consequence, unless the failure is caused by a third party or force majeure. Such risks would then need to be covered by adequate insurances. It must also be noted that the grid connection agreements typically used by the grid operators often provide for a cap of the liability of the grid operator. However, it should be considered whether such liability limits or caps are enforceable under applicable laws in Germany.

Security over offshore assets

Financiers are likely to require security in respect of any debt financing provided for the construction of offshore wind farm projects. While this is undoubtedly possible by way of granting security over the receivables in relation to the guaranteed feed-in tariff, taking security poses a challenge in relation to (i) the offshore components of the offshore wind farm located in the Exclusive Economic Zone (EEZ) and (ii) the rights under the licence to construct and operate the offshore wind farm.

In relation to the components of the offshore wind farm located in the EEZ, the question arises whether the German statutory provisions applicable to the transfer of ownership of moveable assets are applicable in the EEZ and allow for the granting of asset security (or the retransfer of asset security) once the wind farm components are offshore and outside the coastal waters. Whereas the German provisions in relation to the transfer of ownership are applicable within the perimeters of the coastal waters (reaching 12 sea miles from the coastal base line), the EEZ, extending beyond the 12 sea mile line and reaching 200 sea miles from the base line into the ocean, is not part of the sovereign state.

The EEZ is governed by the United Nations Convention on the Law of the Sea (UNCLOS), which grants the neighbouring states specific sovereign rights in relation to the EEZ. With regard to wind farms, article 56 of UNCLOS allows the generation of wind energy in the EEZ and article 60 of UNCLOS grants the coastal state the exclusive right to construct, authorise and regulate the construction, operation and use of offshore wind farms in the EEZ. However, the convention does not explicitly grant the right to extend the civil law jurisdiction into the EEZ and it is debated in German legal literature, if and to what extent the German Civil Code is applicable in the EEZ, in particular since to date there has been no court ruling in relation to this issue and the legislator has not specifically stated that the German Civil Code should also be applicable in the EEZ. The majority of authors support the view that the German Civil Code is also applicable in the EEZ. If, however, the German Civil Law does not apply in the EEZ, a transfer of ownership by way of security or any other encumbrance would not be possible once the wind farm components are offshore.

Financiers may therefore require that they be granted security over the components before they are shipped into the EEZ. While in practice this may be possible (and may involve security interests from various jurisdictions where the components are assembled before they are brought offshore), this would impose the risk on the developer of a valid retransfer of the collateral upon the discharge of the debt facilities. This risk could be mitigated by introducing an additional special purpose vehicle (AssetCo) into the project structure that is set up to only hold title to the offshore components. This AssetCo could either be incorporated by the project company (and security can be granted to the financiers by way of a share pledge) or, alternatively, could be incorporated by the financier directly (combined with the obligation to transfer the shares in the AssetCo to the developer upon the repayment of the debt facilities).

The parties could also consider setting up a trust structure, whereby the AssetCo is held by an independent trustee being obliged to transfer the shares either to the bank (upon the occurrence of defined enforcement triggers) or to the developer (upon the repayment of the debt).

Multilateral institutions

In order to further promote the development of renewable energy projects several multilateral institutions and development banks are supporting the financing of renewable energy facilities.

In line with the Action Plan for EU energy policy 2007-2009 adopted in March 2007, the European Investment Bank (EIB) has reinforced its commitment to foster the development of renewable energy. Its new annual target is a minimum of €800 million in lending facilities to renewable energy projects. It also raised its financing share of total costs for renewable energy projects from 50% up to 75%. In 2008 alone the EIB agreed to make available loan facilities in a total amount of €2.2 billion for renewable energy projects, a figure that has quadrupled between 2006 and 2008.

In order to absorb some of the impacts of the financial crisis the German government has also launched two economic stimulus packages. Kreditanstalt für Wiederaufbau is making available loans of up to €200 million to renewable energy projects that are developed in Germany. Such loans can either be granted directly to the developer or can be made available through commercial banks.