Salans’ Bernhard Gemmel and Peter
Mayer discuss Germany’s shift from nuclear to
Project 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
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
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 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
IFLR: How has this impacted the funding of these
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
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
IFLR: The offshore wind sector has been a great focus, of
late. Are there any trends in the risk allocation of these
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
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 at assets like real estate, but also renewables. That is
definitely a trend. As they are not in the business of taking
project risk, they are buying into existing projects that they
can run for 10 years or so.
Sometimes, but to a lesser extent, you see pension funds
thinking about direct investments too. You see domestic and
foreign fund management companies looking at the German
real-estate and energy market for targets. They are also
looking at spinoffs from the large German utilities like RWE or
E.ON. Not every project has actually happened yet, but there is
a lot of talk about it.
PM: I agree, we see more and more
institutional investors looking for projects that are up and
running. So while the big focus now is offshore wind farms
developing new projects, for existing onshore projects we see
institutional investors getting involved.
IFLR: That's on the equity side, but are any of these funds
interested in the debt side?
BG: We've seen that in the
real-estate sector, and the question is whether we will see it
with renewables too. Will they also provide debt, meaning
replace banks that have left the market? We know some of these
funds are actively thinking of doing that. Again they won't be
taking development risk, but once things are in place, they
will probably refinance or participate as a consortium
IFLR: Staying with finance, how would you describe the
banking sector's appetite for projects?
BG: The trend for the last two
years, at least, is certain international lenders have left the
German market, now focussing on their home markets. Also, a
number of the Landesbanks – Germany's traditional
lenders which have previously taken certain risks in
infrastructure renewables that purely commercial banks have
been hesitant to take on – have had problems from the
crisis. WestLB, for example, has disappeared and that has led
to a shrinking in the number of lenders. So with international
banks leaving and Germany's banks being restricted, the bank
debt market is smaller now. And those that are lending are
choosier and more risk averse.
IFLR: Are project bonds being explored as a possible
alternative to bank finance – and how has EU
initiative been embraced?
BG: I'm not aware of any project
bonds being issued in Germany so far, but there is a lot of
political will to make this work. Generally the capital markets
were reluctant to take some of the risks involved in these
infrastructure projects. The EIB programme is just one way of
it providing support, other than by granting direct loans.
I think it's a very good initiative, as of course the bank
market is not big enough to finance the levels of
infrastructure required across Europe. So of course the capital
markets would be very welcomed to be tapped.
In terms of how and when it will start working in Germany, I
don't know. But it will no doubt first be used for conservative
projects with well-established structures and assessable risks.
Everyone has welcomed it, though. At a conference I attended a
few weeks ago, a panel of bankers said they hoped it would
succeed, but no one could say it was definitely going to
IFLR: Compared to other countries, Germany's PPP schemes
are relatively new, and have no single body of laws and
regulations. Do you see PPP projects expanding in the
PM: Yes, compared to the likes of
the UK, Germany's PPP framework is still at a relatively early
stage. And as you say, there is no single body of laws to which
it relates. However PPPs are increasingly on the agenda in
Germany, and they are starting to generate some interesting
models. One advantage of Germany's scheme is that it's not as
regulated as other jurisdictions; it gives the parties a lot of
freedom in terms of what they want to put in the agreement. So
it might not be as developed as other jurisdictions, but it
provides lots of flexibility to the parties.
BG: Something that has also held
back PPPs' development in Germany is that cheap credit money
was always available to the public sector through specific
German law schemes. These schemes basically created an economic
result whereby the public sector received cheap money from the
banks. But that is not guaranteed to continue forever, and if
the pressure grows, we should see more PPPs.
IFLR: Which recent and upcoming legislative and regulatory
changes should foreign sponsors and financiers be aware
PM: Hypovereinsbank together with
the Hamburg Institute of International Economics prepared a
report this summer about the economic consequences of Germany's
shift in energy politics. One conclusion that came out of this
study is that the new energy policy has created a huge lack of
regulatory reliability. Feed-in tariffs and grid connection are
just some of the moving targets here in Germany. And I think
foreign investors feel there is a lack of regulatory
reliability. That is probably the industry's biggest challenge
at the moment; it means it's very difficult to say where we
will stand a year from today in terms of laws and
BG: It's work in progress.
Everyone agreed with the government's decision to shift from
nuclear to renewables, but now there are the technical and
logistical issues of how to do it. Certainly, all the
regulations aren't in place, and next year's elections will
prove a decisive time.
Bernhard Gemmel, Maître en Droit, is a partner
in Salans' Frankfurt office. He specialises in banking
and financing transactions – in particular
project finance, export/trade finance and real-estate
finance. His sector expertise covers a wide range of
asset classes, with a strong focus on infrastructure,
energy and real estate.
Before joining Salans, Bernhard was a partner at
Shearman & Sterling and Beiten Burkhardt. He is
recommended by Chambers Global 2012, Chambers Europe
2012, and Euromoney Expert Guide for Project Finance
Lawyers 2012 as a leading practitioner in banking and
finance plus project finance in Germany. He is a German
and French qualified lawyer, and speaks German, French,
English and Spanish.
Peter is a counsel at Salans' Berlin office who
specialises in corporate law, M&A and real estate
with an industry focus on energy and chemistry. Before
joining Salans, Peter worked with Hammonds and Stairs
Dillenbeck & Finley. He speaks German and