Germany: Making the switch

Author: | Published: 1 Dec 2012
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Salans’ Bernhard Gemmel and Peter Mayer discuss Germany’s shift from nuclear to renewables energy

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 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 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 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 member.

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 work.

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 country?

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 of?

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 regulations.

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


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.

Dr Peter Mayer


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 English.

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