Germany leads the way with ‘new EEG’

  • 01 May 2007
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Government support through state initiatives has been key to getting the European renewable energy industry off the ground. These initiatives vary throughout Europe from long term preferential feed-in tariffs used in Germany, certificate-based systems like they have in the UK to tax incentives such as those used in Finland. All have their merits and supporters but it is the German system that is arguably the most successful, partly because it creates reliable cashflows which is, of course, very attractive to the capital markets.

The specific impetus that sparked Unicredit Group (HVB)’s Breeze initiative was a tweaking in 2000 of Germany’s highly progressive laws on renewable energy pricing, which dated back to the passage in 1991 of the Stromeinspeisungsgesetz, or Electricity Feed-In Law (EFL), and was a key staging post in the development of clean energy use in Germany. Today, says Christian Kleindienst, utilities credit analyst at UniCredit Group (HVB) in Munich, renewable energy accounts for more than 11% of Germany’s total electricity supply.

According to research published by UniCredit Group (HVB), the original EFL guaranteed to all renewable energy producers up to 90% of the prevailing domestic sale price of electricity for every kilowatt hour (kWh) they generated. That new law, twinned with a range of other incentives provided at state level, led to a surge in the installation of wind turbines in Germany, establishing the country as Europe’s standard bearer for wind energy. According to the UniCredit group (HVB) data, by 2000 well over 9,000 wind turbines had been installed in Germany, up from just 350 in 1990.

Since then, the total has almost doubled, driven principally by the Act on Granting Priority to Renewable Energy Sources (EEG) which was passed in the spring of 2000 and revised (as the ‘new EEG’) in the summer of 2004. Aside from committing Germany to generating 20% of its electricity from renewable sources by 2020, the new EEG regulates the prioritisation of grid-supplied electricity from renewable sources. According to UniCredit Group (HVB)’s analysis, "this means that the closest suitable grid operator must connect the facility to its grid and pay a minimum preferential tariff to the operator. Connection must be done immediately and preferred to the connection of conventional plants."

Perhaps most significant, the new German law guarantees fixed payments for providers of renewable energy for a period of 20 years per plant. In the wind sector, the minimum compensation amounts, or feed-in tariffs, are dependent on the commissioning date of the windfarm, and will be reduced by 2% annually for new installations commissioned in 2005 and later. Windfarms commissioned in 2005 are entitled to a starting feed-in tariff of 8.53 cents per kWh for at least five years, which compares very favourably with current wholesale base load prices of two to three cents per kWh and peak prices of 3.5 to four cents, according to UniCredit Group (HVB)’s Kleindienst.

Thereafter, explains UniCredit Group (HVB), "the feed-in tariff can drop to a lower tariff for the remaining time (5.5 cents per kWh in the 2005 case), if the plant shows a very good performance (usually for plants along the shore). In the case of midland sites, the higher tariff is usually paid over the complete project lifetime up to 20 years."

Reliable cashflows

That may sound complicated, but bankers say that the reliability of the cashflows that can be generated as a result of the new EEG is what acted as the tipping point for the financing of renewable energy projects in Germany. "It was the tariff system introduced by the new EEG that made the bank market for renewable energy projects profitable and professional," says Torsten Hinsche, head of Commerzbank’s Hamburg-based Centre of Competence for Renewable Energies.

Others agree. "In the renewable energy market, supportive regulation is number one, two and three on the agenda of lenders and investors," says Jens Rosebrock, a managing director in global banking at Dresdner Kleinwort in London.

It is that support that allows for the financing of projects that would not otherwise be bankable. A sound principle held by many project lenders is that the project should make intrinsic commercial sense if you stripped out all incentives and taxes, says Robin Baker, global head of energy project finance at Société Générale Corporate & Investment Banking. "With renewable energy projects that is not always the case and we need to evaluate the public good and the government support for the project".

The German tariff system is broadly regarded as Europe’s most favourable for developers as well as lenders and investors, chiefly because it extends to 20 years. That is in contrast to the similar feed-in system that has been adopted under the French Electricity Act in which power producers receive power purchase obligation certificates (PPOCs) for 15 years. Tariff terms in France are defined by decree and are calculated based on a premium tariff for the first five years of the power purchasing agreement (PPA), followed by a reduced rate over the last 10 years.

Feed-in tariffs are now the modus operandi in most European countries, with the EU Commission having identified those in Germany, Spain and Denmark as the most efficient.

Belgium, Italy, Sweden, the UK and Poland have all opted for so-called certificate-based systems, where renewable energy is sold at conventional power market prices, with consumers contributing to the costs of its generation by purchasing green certificates from renewable electricity companies.

Elsewhere in Europe, Malta and Finland have supported renewable energy initiatives with tax incentives, while the tendering process that used to be the norm in France and Ireland is being replaced by feed-in mechanisms.

The trend towards feed-in based tariff structures makes obvious sense, given their proven effectiveness compared with other systems. According to Spanish energy company Iberdrola, one of the world leaders in renewable energy development, in 2004 87.3% of wind capacity in the EU was installed in countries with feed-in tariffs. "Certificate systems imply higher risks, so investors demand higher profitability and payment," explains a recent Iberdrola presentation on renewables. Specifically, this says that in 2003-2004, wind energy generated in feed-in countries cost Eu1.13m per megawatt, compared with Eu1.22m per megawatt in countries using the certificate system.

Call for tariff structure harmony

Bankers say that in an ideal world, Europe would harmonise its tariff structures for renewable energy, especially given the success of programmes such as the Breeze mechanism that has demonstrated how effective the feed-in system has been in opening renewable schemes to the capital market.

"It has been the feed-in tariff that has allowed us to secure a good rating for the Breeze programme and therefore to sell it to investors," says Matthias Glückert, managing director of global syndicate at UniCredit Group (HVB) in Munich.

So perhaps the success of the Breeze programme could act as the trigger that could encourage other countries to adopt the German feed-in mechanism. That may be wishful thinking. For the time being, analysts say that harmonisation of preferential tariff structures across the EU remains some way off, for a number of reasons.

First, as UniCredit Group (HVB)’s Kleindienst says, there is no EU directive that would prompt any move towards a single transmission systems operator for the whole continent, with the EU’s primary target being to achieve free access to the electricity transmission grid within the individual member states. "Also," adds Kleindienst, "there are very different grid management systems from one European country to another, so I don’t see harmonisation coming in the near future."

More fundamentally, a range of factors such as climactic conditions and public opinion’s support for renewable energy systems also vary markedly across Europe, which will also militate against any harmonisation of tariff-based incentives for producers of renewable energy.

Notwithstanding these differences, bankers agree that on balance regulatory support for renewable power is growing, and that as it would be political madness for European governments to reduce that support, the operating environment for companies generating renewable energy or the technology that will promote its efficiency is likely to remain very benign.

That is why the financing of renewable power plants has been transformed over the last decade from a niche activity into a mainstream one at most of the leading European banks. "Things have changed dramatically over the last 10 or 15 years," says Emmanuel Rogy, head of EMEA energy project finance at BNP Paribas in Paris. "10 years ago we had a guy in our team who wore green socks and was very interested in financing what we used to call windmills. It was an opportunistic market and we financed a few projects successfully. Today the business has developed into one in which there is a regular flow of deals and in which the number of banks that are active is huge. That helps everybody involved in the renewable energy sector because they know they can access capital in a transparent environment."

"I’m not going to claim that we are positioning ourselves as the green bank of Europe," says Oliver Reisinger, managing director and global head of debt capital markets at UniCredit Group (HVB) in Munich. "But for us as a bank and as a team the renewable sector is very important, and was very important long before the mainstream press started jumping all over the subject.

"We genuinely believe that we have a certain responsibility towards the environment, and with the Breeze project we have so far arranged the financing that has substituted three conventional power plants in Europe."

As Reisinger rightly adds, if the Breeze initiative can carry on financing projects that replace noxious fossil fuel power stations at the rate of three a year, UniCredit Group (HVB) will have done more than its fair share in terms of environmental protection.

Most banks have integrated their renewable financing activities into their broader project finance or debt capital market operations because the fundamental discipline involved in lending to power projects — clean or dirty — is essentially the same.

"The basic principles don’t differ very much," says Rogy. "In both markets you are analysing the capacity of a ring-fenced project to generate sufficient cashflows to repay the debt, although the variables that go into that analysis are different. When you analyse a coal-fired plant you need to take into account the cost and availability of the coal which you need to fire the plant, whereas when you’re looking at a windfarm you need to analyse the wind resource and make a statistical study on how much wind is likely to be available over the next 20 years. So you’re analysing different things but the basic technique is the same."

The same — but different

Another reason supporting the incorporation of banks’ renewable financing operations into their conventional power sector activities is that so many of the companies exploring renewable options are themselves mainstream utilities.

"Much of the investment going into wind and to a lesser extent solar projects is being driven by the large utilities such as Iberdrola in Spain," says Dresdner Kleinwort’s Rosebrock. "Over the longer term we may see the same thing happening in wind that happened with small hydro plants many years ago. They were engineering wonders at the time but became part of utilities’ everyday business, and I think we will see a similar thing happening with wind projects." If that is the case, any bank aiming to provide their utility clients with a full project financing service will, sooner or later, need to include renewable expertise within their broader product capability.

Although the basic cashflow-driven lending discipline applied to renewable energy and conventional power plants may be similar, bankers say there are still important differences between the two markets, and that experience in the renewable market remains a valuable commodity. "It is certainly a more competitive market," says Sophie Justice, director and head of renewables at RBC Capital Markets, which has been at the forefront of banks active in financing renewable energy projects in the last five years. "But it is still important to have detailed understanding of the technologies involved in the industry, and that is an area where I believe RBC Capital Markets still has an edge. Also, banks that have been active in the market for a number of years are better able to assess how regulation has evolved and how the market has responded to regulatory change."

The experience of other banks supports that view. The Breeze project, for example, was not one that happened to blow in to the UniCredit Group (HVB) strategy overnight. Quite the reverse. It has been the product of hard work and considerable expertise that has been built up over more than a decade, with much of the credit for its evolution due to Dagmar Buhl, a lifetime HVB employee who began her career with a five year special promotion programme at the former Bayerische Vereinsbank before spending eight years in the bank’s project finance department.

It was Buhl’s move across to her present position as managing director and head of structured new issues that was pivotal in supporting the UniCredit Group (HVB) franchise in renewable energy financing, which in turn underpinned the development of the Breeze project.

"To be successful in this business you need to be able to combine expertise in project and corporate finance on the one hand and capital market skills on the other," says Buhl. "You need to be able to speak the language of project developers as well as lenders and investors, and you don’t find too many people who can do that. Remember that many of the developers we are speaking to are tiny companies that are even smaller than those in the German Mittelstand. It’s not as though we’re talking to multinationals like BMW or Siemens in this business."

Allied to the expertise that Buhl and others have brought to the UniCredit Group (HVB) renewable energy financing operation has been the preparedness of the bank to prioritise its development — which, in an industry which is all too often blinded by short term ambition, was easier said than done.

"When we started allocating resources to this project back in 2000 and 2001 I had a tough job convincing board members about the need to build up a team to work on deals that might not materialise for three or four years," says Reisinger. "Investment banking generally demands returns on investment very quickly, so by backing this project the board demonstrated its long term commitment to the Breeze initiative."

Investors chase green energy

That was a shrewd move, because in recent years investor demand for exposure to the development of environmentally-responsible energy has grown at breakneck speed. "There is tremendous demand for exposure to good renewable energy assets," says John Pickett, a partner at Linklaters in London, which in 2006 advised on renewable projects worth some Eu4bn. "It is noticeable that you have investors ranging from private equity and hedge funds through to insurance companies and senior bank lenders all looking to put money into the sector in a sensible way."

Others agree. "We believe that renewable eco markets — from renewable energy to carbon emissions — have evolved into an asset class in their own right, which will see exponential growth in the coming years," says Charlie Longden, global head of credit trading at ABN Amro.

While UniCredit Group (HVB)’s Breeze initiative is one way in which renewable energy-based projects are being made accessible to institutional investors, another German player offering solutions for institutional investors is Epuron, the structured finance arm of Conergy, the solar energy system manufacturer and consultant.

Epuron markets itself with the appropriate tag-line, "power for portfolios".

Thorsten Vespermann, head of corporate communications at Conergy’s Hamburg headquarters, says that Epuron’s business model focuses on structured financing of big renewable energy power plants. That means buying in turbines from the leading manufacturers, buying or leasing land and securing appropriate power purchasing agreements for windfarm installations and then selling them on to institutional investors — of which Vespermann says the Breeze programme has been one example.

"The idea is to develop projects and make them bankable to sell them," says Vespermann. "So we will also offer our institutional investor clients baskets of renewable energy products responding to their appetite for exposure to areas like solar and wind. From our perspective, however, there is still a lot more money available for investment in renewable projects than there are projects available to invest in."

  • 01 May 2007

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 JPMorgan 317,793.98 1355 8.72%
2 Citi 301,114.13 1092 8.26%
3 Barclays 259,580.63 846 7.12%
4 Bank of America Merrill Lynch 258,842.43 934 7.10%
5 HSBC 224,273.23 905 6.15%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 32,854.00 58 6.73%
2 BNP Paribas 31,678.29 142 6.49%
3 UniCredit 31,604.22 138 6.47%
4 HSBC 25,798.87 114 5.29%
5 ING 21,769.65 121 4.46%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 14,633.71 80 10.23%
2 Goldman Sachs 11,731.14 63 8.20%
3 Morgan Stanley 9,435.23 48 6.60%
4 Bank of America Merrill Lynch 9,229.95 42 6.45%
5 UBS 8,781.68 42 6.14%