Germany leads the world in wind power, with 17GW of installed generation. But it is currently entering a more difficult phase of development – many of the best onshore sites have already been developed and progress is slow on offshore generation.

New installations are down on 2003 levels and the market needs an injection of impetus as it heads towards one of the periodic reviews of the Renewable Energy Law.

Energy security and independence are firmly on the agenda for both the conservative CDU and left wing SPD partners in the new grand coalition government in Berlin. And at a meeting in Berlin in January Federal Environment Minister Sigmar Gabriel pledged that the German renewables sector will continue to receive government support.

But the market is a transitional phase. Most of the best onshore sites for wind farms have already been developed, and it is harder to get permits.

For project lenders the future may lie with offshore wind, but these projects are untested in terms of power production and cashflow models, and involve trickier transmission challenges.

Moving offshore

German bureaucracy is not helping either. Offshore projects have been very slow to move forward, caught up in time-consuming processes for various regulatory clearances such as shipping safety. In the meantime other countries such as Norway have moved ahead with installed offshore capacity.

"The current Renewable Energy Law will need to be renewed in 2008 or 2009, and discussions will start next year, but we are very positive about the support for renewables from the new coalition government in Berlin," says Dr Peter Ahmels, President of the German Wind Energy Association.

"Federal Environment Minister Sigmar Gabriel is fully engaged, and a recent government report has said that they want to promote renewable energy, and that by 2020 it may be possible to have 25% of electrical power from renewable energy sources."

But in the offshore sector, he sees more support as necessary, with perhaps credits from the Federal or State governments, if projects are going to move forward.

"Offshore the initial fixed rate tariff is a little higher than for onshore wind projects, at 9.1 cents per kWh, but this is probably not enough to get projects started, especially given the higher construction costs offshore and the cost of laying cables," says Ahmels.

Nonetheless, some progress is being made. REpower has a prototype 5MW offshore turbine that has been operating off the coast near Brunsbuettel, and has performed even better than expected. During 2006 REpower will install two more of its 5MW turbines near Cuxhaven, with the output being sold to E.ON/Essent and the Dutch utility EWE.

And developer WIND-projekt GmbH recently put in place a Nordex N90 turbine in the Baltic Sea near Rostock. WIND-projekt also has plans for the 54MW Baltic 1 project on the Darss peninsula, not far from Rostock.

Onshore investor funds

Offshore may represent the future, but in the meantime most of the projects getting financed are still of the onshore variety, with much of the equity coming from small investors via the many funds on offer. Developers such as Energiekontor, WPD and reconcept have all been active over the past 12 months marketing Windfonds, though since the clampdown on tax shelters by the German government these are now return-based funds rather than tax based products: there is however some tax shelter equity coming from other countries, notably Denmark.

Last year WPD AG raised equity via the placement of the Windpark Koethen fund, which involved a large 34MW wind project powered by seventeen Enercon E-70 turbines. The project is located in Saxony Anhalt.

The total project cost was Eu51 million total with Eu35 million of bank debt provided by Bremer Landesbank. The debt-to-equity ratio is fairly typical for such projects, with debt usually syndicated between two or three banks.

Other projects are being done with equity provided by major developers such as Hamburg based voltwerk, which is active in both solar and wind power. Early this year voltwerk signed up with foreign partners for the installation of 44 wind turbines in various projects around Germany, which will produce 80MW.

All these projects benefit from preferential pricing and dispatch rules, with long term fixed-rate feed-in tariffs under the Renewable Energy Law. They have also benefited on the financing side from environmental loan programmes initiated by institutions such as KfW, with this cheap funding funnelled into the sector via commercial bank arrangers.

"There is currently plenty of bank debt available for good projects, with some new banks entering the market, though wind power in Germany remains a local market dominated by German banks," explains Joerg Fischer, Vice President at Bremer Landesbank. "And in addition to bank debt, there are also some interesting capital market products being used, such as subordinated debt or bond financings."

"Apart from volatile wind conditions, cashflows are stable, since wind projects in Germany have long-term fixed-rate feed-in tariffs that usually extend beyond the typical fifteen year term of the loan," says Fischer.

"In today's market there are so many wind projects already operating that there is usually a reference close by for new projects," Fischer adds. "As a result bank lenders are generally comfortable with the wind risk, and do not require hedging. The cost of hedging wind risk can be rather high, since the market for wind derivatives is not very transparent or liquid."

Secondary market

Banks are also keeping busy funding the acquisition of existing assets. Most are already operating, but some deals are done during the construction phase. Last year GE emerged as the biggest buyer of wind assets in Germany, and is expected to be back for more this year.

One challenge is that projects where equity comes from funds can be hard to sell, so deals tend to be struck between large developers who have put up the equity themselves.

"We see a lot of investors who are keen to invest in existing assets, and are making offers to developers, but many existing German projects are owned by closed end funds with 1000 investors, which can be very difficult to deal with," comments one banker. "But some developers have projects on their balance sheet and international investors are looking for operating assets where you do not have construction risk, an operating asset, stable cashflow, secure cashflow from the EEG. We see a lot of demand for these assets from international investors."

Unlike in the US, where very large developers have begun to play a bigger role in initiating projects, in Germany smaller developers still tend to play that role, negotiating their way through the various permit processes, and putting financing in place with German banks. Big names such as GE come in on the secondary market, once projects are nearing completion.

Last autumn Renewable Energy Holdings (REH) acquired two wind farms from EDF Energies Nouvelles for Eu48.5 million. The deal illustrated a trend for even projects still under construction to be traded. The tariffs are lowered each year, with the tariff set from the time operation of the farm begins.

The two farms, a 32MW facility in Kesfeld and another smaller 9.2MW facility in Kirf, both have the usual long-term fixed-rate tariffs. Debt provider HVB has also provided REH with a weather hedge in case of wind forecasts undershooting targets. HVB was the sole provider of Eu38.8 million worth of project debt with a fifteen year term.
GE bought no less than seven wind farms in 2005, totalling 166MW in capacity. Four were sold by developer Denker & Wolf, and another from Repower.

Later in the year GE Energy acquired the Alsleben project from German developer EAB Technology Group. EAB will continue as technical adviser, while GE Energy will operate the project. With 37 GE 1.5MW turbines, this is one of the largest wind farms in Germany. Lovells acted as legal counsel to EAB on the transaction.

The Alsleben project, situated near Magdeburg, was still under construction at time of the sale. And GE also bought the 12MW Krusemark wind farm in Sachsen Anhalt, developed by Germania. Regional grid operators are the offtakers.

GE put in place Eu60 million worth of debt for the Alsleben and Krusemark projects, with Nord/LB as sole arranger.

Deals are often syndicated among two or the banks, but just as often for deals around the Eu50 million level a single bank will act as sole arranger, and may not bother syndicating the debt.

Major renewable energy lenders, such as NordLB, HSH-Nordbank, BremerLB, and HVB do have a lot of loans on their balance sheets, but so far are not experiencing any great capacity constraints.

They are comfortable lending out as far as 15 years, but rarely go further. Developers have been pressing for longer-term loans, but thus far the German banks have been resisting these demands.

Upgrading

A future source of onshore business may involve the upgrade of existing sites. The technology of wind turbines has improved over the past decade, and replacing them with bigger and more efficient turbines may be worthwhile in some cases. But the newer turbines tend to be taller, and taller hub heights means getting new planning permission, which can complicate the repowering process.

One problem which remains in areas such as the north-east coastline is that the grid can be quite inefficient, and producers can lose 10% to 20% of their production on the grid.

It can be hard for a bank lender to accurately predict what these losses may be, which adds to the risk in some deals. The risks are ever higher on offshore projects, where new cables have to be laid, and where cost-efficient transmission remains a challenge. Some lenders would like to see state governments (the Laender) step up with guarantees pre-completion in order to get the first projects moving along.

"Onshore there are not so many good sites left for windfarms, so developers and bank lenders see the future offshore, but there are still many obstacles to be overcome," says Christian Knuetel, lawyer at Lovells in Frankfurt.

Knuetel explains, "the challenge is how to get the energy produced down from the North Sea or the Baltic Sea to areas such as the Ruhr region where it is needed. Some new cables and transmission lines will clearly need to be financed, and that remains an unresolved issue."

"German offshore projects are mostly planned to be further from the shoreline than is the case in some other countries, so there will be higher cabling costs, and project costs are also being hit by the rising price of copper cable and other construction materials, and by the constraints in the supply of turbines," says Nikolai Ulrich, head of project finance, energy, at HSH-Nordbank in Hamburg.

"We usually lend out to 15 years on onshore wind projects, but we tend to like to see part of the loan being repaid faster, because the operating and maintenance costs might increase after 10 years, whereas the German feed-in tariff is a fixed nominal tariff which will not be adjusted for inflation," says Ulrich.

"Since O&M costs will rise with inflation, that leaves less room for debt service in the later years of a project," he adds. "A typical loan structure in the German market might include 25% equity and 75% debt, with the loan split into two thirds 15 year money, and one third 10 year money."

All the signs are that there will be significant wind capacity added in the German market in the coming years. And Germany has more incentive than most to boost its energy independence, since at a time when the certainty of oil and gas supplies is a major political issue, it has the added burden of having begun the process of a total phase-out of nuclear power.