Not in my back yard
Wind power has gone from being a trendy idea for environmentalists
to big business. In 1998 a record 2,100MW-worth of new turbines
were installed worldwide. Denmark already generates 8% of all its
electricity requirements using wind farms, and Germany and the
Netherlands have ambitious targets for non-renewable energy
sources.
But just as the technology is taking off in Germany, which led the world last year by installing 800MW of new turbines, tax reforms being enacted in Bonn are threatening further growth, since funding has up to now been heavily dependent upon tax-advantaged funds.
Investors have up to now been allowed to write off 100% of their investments over only one or two years. Bank lending into the Kommanditgesellschaft (KG) funds gives additional leverage, creating an efficient tax shelter device for high net worth individuals seeking to avoid the effects of the top marginal rate, still above 50%.
Last year 30 or more such wind power KG funds came onto the market, and arrangers had believed that they were safe from the planned tax reforms expected to hit assets such as aircraft with changes to depreciation rules. But the latest reports from Bonn suggest that the government is also considering making it impossible to write off losses generated from so-called passive investments against other income.
The Red-Green government led by Gerhard Schröder is in a hurry to push through legislation before it loses its majority in the upper house as a consequence of recent state elections in the land of Hessen. Once this re-allocation of seats takes place in the Bundesrat, the opposition CDU conservative party will have considerable powers to block any tax reforms it considers too radical. Any initiative to prevent losses from passive investments would be a much bigger blow to the tax-driven funds than even the biggest of pessimists had anticipated.
The past few years have been very attractive to investors because of the tax write-offs, says Jutta Gelbrich at Frankfurt-based Okobank, which last year placed around Dm20 million ($35.25 million) worth of wind power equity with small investors. But if the tax allowances are ended it will end the boom, not just for the wind power industry.
Placing such funds in 1998 was a relatively simple matter, with demand often outstripping supply. For example, last summer the Freiburg-based green investment bank Bobikiewicz & Partner launched a closed end fund for Windpark Bockelwitz. All the units sold out within two months, with the bank not even having to wait until the traditional fourth quarter rush when most Germans calculate their likely tax bill for the year and buy into tax shelter funds.
Windpark Bockelwitz, a large Dm40 million facility comprising 10 1.5MW turbines, benefits from legislation guaranteeing it access to the grid at an agreed price, giving it priority over dirtier electricity-generating technologies. This access through sales to Westsachsische Energie (WESAG) makes the installation an attractive proposition to investors, who want to see a reliable cashflow after their initial 100% tax write-off.
But this year will be far more difficult for such projects, and in the wait-and-see environment the placing of funds has all but dried up in Germany. However, even if writing off losses from passive investments is outlawed, there may still be a role for tax allowances. One likely solution would be to switch to a corporate investor base, accessing players similar to the ones in the US, and moving away from Germany's distinctive retail distribution of funds in small equity units of Dm50,000 ($27,144) for aircraft and only Dm20,000 in many wind power transactions. ?Corporate investors would be able to meet the requirements on passive income by taking the assets on their own balance sheets,? one arranger suggests. He adds that cross-border leases are also a possibility, even being used as part of a double-dip. The main obstacle is the relatively small size of windfarms, which would mean finding several sizeable projects and bundling them together to create a large enough transaction to make the arranging and legal costs worthwhile.
But he does see US leases as a possibility, especially since the German government still has a long term commitment to phase out nuclear power. This will stimulate even more construction of alternative power plants, making Germany the world leader in installing new capacity.
It is ironic that the Red-Green coalition government, with its environmental credentials, should be casting a shadow over the funding and development of wind farms as a result of its tax reform initiative. But in neighbouring Netherlands the environmental activists are the ones holding up the wind energy industry.
Having opposed coal fired power stations because of air pollution, many of the same activists have now come out against building windfarms because they spoil the landscape.
One banker explains that the term ?Not In My Back Yard' (Nimby) has entered the language in the Netherlands, especially among those connected to the wind power industry, who have found that although everyone wants clean electricity they do not necessarily want a windfarm built nearby. This is a particular problem in a densely populated country such as the Netherlands. The result is that the capital generated by tax incentives is outstripping the number of projects getting built. In 1995 the Dutch government introduced a law stipulating that investors would no longer pay tax on interest and dividends from green funds, and since that time a number of sizeable funds have been established.
These funds can invest in approved technology, with a list known as Vamil stating what sort of equipment is eligible for tax breaks, in the form of accelerated depreciation. The list is updated regularly and technologies like biomass have been added to equipment such as wind turbines which are already well established for Vamil tax breaks.
Accelerated depreciation of asset can be as much as 140% of equipment value, taken in a single hit in one year, so the banks often step up with equity and use their own balance sheets to take the depreciation. The big Dutch banks have set up special units to arrange financing, both as principal and agent, Rabobank for example, has a Strategic Sustainable Development Department.
To date Rabobank has invested in 106 wind farms, some of them small single turbine projects. It also manages a Green Fund which invests in wind and other alternative sources of energy, which has Fls806 million ($330 million) to invest, indicating the rapid growth in windpower development expected in the Netherlands.
? The Dutch government has a target of 10% of its energy requirements coming from renewable sources by the year 2020, which will involve at least 100MW of wind turbine power being installed annually.
? This could once again mean a role for US leveraged leases, though arrangers and lawyers still think that the small size of projects remains a formidable obstacle.
Deals tend to be small, perhaps Fls25 million, and are often initiated by farmers who use their land to build windfarms, comments Heleen Sprenger in the New York office of Dutch law firm Loeff Claeys Verbeke, which has arranged a number of domestic leases making use of Vamil and other tax breaks.
?A lot of farmers are getting involved, since there are a lot of subsidies for clean energy, but usually you don't get a permit to build hundreds of windmills close to one another,? Sprenger notes, ?because of the effect on the landscape.?
This means that the kind of very large farms which might be suitable for cross-border leasing are unlikely to be built. ING Bank is active in arranging financing for alternative energy projects, and looks at a range of structures including leasing, project loans and retail investor funds. But unlike Rabobank it does not go out and raise capital without a specific project in mind. ?We find a project first, then we go to the market to raise the money, so we don't have a big pool of money waiting for deals,? explains Eric de Bruin, project manager in the environmental finance department at ING.
ING has arranged deals as far afield as China, but for the next few years the global market is likely to be led by Europe, primarily Denmark, the Netherlands, Spain ? and Germany if the German government wakes up to the link between the environment and tax breaks.
But just as the technology is taking off in Germany, which led the world last year by installing 800MW of new turbines, tax reforms being enacted in Bonn are threatening further growth, since funding has up to now been heavily dependent upon tax-advantaged funds.
Investors have up to now been allowed to write off 100% of their investments over only one or two years. Bank lending into the Kommanditgesellschaft (KG) funds gives additional leverage, creating an efficient tax shelter device for high net worth individuals seeking to avoid the effects of the top marginal rate, still above 50%.
Last year 30 or more such wind power KG funds came onto the market, and arrangers had believed that they were safe from the planned tax reforms expected to hit assets such as aircraft with changes to depreciation rules. But the latest reports from Bonn suggest that the government is also considering making it impossible to write off losses generated from so-called passive investments against other income.
The Red-Green government led by Gerhard Schröder is in a hurry to push through legislation before it loses its majority in the upper house as a consequence of recent state elections in the land of Hessen. Once this re-allocation of seats takes place in the Bundesrat, the opposition CDU conservative party will have considerable powers to block any tax reforms it considers too radical. Any initiative to prevent losses from passive investments would be a much bigger blow to the tax-driven funds than even the biggest of pessimists had anticipated.
The past few years have been very attractive to investors because of the tax write-offs, says Jutta Gelbrich at Frankfurt-based Okobank, which last year placed around Dm20 million ($35.25 million) worth of wind power equity with small investors. But if the tax allowances are ended it will end the boom, not just for the wind power industry.
Placing such funds in 1998 was a relatively simple matter, with demand often outstripping supply. For example, last summer the Freiburg-based green investment bank Bobikiewicz & Partner launched a closed end fund for Windpark Bockelwitz. All the units sold out within two months, with the bank not even having to wait until the traditional fourth quarter rush when most Germans calculate their likely tax bill for the year and buy into tax shelter funds.
Windpark Bockelwitz, a large Dm40 million facility comprising 10 1.5MW turbines, benefits from legislation guaranteeing it access to the grid at an agreed price, giving it priority over dirtier electricity-generating technologies. This access through sales to Westsachsische Energie (WESAG) makes the installation an attractive proposition to investors, who want to see a reliable cashflow after their initial 100% tax write-off.
But this year will be far more difficult for such projects, and in the wait-and-see environment the placing of funds has all but dried up in Germany. However, even if writing off losses from passive investments is outlawed, there may still be a role for tax allowances. One likely solution would be to switch to a corporate investor base, accessing players similar to the ones in the US, and moving away from Germany's distinctive retail distribution of funds in small equity units of Dm50,000 ($27,144) for aircraft and only Dm20,000 in many wind power transactions. ?Corporate investors would be able to meet the requirements on passive income by taking the assets on their own balance sheets,? one arranger suggests. He adds that cross-border leases are also a possibility, even being used as part of a double-dip. The main obstacle is the relatively small size of windfarms, which would mean finding several sizeable projects and bundling them together to create a large enough transaction to make the arranging and legal costs worthwhile.
But he does see US leases as a possibility, especially since the German government still has a long term commitment to phase out nuclear power. This will stimulate even more construction of alternative power plants, making Germany the world leader in installing new capacity.
It is ironic that the Red-Green coalition government, with its environmental credentials, should be casting a shadow over the funding and development of wind farms as a result of its tax reform initiative. But in neighbouring Netherlands the environmental activists are the ones holding up the wind energy industry.
Having opposed coal fired power stations because of air pollution, many of the same activists have now come out against building windfarms because they spoil the landscape.
One banker explains that the term ?Not In My Back Yard' (Nimby) has entered the language in the Netherlands, especially among those connected to the wind power industry, who have found that although everyone wants clean electricity they do not necessarily want a windfarm built nearby. This is a particular problem in a densely populated country such as the Netherlands. The result is that the capital generated by tax incentives is outstripping the number of projects getting built. In 1995 the Dutch government introduced a law stipulating that investors would no longer pay tax on interest and dividends from green funds, and since that time a number of sizeable funds have been established.
These funds can invest in approved technology, with a list known as Vamil stating what sort of equipment is eligible for tax breaks, in the form of accelerated depreciation. The list is updated regularly and technologies like biomass have been added to equipment such as wind turbines which are already well established for Vamil tax breaks.
Accelerated depreciation of asset can be as much as 140% of equipment value, taken in a single hit in one year, so the banks often step up with equity and use their own balance sheets to take the depreciation. The big Dutch banks have set up special units to arrange financing, both as principal and agent, Rabobank for example, has a Strategic Sustainable Development Department.
To date Rabobank has invested in 106 wind farms, some of them small single turbine projects. It also manages a Green Fund which invests in wind and other alternative sources of energy, which has Fls806 million ($330 million) to invest, indicating the rapid growth in windpower development expected in the Netherlands.
? The Dutch government has a target of 10% of its energy requirements coming from renewable sources by the year 2020, which will involve at least 100MW of wind turbine power being installed annually.
? This could once again mean a role for US leveraged leases, though arrangers and lawyers still think that the small size of projects remains a formidable obstacle.
Deals tend to be small, perhaps Fls25 million, and are often initiated by farmers who use their land to build windfarms, comments Heleen Sprenger in the New York office of Dutch law firm Loeff Claeys Verbeke, which has arranged a number of domestic leases making use of Vamil and other tax breaks.
?A lot of farmers are getting involved, since there are a lot of subsidies for clean energy, but usually you don't get a permit to build hundreds of windmills close to one another,? Sprenger notes, ?because of the effect on the landscape.?
This means that the kind of very large farms which might be suitable for cross-border leasing are unlikely to be built. ING Bank is active in arranging financing for alternative energy projects, and looks at a range of structures including leasing, project loans and retail investor funds. But unlike Rabobank it does not go out and raise capital without a specific project in mind. ?We find a project first, then we go to the market to raise the money, so we don't have a big pool of money waiting for deals,? explains Eric de Bruin, project manager in the environmental finance department at ING.
ING has arranged deals as far afield as China, but for the next few years the global market is likely to be led by Europe, primarily Denmark, the Netherlands, Spain ? and Germany if the German government wakes up to the link between the environment and tax breaks.
Top project finance arrangers for signed alternative energy projects since 1996
| Rank | arranger (exc. co-arranger) name | amount ($m) | no. |
| 1 | Asian Development Bank | 464 | 1 |
| 2 | Greenwich NatWest | 199.91 | 1 |
| 3 | MeesPierson | 193.1 | 1 |
| 4 | Warburg Dillon Read | 175 | 1 |
| 4 | ABB | 175 | 1 |
| 6 | Chase | 145.95 | 2 |
| 7 | ABN Amro | 140.09 | 1 |
| 8 | Bank of America | 101.63 | 1 |
| 9 | BCH | 90.55 | 1 |
Global alternative energy projects in the pipeline
| Project name | project amount ($m) | country |
| Tagoloan II Hydroelectric Plant | 210.00 | Philippines |
| Piacenza Waste-to-Energy | 68.31 | Italy |
| Three Gorges Project | 30,000.00 | China |
| Biomasa-Generacion Waste-to-Energy I | 26.00 | Honduras |
| Xiaolangdi Dam Project | 1,500.00 | China |
| Tuas Waste Incineration Plant | 597.37 | Singapore |
| Amoco-Enron Solar Plant | 15.00 | US |
| Song Hinh Hydropower | 144.00 | Vietnam |
| Kali Gandaki A project | 543.00 | Nepal |
| Enel Waste to Energy | 164.00 | Italy |
| Alto Cachopoal | 380.00 | Chile |
| Small Hydroelectric Programme | 900.00 | Philippines |
| Vicedo Galicia Wind | 40.00 | Spain |
| Foote Creek Rim Power Plant | 60.00 | US |
| Gulf Syndicate Wind Power | 600.00 | Kazakhstan |
| Dachaoshan Hydropower Project | 1,073.00 | China |
| Italian Windfarms | 210.00 | Italy |
| CBK Hydropower | 450.00 | Philippines |
| Hongjiang 200MW Hydropower Project | 249.00 | China |
| Egiin River Hydropower Project | 280.00 | Mongolia |
| Waste to Energy Project | 10.00 | UK |
| Baghhar 450MW Hydropower | 600.00 | India |
| Tianjin Waste-to-Energy Plant | 45.00 | China |
| Castelfranco Wind Project | 56.92 | Italy |
| Buffalo Ridge Wind Farm One | 16.60 | US |
| Buffalo Ridge Wind Farm Two | 14.75 | US |
| Xistral Wind Farm | 206.86 | Spain |
| Ruhleben Waste to Energy Power Plant | 75.00 | Germany |
| Perl Waste to Energy Project | 99.00 | UK |
| Thermo Tech Waste Project | 11.00 | Canada |
| EDC Waste to Energy Project | 75.00 | UK |
| Wyoming Wind Power Project | 60.00 | US |
| Coelce Wind Project | 81.00 | Brazil |
| Goindwal 500MW Hydropower | 550.00 | India |
| Upper Agno Six Mini Hydropower Plants | 130.00 | Philippines |
| Mazar Hydroelectric Plant | 375.00 | Ecuador |
| Cahora Bassa Hydropower | 130.00 | Mozambique |
| Karuma Falls Hydroelectric Project | 400.00 | Uganda |
| Szczecin Waste-to-Energy Project | 30.00 | Poland |
| Fabiansebestyen Geothermal Power Plant | 140.00 | Hungary |
| Biomass Pilot Power | 70.00 | Brazil |
| Renewable Energy Development Project | 295.00 | Indonesia |
| Ban Mai Hydroelectric Project | 686.81 | Vietnam |
| Nan'ao Wind Farm Project | 30.00 | China |
| Mini Hydroelectric Schemes | 70.00 | Australia |
| Tad-Salem Hydropower | 60.00 | Vietnam |
| Hinh River Hydropower Plant | 90.00 | Vietnam |
| Sesan 3 Hydropower Plant | 300.00 | Vietnam |
| Gai Lai ? Pleikrong Hydropower | 150.00 | Vietnam |
| Great Yarmouth Windpower Farm | 57.08 | UK |
| MMC Hydropower Plant | 350.00 | Mongolia |
| Dong Nai River Hydropower | 175.00 | Vietnam |
| Waste-to-energy Power Generation Plant | 10.00 | UK |
| Derby Hydro Power Station | 70.30 | Australia |
| Jinghong Hydropower | 940.00 | China |
| Enron Wind Power Plant | 67.00 | Peru |
| Enron Wind Plants | 37.00 | US |
| Tetuan Wind Project | 64.00 | Morocco |
| Nine Hydroelectric | 40.00 | Sri Lanka |
| Source: Capital DATA's ProjectWare | ||
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