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Germany

Harsh criticism of popular wind funds -- German analyst speaks out

Wind energy has yet to make a significant breakthrough in the German investment market and will remain "just a niche" in the wider field unless it becomes more professional in its approach to structuring projects, claims a leading analyst. "There is a shortage of good products," says Stefan Loipfinger. In his report he says many wind fund companies display a lack of professionalism. But ironically there is no shortage of investors.

Harsh criticism of popular wind funds

Wind energy has yet to make a significant breakthrough in the German investment market and will remain "just a niche" in the wider field unless it becomes more professional in its approach to structuring projects, claims a leading analyst. "There is a shortage of good products," says Stefan Loipfinger. "You can trash nine out of ten wind fund products on the market at the moment. They are unworthy of discussion. The sites and output forecasts are no good and the financial provisions for maintenance and repairs are much too low."

The independent market analyst revealed his findings after researching a report titled "Marktanalyse der Beteiligungsmodelle 2002." He claims there is "a noticeable lack of readiness" among some companies to provide information. Even some publicly traded wind-fund initiators "couldn't or wouldn't" provide meaningful figures.

Many wind fund companies "are reluctant to release information on how the wind stations have run, on performance forecasts, on earnings and expenditure or even the number of investors in a project and the lack of transparency speaks volumes," says Loipfinger. "It displays a lack of professionalism that is mirrored in many of the funds' prospectuses," he states.

He criticises, too, the role of project leaders. "Prospectus business conditions often grant the initiator of the project 10% to 15% of voting rights even though it invests no money of its own." This arrangement, "not found in any other fund sector," means the lead company usually controls the majority vote at annual general meetings, which few individual investors attend, without any capital at risk. "Hardly democratic is one way of describing the situation," says Loipfinger.

He goes on to warn that "unsuitable investors" are risking their money as wind funds are relatively speculative. The funds are usually financed with up to 75% external debt that "has to be serviced come what may." A 10% drop in average wind speeds as experienced in Germany last year leads to a 30% drop in earnings, which debt servicing will swallow up, wiping out any dividends. He urges wind fund companies to employ experienced advisors and find "suitable investors," those with a high tax progression. It is important, he maintains, that an investor can write off any losses in the early years.

Enthusiastic investors

Ironically, there is no shortage of investors. With the government fixing the price of wind power -- and the European Commission now officially allowing it -- putting savings in wind funds is seen as a safe bet. Demand was "once again enormous" in 2001, says Tim Warnke, finance head at one of the largest players, Umweltkontor Finance in Erkelenz. By the end of 2001, just over 25,000 investors had put EUR 406 million into wind energy funds, 13% more than the previous year. The equity raised project financing of EUR 1.353 billion, Loipfinger reports.

But wind funds are only one of a series available to Germans and in 2001 accounted for no more than 4% of total fund investments, up on 3.1% in 2000. Of the more than 40 companies marketing wind investment funds in Germany, the largest ten accounted for 68% of the capital raised. The most successful, WPD of Bremen, raised EUR 50 million last year, doubling its year 2000 performance. The finance flowed into 11 wind project funds financed to the tune of EUR 160 million. Another five companies raised EUR 20 million for their wind funds.

The sector expects significant growth this year, but many of its forecasts seem optimistic, says Loipfinger. His study indicates that EUR 1 billion will be needed in 2002, two and a half times the 2001 figure, requiring EUR 3.2 billion of projects. "This looks impossible in view of the declining number of suitable locations with adequate wind speeds," he comments. Foreign projects financed under the wind fund model, however, may prove "a real alternative," as they have been in the real-estate fund sector.

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