Implementation of the tax code change could be delayed by the German general election, now scheduled for September, but it is still expected to proceed. If the Conservative Christian Democrat Party comes to power as many expect, the fiscal crackdown, when it finally comes, could even be harsher.
The closed-end fund has been the major source of equity for German wind power development, with investors typically being private individuals looking to lever the tax advantages on offer. In the last 18 months, however, their popularity has waned, with equity increasingly coming from major institutional investors instead (Windpower Monthly, November 2004). The tax change may speed this process rather than stop German wind development in its tracks.
This year just nine companies have reported plans for wind funds, compared to the 50 or so in recent years, reports Stefan Loipfinger, publisher of news service fondstelegramm.de. Some of these plans may not go ahead now, or will be withdrawn and reworked, suggests Dirk Jesaitis of WIND7, a company which sells stakes in German wind funds to Danish private investors.
Stefan Schmitz of lawyers Field Fischer Waterhouse agrees. With the tax advantages consigned to the scrap yard their popularity is expected to decline even further, while "many wind projects poised for completion will suddenly have no financing," he says. As a result, Schmitz predicts a swift change in the approach to wind financing.
With some 1700 MW of new wind plant planned for completion in Germany this year, the door to international commercial and institutional investors is likely to be thrown wide open, he says. As a result, wind projects will need to be developed and run more cost effectively and brought into line with project standards in other countries. A key challenge will be to reconcile the needs of international investors, such as their preference for projects of 50 MW or more, with the interests of Germany's large number of small independent wind developers, says Schmitz.
"The funds themselves very often had comparatively low returns and were only attractive because of their tax advantages. Very often the loss allocation would exceed 100% of the capital invested," says Schmitz. When the tax advantage disappears, investors will only put money into renewable energy if the returns are sufficiently high to compete with other investment opportunities. International investors, he points out, will be looking for returns of 13-15%. "So far, German projects have not been able to deliver these returns" he claims.
Turbine manufacturers will almost certainly come under pressure to reduce the price of their products in line with those sold elsewhere, continues Schmitz, as will land owners when it comes to the rents they receive from turbine owners. Meanwhile, investors in closed-end funds established after March 18 may have to accept the current average returns of 6-8%, but without the tax advantage. Schmitz adds that rather than continuing their work exclusively or mainly in Germany, developers will increasingly have to look abroad for new profit opportunities.
While alternative financing arrangements are likely to be favoured after the tax law revamp, Jörg Böttcher of HSH Nordbank believes it is not the end for closed-end wind funds. He points out that while the total invested in wind funds may have declined in recent years, the performance of wind fund projects has actually enhanced as project specification, siting and operational management has tightened up to improve output and achieve savings.
"With adjustments, they can stand alone without the fiscal advantage," he says. "There will be a shift in investors' thinking from decisions based formerly on fiscal advantages to earnings performance." He adds that while margins will shrink "the market will not completely collapse."
Last year, the total value of wind funds was down 38% at EUR 705 million compared with EUR 1.4 billion in 2003, reports Loipfinger. The equity share from investors in 2004 fell to EUR 209.5 million from EUR 340 million in 2003. The result was that wind funds accounted for just 29% of the EUR 2.4 billion invested in Germany's wind sector in 2004, compared to around 37% over the previous two years.