German wind developers are teetering on the threshold of a major new business sector: financing foreign wind projects. Wind developers with their own finance division -- like listed companies Energiekontor, Plambeck, P&T and Umweltkontor -- as well as wind financing companies such as WPD of Bremen and Munich-based BVT Group have foreign projects moving steadily towards construction. Having supplied the up-front costs from their balance sheets, they are now seeking financing before their cash resources are exhausted.
One option is to adapt what has become the classic German financing model for wind power projects: closed- end funds set up to finance individual wind projects through limited liability companies (Windpower Monthly, September 2001). These funds are used to raise equity, usually 30-40% of project value, from smaller investors as the seed to get cheap loans from environment programs at Germany's two development banks, Kreditanstalt für Wiederaufbau (KfW) and Deutsche Ausgleichsbank.
Whether the fiscal benefits which make closed-end funds in Germany attractive to private investors can also be applied to foreign projects remains unclear. But KfW is doing its bit to encourage investment in foreign wind projects by providing its first soft loan for a large scale wind plant abroad. This went to the La Muela project in Spain (page 59). Meantime, Energiekontor and Umweltkontor and WPD are among others preparing funds to finance foreign projects, though none have yet hit the market.
Energiekontor plans to start marketing a closed-end wind fund for its first foreign wind station, the 2.5 MW Zarax 1 plant in Greece made up of five Enercon turbines and commissioned in May 2001, before the middle of the year. At about the same time a fund for its Portuguese 18.2 MW Trandeiras project, now under construction, will be launched, according to the company's Christian Bredemeier. "It has taken a long time to prepare these funds because we have had to gather a lot of know-how," he comments. There is no shortage of investors, it seems. "There is a growing trend for German investors to put their money in foreign property funds and the same clientele is interested in wind stations," Bredemeier says.
Umweltkontor set up an open-ended fund called "Blue Energy" last year. It is a stockholding company aimed at both private and institutional investors. Into this has been placed its 26% stake in the 100 MW Spanish La Muela project, says the company's Elke Schlüter. But the nuts and bolts of the fund financing are not in place yet. "We haven't starting looking for investors for Blue Energy yet," Schlüter says.
WPD will be ready to market its first foreign fund for a project in Spain at the end of 2002 and for another project in France during the course of 2003, according to Christian Gawin of the company. The structure for Spanish project equity financing will probably allow for the investor company to be based in Germany and the operator company in Spain, he says. As such, German investors in foreign wind stations could benefit from earnings for wind-generated electricity that are tax-free, he argues.
The slow progress in getting funds for foreign wind stations marketed implies that transplanting the German system on to foreign developments is not simple. Developers are asking whether there are other options. Companies offering project finance and other financial and tax services have spotted the need for know-how and are raising their profile in the wind sector.
Jealous of Germany
"I'm very jealous of you in Germany. You have successfully got people from the street to put their money in wind. This is unique," says Mark Henderson from the power project finance team at French bank Societe Generale. "But can you re-create these unit trusts abroad? Probably not, so developers are going to have to put in more of their own resources as equity," he predicts.
Martin Stewart-Smith of the London branch of legal company Orrick Global Infrastructure Group also refers to the "benign financing market in Germany." He concurs with Henderson, however, that the fund method "may not be transportable." At the same time, he admits that if a way can be found to use the fund method, German investors might prove willing to place their money in foreign wind projects.
"At home, developers have satisfied investors with quite a low rate of return, of around 8%, so there has been little inroad of non-German companies to participate in the German market," he remarks. "This low expectation level could give German developers an advantage as their investors at home will then be delighted with what they get abroad," he says. On the other hand, "you are playing a very different game abroad and German companies have not participated in the development of financial techniques. There will be a learning curve," he warns.
This is where companies like international law and tax consultancy Ernst & Young, with its 3500 employees worldwide, hope to bring their strengths into play. Karl Hamberger of the Ernst & Young Munich branch says his team is working up carefully tailored legal and fiscal models for closed end funds that can make the participation of German investors in foreign wind projects as attractive as in projects on home ground.
His models are legal and tax structures that allow German investors to earn money from foreign wind projects and at the same time limit the risk for both the investors and initiators of the projects. Differing fiscal practices play a crucial part in his models. Tax rates in the countries where wind is being developed are usually lower than those in Germany. Double taxation agreements between countries allow for earnings from activities in another country to be taxed in that country and not in Germany, where the investor is based.
"Wind funds abroad can allow investors to shift taxable income from Germany, where taxes are high, to countries where other tax rules apply. This can lead to considerable fiscal advantages," says Hamberger. While both investors and developers may worry about the stability of fiscal law abroad, "you mustn't forget that Germany has been experiencing a major tax reform over the last four years that will presumably continue for another four years," Hamberger points out. He adds that excellent knowledge of and contacts in the country in question are vital. Developers and financiers must be in a position to deal with unexpected "soft costs" (such as bribes) they may not have encountered at home.
Ernst & Young is already advising three German companies involved with wind funds on legal and fiscal matters. Hamberger expects the first funds for foreign wind stations to be marketed in the autumn.
Regardless of whether development companies can raise equity for projects abroad through Germany's favoured fund structure or have to pour in their own resources, they are still faced with raising the rest of the required finance. "Your options include project financing, corporate debt, leasing -- also called asset-based finance structure -- and issuing bonds on the capital markets," says Henderson. "And all large banks are showing increasing interest in structured financing," notes Hamberger. "For project financing, an investment of EUR 50 million is the bottom limit."
Project financing is recommended by global legal company Orrick, albeit with a proviso. "Project financing is expensive in terms of external costs compared with borrowing as a corporate, but all the costs get capitalised into the loan so you have to see what your return is," says Stewart-Smith. Project financing is a means of raising debt backed by the revenues earned under a power purchase agreement between the wind project and a utility.
"Project finance is better than corporate debt because of the amount and depth of project due-diligence," say Stewart-Smith, referring to the detailed investigation of all aspects of a project, from the technology to the wind measurements to the background of all companies involved, that a project financier will order. "Relatively little analysis is required in connection with a corporate loan even though you are pledging the balance sheet of your company by taking a full recourse loan," he explains.
Where developers have smaller projects, Stewart-Smith suggests these could be aggregated to create one larger project of a size suitable for project financing, "although this adds complications." Germany's HypoVereinsbank has taken a unique approach to project financing by involving itself in raising both equity and loans for the EUR 106 million La Muela project in Spain. It joined forces with Etaplan, the BVT Group and Thyssen Rheinstahl Technik to set up a joint venture dubbed Project Development Fund to develop and bring "bankability" to the 100 MW wind station. The joint venture brought on board a series of equity investors, including American-based power marketer TXU, Blue Energy and BVT Umwelt-und Energietechnik. Together they have provided EUR 26.6 million with the HypoVereinsbank as lead arranger along with local bank Cajae Madrid. Credit of EUR 70-80 million (excluding turnover tax) was raised for the project.
"The project is unusual because it is pure non-recourse. It also stands out as being the first foreign wind project to benefit from a cheap loan from the KfW's environment foreign program. We had a push to optimise earnings as far as possible because the equity is to be marketed," says the bank's Joerg Doppelfeld. The wind station, which has a 20 year power purchase agreement with local Zaragoza utility EAZ, is to be officially commissioned in spring 2003. HypoVereinsbank will market similar financing products for other countries. "There is a financing tool box available that hasn't yet been used," says Doppelfeld.
Financing smaller foreign wind projects is best done by leasing, according to Henderson. His bank has worked up a leasing model which Henderson claims is ideally suited to the French market where projects have to be small, of no more than 12 MW, to qualify for the fixed premium payments for the power output available under the government's wind program. "The process is quick and cheap," he says. Key players are the leasing companies, so-called "Sofergie," that were created by law in 1980 to promote the use of energy saving assets. They are owned by banks. SG's Sofergie is called Sogefinerg.
At the other end of the financing scale, "Bond issuance is popular in the USA, rare in Europe, but the issue has to be at least EUR 100 million to make sense. If you had to finance lots of wind projects together you could fund them with bonds," Henderson says.