New tax law can cause rush on wind

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Fiscal benefits for investors in German wind farms have been reduced with the introduction of new tax legislation on April 1. Although wind financiers are still unsure of the effects of the new law, passed March 19, a run on wind energy funds is predicted since even harsher benefit cuts have been imposed on other investments.

Under the new law, tax write-offs for investments in "good causes," such as ship building and the media, have all but disappeared, but for wind projects they have not been removed, only reduced, says Jörg Bold of German financing company Bobikiewicz and Partner. "This means that these investors will turn to wind funds," Bold predicts. He fears that such a rush could overheat an already hotly pursued market.

Generally, wind investments will be affected in four ways, he says. From now on, an investor's earnings must stem largely from power generation rather than from tax savings. Second, a DEM 200,000 cap has been placed on the wind plant losses that can be fully offset against earnings. Beyond the cap, only 50% of wind investment losses can be written-off. Third, special tax write-off rules allowing artificially high accounting losses, applicable only in eastern Germany, have been abolished. Lastly, wind project financing companies will no longer be allowed to actively advertise wind investments as tax write-offs. Existing wind projects that applied for building licence before March 5, 1999, are protected from the changes.


Bold admits that large investors, those, bringing DEM 200,000 or more into a wind project fund, are likely to lose interest. Individuals who buy wind turbines outright will not be hit by the limit -- and this loophole could raise legal problems, Bold says. Neither will small and medium sized investments, such as those that on average invest DEM 45,000 in Bobikiewicz' projects, be affected.

Bianca Frischer from Energikontor, a wind energy planning and financing company based in Bremen, echoes Bold's views, stressing that not much will change initially. "We have smaller investors for whom the write-off limit will hardly play a role," she says, stressing that Energikontor was never a "tax-loss" company. "At Energiekontor, the possibility of tax write-offs will no longer be placed in the foreground, but our projects continue to be absolutely economic."

From 2001, however, the protection period is over. "Before then, we will consider other financing mechanisms that conform with the new legislation," Frischer notes, adding that the situation for investors will most likely worsen slightly. Losses in the first few years will no longer be written off against earnings from other sources, but rather will be hedged against future profits in the life of the plant. The tax-free dividends will be postponed, which is perhaps a small disadvantage to investors, she says.

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