Raising wind project capital the German way

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Private capital lies behind nearly all the wind power development in Germany. Putting savings in "wind funds" is seen as one of the safest investment bets around and demand for stakes in wind projects is taking fund operators abroad

So sound is the German wind power market that investors cluster around each new project as bees around a honey pot, savouring the prospect of the sweet returns that a relatively modest capital outlay will bring. These days it can take less than a week to raise the capital for a 4 MW wind plant, as Umweltkontor Renewable Energy demonstrated in July when it raked in EUR 1.6 million from private investors for a EUR 5.2 million wind station at Viersen, that went on-line that month. "This looks like a record," says the company's Tim Warnke, referring to the speed at which money was raised.

"There is hardly another entrepreneurial involvement with so much security for the investor. Wind as a raw material is available in unlimited amounts and the electricity companies are legally obliged to take up the electricity at a fixed price. Greater security is hard to imagine," comments Georg Hetz from Umwelt Direkt Invest-Beratung (UDI), a finance company specialising in raising capital for "wind funds," based in Nürnberg. With wind turbines now regarded as a reliable technology, the risk for investors is minimal and the gains potentially significant.

There are at least 30 companies like UDI and Umweltkontor Renewable Energy offering closed-end wind funds like the one behind the Viersen station. Each fund is launched for a specific wind project, structured as a limited liability company, with private investors participating as limited partners. They supply the capital to secure the soft bank loans available for wind project development in Germany (Windpower Monthly, September 2000). Subject to limitations, investors can write some losses off against tax.

Judging by the speed at which investors are found, there is no shortage of individuals and institutions willing to pour in substantial sums. Over the past ten years, more than 100,000 people have invested directly in wind projects, estimates Bundesverband Windenergie (BWE), the German wind energy association. In this way, 20-30% of the DEM 15 billion spent on more than 10,000 turbines was raised. BWE has even released a wind fund investment guide called "Make profits with a green investment."

The trend is being encouraged by government. "Private households in Germany represent a capital value of DEM 7000 billion. The use of just a fraction of this in ecological investment could result in a significant improvement in the environment," according to environment minister Jürgen Trittin. The ministry, too, has a brochure to encourage citizens to invest their savings in ecological funds.

Rolling in money

"The demand for stakes in wind stations is rising year by year," observes Beate Haller of Umweltbank, another wind fund company also based in Nürnberg. Last year, DEM 671 million in private money flowed into wind funds in Germany, up 68% on 1999, according to market analyst Stefan Loipfinger. This private investment triggered DEM 1.6 billion in state supported bank loans, resulting in DEM 2.28 billion of wind projects in 2000. This year Loipfinger predicts that private investors will put more than DEM 1 billion into wind funds, triggering some DEM 5.3 billion of wind power development. At least five new wind fund companies will help to achieve this result, he says.

The wind fund market differs from other types of investment funds in that the average sum placed by each investor is just DEM 55,464, Loipfinger says. The average for other industrial sectors, which he calculated from six types of fund, is about twice that at DEM 101,785. The general size of wind funds -- with the capital at less than DEM 9 million -- is also relatively tiny, he continues. The capital in an average shipping fund is more than twice as much at DEM 24.2 million, while the market average is DEM 52.2 million. Furthermore, the guaranteed returns allows the funds to be highly geared since investors can well afford to pay the interest on large loans. On average capital makes up no more than 29.4% of a wind fund, compared with 51.7% across the board of all types of funds on the market.

The rash of new wind funds now appearing is largely a result of the extra market security provided by the European Court of Justice in March when it ruled on Germany's fixed tariff system of support for wind power. The court said the country had not, as charged, contravened EU rules on "state aid" by failing to seek EU approval for the system. A fixed tariff, ruled the court, is not aid provided by the state when paid by consumers and is therefore not governed by the rules. Germany interprets the decision to mean that its Erneuerbare Energien Gesetz (EEG) law, which fixes the wind tariff, is in the clear. Investor confidence bloomed.

Replication abroad

Such is the demand from German investors for more wind funds that the opportunity to put their money in projects abroad could be opening up. Modified versions of the closed-end fund model are being prepared, but so far only for markets with a secure wind tariff system.

"We are looking into this," says Claus Burghardt of Deutsche Erneuerbare Energien (DEE), a subsidiary of Deutsche Immobilien Leasing (DIL), active since 1998 in wind funds as a side line to its property and leasing business. DIL is part of the giant Deutsche Bank. "It should be possible in almost all European countries. Much depends on the legal framework in the target country, in particular on the fiscal situation for German investors," he adds.

Whether losses can be written off against tax on overseas wind fund investments remains to be seen. "But funds relying for their investor appeal on an eight to ten per cent pay-out from cash flow are attractive enough without the benefit of loss write-offs," says Burghardt.

Deutsche Bank and DIL have branches in almost all European countries and they are working on wind fund models, notes Burghardt. "In the larger countries, it may be possible to offer funds in which both local and German investors can participate," he adds. "We are primarily looking at countries with a fixed premium payment for renewables electricity or countries likely to introduce this soon." Neighbouring Poland, waiting in the wings to join the EU, is on the list, but the currency risk is still a problem. "We don't know what conversion rate for the Zloty will be used, a risk that we can't burden our investors with," says Burghardt.

Another wind fund company, BVT in Munich, echoes DEE's views. "German investors cannot expect the same fiscal advantage from their investment in a wind station abroad as that they enjoy at home, so the return on investment must be good. They will expect at least ten to twelve per cent compared with eight to nine per cent for a German inland power station," says the company's Robert List. He also underlines the importance of reliable power purchase at a fixed price.

Invest in Italy or Spain

BVT is developing a wind investment fund to raise the EUR 20-30 million capital for an EUR 80 million, 80 MW wind project in Italy. "The fund will only be open to German investors. The exact structure hasn't been defined yet. We'll release details next year. It's likely to be similar to the usual German arrangement of a limited company coupled with limited partner shares," List says. Meantime, BVT is taking a more traditional route to raising new money by urging private investors to participate in its share offer, launched in June. "By taking a stake in BVT they automatically participate in wind station projects that the company is involved in abroad," he points out. BVT filled a private offer of about 2.48 million shares at EUR 6 each, just 80,000 less than its hoped for maximum.

Umweltkontor Renewable Energy is considering a different tack for foreign installations. It may bring foreign projects into its new open ended fund, the New Energy shareholding company, according to the firm's Andreas Köster. "The open ended fund will bundle various projects, bringing together financing for, say, biomass, solar and wind projects, to spread the risk for investors," Köster explains. The minimum investment accepted by Umweltkontor -- EUR 10,000, or EUR 5000 for locals living close to the wind station -- will also be lower than that for the closed wind funds, he adds. Furthermore, in the closed funds, investors lock up their money for up to 20 years. The open ended funds will allow them to opt out at specified intervals.

Spain is a target market for Umweltkontor. "We have a stake in Nevag, whose Spanish project developer subsidiary, Sersa, has several projects close to authorisation which will then need financing," Köster notes.

DEE does not favour this more traditional share holding route. It feels the limited liability company with limited partnerships is a better arrangement. "In principle the larger the fund, the cheaper the costs," says Burghardt, in support of the open-ended fund option. But there are tax considerations to take into account. As a result he says, returns are better for limited partners than shareholders, especially when a shareholding structure like the open-ended fund model involves higher costs.

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