by Jerome a Paris
Mon Jun 6th, 2011 at 09:51:59 AM EST
Following the recent announcement by the German government of the forthcoming closure of all nuclear plants by 2022 (see Merkel's nuclear exit), a new step has been taken today with the announcement of a specific financing programme for the offshore wind industry (see here, in German only for now) via public development bank KfW.
This programme does two very smart things:
- it provides scale.
Depending on the options selected, KfW can provide up to €700 million in funding (and half of that in risk participation) per project. Given that one of the big difficulties in today's banking markets is the lack of underwriting capacity (ie the inability by individual banks to commit large volumes to a transaction when it's signed, which they syndicate to other banks at a later stage), large projects require large numbers of banks to find the require level of funding. With a limited number of banks having experience in offshore wind so far, this makes these deals, which are structurally large (a 400MW wind farm, the typical size in Germany, costs something in the €1-1.5 billion range to get built), almost impossible to finance today. Having an institution able to provide close to half of the funds required makes the task suddenly more manageable, and will make a real difference in the next 1-3 years, before the market becomes mature enough and large enough for deals to happen without them;
- it provides cheap funding.
KfW, being a public entity, benefits from the very low cost of borrowing of the German government, and the programme specifically makes it possible for it to fund projects passing through its low rate of funding. It may even provide funding to commercial banks (which bear the risk via contractual guarantees towards KfW) in addition to its own tranche, further reducing the overall cost of debt for the project. I've written enough on ET about the fundamental importance of the cost of money for the determination of the final cost of power for offshore wind not to underline how important news this is. In this case, it won't change the cost of offshore wind electricity for consumers (set by law at 15c€/kWh for 12 years, under the existing feed-in regime), but it will make that feed-in tariff, which is relatively low (as it is not inflated over time) profitable for a larger number of projects and thus ensure that the expected volumes do get built.
Of course, KfW will require commercial banks to be involved alongside itself to ensure that transactions are done on "realistic" commercial terms, so the programme will officially not distort markets, but that cheap funding is a very real political choice nevertheless. This is a very clear case of a country "walking the walk" in its policy choices, and it makes the goal of building 25 GW by 2020
all the more realistic.