Impact of Renewable Energy Act Reform on Wind Project Finance

Matthew Tisdale,Karsten Neuhoff,Thilo Grau

doi:10.2139/ssrn.2456125

Abstract

The 2014 reform of the German Renewable Energy Act introduces a mandatory shift from a fixed feed-in tariff to a floating premium system. This is envisaged to create additional incentives for project developers, but also impacts revenues and costs for new investments in wind generation. Thus uncertainties for example about balancing costs and the impact of the location specific generation profile on the average price received by a wind project are allocated to renewable projects. We first estimate the magnitude of the impacts on wind projects based on historic and cross-country comparison. We then apply a cash-flow model for project finance to illustrate to what extent the impact of the uncertainty for project investors reduces the scale of debt that can be accessed by projects and thus increases financing costs.

Highlights

Reaching Germany’s renewable energy targets will require the development of between 6 and 7 GW per year until 2020 and new capital commitments from lenders and equity investors
EEG 2014 would expose wind generators to revenue uncertainty through changes to the law’s remuneration scheme. These changes are likely to increase the cost of capital needed to finance new wind generation
EEG 2014 compensates the generator at the market price, plus a premium, the combination of which may be less than under EEG 2012

Summary

Introduction

Reaching Germany’s renewable energy targets will require the development of between 6 and 7 GW per year until 2020 and new capital commitments from lenders and equity investors. Germany has successfully minimized its cost of capital through an allocation of risk that investors found attractive (De Jager 2008, Rathmann 2011). EEG 2014 would expose wind generators to revenue uncertainty through changes to the law’s remuneration scheme These changes are likely to increase the cost of capital needed to finance new wind generation. Overview Project finance allows the sponsors of renewable electricity generation facilities to secure the debt and equity needed to build the generator. Key Financial Metrics In project finance, lenders take a senior position in the capital structure, giving them priority rights to cash earned. Their seniority implies a lower return (Return on Debt, ROD).

Objectives

Discussion

Conclusion