Authored by Ludwig Fischer, Invigors Germany
Given the uncertain outlook for the German asset finance market, new ideas and strategies are required in order to escape from the current downward spiral. Is "Green Asset Financing" a strategy out of the crisis?
Although most of the major leasing companies have been willing to fund this market for a couple of years, “green assets” still only account for marginal business volumes compared to traditional assets. Nevertheless Germany has been an early adopter in this market and the current worldwide campaigns against global warming will further support investments in biomass, solar, wind and hydro energy production assets. Production of renewable energy is a significant and fast growing business with total turnover of 24.6 billion euro in 2007. Beside the big projects like off-shore wind farms there are numerous smaller investments in local solar photovoltaic (PV) installations, combined heat and power plants or biomass energy production systems which fall well within the standard ticket sizes of the leasing industry.
Investment in the renewable energy market requires that leasing companies take into account different technical, legal and economical considerations compared to traditional assets like production machinery, cars, vans or IT. Most of the installations are non-standardized but individual plants and installations are designed and constructed with standard components. Consequently the engineering concept and design needs to be evaluated in order to determine the level of performance risk associated with funding these assets.
With premises-mounted solar PV systems legal considerations need to be taken into account in order to ensure that the assets are not intrinsically tied to the real estate asset on which they are installed. Or in the case of energy contracts for combined heat and power plants, a careful evaluation of the detailed contract terms with the third parties is crucial as typically the contractor’s creditworthiness is insufficient for the funding required. The assignment of a back up service provider can help to reduce this credit risk.
From a RoI perspective almost no investment in renewable energy technologies can currently compete with those based on traditional energies without some form of subsidy. Consequently a detailed knowledge of the terms and conditions (and their changes over the course of time) of renewables incentive programs like the German EEG (“Gesetz zum Vorrang erneuerbarer Energien” – a law which promotes investment in renewable energy sources through the use of feed-in tariffs) is essential in order to evaluate the rate of return on the investment.
Leasing companies have to build up their own expertise in these areas. But the complexity of the market often requires external consultancy and support in order to assess the legal, technical and economic risks of both the generic technologies and specific projects. There are individual specialists and associations available in the German market which some leasing companies are already cooperating with. Creating a specialist centre of excellence which combines solid sales and back office expertise in the renewable energy market would allow leasing companies to mitigate the specific risks and find new sustainable growth opportunities.
Finally there is one common challenge which is faced by almost all investments in renewable energies - lengthy RoI cycles require long payment terms which often do not match leasing companies’ funding capabilities. Capital market funding is often limited to 7-8 years whereas investments in solar PV for example would require 15 years or longer. At this level government intervention is necessary to encourage institutions like the publicly owned KfW to expand their economic development schemes by funding leasing companies in green asset projects in order to boost this business and promote environmental investments.
Are you interested in learning more about green asset funding in Germany? Do you think this could have implications for other markets in Europe? To learn more contact Ludwig Fischer on +49 7073 913 265 or e-mail ludwig.fischer@invigors.com
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