On January 1st 2017, the amended German Renewable Energy Sources Act 2017 (further referred to as the ‘EEG 2017‘) comes into effect. The EEG 2017 marks the start of a complete shift in policy: instead of the current statutory remuneration claim for electricity generated by a power plant using renewable energy sources (‘EEG plant‘), the so-called feed-in tariff, there will be an open competitive tendering. In future, the amount of financial funding granted to electricity generated by an EEG plant will therefore equal the amount set out in the respective successful offer (‘pay-as-bid‘). This funding is granted for a period of 20 years, starting with the commissioning of the respective plant.
Design of the tender procedure
The overall aim of this fundamental change in statutory funding which, by the way, was asked for by the European Commission, is to better implement renewable energies into the given market structure for electricity while maintaining a wide range of renewable energy suppliers. Affected by the new tender procedure are all renewable energy systems, be they solar-, wind- (on- and offshore equally) or biomass- driven, with a start of operations dating after January 1st 2017. However, there are some exemptions to the rule. One concerns small-scale onshore wind turbines as well as solar plants with an output less than 750 kW. Another one is about onshore wind turbines (i) holding permissions issued before January 1st 2017, (ii) which are then registered before February 1st and (iii) start production of electricity prior to 2019. The same applies to offshore wind turbines with a grid connection commitment and a start of operations before 2021 or certain prototypes (on- and offshore wind turbines).
All other projects have to take part in the tender procedure to receive an award and thus statutory funding. A key requirement for taking part in the tender procedure will be that the respective project is already developed to a certain stage. The EEG 2017 sets out different standards for each energy source which have to be met in order to qualify the project as substantially developed in this sense.
The first call for tender regarding solar power will already take place on January 1st 2017, with onshore wind turbines following on the 1st of May 2017. The bidding rounds for offshore wind turbines will start significantly later with a first date set on September 1st 2021 for projects getting commissioned at the earliest in 2026. The frequency of bidding rounds depends on the technology. While there will be 3 bidding rounds annually for solar power with a bidding volume of 200 MW each, there will be 3-4 bidding rounds for onshore wind turbines covering 800-1,000 MW each. For already existing offshore projects there will be bidding rounds on March 1st 2017 and 2018 for volumes of 1,550 MW, each. Starting 2021, there will be one bidding round each year for offshore wind turbines.
Impact of the new legal framework on project financing
The new legal framework leads to various implications on project planning and realization. Beside the overall risk not to be awarded, the whole project planning process has to be adapted to the new tender procedure. In the following, we will point out potential pitfalls arising therefrom related to project financing:
Involving the financing bank prior to bidding
According to sec. 31 EEG 2017 the bidder must provide a security to the Federal Network Agency in order to participate in the tender procedure. This security is meant to hedge penalties the project developer might face according to sec. 55 EEG 2017. The amount of security to be provided depends on the energy source. For example, bidders for onshore wind turbines have to provide EUR 30 per each kW of their offer (so called ‘bid bond‘), either in form of a letter of credit or by cash deposit on a blocked account. The latter does not require involvement of a bank, however such option should be commercially unattractive for the developer due to the tied-up capital. We therefore assume the developers to constantly prefer the bid bond. This results in the necessity of involving the project financing bank before bidding, hence at an early stage of the project that has not necessarily yet been specified. In particular, the expected revenue may not always be validly estimated at this point in time. Due to this, it is questionable whether banks and insurance companies will consider a project planning at that time as sufficiently advanced and calculable for them to provide security. Assumingly, they will connect their willingness to do so to the developer’s creditworthiness. Thus, being able to provide sufficient security could be the first hurdle to clear, especially for smaller developers, when implying a renewable energy project in the future, whereas market-known sponsors should not have problems here.
Financial commitment unaware of the actual statutory funding
By awarding, the bidder is entitled to statutory funding regarding the electricity generated by those EEG plants being part of the offer. Now, he will conclude financing contracts and start the implementation of his project, at the latest. In case of an onshore wind project the problem arises that at this stage the statutory funding for the electricity generated in the respective wind turbines is not yet fixed. Even though successful bidders receive an award amounting to their bid, the problem remains that they have to calculate their bid for a 100% reference site (see Appendix 2 to EEG 2017), not taking into account their project’s actual site. It is only after the award that the concrete statutory funding of the respective wind farm project is calculated on the basis of the actual site’s wind conditions by the grid operator, sec. 36h EEG 2017. As a basis for this calculation the law requires an expert report presented by the project developer before commissioning of the wind turbines. For a financing bank this means it has to grant financing without knowing the project’s actual remuneration. Therefore, the bank has to finance projects without knowing their revenues. Conceivably, this will lead to banks requesting project developers for a higher equity capital ratio or their DSCR (Debt Service Cover Ratio) than they used to do. As an alternative, the financing agreement could foresee adaption mechanisms depending on the amount of the actual statutory funding. Again, the revised legal framework might lead to uncertainties, which could have an adverse effect on financing of renewable energy projects.
Uncertainties caused by the necessity of adjusting the statutory funding
With regard to onshore wind farms, the EEG 2017 leads to even more uncertainties after the commissioning of wind turbines took place. The EEG 2017 obliges plant operators to periodically evaluate and adjust their reported statutory funding, if necessary: in case of change of wind conditions, the statutory funding has to be adjusted at the beginning of the 6th, 11th and 16th year of commissioning. Background for these reevaluations is the site output achieved during the last 5 consecutive years. In case the determined new statutory funding turns out to deviate more than 2% from the last calculated statutory funding, over- or underpayments have to be balanced according to sec. 36h subs. 2 EEG 2017. Consequently, there is a constant risk that an operator has to pay back potentially overpaid statutory funding to the grid operator, which he even is obliged to pay interest on. Such risk may lead banks and investors to demand additional securities and is best to be handled in the financing agreements. One possible way to tackle this problem could be to enter into an agreement on an additional funding obligation by the sponsor. Additionally, setting up accruals or an escrow account should be considered. In addition, one could think about developing the DSCR code more flexible, depending on the statutory funding and to agree on a distribution to sponsors only in case of compliance with the respective DSCR code applicable. In order to anticipate adjustments and compensation claims, lenders could also take into consideration to already impose constraints for the assessment of the statutory funding during the respective 5 year periods between the statutory adjustments.
It clearly shows that the new legal framework for the funding of electricity generated by EEG plants holds manifold uncertainties, which will notably affect the financing of renewable energy projects. In order not to endanger a project’s success it is therefore indispensable for all parties involved to deal with the new legal requirements. By doing so, the legal impact on financing renewable energy projects can be adequately taken into consideration.
Authors
Dr. Carmen Schneider and Dr. Thomas Lange, Lawyer at GÖRG Partnerschaft von Rechtsanwälten mbB
GÖRG is one of Germany’s leading business law firms. As an independent law firm with more than 250 lawyers at six offices in Berlin, Cologne, Essen, Frankfurt am Main, Hamburg and Munich, GÖRG advises on the core areas of business law.
