Cost-cutting pressure sparked by onshore wind power auctions in Germany and France may spur participants to scale up the size of projects and scale of finance in key European markets, according to state lender Norddeutsche Landesbank Girozentrale.
Germany is tendering 2.8 gigawatts of onshore wind this year in auctions starting in May. France follows in November with plans to put 3 gigawatts of capacity under the hammer by 2019. Auction formats designed to drive tariffs down may encourage developers and financiers to seek savings on maintenance and grid-connection costs by building bigger wind parks, according to Dietmar Koehne, NordLB’s global head of portfolio management and a veteran of project finance.
The plunge in onshore and offshore wind costs, expected to continue this year, is prompting developers and banks to reassess how projects get funded and to come up with tailored financing solutions as analysts caution companies against a “race to the bottom.”
“The cookie cutter days, as successfully performed by some smaller financial institutions, are over,” Koehne said in an interview at NordLB’s headquarters in Hanover. NordLB has invested in clean power globally over two decades and is “very optimistic and keen to hold its market share,” he said.
Financial Innovation
Innovative finance, including access to institutional long-term money, may be a way forward for traditional mid-sized German lenders that have to compete against deep-pocketed utilities and pension funds, Koehne said.
NordLB invested about 1.1 billion euros ($1.16 billion) of fresh loans in renewable energy projects last year and targets the same amount in 2017, Koehne said. NordLB’s full energy-project portfolio was about 12.5 billion euros last year, of which 6.5 billion euros were assets under control with the rest managed by its Bremer Landesbank Kreditanstalt Oldenburg unit, he said.
NordLB sees onshore wind opportunities in “two-tranche,” or hybrid finance that builds experience gained from U.S. and European project finance, Koehne said. Projects in the U.K., Ireland, Germany and France have been the main focus of bank loans toward European renewable energy projects.
Hybrid finance models could see the bank as a lead arranger, which would then partner with large strategic investors like pension funds or life insurers, according to Koehne. NordLB could typically offer a shorter-term investment that would be transitioned into a long-term stake held by a partner, he said.
Offshore wind project finance may be less attractive for mid-sized banks that are confronted by developers who expect lead arrangers to finance hundreds of millions of euros of project costs, Koehne said. Germany initiated its maiden offshore wind auction on Jan. 30 and is tendering 1.55 gigawatts of power this year.
“We’re not going to tie down that kind of investment just to get a seat at the table with offshore developers,” Koehne said. “But we would still grab the opportunity to arrange an offshore wind project whenever they achieve a reasonable risk-return profile.”