Financial Solutions for Innovation and Sustainable Development in the Energy Sector - FINE Project (BMBF)

Overview

Fine (Finanzierungslösungen für Innovation und Nachhaltige Entwicklung im Energiebereich)
Financial Solutions for Innovation and Sustainable Development in the Energy Sector

The project is funded by the German Ministry of Education and Research (BMBF) under the thematic focus "Fields of action for innovation policy for sustainable development" within the Innovation and Technology Analysis (ITA) under grant numbers 16I1602/3.
The program is administered by the project management organization VDI|VDE-IT.

Introduction

On May 6th, 2010, the first workshop of the project “Financing Solutions for Innovation and Sustainable Development in the Energy Sector” (German acronym: FINE) was held in Lüneburg. The idea was to take stock after phase 1 of the project which included a review of the literature on financing renewable energies, especially solar energy, in Europe and in developing countries as well as a couple of expert interviews conducted until then. Moreover, several preliminary results from case studies in Tanzania were presented. Practitioners from different types of organizations and companies were invited: Solar module manufacturers, system houses and project developers, banks, investment companies (closed-ended funds) and proponents of citizen participation models, consultancies, development agencies, and non-governmental organizations (NGOs). The research project FINE is conducted within the thematic focus of "Fields of action for innovation policy for sustainable development" which is part of the Innovation and Technology Analysis (ITA) research program of the German Ministry of Education and Research (BMBF).

Aims of the project are:

• To describe the current state of financing renewable energies, esp. solar energy, in Europe and in developing countries (financial instruments; governance structures; drivers, risks, and challenges);
• To analyze the link between financing, innovation processes – esp. market introduction and penetration of solar energy technologies – and sustainable development of the sector;
• To discuss potential financial solutions for solar energy in rural areas of developingcountries.

The project started in October 2009 and will end in June 2011. It is divided into two working packages:

1. A review of the literature, expert interviews and the development of the conceptual framework with phase 1 from October 2009 to April 2010 and phase 2 from May to August 2010
2. data collection and analysis, comparison, and investigation of potential impacts of the financial crisis for selected case studies in Germany and some other European countries (data collection phase from June to December 2010), Costa Rica (data collection: August 2010), and Tanzania (February to May 2010). The Leuphana University of Lüneburg, which co-ordinates the project, is responsible for financial analysis and European case studies; the German Institute of Global and Area Studies (GIGA) Hamburg for governance analysis and the non-European case studies, i.e. Costa Rica and Tanzania.

Sustainable Development of the Energy Sector and Market Overview

At the beginning of the first part of the workshop Lars Holstenkamp introduced the topic by making brief comments on the notion of sustainable development in the energy sector as well as different solar energy technologies and markets and by giving a short overview of some major challenges and risks. Different regulatory schemes and impacts of the financial crisis were dealt with in some more detail. Results of the discussion about the latter points will be described in the next section. Regarding sustainable development of the energy sector three points were mentioned in the presentation: First, different visions of future (sustainable) energy systems exist. Second, renewable energy targets have been set nationally and internationally (e.g. on the level of the European Union, EU) which have to be considered when discussing future scenarios (and potential financial solutions to reach these goals), especially if these regulations are binding to some extend. Third, the discussion of sustainable development is not only relevant for policy discussions, but also from an investor's perspective: Missing acceptance in the 3 neighborhood may lead to project delays. Furthermore, it constitutes a reputational risk. Moreover, political action to achieve a more sustainable energy supply may be taken (e.g. changes in the support schemes). In the discussion the claim that sustainability means decentral energy supply remained uncontested. One conflict has been mentioned, though, namely the prolongation of the operation time of nuclear reactors which might constitute a barrier to further development in the renewable energy sector. Several contributions were directed at the issue of public acceptance: Acceptance always had to be seen in relation to other possibilities. It was a matter of communication. In some regions like Asia public acceptance did not play any role. Some participants named certain markets: Spain, Italy, and France being attractive target
countries. Greece was mentioned as an example of difficult framework conditions despite of an attractive feed-in tariff. Czech Republic and Poland were named as Eastern European markets where some of the participants are active.

Financial Instruments and Problems with Financing Solar Energy in Germany / Europe

Drivers, challenges, and risks. Other comments were given on drivers, challenges, and risks mentioned in the presentation. Even if one might be tempted to see solar energy projects or renewables in general as a winner of the financial crisis, this depended on the position within the value chain: Sales volumes have risen due to lower module prices. Lower costs have a positive impact on economic
feasibility of projects. On the other hand, manufacturers are facing lower gross margins. Longer checking processes were a consequence of the market entry of new manufacturers rather than a result of the financial crisis. Bank clubs were not cumbersome, but rather stable. Many banks – Austrian or Dutch banks for instance – have come back to domestic markets, e.g. from Eastern European markets. In concordance with the literature the importance of legal certainty was stressed. Not the level of the feed-in tariff, but rather the stability of regulations was relevant. One participant stated that there was no legal certainty in Germany anymore giving the examples of closedended media funds, changes of the Renewable Energy Sources Act (EEG), and potential prolongation of the operation time of nuclear power plants. Others stressed the importance of permission procedures. Greece was quoted as an example where bureaucratic barriers and time consuming procedures constitute an obstacle to market development. Besides, abrupt market changes in Spain in 2008/9 and currently in the Czech Republic as a result of changes in rules were mentioned. Other challenges and risks discussed include:

• Resistance by (former) monopolists
• Improvements of the grid as prerequisite for the large-scale deployment of renewable energies
• Currency risks
• A lack of suitable roofs for roof-top PV installations
• Degradation being a commercial or mercantile risk factor and not backed by technical conditions

Bankability and Project Financing

To make solar projects bankable can be seen as an essential prerequisite for implementation. Therefore, the meaning of "bankability" was discussed in the workshop. The complexity of the checking process was emphasized, including permits, project rights, supplier, EPC contractor and technology. Some banks have their own engineers – KfW IPEX and Deutsche Kreditbank (DKB) were named.
Checks of these kinds are made for non-recourse project financing. Numbers given as minimum project size differed from EUR 1m in Italy to EUR 5m debt portion or EUR 7m in Germany or 1-3 MW or more than 3 MW respectively. Below 1 MW cooperatives, citizen participation models or classical bank financing (corporate, end-user finance) were used. Moreover, it depended on the country: Financing in Greece was based on creditworthiness of the 4 operator. One participant reported of projects in Bulgaria and Greece financed through 100% equity. In general, equity requirements were calculated via cash flow models with a minimum Debt Service Cover Ratio (DSCR) of 1.1 or 1.05. Besides, the meaning of "proven technology" was discussed. The question if Chinese modules
are bankable was raised. Participants mentioned several criteria which have to be met: The manufacturer must have a certain production capacity. There must be a track record of 50 MW to 100 MW already installed. TÜV certificates and/or verification by a third party were required. Reinsurance was important, i.e. which insurance company took over the risk. Strong and reliable partners could also make a project bankable as in the case of First Solar thin film modules at the stage of market introduction. Besides, it was explained that KfW refinancing will require from October 2010 on a declaration by the manufacturer that it will take back old modules.
Citizen participation models The discussion about citizen participation models focused on cooperatives ("eingetragene Genossenschaft", eG) as a suitable legal form and limits of cooperatives or citizen participation models in general. Although most participants had not thought about using cooperatives as a vehicle to finance solar PV projects, most emphasized they would choose any legal form that was beneficial to investors. The lack of knowledge about cooperatives was seen as an obstacle. Moreover, cooperatives may be regarded as "outmoded". Proponents of cooperative solutions claimed that there was no upper limit with regard to financing volumes. A minimum investment of EUR 100,000 was required, though, to cope with transaction costs. Examples of other cooperatives showed that there was enough capital available in the regions, so that no external money would be needed.

Other Financial Instruments and Issues

Several other topics and questions were raised during the discussion:

• Portfolio effects might appear in smaller banks, but not in large banks as long as project sizes are not too high – which was said to be no problem even in the case of wind farms.
• Solar PV projects still had a relatively long payback period. In case of a shorter payback period participating certificates or to set up several debt tranches would become interesting financial instruments.
• The population lacked technical and legal knowledge required to understand solar energy projects.
• What drives module prices – the level of (feed-in) tariffs or resource availability and prices? There was no consensus if the market entry by a number of competitors will drive down module prices or mechanisms will prevail which lead to trust-like results.
• There was a rush to the most attractive markets. It changed rapidly.
• Networks were important to establish the business in a country. Local contacts are necessary. At least in some markets you "needed some stamina" or perseverance.
• Due to the three-tiered German banking system every type of solar energy project could be financed. The long and good experience of Germany compared to other countries was at least partly traced back to the fact that there is the Kreditanstalt für Wiederaufbau (KfW) which had become very professional.
• Other financing solutions mentioned were leasing and bonds. The latter was expected to enter the PV financing market in the coming year.

Governance Structures and Financial Instruments for Solar Energy in Latin America (Costa Rica) and Africa (Tanzania)

In the second part of the workshop governance structures and financial instruments in the developing world were discussed. Three presentations were given on governance structures, country background (Costa Rica and Tanzania), and some preliminary results of first interviews in Tanzania. One participant reported of experiences with solar PV installations in schools. She stressed lack of funds as one of the problems. Payback periods had to be short because of inflation, fluctuating income, and high overall uncertainty. Moreover, the breakdown of batteries constituted a challenge to PV projects in Africa. It seems to be difficult to replicate the successful
model of Grameen Shakti in Bangladesh. After the three presentations different options and support schemes were discussed, e.g. low
interest rates or loans without interest, capacity building, and quality control. Private investments were driven by return on investment (RoI). Considering high risks and uncertain revenues it was a pretty long way until investments would be done in settings like (rural) African energy markets. It was more a role for venture capital and microfunds with a few hundred thousand euros.

Four conditions were to be met for private businesses to engage in a country:

1. the introduction of a feed-in tariff
2. in hard currency
3. grid connection
4. political stability

Typical steps for a company to enter a new market were, first, to test it through the retail market and second, if a feed-in tariff allowed the installation of power plants, to realize first projects together with a local partner. The example of a joint venture with a company from Guadeloupe was given for the latter step. It had been a step-by-step approach and it had taken quite a long time. An obstacle to the involvement of private companies from the North in African countries was seen in compliance risks. Besides, local capital market were mentioned which should be involved, especially in small scale projects. China could be a more suitable partner since costs of modules were much lower, the Chinese would build up knowledge to take over EPC, not only manufacturing, and they were already highly engaged in African countries. However, one has to notice a potential conflict with the request for higher quality here, which was not directly addressed at the workshop: Many Chinese modules sold in Africa are third and therefore very low quality products. !!!!

Conclusions for Further Work in the Research Project

Three issues may be highlighted at this point:

1. An answer to the question what constitutes a sustainable development of the energy sector entails a number of diverse aspects some of which will have to be discussed in more detail, including decentral vs. central energy supply, the feasibility of grid connection in African countries, or the meaning of sustainable market development (e.g. the role of public support/ subsidies and cooperation with the private sector).
2. Since country contexts and primary goals to be achieved via solar energy applications vary considerably between the countries chosen as case studies, comparisons of financial instruments will be difficult. While providing challenges to the analysis at those steps of working package 2 where comparisons will be made, this may at the same time become scientifically fruitful if conditions for (a successful) application or the suitability of certain financial instruments can be identified.
3. Although there seems to be no general lack of funds, making projects financeable for private companies and attractive for investors may in some cases be challenging – especially in the African context. When analyzing financial solutions and governance structures, potential development paths have to be taken into consideration, where conflicts between different political targets may arise.

Contact

Research Team:
Leuphana University of Lüneburg
Institute of Business Law
Finance and Financial Institutions
Prof. Dr. Heinrich Degenhart
Dipl.-Volkswirt Lars Holstenkamp

Contact:
Wilschenbrucher Weg 69
D-21335 Lüneburg
Germany
Fon: +49 4131 677-7784
Fax: +49 4131 677-7911
E-Mail: holstenkamp@uni.leuphana.de


GIGA German Institute of Global and Area
Studies:
Prof. Dr. Robert Kappel
Prof. Dr. Wolfgang Hein
Daniela García Sanchez, MSc

Tanzania Case Studies:
Dr. Esther Ishengoma
Mesia Ilomo, MIT
Contact:
Neuer Jungfernstieg 21
D-20354 Hamburg
Germany
Fon: +49 40 42825-756
Fax: +49 40 42825-562
E-Mail: garcia@giga-hamburg.de

References

• Results of the First Project Workshop in Lüneburg on May 6th, 2010